The
information in this preliminary prospectus supplement is not complete and may
be
changed. This preliminary prospectus supplement is not an offer to sell these
securities and it is not a solicitation of an offer to buy these securities
in
any state where the offer or sale is not permitted.
Preliminary
Prospectus Supplement dated May 9, 2007 (to Prospectus dated May 9,2007)
$350,637,000
(Approximate)
SunTrust
Acquisition Closed-End Seconds Trust, Series 2007-1
Asset
Backed Pass-Through Certificates
SunTrust
Acquisition Closed-End Seconds Trust, Series 2007-1
Issuing
Entity
SunTrust
Asset Funding, LLC
Sponsor
ACE
Securities Corp.
Depositor
GMAC
Mortgage, LLC
Servicer
Wells
Fargo Bank, National Association
Master
Servicer and Securities Administrator
You
should consider carefully the risk factors beginning on page S-11
in this
prospectus supplement.
This
prospectus supplement may be used to offer and sell the Offered
Certificates only if accompanied by the prospectus. The Offered
Certificates represent an interest solely in the Issuing Entity and
do not
represent interests in or obligations of the Sponsor, the Depositor,
or
any of their affiliates.
Distributions
on the Offered Certificates will be made on the 25th day of each
month,
or, if such day is not a business day, on the next succeeding business
day, beginning in May 2007.
Offered
Certificates The
trust
created for the Series 2007-1 certificates will hold a pool of second lien
fixed-rate, one- to four-family, residential mortgage loans. The trust will
issue four classes of Offered Certificates. You can find a list of these
classes, together with their initial certificate principal balances and
pass-through rates, in the table below. Credit enhancement for all of the
Offered Certificates will be provided in the form of excess interest,
overcollateralization and subordination. The Offered Certificates may benefit
from net swap payments pursuant to an interest rate swap agreement which is
intended partially to mitigate interest rate risk. In addition, the Class A
Certificates may benefit from a certificate guaranty insurance policy issued
by
XL Capital Assurance Inc. as described in this prospectus
supplement.
Class
Initial
Certificate Principal Balance(1)
Pass-Through
Rate
Scheduled
Final Distribution Date
A
$ 317,075,000
One-Month
LIBOR + _____%(2)(3)
April
2037
M-1
$
7,232,000
One-Month
LIBOR + _____%
(2)(3)
April
2037
M-2
$
11,496,000
One-Month
LIBOR + _____%
(2)(3)
April
2037
M-3
$
14,834,000
One-Month
LIBOR + _____%
(2)(3)
April
2037
______________________
(1)
Approximate.
Subject to a permitted variance of +/-
5%.
(2)
The
pass-through rate for each class of Offered Certificates will be
subject
to the applicable Net WAC Pass-Through Rate as described in this
prospectus supplement under “Description of the Certificates-Pass-Through
Rates.”
(3)
After
the first possible optional termination date, the margins applicable
to
the Class A Certificates will increase by 100% and the margins applicable
to the Class M-1, Class M-2 and Class M-3 Certificates will increase
by
the product of the applicable margin and
50%.
Deutsche
Bank Securities Inc., SunTrust Capital Markets, Inc. and Bear, Stearns & Co.
Inc. will each offer certain classes of the Offered Certificates to the public
on behalf of the Depositor on a best efforts basis, from time to time at varying
prices to be determined at the time of sale. Deutsche Bank Securities Inc.,
SunTrust Capital Markets, Inc. and Bear, Stearns & Co. Inc. are not required
to place any specific dollar amount of the Offered Certificates, but will use
its best efforts to place the Offered Certificates. Proceeds of this offering
will not be placed in escrow, trust or similar arrangement. The proceeds to
the
Depositor from the sale of the Offered Certificates, net of compensation to
the
Underwriters and the Co-Manager, is anticipated to be approximately _____%
of
the aggregate certificate principal balance of the Offered Certificates, plus
accrued interest from the cut-off date on the Offered Certificates, less
expenses estimated to be approximately $______. See “Method of Distribution” in
this prospectus supplement.
Neither
the Securities and Exchange Commission nor any state securities commission
has
approved or disapproved of the Offered Certificates or determined that this
prospectus supplement or the prospectus is truthful or complete. Any
representation to the contrary is a criminal offense.
The
Attorney General of the State of New York has not passed on or endorsed the
merits of this offering. Any representation to the contrary is
unlawful.
Deutsche
Bank Securities
SunTrust
Robinson Humphrey
Lead
Underwriters
Bear,
Stearns & Co. Inc.
Co-Manager
Important
notice about information in this prospectus supplement and the accompanying
prospectus
You
should rely only on the information contained in this document. We have not
authorized anyone to provide you with different
information.
We
provide information to you about the Offered Certificates in two separate
documents that progressively provide more detail:
·
the
accompanying prospectus, which provides general information, some
of which
may not apply to this series of certificates;
and
·
this
prospectus supplement, which describes the specific terms of this
series
of certificates.
ACE
Securities Corp.’s principal offices are located at 6525 Morrison Blvd., Suite
318, Charlotte, North Carolina28211, and its telephone number is
704-365-0569.
Table
of
Contents
Prospectus
Supplement
SUMMARY
OF PROSPECTUS SUPPLEMENT
S-1
TRANSACTION
STRUCTURE
S-10
RISK
FACTORS
S-11
USE
OF PROCEEDS
S-21
THE
MORTGAGE POOL
S-21
YIELD
ON THE CERTIFICATES
S-37
DESCRIPTION
OF THE CERTIFICATES
S-48
THE
ORIGINATORS
S-84
STATIC
POOL INFORMATION
S-84
ISSUING
ENTITY
S-85
THE
DEPOSITOR
S-85
THE
SPONSOR
S-86
SERVICING
OF THE MORTGAGE LOANS
S-86
THE
SECURITIES ADMINISTRATOR AND THE MASTER SERVICER
S-95
THE
CUSTODIAN
S-97
THE
TRUSTEE
S-98
THE
CREDIT RISK MANAGER
S-100
THE
CLASS A CERTIFICATE INSURER
S-100
POOLING
AND SERVICING AGREEMENT
S-103
FEDERAL
INCOME TAX CONSEQUENCES
S-108
METHOD
OF DISTRIBUTION
S-112
SECONDARY
MARKET
S-112
LEGAL
MATTERS
S-113
RATINGS
S-113
LEGAL
PROCEEDINGS
S-114
AFFILIATIONS,
RELATIONSHIPS AND RELATED TRANSACTIONS
S-114
LEGAL
INVESTMENT
S-115
CONSIDERATIONS
FOR BENEFIT PLAN INVESTORS
S-116
AVAILABLE
INFORMATION
S-118
REPORTS
TO CERTIFICATEHOLDERS
S-119
INCORPORATION
OF INFORMATION BY REFERENCE
S-119
EXPERTS
S-119
ANNEX
I
I-1
ii
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
Underwriter and the Co-Manager severally 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 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 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
Underwriter and the Co-Manager severally 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 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
certificates in, from or otherwise involving the United Kingdom.
iii
SUMMARY
OF PROSPECTUS SUPPLEMENT
The
following summary is a brief discussion of the important features of the
certificates offered by this prospectus supplement and the accompanying
prospectus but does not contain all of the information that you should consider
in making your investment decision. To understand the terms of the Offered
Certificates, carefully read this entire prospectus supplement and the entire
accompanying prospectus.
Issuing
Entity
SunTrust
Acquisition Closed-End Seconds Trust, Series
2007-1.
ACE
Securities Corp., a Delaware corporation. See
“The Depositor” in this prospectus
supplement.
Originators
American
Home Mortgage Corp., a New York corporation, originated or acquired
approximately 67.81% of the mortgage loans and New Century Mortgage
Corporation, a California corporation, originated or acquired
approximately 10.29% of the mortgage loans, in each case, by aggregate
principal balance as of the Cut-off Date. The remainder of the
mortgage
loans were originated or acquired by various originators, none
of which
have originated more than 10% of the mortgage loans. See
“The Originators” in this prospectus supplement.
Sponsor
SunTrust
Asset Funding, LLC, a Delaware limited liability company.
See “The Sponsor” in this prospectus
supplement.
Master
Servicer
Wells
Fargo Bank, National Association, a national banking association.
See
“The Securities Administrator and The Master Servicer” in this prospectus
supplement.
Servicer
and Interim Seller
GMAC
Mortgage, LLC, a Delaware limited liability company. See
“Servicing of the Mortgage Loans” in this prospectus
supplement.
Trustee
HSBC
Bank USA, National Association, a national banking association,
will be
the trustee of the trust and the supplemental interest trust. See
“The Trustee” in this prospectus
supplement.
Securities
Administrator
Wells
Fargo Bank, National Association. See
“The Securities Administrator and The Master Servicer” in this prospectus
supplement.
S-1
Custodian
Deutsche
Bank National Trust Company. See
“The Custodian” in this prospectus
supplement.
Swap
Provider
Bear
Stearns Financial Products Inc. See
“Description of the Certificates—The Interest Rate Swap Agreement and the
Swap Provider” in this prospectus
supplement.
Distribution
Dates
Distributions
on the Offered Certificates will be made on the 25th day of each
month,
or, if that day is not a business day, on the next succeeding business
day, beginning in May 2007. The scheduled final Distribution Date
for the
Offered Certificates is the Distribution Date in April
2037.
Credit
Risk Manager
Clayton
Fixed Income Services Inc. See
“The Credit Risk Manager” in this prospectus
supplement.
Class
A Certificate Insurer
XL
Capital Assurance Inc., a New York stock insurance company licensed
to do
business in the state of New York, will provide a certificate guaranty
insurance policy to insure certain payments on the Class A Certificates.
See
“The Class A Certificate Insurer” in this prospectus
supplement.
Offered
Certificates
Only
the certificates listed on the cover of this prospectus supplement
are
being offered by this prospectus supplement. Each class of Offered
Certificates will have the initial certificate principal balance
and
pass-through rate set forth or described in the table appearing
on the
cover of this prospectus
supplement.
The
Trust
The
Depositor will establish a trust with respect to the certificates under the
pooling and servicing agreement dated as of the Cut-off Date among the
Depositor, the Servicer, the Master Servicer, the Securities Administrator
and
the Trustee. There will be eight classes of certificates representing the
trust.
See
“Description of the Certificates” in this prospectus
supplement.
The
certificates will represent in the aggregate the entire beneficial ownership
interest in the trust. In general, distributions of interest and principal,
if
applicable, on the Offered Certificates will be made only from payments received
or advanced in respect of the mortgage loans and payments made by the Swap
Provider under the interest rate swap agreement. In addition, certain payments
on the Class A Certificates will be insured by a certificate guaranty insurance
policy.
The
Mortgage Loans
References
to percentages of the mortgage loans under this section are calculated based
on
the aggregate principal balance of the mortgage loans as of the Cut-off
Date.
The
trust
will contain approximately 5,767 conventional, one- to four-family, second
lien,
fixed-rate mortgage loans on residential real properties (the “Mortgage
Loans”).
The
Mortgage Loans have an aggregate principal balance of approximately $370,848,626
as of the Cut-off Date. The Mortgage Loans have original terms to maturity
of
not greater than approximately 30 years and have the following characteristics
as of the Cut-off Date:
S-2
Range
of mortgage rates:
4.625%
to 22.250%.
Weighted
average mortgage rate:
11.447%.
Weighted
average remaining term to stated maturity:
196
months.
Range
of principal balances:
$7,614
to $597,052.
Average
principal balance:
$64,305.
Range
of original combined loan-to-value ratios:
12.85%
to 100.00%.
Weighted
average original combined loan-to-value ratio:
95.61%.
For
additional information regarding the Mortgage Loans, see “The Mortgage Pool” in
this prospectus supplement.
Removal
and Substitution of a Mortgage Loan
The
Trustee will acknowledge the sale, transfer and assignment of the trust fund
to
it by the Depositor and receipt of, subject to further review and the
exceptions, the Mortgage Loans. If the Trustee has actual knowledge or received
written notice that any Mortgage Loan is defective on its face due to a breach
of the representations and warranties with respect to that Mortgage Loan
made in
the transaction agreements, the Trustee shall promptly notify the Sponsor
and
the Class A Certificate Insurer of such defect. The Sponsor must then correct
or
cure any such defect within 90 days from the date of notice from the Trustee
of
the defect and if the Sponsor fails to correct or cure such defect within
such
period and such defect materially and adversely affects the value of the
Mortgage Loan, or the interests of the Certificateholders or the Class A
Certificate Insurer in such Mortgage Loan, the Sponsor will, in accordance
with
the terms of the transaction agreements, within 90 days of the date of notice,
repurchase such Mortgage Loan or provide the Trustee with a qualified substitute
Mortgage Loan (if within two years of the Closing Date); provided that, if
such
defect would cause the Mortgage Loan to be other than a “qualified mortgage” as
defined in Section 860G(a)(3) of the Internal Revenue Code, any such cure,
repurchase or substitution must occur within 90 days from the date such breach
was discovered.
The
Certificates
Offered
Certificates.
The
Class A Certificates and the Class M-1, Class M-2 and Class M-3 Certificates
(collectively, the “Offered Mezzanine Certificates”) are the only classes of
certificates offered by this prospectus supplement and are referred to in
this
prospectus supplement as the “Offered Certificates”. The Offered Certificates
will have the characteristics shown in the table on the cover of this prospectus
supplement and as described in this prospectus supplement.
The
pass-through rate on each class of Offered Certificates is variable and will
be
calculated for each Distribution Date as described below and under “Description
of the Certificates- Pass-Through Rates” in this prospectus supplement.
The
pass-through rate on each class of Offered Certificates is a rate per annum
based on one-month LIBOR plus an applicable spread, subject to a rate cap
(adjusted
for the actual number of days elapsed in the related Interest Accrual Period)
equal
to
the product of (i) twelve and (ii) a fraction, expressed as a percentage,
the
numerator of which is the amount of interest which accrued on the Mortgage
Loans
in the prior calendar month minus the fees payable to the Servicer, the Master
Servicer and the Credit Risk Manager (collectively, the “Administration Costs”)
with respect to the Mortgage Loans for such Distribution Date and the net
swap
payment payable to the swap provider and any swap termination payment payable
to
the swap provider which is not payable as a result of the occurrence of a
swap
provider trigger event (solely
to the extent such amount has not been paid by the Securities Administrator
from
any upfront payment received pursuant to any related replacement interest
rate
swap agreement that may be entered into by the Supplemental Interest Trust
Trustee) and
the
premium payable to the Class A Certificate Insurer for providing the Class
A
certificate guaranty insurance policy,
in each
case for such Distribution Date, and the denominator of which is the aggregate
principal balance of the Mortgage Loans as of the Due Date in the month
preceding the month in which the Distribution Date occurs (or
as of
the Cut-off Date with respect to the first Distribution Date),
after
giving effect to principal prepayments received during the Prepayment Period
that includes such Due Date. The
initial spread relating to the Class A Certificates is _____% per annum.
The
initial spread relating to the Class M-1 Certificates is _____% per annum.
The
initial spread relating to the Class M-2 Certificates is _____% per annum.
The
initial spread relating to the Class M-3 Certificates is _____% per annum.
Each
spread is subject to increase as more fully described under “Description of the
Certificates-Pass-Through Rates” in this prospectus supplement.
S-3
Deutsche
Bank Securities Inc. and SunTrust Capital Markets, Inc. (each an “Underwriter”
and together, the “Underwriters”) and Bear, Stearns & Co. Inc. (the
“Co-Manager”) will each offer certain classes of the Offered Certificates to the
public on behalf of the Depositor on a best efforts basis, from time to time
at
varying prices to be determined at the time of sale. The Underwriters and
the
Co-Manager are not required to place any specific dollar amount of the Offered
Certificates, but will use its best efforts to place the Offered Certificates.
See “Method of Distribution” in this prospectus supplement.
The
Offered Certificates will be represented initially by one or more global
certificates registered in the name of a nominee of the Depository Trust
Company
in the United States, or of Clearstream and the Euroclear System (each, as
defined in this prospectus supplement) in Europe and will be issued in minimum
dollar denominations of $25,000 and integral multiples of $1.00 in excess
thereof. See
“Description of the Certificates-Book-Entry Certificates” in this prospectus
supplement.
Class
M-4 Certificates.
The
Class M-4 Certificates are not offered by this prospectus supplement. The
Class
M-4 Certificates, together with the Offered Mezzanine Certificates are referred
to in this prospectus supplement as the “Mezzanine Certificates”. The Class M-4
Certificates will have an initial certificate principal balance of approximately
$16,689,000.
The
pass-through rate on the Class M-4 Certificates will be variable and will
be
calculated for each Distribution Date as described below and under “Description
of the Certificates—Pass-Through Rates” in this prospectus supplement. The
pass-through rate for the Class M-4 Certificates will be a rate per annum
based
on one-month LIBOR plus an applicable spread, subject to a rate cap (adjusted
for the actual number of days elapsed in the related Interest Accrual Period)
equal to the product of (i) twelve and (ii) a fraction, expressed as a
percentage, the numerator of which is the amount of interest which accrued
on
the Mortgage Loans in the prior calendar month minus the fees payable to
the
Servicer, the Master Servicer and the Credit Risk Manager with respect to
the
Mortgage Loans for such Distribution Date and the net swap payment payable
to
the swap provider and any swap termination payment payable to the swap provider
which is not payable as a result of the occurrence of a swap provider trigger
event (to the extent such amount has not been paid by the Securities
Administrator from any upfront payment received pursuant to any related
replacement interest rate swap agreement that may be entered into by the
Supplemental Interest Trust Trustee) and the premium payable to the Class
A
Certificate Insurer for providing the certificate guaranty insurance policy,
in
each case for such Distribution Date, and the denominator of which is the
aggregate principal balance of the Mortgage Loans as of the Due Date in the
month preceding the month in which the Distribution Date occurs (or as of
the
Cut-off Date with respect to the first Distribution Date), after giving effect
to principal prepayments received during the Prepayment Period that includes
such Due Date. The initial spread relating to the Class M-4 Certificates
is
______% per annum. The Class M-4 Certificates initially evidence an aggregate
interest of approximately 4.50% in the trust.
Class
CE Certificates.
The
Class CE Certificates are not offered by this prospectus supplement. The
Class
CE Certificates will have an initial certificate principal balance of
approximately $3,522,526, which represents approximately 0.95% of the aggregate
principal balance of the Mortgage Loans as of the Cut-off Date.
Class
P Certificates.
The
Class P Certificates are not offered by this prospectus supplement. The Class
P
Certificates will have an initial certificate principal balance of $100 and
will
not be entitled to distributions in respect of interest. The Class P
Certificates will be entitled to all prepayment charges received in respect
of
the Mortgage Loans.
S-4
Residual
Certificates.
The
Class R Certificates (the “Residual Certificates”) which are not offered by this
prospectus supplement, will represent the residual interests in the
trust.
Credit
Enhancement
The
credit enhancement provided for the benefit of the holders of the Class A
Certificates, the holders of the Mezzanine Certificates and the Class A
Certificate Insurer will consist of excess interest, overcollateralization
and
subordination, each as described in this section and under “Description of the
Certificates-Credit Enhancement” and “-Overcollateralization Provisions” in this
prospectus supplement. In addition, certain payments of principal and interest
on the Class A Certificates will be insured by a certificate guaranty insurance
policy provided by the Class A Certificate Insurer as described under “The
Policy” in this prospectus supplement.
Excess
Interest.
The
Mortgage Loans bear interest each month in an amount that in the aggregate
is
expected to exceed the amount needed to distribute monthly interest on the
Class
A Certificates and Mezzanine Certificates and to pay certain fees and expenses
of the trust and the supplemental interest trust (including, but not limited
to,
any net swap payment payable to the Swap Provider and any swap termination
payment payable to the Swap Provider which is not payable as a result of
the
occurrence of a Swap Provider trigger event and the premium due to the Class
A
Certificate Insurer). Any excess interest from the Mortgage Loans each month
will be available to absorb realized losses on the Mortgage Loans and to
maintain or restore overcollateralization at required levels.
Subordination.
The
rights of the holders of the Mezzanine Certificates and the Class CE
Certificates to receive distributions will be subordinated, to the extent
described in this prospectus supplement, to the rights of the holders of
the
Class A Certificates.
In
addition, to the extent described under “Description of the
Certificates—Allocation
of Losses; Subordination” in this prospectus supplement,
• the
rights of the holders of the Class M-2, Class M-3, Class M-4 and Class CE
Certificates will be subordinated to the rights of the holders of the Class
M-1
Certificates;
• the
rights of the holders of the Class M-3, Class M-4 and Class CE Certificates
will
be subordinated to the rights of the holders of the Class M-2 Certificates;
• the
rights of the holders of the Class M-4 Certificates and Class CE Certificates
will be subordinated to the rights of the holders of the Class M-3 Certificates;
and
• the
rights of the holders of the Class CE Certificates will be subordinated to
the
rights of the holders of the Class M-4 Certificates.
Subordination
is intended to enhance the likelihood of regular distributions on the more
senior certificates in respect of interest and principal and to afford the
more
senior certificates protection against realized losses on the Mortgage Loans,
as
described under “Description of the Certificates—Allocation of Losses;
Subordination” in this prospectus supplement.
Overcollateralization.
The
aggregate principal balance of the Mortgage Loans as of the Cut-off Date
will
exceed the aggregate certificate principal balance of the Class A, Mezzanine
and
Class P Certificates on the Closing Date by approximately $3,522,526, which
will
equal the initial Certificate Principal Balance of the Class CE Certificates.
This amount represents approximately 0.95% of the aggregate principal balance
of
the Mortgage Loans as of the Cut-off Date, and is the initial amount of
overcollateralization that will be required to be provided by the mortgage
pool
under the pooling and servicing agreement. See
“Description of the Certificates-Overcollateralization Provisions” in this
prospectus supplement.
S-5
Allocation
of Losses.
If, on
any Distribution Date, there is not sufficient excess interest, Net Swap
Payments or overcollateralization (represented by the Class CE Certificates)
to
absorb realized losses on the Mortgage Loans as described under “Description of
the Certificates—Overcollateralization Provisions” in this prospectus
supplement, then realized losses on the Mortgage Loans will be allocated
to the
Class M-4, Class M-3, Class M-2 and Class M-1 Certificates, in that order,
in
each case until the certificate principal balance of each such class has
been
reduced to zero. The pooling and servicing agreement will not permit the
allocation of realized losses on the Mortgage Loans to the Class A Certificates;
however, investors in the Class A Certificates should realize that under
certain
loss scenarios, there will not be enough principal and interest on the Mortgage
Loans to pay the Class A Certificates all interest and principal amounts
to
which these certificates are then entitled. See
“Description of the Certificates—Allocation of Losses;
Subordination”
in
this prospectus supplement.
Unless
the Servicer collects subsequent recoveries on Mortgage Loans for which realized
losses were allocated to the Mezzanine Certificates, once realized losses
are
allocated to the Mezzanine Certificates, their certificate principal balances
will be permanently reduced by the amount so allocated. However, the amount
of
any realized losses allocated to the Mezzanine Certificates may be distributed
to the holders of those certificates according to the priorities set forth
under
“Description
of the Certificates—Overcollateralization
Provisions” in this prospectus supplement.
The
Policy. Certain
payments of principal and interest on the Class A Certificates will have
the
benefit of a certificate guaranty insurance policy (the “Policy”) pursuant to
which the Class A Certificate Insurer will unconditionally and irrevocably
guarantee (i) certain interest shortfalls on the Class A Certificates on
each
Distribution Date, (ii) if such distribution date is not in April 2037, the
amount, if any, by which the Certificate Principal Balance of the Class A
Certificates (after giving effect to all distributions to the Class A
Certificates on such Distribution Date) exceeds the aggregate principal balance
of the Mortgage Loans as of the last day of the related Due Period and (iii)
the
certificate principal balance of the Class A Certificates to the extent unpaid
in April 2037. As set forth in this prospectus supplement, the Policy will
not
cover any Net WAC Rate Carryover Amounts, Prepayment Interest Shortfalls
or
shortfalls resulting from the Relief Act or any increase in the Pass-Through
Rate applicable to the Class A Certificates as a result of the failure to
exercise the optional termination right on the first possible distribution
date
on which such right is exercisable. See
“The Policy” in this prospectus supplement.
Interest
Rate Swap Agreement
The
Class
A Certificates and the Mezzanine Certificates will have the benefit of an
Interest Rate Swap Agreement (the “Interest Rate Swap Agreement”) provided by
the Swap Provider for each Distribution Date commencing in May 2007 and
terminating immediately following the Distribution Date in September 2011,
unless terminated earlier in accordance with the provisions of the Interest
Rate
Swap Agreement.
Pursuant
to the Interest Rate Swap Agreement, on each Distribution Date, (i) the
Securities Administrator (on behalf of a supplemental interest trust and
from
funds of such trust) will be obligated to pay to the Swap Provider, a fixed
amount as described in this prospectus supplement (the “Securities Administrator
Swap Payment”); and (ii) the Swap Provider will be obligated to pay to the
supplemental interest trust for the benefit of the holders of the Class A
Certificates and the Mezzanine Certificates (the “Swap Provider Payment”), a
floating amount as described in this prospectus supplement.
A
net
payment will be required to be made on each Distribution Date (each such
net
payment, a “Net Swap Payment”) (a) by the Securities Administrator to the Swap
Provider, to the extent that the Securities Administrator Payment exceeds
the
corresponding Swap Provider Payment, or (b) by the Swap Provider to the
Securities Administrator, to the extent the Swap Provider Payment exceeds
the
corresponding Securities Administrator Payment.
S-6
On
each
Distribution Date, if the Swap Provider is required to make a Net Swap Payment,
such amount will be deposited into a supplemental interest trust and will
be
available for distribution to the Class A Certificates and the Mezzanine
Certificates in respect of any interest shortfall amounts, any realized losses
allocated to the Mezzanine Certificates as described in this prospectus
supplement and to maintain or restore the required level of
overcollateralization. If, on any Distribution Date, the Net Swap Payment
with
respect to the Class A Certificates and Mezzanine Certificates exceeds the
amount of the interest shortfall amounts, any realized losses allocated to
the
Mezzanine Certificates for such Distribution Date, after making the
distributions set forth under “Description of the Certificates—The Interest Rate
Swap Agreement and the Swap Provider” in this prospectus supplement, and amounts
necessary to maintain or restore the required level of overcollateralization
any
remaining amounts will be distributed to the Class CE Certificates. See
“Description of the Certificates—The Interest Rate Swap Agreement and the Swap
Provider” in this prospectus supplement.
Upon
early termination of the Interest Rate Swap Agreement, the Securities
Administrator (on behalf of a supplemental interest trust and from funds
of such
trust) or the Swap Provider may be liable to make a termination payment (the
“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 Securities Administrator is required to make a Swap Termination
Payment, that payment will be paid on the related Distribution Date, and
on any
subsequent Distribution Dates until paid in full, generally prior to any
distribution to certificateholders. See “Description of the Certificates—The
Interest Rate Swap Agreement and the Swap Provider” in this prospectus
supplement.
Amounts
payable by the Securities Administrator in respect of Net Swap Payments and
Swap
Termination Payments which are not payable as a result of the occurrence
of a
Swap Provider trigger event will be paid to the Swap Provider on each
Distribution Date before distributions to certificateholders and will first
be
deposited to the supplemental interest trust before payment to the Swap
Provider.
P&I
Advances
The
Servicer will be required to advance delinquent payments of principal and
interest on the Mortgage Loans, subject to the limitations described under
“Description of the Certificates—P&I Advances” in this prospectus
supplement. A successor servicer will be obligated to make any required
delinquency advance if the Servicer fails in its obligation to do so, to
the
extent provided in the pooling and servicing agreement. The Servicer or any
successor servicer, as the case may be, will be entitled to be reimbursed
for
these advances, and therefore these advances are not a form of credit
enhancement. See
“Servicing of the Mortgage Loans—Advances” in this prospectus supplement and
“Description of the Securities—Advances in Respect of Delinquencies” in the
prospectus.
Servicing
Fee
With
respect to each Mortgage Loan, the amount of the annual servicing fee that
will
be paid to the Servicer is, for a period of one full month, equal to one-twelfth
of the product of (a) 0.500% and (b) the outstanding principal balance of
such
Mortgage Loan. Such fee will be payable monthly, computed on the basis of
the
same principal amount and period respecting which any related interest payment
on such Mortgage Loan is computed. The obligation to pay the servicing fee
will
be limited to, and the servicing fee will be payable from the interest portion
of such monthly payments collected.
Master
Servicing Fee
With
respect to each Mortgage Loan, the amount of the annual master servicing
fee
that will be paid to the Master Servicer is, for a period of one full month,
equal to one-twelfth of the product of (a) 0.009% and (b) the outstanding
principal balance of such Mortgage Loan. Such fee will be payable monthly,
computed on the basis of the same principal amount and period respecting
which
any related interest payment on such Mortgage Loan is computed. Additionally,
the Master Servicer will retain any interest or other income earned on funds
held in the distribution account. The Master Servicer will pay the trustee
fee
and the custodial fees from its fee.
S-7
Class
A Certificate Insurer Premium
The
Class
A Certificate Insurer will be entitled to a monthly premium that will be
remitted to the Class A Certificate Insurer by the Securities Administrator.
For
each Distribution Date, the premium will be a per annum rate equal to 0.230%
calculated on an actual/360 basis of the class principal balance of the Class
A
Certificates as of such distribution date (without giving effect to any
distributions thereon on that distribution date).
Credit
Risk Manager’s Fee
With
respect to each Mortgage Loan, the amount of the annual credit risk manager’s
fee that will be paid to the credit risk manager is a fee, for a period of
one
full month, equal to one-twelfth of the product of (a) 0.010% and (b) the
outstanding principal balance of such Mortgage Loan. Such fee will be payable
monthly, computed on the basis of the same principal amount and period with
respect to which any related interest payment on such Mortgage Loan is computed.
The obligation to pay the credit risk manager’s fee will be limited to, and the
credit risk manager’s fee will be payable from the interest portion of such
monthly payments collected.
Optional
Termination
At
its
option and subject to certain conditions, the Servicer will be permitted
to
purchase all of the Mortgage Loans in the mortgage pool, together with any
properties in respect of the Mortgage Loans acquired on behalf of the trust,
and
thereby effect termination and early retirement of the certificates, after
the
aggregate principal balance of the Mortgage Loans (and properties acquired
in
respect of the Mortgage Loans), remaining in the trust as of the last day
of the
related due period has been reduced to less than or equal to 10% of the
aggregate principal balance of the Mortgage Loans as of the Cut-off Date.
In the
event the Servicer does not exercise such optional termination right, within
90
days after the first date that it is able to exercise such right, the Master
Servicer will have the right, subject to certain conditions, to exercise
such
optional termination right. If either the Servicer or Master Servicer exercises
such optional termination right, such party will be required to obtain the
consent of the Class A Certificate Insurer if (i) any amounts are owed to
the
Class A Certificate Insurer or (ii) the optional termination would result
in a
draw on the insurance policy issued by the Class A Certificate Insurer.
See
“Pooling and Servicing Agreement—Termination” in this prospectus supplement and
“Description of the Securities—Termination” in the prospectus.
Federal
Income Tax Consequences
Multiple
elections will be made to treat designated portions of the trust (exclusive
of
the reserve fund, the Interest Rate Swap Agreement, payments from the
supplemental interest trust or the obligation to make payments to the
supplemental interest trust) as real estate mortgage investment conduits
(each a
“REMIC”) for federal income tax purposes. See
“Material Federal Income Tax Considerations—REMICs —Characterization of
Investments in REMIC Securities” in the prospectus.
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 “Material Federal Income Tax Considerations” in the
prospectus.
Ratings
It
is a
condition to the issuance of the certificates that the Offered Certificates
receive at least the following ratings from Standard & Poor’s Ratings
Service, a division of The McGraw-Hill Companies, Inc. (“S&P”) and DBRS,
Inc. (“DBRS”), and with respect to the Class A Certificates, from Moody’s
Investors Service, Inc. (“Moody’s”):
S-8
Offered
Certificates
S&P
Moody’s
DBRS
Class
A
AAA
Aaa
AAA
Class
M-1
A+
NR
A
(high)
Class
M-2
A-
NR
A
(low)
Class
M-3
BBB-
NR
BBB
(low)
A
security rating does not address the frequency of prepayments on the Mortgage
Loans or the corresponding effect on yield to investors.
The
ratings assigned to the Class A Certificates will depend primarily upon the
creditworthiness of the Class A Certificate Insurer. Any reduction in a
rating assigned to the financial strength of the Class A Certificate Insurer
below the ratings initially assigned to the Class A Certificates may result
in a
reduction of one or more of the ratings assigned to the Class A
Certificates. Any downgrade revision or withdrawal of any of the ratings
assigned to the Class A Certificates may have an adverse affect on the market
price of the Class A Certificates. The Class A Certificate Insurer does
not guaranty the market price of the Class A Certificates nor does it guaranty
that the ratings on the Class A Certificates will not be revised or
withdrawn.
The
AAA
ratings by DBRS on the securities address the dual probability of default on
the
underlying mortgage loans and the non-payment by the Class A Certificate Insurer
under the Policy.
See
“Yield on the Certificates” and “Ratings” in this prospectus supplement and
“Yield 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. See
“Legal Investment” in this prospectus supplement and in the
prospectus.
Considerations
for Benefit Plan Investors
It
is
expected that the Offered Certificates may be purchased by, or with the assets
of, employee benefit plans subject to the Employee Retirement Income Security
Act of 1974, as amended (“ERISA”) or plans or arrangements (each, a “Plan”)
subject to section 4975 of the Internal Revenue Code of 1986, as amended (the
“Code”). Prior to the termination of the supplemental interest trust, Plans or
persons using assets of a Plan may purchase the Offered Certificates if the
purchase and holding meets the requirements of an investor-based class exemption
issued by the Department of Labor. Investors are encouraged to consult with
their counsel with respect to the consequences under ERISA and the Code of
a
Plan’s acquisition and ownership of the Offered Certificates. See
“Considerations for Benefit Plan Investors” in this prospectus supplement and
“ERISA Considerations” in the prospectus.
S-9
TRANSACTION
STRUCTURE
S-10
RISK
FACTORS
The
following information, which you should consider carefully, identifies
significant risks associated with an investment in the
certificates.
Second
Lien Mortgage Loans Risk.
All
of
the Mortgage Loans are secured by second liens on the related mortgaged
properties. The proceeds from any liquidation, insurance or condemnation
proceedings will be available to satisfy the outstanding balance of the Mortgage
Loans only to the extent that the claims of the related first lien mortgages
have been satisfied in full, including any related foreclosure costs. In certain
circumstances, where the Server determines that it would be uneconomical to
foreclose on the mortgaged property, the Servicer may modify or waive any term
of the Mortgage Loan, including accepting a lesser amount than stated in the
mortgage note in satisfaction of the mortgage note. In addition, the Servicer
shall be required to “charge off” any Mortgage Loan serviced by it that is
delinquent in payment for 180 days in accordance with the terms of the pooling
and servicing agreement. The foregoing considerations will be particularly
applicable to Mortgage Loans secured by second liens that have high combined
loan-to-value ratios because it is comparatively more likely that the Servicer
would determine foreclosure to be uneconomical in the case of such Mortgage
Loans. The rate of default of the Mortgage Loans may be greater than that of
mortgage loans secured by first liens on comparable properties. You should
consider the risk that to the extent losses on Mortgage Loans are not covered
by
available credit enhancement, there will be a delay in distributions to you
while a deficiency judgment against the mortgagor is sought and if such a
deficiency judgment cannot be obtained or is not pursued you may incur a
loss.
The
Mortgage Loans were underwritten to standards which do not conform to the
standards of Fannie Mae or Freddie Mac.
The
underwriting standards of the originators are intended to assess the ability
and
willingness of the mortgagor to repay the debt and to evaluate the adequacy
of
the property as collateral for the mortgage loan. The originators consider,
among other things, a mortgagor’s credit history, repayment ability and debt
service-to-income ratio, as well as the value, type and use of the mortgaged
property. As further described in this prospectus supplement, the underwriting
standards of the originators do not conform to Fannie Mae and Freddie Mac
guidelines.
In
addition, mortgage loans originated by the originators generally bear higher
rates of interest than mortgage loans originated in accordance with Fannie
Mae
and Freddie Mac guidelines and may experience rates of delinquency, foreclosure
and bankruptcy that are higher, and that may be substantially higher, than
those
experienced by mortgage loans underwritten in accordance with Fannie Mae and
Freddie Mac guidelines.
Furthermore,
changes in the values of mortgaged properties may have a greater effect on
the
delinquency, foreclosure, bankruptcy and loss experience of the Mortgage Loans
than on mortgage loans originated in accordance with Fannie Mae and Freddie
Mac
guidelines. No assurance can be given that the values of the related mortgaged
properties have remained or will remain at the levels in effect on the dates
of
origination of the related Mortgage Loans. See
“The Mortgage Pool—Underwriting Standards”in
this
prospectus supplement.
S-11
Mortgage
Loans with high combined loan-to-value ratios leave the related mortgagor with
little or no equity in the related mortgaged property.
Approximately
95.13% of the Mortgage Loans, by aggregate principal balance as of the Cut-off
Date, had a combined loan-to-value ratio at origination in excess of 80%.
An
overall decline in the residential real estate market, a rise in interest rates
over a period of time and the condition of a mortgaged property, as well as
other factors, may have the effect of reducing the value of the mortgaged
property from the appraised value at the time the Mortgage Loan was originated.
If there is a reduction in the value of the mortgaged property, the combined
loan-to-value ratio may increase over what it was at the time the Mortgage
Loan
was originated. Such an increase may reduce the likelihood of liquidation or
other proceeds being sufficient to satisfy the Mortgage Loan, and any losses
to
the extent not covered by the credit enhancement may affect the yield to
maturity of your certificates. There can be no assurance that the value of
a
mortgaged property estimated in any appraisal or review is equal to the actual
value of that mortgaged property at the time of that appraisal or review.
Investors should note that the values of the mortgaged properties may be
insufficient to cover the outstanding principal balance of the Mortgage Loans.
There can be no assurance that the combined loan-to-value ratio of any Mortgage
Loan determined at any time after origination will be less than or equal to
its
combined loan-to-value ratio at origination.
Developments
in specified states could have a disproportionate effect on the Mortgage Loans
due to the geographic concentration of the mortgaged
properties.
Approximately
16.06%, 15.64%, 6.38%, 6.22%, 5.24% and 4.64% of the Mortgage Loans by aggregate
principal balance as of the Cut-off Date, are secured by mortgaged properties
located in the State of Florida, California, Virginia, Arizona, Maryland and
New
York, respectively. Approximately 0.62% of the aggregate principal balance
of
the Mortgage Loans as of the Cut-off Date, are located in a single Florida
zip
code, which is the largest concentration of Mortgage Loans in a single zip
code.
If the residential real estate market in any of the foregoing states should
experience an overall decline in property values after the dates of origination
of the Mortgage Loans, the rates of delinquencies, foreclosures, bankruptcies
and losses on the Mortgage Loans may increase over historical levels of
comparable type loans, and may increase substantially. In addition, properties
located in California and Florida may be more susceptible than homes located
in
other parts of the country to certain types of uninsured hazards, such as
earthquakes, hurricanes, as well as floods, mudslides and other natural
disasters.
Balloon
Mortgage Loan Risk.
Mortgage
Loans that are balloon loans pose a risk because a borrower must make a large
lump sum payment of principal at the end of the loan term. If the borrower
is
unable to pay the lump sum or refinance such amount, the Servicer will not
be
obligated to advance the principal portion of that lump sum payment, you may
suffer a loss if the credit enhancement is not sufficient to cover such
shortfall. Many of the mortgagors in respect of the balloon loans may have
erratic payment histories, including multiple payment delinquencies that may
substantially impair their ability to refinance the balloon loans. Approximately
86.48% of the Mortgage Loans, by aggregate principal balance as of the Cut-off
Date, are balloon loans.
The
Mezzanine Certificates will be more sensitive to losses on the Mortgage Loans
than the Class A Certificates because they are subordinate to the Class A
Certificates.
The
weighted average lives of, and the yields to maturity on, the Class M-1, Class
M-2, Class M-3 and Class M-4 Certificates will be progressively more sensitive,
in that order, to the rate and timing of mortgagor defaults and the severity
of
ensuing losses on the Mortgage Loans. If the actual rate and severity of losses
on the Mortgage Loans is higher than those assumed by an investor in these
certificates, the actual yield to maturity of these certificates may be lower
than the yield anticipated by the investor based on such assumption. The timing
of losses on the Mortgage Loans will also affect an investor’s actual yield to
maturity, even if the rate of defaults and severity of losses over the life
of
the mortgage pool are consistent with an investor’s expectations. In general,
the earlier a loss occurs, the greater the effect on an investor’s yield to
maturity. Realized losses on the Mortgage Loans, to the extent they exceed
the
amount of excess interest, Net Swap Payments received from the Swap Provider
in
respect of the Interest Rate Swap Agreement and available for this purpose,
and
overcollateralization, will reduce the certificate principal balances of the
Mezzanine Certificates beginning with the class of Mezzanine Certificates then
outstanding with the lowest payment priority. As a result of such reductions,
less interest will accrue on each such class of Mezzanine Certificates than
would otherwise be the case. However, the amount of any realized losses
allocated to the Mezzanine Certificates may be distributed to the holders of
those certificates according to the priorities set forth under “Description of
the Certificates—Overcollateralization Provisions” and “Description of the
Certificates—The Interest Rate Swap Agreement and the Swap Provider” in this
prospectus supplement.
S-12
The
Mezzanine Certificates generally will not be entitled to receive principal
payments until May 2010 which may result in a greater risk of loss relating
to
these certificates.
Unless
the aggregate certificate principal balance of the Class A Certificates has
been
reduced to zero, the Mezzanine Certificates will not be entitled to any
principal distributions until at least May 2010 or a later date as provided
in
this prospectus supplement or during any period in which delinquencies on the
Mortgage Loans exceed the levels set forth under “Description of the
Certificates—Principal Distributions on the Certificates” in this prospectus
supplement. As a result, the weighted average lives of the Mezzanine
Certificates will be longer than would be the case if distributions of principal
were allocated among all of the certificates at the same time. As a result
of
the longer weighted average lives of the Mezzanine Certificates, the holders
of
these certificates have a greater risk of suffering a loss on their investments.
Further, because such certificates might not receive any principal if the
delinquency levels set forth under “Description of the Certificates—Principal
Distributions on the Certificates” in this prospectus supplement are exceeded,
it is possible for such certificates to receive no principal distributions
on a
particular Distribution Date even if no losses have occurred on the mortgage
pool.
The
Offered Certificates will be limited obligations solely of the Issuing Entity
and not of any other party.
The
Offered Certificates will not represent an interest in or obligation of the
Sponsor, the Depositor, the Servicer, the Master Servicer, the Securities
Administrator, the originators, the Trustee, the Class A Certificate Insurer
or
any of their respective affiliates. Neither the Offered Certificates (other
than
the Class A Certificates) nor the underlying Mortgage Loans will be guaranteed
or insured by any governmental agency or instrumentality, or by the Sponsor,
the
Depositor, the Servicer, the Master Servicer, the Securities Administrator,
the
originators, the Trustee, the Certificate Insurer or any of their respective
affiliates. Proceeds of the assets included in the trust and the supplemental
interest trust will be the sole source of payments on the Offered Certificates,
and there will be no recourse to the Sponsor, the Depositor, the Servicer,
the
originators, the Master Servicer, the Securities Administrator, the Trustee,
the
Certificate Insurer or any other entity in the event that these proceeds are
insufficient or otherwise unavailable to make payments provided for under the
Offered Certificates (other than the Class A Certificates).
S-13
The
rate and timing of principal distributions on the Class A Certificates and
the
Mezzanine Certificates will be affected by prepayment speeds and by the priority
of payment on such certificates.
The
rate
and timing of distributions allocable to principal on the Class A Certificates
and the Mezzanine Certificates will depend, in general, on the rate and timing
of principal payments (including prepayments and collections upon defaults,
liquidations and repurchases) on the Mortgage Loans and the allocation thereof
to pay principal on such certificates as described in “Description of the
Certificates—Principal Distributions on the Certificates” in this prospectus
supplement. As is the case with mortgage backed pass-through certificates
generally, the Offered Certificates are subject to substantial inherent
cash-flow uncertainties because the Mortgage Loans may be prepaid at any time.
However, with respect to approximately 4.09% of the Mortgage Loans, by related
aggregate principal balance as of the Cut-off Date, a prepayment may subject
the
related mortgagor to a prepayment charge. A prepayment charge may or may not
act
as a deterrent to prepayment of the related Mortgage Loan. See
“The Mortgage Pool” in this prospectus supplement.
Further, the Class A Certificate insurance policy does not insure against
prepayment interest shortfalls.
Generally,
when prevailing interest rates are increasing, prepayment rates on mortgage
loans tend to decrease; a decrease in the prepayment rates on the Mortgage
Loans
will result in a reduced rate of return of principal to investors in the Class
A
Certificates and the Mezzanine Certificates at a time when reinvestment at
such
higher prevailing rates would be desirable. Conversely, when prevailing interest
rates are declining, prepayment rates on mortgage loans tend to increase; an
increase in the prepayment rates on the Mortgage Loans will result in a greater
rate of return of principal to investors in the Class A Certificates and the
Mezzanine Certificates at a time when reinvestment at comparable yields may
not
be possible.
Distributions
of principal will be made to the holders of the Mezzanine Certificates according
to the priorities described in this prospectus supplement. The timing of
commencement of principal distributions and the weighted average life of each
such class of certificates will be affected by the rates of prepayment on the
Mortgage Loans experienced both before and after the commencement of principal
distributions on such classes. For further information regarding the effect
of
principal prepayments on the weighted average lives of the Offered Certificates,
see
“Yield on the Certificates” in this prospectus supplement, including the tables
entitled “Percent of Initial Certificate Principal Balance Outstanding at the
Specified Percentages of the Prepayment Assumption.”
The
yield to maturity on the Offered Certificates will depend on a variety of
factors.
The
yield
to maturity on the Offered Certificates will depend on:
·
the
applicable pass-through rate
thereon;
·
the
applicable purchase price;
·
the
rate and timing of principal payments (including prepayments and
collections upon defaults, liquidations and repurchases) and the
allocation thereof to reduce the certificate principal balance of
the
Offered Certificates;
·
the
rate, timing and severity of realized losses on the Mortgage Loans,
the
amount of excess interest generated by the Mortgage Loans and the
allocation to the Offered Certificates of certain interest shortfalls;
and
S-14
·
payments
due from the supplemental interest trust in respect of payments received
from the Swap Provider under the Interest Rate Swap
Agreement.
In
general, if the Offered Certificates are purchased at a premium and principal
distributions thereon occur at a rate faster than anticipated at the time of
purchase, the investor’s actual yield to maturity will be lower than that
assumed at the time of purchase. Conversely, if the Offered Certificates are
purchased at a discount and principal distributions thereon occur at a rate
slower than that anticipated at the time of purchase, the investor’s actual
yield to maturity will be lower than that originally assumed.
The
proceeds to the Depositor from the sale of the Offered Certificates were
determined based on a number of assumptions, including a prepayment assumption
of 100.00% PPC (based on the assumed prepayment rates set forth under “Yield on
the Certificates—Weighted Average Lives” in this prospectus supplement) and
weighted average lives corresponding thereto. No representation is made that
the
Mortgage Loans will prepay at such rate or at any other rate. The yield
assumptions for the Offered Certificates will vary as determined at the time
of
sale.
The
yield to maturity on the Mezzanine Certificates will be particularly sensitive
to the rate of prepayments on the Mortgage Loans.
The
multiple class structure of the Mezzanine Certificates causes the yield of
these
classes to be particularly sensitive to changes in the rates of prepayment
of
the Mortgage Loans. Because distributions of principal will be made to the
holders of such certificates according to the priorities described in this
prospectus supplement, the yield to maturity on such classes of certificates
will be sensitive to the rates of prepayment on the Mortgage Loans experienced
both before and after the commencement of principal distributions on such
classes. The yield to maturity on such classes of certificates will also be
extremely sensitive to losses due to defaults on the Mortgage Loans (and the
timing thereof), to the extent these losses are not covered by excess cashflow
otherwise payable to the Class CE Certificates, Net Swap Payments received
under
the Interest Rate Swap Agreement and available for this purpose, or allocated
to
a class of Mezzanine Certificates with a lower payment priority. Furthermore,
as
described in this prospectus supplement, the timing of receipt of principal
and
interest by the Mezzanine Certificates may be adversely affected by losses
even
if these classes of certificates do not ultimately bear such loss.
Violation
of consumer protection laws may result in losses on the Mortgage Loans and
your
certificates.
Applicable
state laws generally regulate interest rates and other charges, require certain
disclosure, and require licensing of originators of mortgage loans. In addition,
other state laws, public policy and general principles of equity relating to
the
protection of consumers, unfair and deceptive practices and debt collection
practices may apply to the origination, servicing and collection of the Mortgage
Loans. These laws have changed over time and have become more restrictive or
stringent with respect to specific activities of servicers and originators.
There can be no assurance that new state or federal legislation will not be
enacted that could be more restrictive and limit the ability of servicers to
foreclose or take other collection actions with respect to mortgage loans,
or
that may entitle the mortgagor to a refund of amounts previously paid and,
in
addition, could subject the owner of mortgage loans to damages and
administrative enforcement.
The
Mortgage Loans are also subject to federal laws, including:
·
the
Federal Truth-in-Lending Act and Regulation Z promulgated thereunder,
which require certain disclosures to the mortgagors regarding the
terms of
the Mortgage Loans;
S-15
·
the
Equal Credit Opportunity Act and Regulation B promulgated thereunder,
which prohibit discrimination on the basis of age, race, color, sex,
religion, marital status, national origin, receipt of public assistance
or
the exercise of any right under the Consumer Credit Protection Act,
in the
extension of credit;
·
the
Fair Credit Reporting Act, which regulates the use and reporting
of
information related to the mortgagor’s credit experience;
and
·
the
Depository Institutions Deregulation and Monetary Control Act of
1980,
which preempts certain state usury
laws.
Violations
of certain provisions of these federal and state laws may limit the ability
of
the Servicer to collect all or part of the principal of or interest on the
related Mortgage Loans and in addition could subject the trust to damages and
administrative enforcement. In particular, the failure of the originator to
comply with certain requirements of the Federal Truth-in-Lending Act, as
implemented by Regulation Z, could subject the trust to monetary penalties,
and
result in the mortgagors’ rescinding the Mortgage Loans against the trust. In
addition to federal law, some states have enacted, or may enact, laws or
regulations that prohibit inclusion of some provisions in Mortgage Loans that
have interest rates or origination costs in excess of prescribed levels, and
require that mortgagors be given certain disclosures prior to the consummation
of the Mortgage Loans and restrict the Servicer’s ability to foreclose in
response to mortgagor defaults. The failure of the originators to comply with
these laws could subject the trust to significant monetary penalties, could
result in the mortgagors rescinding the Mortgage Loans against the trust and/or
limit the Servicer’s ability to foreclose upon the related mortgaged properties
in the event of mortgagor defaults.
Under
the
anti-predatory lending laws of some states, the mortgagor is required to meet
a
net tangible benefits test in connection with the origination of the related
mortgage loan. This test may be highly subjective and open to interpretation.
As
a result, a court may determine that a mortgage loan does not meet the test
even
if the originator reasonably believed that the test was satisfied. Any
determination by a court that a Mortgage Loan included in the trust fund does
not meet the test will result in a violation of the state anti-predatory lending
law, in which case the Sponsor will be required to purchase that Mortgage Loan
from the trust fund.
The
Sponsor will represent that, as of the Closing Date, each Mortgage Loan is
in
compliance with applicable federal and state laws and regulations. In the event
of a breach of such representation, the Sponsor will be obligated to cure such
breach or repurchase or replace the affected Mortgage Loan in the manner
described in the prospectus. The Sponsor shall indemnify the trust for any
loss,
liability, cost, expense or charge caused by a violation of a predatory or
abusive lending law. If the Sponsor or SunTrust Bank is unable or otherwise
fails to satisfy such obligations and, in the case of payments on the Class
A
Certificates covered by the Class A Certificate insurance policy, the Class
A
Certificate Insurer defaults in its obligations, the yield on the Offered
Certificates may be materially and adversely affected.
Your
distributions could be adversely affected by the bankruptcy or insolvency of
certain parties.
The
Sponsor and the Interim Seller will treat the transfer of the Mortgage Loans
to
the Depositor as a sale of the Mortgage Loans. However, if the Sponsor or the
Interim Seller become bankrupt, the trustee in bankruptcy may argue that the
Mortgage Loans were not sold but were only pledged to secure a loan to the
Sponsor or the Interim Seller, as applicable. If that argument is made, you
could experience delays or reductions in payments on the certificates. If that
argument is successful, the bankruptcy trustee could elect to sell the Mortgage
Loans and pay down the certificates early. Thus, you could lose the right to
future payments of interest, and might suffer reinvestment loss in a lower
interest rate environment.
S-16
In
addition, if the Servicer or the Master Servicer becomes bankrupt, a bankruptcy
trustee or receiver may have the power to prevent the appointment of a successor
Servicer or successor Master Servicer, as applicable. Any related delays in
servicing could result in increased delinquencies or losses on the Mortgage
Loans.
Interest
generated by the Mortgage Loans may be insufficient to maintain or restore
overcollateralization.
The
Mortgage Loans are expected to generate more interest than is needed to pay
interest owed on the Class
A
Certificates and Mezzanine Certificates
and to
pay certain fees and expenses of the trust (including amounts payable to the
Class A Certificate Insurer under the Policy) and the supplemental interest
trust (including any Net Swap Payment payable to the Swap Provider and any
swap
termination payment payable to the Swap Provider which is not payable as a
result of the occurrence of a Swap Provider trigger event). Any remaining
interest generated by the Mortgage Loans will then be used to absorb losses
that
occur on the Mortgage Loans. After these financial obligations of the trust
are
covered, available excess interest generated by the Mortgage Loans will be
used
to maintain or restore the overcollateralization. We cannot assure you, however,
that enough excess interest will be generated to maintain or restore the
required level of overcollateralization. The factors described below will affect
the amount of excess interest that the Mortgage Loans will
generate:
·
Every
time a Mortgage Loan is prepaid in full, excess interest may be reduced
because such 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
may be
reduced because such 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 to make
required distributions on the Offered
Certificates.
·
Since
the Mortgage Loans have mortgage rates that do not adjust, when the
pass-through rates on the Offered Certificates increase, a greater
portion
of the interest generated by the Mortgage Loans will be required
to cover
interest on the Offered
Certificates.
Interest
payments on the Mortgage Loans may be insufficient to pay interest on your
certificates.
When
a
Mortgage Loan is prepaid in full, the mortgagor is charged interest only up
to
the date on which payment is made, rather than for an entire month. This may
result in a shortfall in interest collections available for payment on the
next
Distribution Date. The Servicer will be required to cover a portion of the
shortfall in interest collections that are attributable to voluntary prepayments
in full on the Mortgage Loans and received during the related Prepayment Period,
but only up to the servicing fee payable to the Servicer for the related
interest accrual period. In addition, if the Servicer fails to pay all or a
portion of these amounts, the Master Servicer will be required to pay such
amounts up to the compensation payable to the Master Servicer for the related
due period. If the credit enhancement is insufficient to cover this shortfall
in
excess of the amount the Servicer or the Master Servicer covers, and, in the
case of payments on the Class A Certificates covered by the Class A Certificate
insurance policy, the Class A Certificate Insurer defaults in its obligations,
you may incur a loss. In addition, none of the Servicer, the Master Servicer
or
the Class A Certificate Insurer will be required to cover shortfalls in interest
collections due to bankruptcy proceedings of the mortgagor or the application
of
the Servicemembers Civil Relief Act (the “Relief Act”) or similar state or local
laws.
S-17
On
any
Distribution Date, any shortfalls resulting from the application of the Relief
Act or similar state or local laws and any prepayment interest shortfalls to
the
extent not covered by compensating interest paid by the Servicer or the Master
Servicer will be allocated to reduce the interest accrued thereon, first, to
the
Class CE Certificates, second, to the Class M-4 Certificates, third, to the
Class M-3 Certificates, fourth, to the Class M-2 Certificates, fifth, to the
Class M-1 Certificates and sixth, to the Class A Certificates. The holders
of
the Class A Certificates and Mezzanine Certificates will be entitled to
reimbursement for any such interest shortfalls but only to the extent of
available funds and amounts payable by the Swap Provider under the Interest
Rate
Swap Agreement, and in the order of priority set forth under “Description of the
Certificates—The Interest Rate Swap Agreement and the Swap Provider” in this
prospectus supplement. If these shortfalls are allocated to the Class A
Certificates or Mezzanine Certificates the amount of interest paid to those
certificates will be reduced, adversely affecting the yield on your investment.
Further, the Class A Certificate insurance policy does not insure shortfalls
resulting from the application of the Servicemembers’ Civil Relief
Act.
The
liquidity of your certificates may be limited.
Neither
the Underwriters nor the Co-Manager have any obligation to make a secondary
market in the classes of Offered Certificates. There is therefore no assurance
that a secondary market will develop or, if it develops, that it will continue.
Consequently, you may not be able to sell your certificates readily or at prices
that will enable you to realize your desired yield. The market values of the
certificates are likely to fluctuate; these fluctuations may be significant
and
could result in significant losses to you.
The
secondary markets for asset-backed securities have experienced periods of
illiquidity and can be expected to do so in the future. Illiquidity can have
a
severely adverse effect on the prices of securities that are especially
sensitive to prepayment, credit or interest rate risk, or that have been
structured to meet the investment requirements of limited categories of
investors.
The
Interest Rate Swap Agreement and the Swap Provider.
Any
amounts received from the Swap Provider under the Interest Rate Swap Agreement
will be applied as described in this prospectus supplement to pay current and
carryforward interest, maintain or restore the required level of
overcollateralization, cover realized losses on the Mortgage Loans allocated
to
the Mezzanine Certificates and pay any Net WAC Rate Carryover Amounts (as
defined in this prospectus supplement under “Description of the
Certificates—Glossary”) to the Class A Certificates and Mezzanine Certificates.
However, no amounts will be payable by the Swap Provider unless the floating
amount owed by the Swap Provider on a Distribution Date exceeds the fixed amount
owed to the Swap Provider on such Distribution Date. This will generally not
occur except in periods when one-month LIBOR (as determined pursuant to the
Interest Rate Swap Agreement) exceeds 5.065%. No assurance can be made that
any
amounts will be received under the Interest Rate Swap Agreement, or that any
such amounts that are received will be sufficient to pay current and
carryforward interest, maintain or restore the required level of
overcollateralization, cover realized losses on the Mortgage Loans allocated
to
the Mezzanine Certificates or pay any Net WAC Rate Carryover Amounts. Any Net
Swap 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 pass-through rates of the certificates.
The combination of a rapid rate of prepayment and low prevailing interest rates
could adversely affect the yields on the Class A Certificates and Mezzanine
Certificates. In addition, any swap termination payment payable to the Swap
Provider in the event of early termination of the Interest Rate Swap Agreement
which was not caused by the occurrence of a Swap Provider trigger event will
reduce amounts available for distribution to certificateholders.
S-18
Upon
early termination of the Interest Rate Swap Agreement, the Securities
Administrator (on behalf of 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 Securities Administrator (on behalf
of the supplemental interest trust) is required to make a Swap Termination
Payment, that payment will be paid on 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 application of the available
distribution amount, the Mezzanine Certificates will bear the effects of any
shortfalls resulting from a Net Swap Payment or Swap Termination Payment by
the
Securities Administrator before such effects are borne by the Class A
Certificates and therefore, one or more classes of Mezzanine Certificates may
suffer a loss as a result of such payment.
To
the
extent that distributions on the Class A Certificates and Mezzanine Certificates
depend in part on payments to be received by the Securities Administrator (on
behalf of the supplemental interest trust) under the Interest Rate Swap
Agreement, the ability of the Securities Administrator to make such
distributions on the Class A Certificates and Mezzanine Certificates will be
subject to the credit risk of the Swap Provider. Although there is a mechanism
in place to facilitate replacement of the Interest Rate Swap Agreement upon
the
default or credit impairment of the Swap Provider, there can be no assurance
that any such mechanism will result in the ability of the Securities
Administrator to obtain a suitable replacement interest rate swap agreement.
On
the
date of this prospectus supplement, the credit ratings of the Swap Provider
are
the same as the ratings assigned to the Class A Certificates.
See
“Description of the Certificates—The Interest Rate Swap Agreement and the Swap
Provider” in this prospectus supplement.
The
return on your certificates could be reduced by shortfalls due to the
application of the Relief Act.
The
Relief Act and similar state or local laws provide relief to mortgagors who
enter active military service and to mortgagors in reserve status who are called
to active military service after the origination of their mortgage loans. The
ongoing military operations of the United States in Iraq and Afghanistan have
caused an increase in the number of citizens in active military duty, including
those citizens previously in reserve status. Under the Relief Act the interest
rate applicable to a mortgage loan for which the related mortgagor is called
to
active military service will be reduced from the percentage stated in the
related mortgage note to 6.00%. This interest rate reduction and any reduction
provided under similar state or local laws could result in an interest shortfall
because the Master Servicer and the Servicer will not be able to collect the
amount of interest which otherwise would be payable with respect to such
Mortgage Loan if the Relief Act or similar state or local law was not applicable
thereto. This shortfall will not be paid by the mortgagor on future due dates
or
advanced by the Servicer or the Master Servicer and, therefore, will reduce
the
amount available to pay interest to the certificateholders on subsequent
Distribution Dates. We do not know how many Mortgage Loans in the mortgage
pool
have been or may be affected by the application of the Relief Act or similar
state or local law. Further, the Class A Certificate insurance policy does
not
insure shortfalls resulting from the application of the Servicemembers’ Civil
Relief Act.
S-19
Possible
reduction or withdrawal of ratings on the Offered
Certificates.
Each
rating agency rating the Offered Certificates may change or withdraw its initial
ratings at any time in the future if, in its judgment, circumstances warrant
a
change. No person is obligated to maintain the ratings at their initial levels.
If a rating agency reduces or withdraws its rating on one or more classes of
the
Offered Certificates, the liquidity and market value of the affected
certificates is likely to be reduced.
The
ratings on the Class A Certificates are based primarily on claims-paying ability
of the Class A Certificate Insurer.
The
ratings on the Class A Certificates depend primarily on the claims-paying
ability of the Class A Certificate Insurer. Therefore, a reduction in the
claims-paying ability of the Class A Certificate Insurer will likely result
in a
corresponding reduction in the credit ratings assigned to the Class A
Certificates. A reduction in the credit rating assigned to the Class A
Certificates would reduce the market value of such certificates and may affect
your ability to sell them. The Class A Certificate Insurer does not guarantee
the market value of the Class A Certificates or the credit ratings assigned
to
them.
Suitability
of the Offered Certificates as investments.
The
Offered Certificates are not suitable investments for any investor that requires
a regular or predictable schedule of monthly payments or payment on any specific
date. The Offered Certificates are complex investments that should be considered
only by investors who, either alone or with their financial, tax and legal
advisors, have the expertise to analyze the prepayment, reinvestment, default
and market risk, the tax consequences of an investment and the interaction
of
these factors.
FICO
scores are not an indicator of future performance of
mortgagors.
Investors
are encouraged to be aware that FICO scores are based on past payment history
of
the mortgagor. Investors are encouraged not to rely on FICO scores as an
indicator of future borrower performance. See “The Mortgage Pool—Underwriting
Standards” in this prospectus supplement.
Recent
Developments in the Residential Mortgage Market May Adversely Affect the
Performance and Market Value of Your Securities
Recently,
the residential mortgage market in the United States has experienced a variety
of difficulties and changed economic conditions that may adversely affect the
performance and market value of your securities. Delinquencies and losses with
respect to residential mortgage loans generally have increased in recent months,
and may continue to increase, particularly in the subprime sector. In addition,
in recent months housing prices and appraisal values in many states have
declined or stopped appreciating, after extended periods of significant
appreciation. A continued decline or an extended flattening of those values
may
result in additional increases in delinquencies and losses on residential
mortgage loans generally, particularly with respect to second homes and investor
properties and with respect to any residential mortgage loans whose aggregate
loan amounts (including any subordinate liens) are close to or greater than
the
related property values.
In
addition, numerous residential mortgage loan originators that originate subprime
mortgage loans have recently experienced serious financial difficulties and,
in
some cases, bankruptcy, including originators of certain of the Mortgage Loans
such as New Century Mortgage Corporation and People’s Choice Home Loan, Inc.
See
“The Originators” in this prospectus supplement.
Those
difficulties have resulted in part from declining markets for 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. The inability to repurchase these loans in the
event of early payment defaults or breaches of representations and warranties
may also affect the performance and market value of your
securities.
S-20
All
capitalized terms used in this prospectus supplement will have the meanings
assigned to them under “Description of the Certificates—Glossary” or in the
prospectus under “Index of Defined Terms.”
USE
OF PROCEEDS
On
the
Closing Date, SunTrust Asset Funding, LLC (the “Sponsor”), will sell the
Mortgage Loans to GMAC Mortgage, LLC (the “Interim Seller”) on a servicing
released basis and the Interim Seller will sell the Mortgage Loans to ACE
Securities Corp. (the “Depositor”) on a servicing retained basis. The Depositor
will convey the Mortgage Loans to the trust fund in exchange for and
concurrently with the delivery of the certificates. Net proceeds from the sale
of the Offered Certificates will be applied by the Depositor to the purchase
of
the Mortgage Loans from the Interim Seller. Such net proceeds together with
certain classes of certificates not offered by this prospectus supplement will
represent the purchase price to be paid by the Depositor to the Interim Seller
for the Mortgage Loans, which proceeds will be used by the Interim Seller to
acquire the Mortgage Loans from the Sponsor. The Mortgage Loans were previously
purchased by the Sponsor directly from the originators.
THE
MORTGAGE POOL
General
The
pool
of mortgage loans (the “Mortgage Pool”) will consist of approximately
5,767 conventional,
one- to four-family, second lien, fixed-rate mortgage loans (the “Mortgage
Loans”) on residential real properties (the “Mortgaged Properties”) having an
aggregate principal balance as of the Cut-off Date of approximately $370,848,626
after application of scheduled payments due on or before the Cut-off Date
whether or not received and subject to a permitted variance of plus or minus
5%.
The Mortgage Loans have original terms to maturity of not greater than 30 years.
Approximately
13.52% of the Mortgage Loans, by aggregate principal balance as of the Cut-off
Date, provide for level monthly payments in an amount sufficient to amortize
fully the Mortgage Loans over their terms. Approximately 86.48% of the Mortgage
Loans, by aggregate principal balance as of the Cut-off Date, are balloon loans
(the “Balloon Loans”), which require the related mortgagors to make balloon
payments on the maturity date of such Balloon Loans that are larger than the
monthly payments made by such mortgagors on prior due dates in order to amortize
such Balloon Loans fully over their terms. None of the Mortgage Loans are
interest only loans.
All
of
the Mortgage Loans are secured by second mortgages or deeds of trust or other
similar security instruments creating second liens on residential properties.
The Mortgaged Properties generally consist of attached, detached or semi
detached, one-to-four family dwelling units, individual condominium units,
individual units in planned unit developments, and townhouses.
S-21
References
to percentages of the Mortgage Loans, unless otherwise noted, are calculated
based on the aggregate principal balance of the Mortgage Loans as of the Cut-off
Date.
The
mortgage rate (the “Mortgage Rate”) on each Mortgage Loan is the per annum rate
of interest specified in the related mortgage note as reduced by application
of
the Relief Act or similar state or local laws and bankruptcy
adjustments.
All
of
the Mortgage Loans have scheduled monthly payments due on the first day of
the
month (with respect to each Mortgage Loan, the “Due Date”). Each Mortgage Loan
will contain a customary “due-on-sale” clause which provides that the Mortgage
Loan must be repaid at the time of a sale of the related Mortgaged Property
or
assumed by a creditworthy purchaser of the related Mortgaged
Property.
Approximately
4.09% of the Mortgage Loans, by aggregate principal balance as of the Cut-off
Date, provide for payment by the mortgagor of a prepayment charge (a “Prepayment
Charge”) in limited circumstances on certain prepayments as provided in the
related mortgage note. Each such Mortgage Loan provides for payment of a
Prepayment Charge on certain partial prepayments and all prepayments in full
made within a certain period of time from the date of origination of the
Mortgage Loan, as provided in the related mortgage note. The amount of the
Prepayment Charge is as provided in the related mortgage note. The holders
of
the Class P Certificates will be entitled to all Prepayment Charges received
on
the Mortgage Loans, and these amounts will not be available for distribution
on
the other classes of certificates. Under the limited instances described under
the terms of the pooling and servicing agreement, the Servicer may waive the
payment of any otherwise applicable Prepayment Charge with respect to the
related Mortgage Loans. Investors should conduct their own analysis of the
effect, if any, that the Prepayment Charges, decisions by the Servicer with
respect to the waiver of the Prepayment Charges, may have on the prepayment
performance of the Mortgage Loans. The Depositor makes no representation as
to
the effect that the Prepayment Charges, and decisions by the Servicer with
respect to the waiver of the Prepayment Charges, may have on the prepayment
performance of the Mortgage Loans. See “Certain Legal Aspects of the Mortgage
Loans-Prepayment Charges and Late Fees; Debt-Acceleration Clauses” in the
prospectus.
In
addition, the Servicer may waive the collection of any otherwise applicable
Prepayment Charge, but only if: (i) such waiver is standard and customary in
servicing similar Mortgage Loans and such waiver is related to a default or
reasonably foreseeable default and would, in the reasonable judgment of the
Servicer maximize recovery of total proceeds taking into account the value
of
such Prepayment Charge and the related Mortgage Loan and, if such waiver is
made
in connection with a refinancing of the related Mortgage Loan, such refinancing
is related to a default or a reasonably foreseeable default, (ii) such
Prepayment Charge is unenforceable in accordance with applicable law or the
collection of such related Prepayment Charge would otherwise violate applicable
law or (iii) the collection of such Prepayment Charge would be considered
“predatory” pursuant to written guidance published or issued by any applicable
federal, state or local regulatory authority acting in its official capacity
and
having jurisdiction over such matters.
As
of the
Cut-off Date, none of the Mortgage Loans by aggregate principal balance are
30
days delinquent. No Mortgage Loan was greater than 30 days delinquent as of
the
Cut-off Date. A Mortgage Loan is considered to be delinquent when a payment
due
on any Due Date remains unpaid as of the close of business on the next monthly
Due Date. The determination as to whether a Mortgage Loan falls into this
category is made as of the close of business on the last business day of each
month. By way of example, a Mortgage Loan will be considered 30 days delinquent
if the borrower fails to make a scheduled payment due on July 1 by the close
of
business on August 1. Such loan will be reported as current at the end of July
and on the August statement to investors and will not be reported as delinquent
until the end of August and on the September statement to investors. The
following table sets forth the historical delinquency experience of the Mortgage
Loans. The historical delinquency information is based on the delinquency of
each Mortgage Loan since origination of such Mortgage Loan.
S-22
Historical
Delinquency
Historical
Delinquency
Number
of
Mortgage
Loans
Aggregate
Remaining
Principal
Balance
%
of Aggregate Remaining
Principal
Balance
Never
Delinquent
5,766
$
370,764,707.00
99.98
%
30
Days Delinquent
1
83,920.00
0.02
Total:
5,767
$
370,848,626.00
100.00
%
For
a
further description of the underwriting or selection criteria used to purchase
the mortgage pool assets, please see “The Mortgage Pool — Underwriting
Standards” and “The Sponsor” in this prospectus supplement.
Mortgage
Loan Characteristics
The
average principal balance of the Mortgage Loans at origination was approximately
$64,463. No Mortgage Loan had a principal balance at origination greater than
approximately $600,000 or less than approximately $10,000. The average principal
balance of the Mortgage Loans as of the Cut-off Date was approximately $64,305.
No Mortgage Loan had a principal balance as of the Cut-off Date greater than
approximately $597,052 or less than approximately $7,614.
The
Mortgage Loans had Mortgage Rates as of the Cut-off Date ranging from
approximately 4.625% per annum to approximately 22.250% per annum, and the
weighted average Mortgage Rate was approximately 11.447% per annum.
The
weighted average combined loan-to-value ratio of the Mortgage Loans at
origination was approximately 95.61%. At origination, no Mortgage Loan had
a
combined loan-to-value ratio greater than approximately 100.00% or less than
approximately 12.85%.
The
original combined loan-to-value ratio of a Mortgage Loan at any given time
is a
fraction, expressed as a percentage, the numerator of which is the sum of (a)
the principal balance of such Mortgage Loan at the date of origination plus
(b)
the principal balance of the first lien mortgage loan at the date of origination
of such first lien mortgage loan and the denominator of which is (a) in the
case
of a purchase, the lesser of the sales price of the related mortgaged property
and its appraised value determined in an appraisal obtained by the originator
at
origination of such Mortgage Loan or (b) in the case of a refinance, the
appraised value of the mortgaged property at the time of such refinance. No
assurance can be given that the value of any mortgaged property has remained
or
will remain at the level that existed on the appraisal or sale date. If
residential real estate values overall or in a particular geographic area
decline, the loan-to-value ratios might not be a reliable indicator of the
rates
of delinquencies, foreclosures and losses that could occur on those Mortgage
Loans.
The
weighted average remaining term to stated maturity of the Mortgage Loans was
approximately 196 months as of the Cut-off Date. None of the Mortgage Loans
will
have a first due date prior to October 1, 2005 or after April 1, 2007
or will have a remaining term to stated maturity of less than 115 months or
greater than 359 months as of the Cut-off Date. The latest maturity date of
any
Mortgage Loan is March 1, 2037.
S-23
As
of the
Cut-off Date, the weighted average FICO Score for the Mortgage Loans that were
scored is approximately 709. No Mortgage Loan which was scored had a FICO Score
as of the Cut-off Date greater than 822 or less than 620.
The
Mortgage Loans are expected to have the following additional characteristics
as
of the Cut-off Date (the sum in any column may not equal the total indicated
due
to rounding):
S-24
Amortization
Type of the Mortgage Loans
Amortization
Type
Number
of
Mortgage
Loans
Aggregate
Principal
Balance
Outstanding
as of
the
Cut-off Date
%
of Aggregate
Principal
Balance
Outstanding
as of
the
Cut-off Date
Fixed
- 10 Year
6
$
246,874
0.07
%
Fixed
- 15 Year
148
6,904,083
1.86
Fixed
- 20 Year
64
2,620,837
0.71
Fixed
- 30 Year
737
40,373,948
10.89
Balloon
- 15/30
4,812
320,702,884
86.48
Total:
5,767
$
370,848,626
100.00
%
Lien
Priority of the Mortgage
Loans
Lien
Priority
Number
of Mortgage Loans
Aggregate
Principal
Balance Outstanding as of
the
Cut-off Date
%
of Aggregate
Principal
Balance
Outstanding
as of
the
Cut-off Date
Second
Lien
5,767
$
370,848,626
100.00
%
Total:
5,767
$
370,848,626
100.00
%
Principal
Balances of the Mortgage Loans at
Origination
Principal
Balance
at
Origination ($)
Number
of
Mortgage
Loans
Aggregate
Principal
Balance
Outstanding
at Origination
%
of Aggregate
Principal
Balance
Outstanding
at Origination
0.01
-
50,000.00
2,941
$
92,336,201
24.84
%
50,000.01
-
100,000.00
1,985
139,804,514
37.61
100,000.01
-
150,000.00
459
56,454,418
15.19
150,000.01
-
200,000.00
239
42,071,531
11.32
200,000.01
-
250,000.00
65
14,689,093
3.95
250,000.01
-
300,000.00
44
12,662,507
3.41
300,000.01
-
350,000.00
6
1,958,886
0.53
350,000.01
-
400,000.00
20
7,808,994
2.10
400,000.01
-
450,000.00
1
415,000
0.11
450,000.01
-
500,000.00
6
2,959,800
0.80
550,000.01
-
600,000.00
1
600,000
0.16
Total:
5,767
$
371,760,944
100.00
%
S-25
Principal
Balances of the Mortgage Loans
as
of the Cut-off Date
Principal
Balance
as
of the Cut-off Date ($)
Number
of
Mortgage
Loans
Aggregate
Principal
Balance
Outstanding
as of the Cut-off Date
%
of Aggregate
Principal
Balance
Outstanding
as of
the
Cut-off Date
0.01
-
50,000.00
2,948
$
92,426,587
24.92
%
50,000.01
-
100,000.00
1,979
139,247,399
37.55
100,000.01
-
150,000.00
460
56,542,500
15.25
150,000.01
-
200,000.00
237
41,675,396
11.24
200,000.01
-
250,000.00
66
14,887,831
4.01
250,000.01
-
300,000.00
43
12,354,826
3.33
300,000.01
-
350,000.00
6
1,955,924
0.53
350,000.01
-
400,000.00
20
7,791,743
2.10
400,000.01
-
450,000.00
1
414,226
0.11
450,000.01
-
500,000.00
6
2,955,144
0.80
550,000.01
-
600,000.00
1
597,052
0.16
Total:
5,767
$
370,848,626
100.00
%
S-26
Geographic
Distribution of the Mortgaged Properties of the Mortgage
Loans
Location
Number
of Mortgage Loans
Aggregate
Principal
Balance
Outstanding
as of
the
Cut-off Date
%
of Aggregate Principal Balance
Outstanding
as of
the
Cut-off Date
Florida
760
$
59,566,191
16.06
%
California
660
58,017,970
15.64
Virginia
296
23,678,065
6.38
Arizona
344
23,075,028
6.22
Maryland
279
19,424,929
5.24
New
York
181
17,211,381
4.64
Illinois
270
16,524,688
4.46
Texas
319
12,234,896
3.30
Georgia
267
11,189,996
3.02
New
Jersey
144
10,699,910
2.89
North
Carolina
261
10,491,497
2.83
Nevada
138
9,455,284
2.55
Massachusetts
124
9,093,723
2.45
Colorado
156
8,987,897
2.42
Washington
132
8,133,004
2.19
Oregon
120
7,600,628
2.05
Utah
70
6,911,147
1.86
Connecticut
91
6,559,452
1.77
Minnesota
92
5,677,046
1.53
Michigan
156
5,623,334
1.52
Pennsylvania
120
5,063,901
1.37
South
Carolina
94
4,504,847
1.21
Hawaii
27
2,808,862
0.76
Idaho
46
2,577,213
0.69
Rhode
Island
39
2,499,238
0.67
Ohio
70
2,477,231
0.67
Missouri
57
2,224,810
0.60
New
Hampshire
42
1,898,539
0.51
Delaware
26
1,472,645
0.40
Indiana
49
1,340,578
0.36
Tennessee
28
1,212,924
0.33
Wisconsin
22
1,182,295
0.32
District
of Columbia
17
1,156,583
0.31
Maine
30
1,126,964
0.30
Alabama
36
1,092,413
0.29
Louisiana
27
1,078,648
0.29
Kentucky
24
909,766
0.25
Oklahoma
27
807,628
0.22
Mississippi
23
729,954
0.20
Kansas
16
717,778
0.19
New
Mexico
16
684,975
0.18
Montana
9
646,283
0.17
West
Virginia
11
557,780
0.15
Wyoming
8
407,765
0.11
Vermont
8
384,618
0.10
Arkansas
10
335,235
0.09
Nebraska
9
330,290
0.09
Iowa
12
278,349
0.08
Alaska
4
184,447
0.05
Total:
5,767
$
370,848,626
100.00
%
S-27
Mortgage
Rates of the Mortgage Loans as of the Cut-Off
Date
Mortgage
Rate (%)
Number
of Mortgage Loans
Aggregate
Principal
Balance
Outstanding
as of
the
Cut-off Date
%
of Aggregate
Principal
Balance
Outstanding
as of
the
Cut-off Date
4.500
-
4.999
2
$
177,119
0.05
%
5.000
-
5.499
3
385,156
0.10
5.500
-
5.999
8
645,067
0.17
6.000
-
6.499
8
489,901
0.13
6.500
-
6.999
21
1,759,177
0.47
7.000
-
7.499
32
1,959,870
0.53
7.500
-
7.999
126
8,784,530
2.37
8.000
-
8.499
147
8,046,960
2.17
8.500
-
8.999
248
14,559,980
3.93
9.000
-
9.499
188
12,693,383
3.42
9.500
-
9.999
480
27,880,880
7.52
10.000
-
10.499
553
35,527,281
9.58
10.500
-10.999
459
34,975,896
9.43
11.000
-
11.499
407
35,110,221
9.47
11.500
-
11.999
426
34,043,444
9.18
12.000
-
12.499
480
28,634,440
7.72
12.500
-
12.999
828
46,684,486
12.59
13.000
-
13.499
490
27,055,608
7.30
13.500
-
13.999
384
22,848,669
6.16
14.000
-
14.499
210
12,860,639
3.47
14.500
-
14.999
125
7,562,143
2.04
15.000
-
15.499
49
2,626,349
0.71
15.500
-
15.999
49
2,678,225
0.72
16.000
-
16.499
13
851,140
0.23
16.500
-
16.999
12
1,086,037
0.29
17.000
-
17.499
8
161,546
0.04
17.500
-
17.999
5
387,957
0.10
18.000
-
18.499
1
55,985
0.02
18.500
-
18.999
1
23,791
0.01
19.000
-
19.499
1
121,961
0.03
20.000
-
20.499
2
133,813
0.04
22.000
-
22.499
1
36,975
0.01
Total:
5,767
$
370,848,626
100.00
%
Original
Term to Stated Maturity of the Mortgage
Loans
Original
Term to Stated Maturity (Months)
Number
of Mortgage Loans
Aggregate
Principal
Balance Outstanding as of
the
Cut-off Date
%
of Aggregate
Principal
Balance
Outstanding
as of
the
Cut-off Date
120
6
$
246,874
0.07
%
180
4,960
327,606,967
88.34
240
64
2,620,837
0.71
360
737
40,373,948
10.89
Total:
5,767
$
370,848,626
100.00
%
S-28
Remaining
Term to Stated Maturity of
the
Mortgage Loans as of the Cut-off
Date
Remaining
Term to
Stated
Maturity (Months)
Number
of Mortgage Loans
Aggregate
Principal
Balance Outstanding as of
the
Cut-off Date
%
of Aggregate
Principal
Balance
Outstanding
as of
the
Cut-off Date
61
- 120
6
$
246,874
0.07
%
121
- 180
4,960
327,606,967
88.34
181
- 240
64
2,620,837
0.71
301
- 360
737
40,373,948
10.89
Total:
5,767
$
370,848,626
100.00
%
Property
Types of the Mortgage
Loans
Property
Type
Number
of Mortgage Loans
Aggregate
Principal
Balance Outstanding as of
the
Cut-off Date
%
of Aggregate
Principal
Balance
Outstanding
as of
the
Cut-off Date
Single
Family Residence
3,303
$
205,181,958
55.33
%
PUD
1,344
93,997,160
25.35
Condominium
648
40,658,356
10.96
2-4
Family
462
30,693,713
8.28
Townhouse
10
317,438
0.09
Total:
5,767
$
370,848,626
100.00
%
Original
Combined Loan-to-Value Ratios of the Mortgage
Loans
Original
Combined Loan-to-Value Ratio (%)
Number
of Mortgage Loans
Aggregate
Principal
Balance
Outstanding
as of
the
Cut-off Date
%
of Aggregate
Principal
Balance
Outstanding
as of
the
Cut-off Date
Less
than or equal to 50.00
17
$
982,905
0.27
%
50.01
- 55.00
8
879,369
0.24
55.01
- 60.00
9
606,551
0.16
60.01
- 65.00
5
586,078
0.16
65.01
- 70.00
28
1,859,136
0.50
70.01
- 75.00
23
2,396,901
0.65
75.01
- 80.00
99
10,730,957
2.89
80.01
- 85.00
142
8,179,921
2.21
85.01
- 90.00
1,097
54,309,014
14.64
90.01
- 95.00
1,267
72,907,108
19.66
95.01
- 100.00
3,072
217,410,688
58.63
Total:
5,767
$
370,848,626
100.00
%
S-29
Documentation
Type of the Mortgage Loans
Documentation
Type
Number
of Mortgage Loans
Aggregate
Principal
Balance Outstanding as of
the
Cut-off Date
%
of Aggregate
Principal
Balance
Outstanding
as of
the
Cut-off Date
Stated
Income Verified Assets
2,039
$
134,016,262
36.14
%
No
Ratio
1,775
128,558,195
34.67
Full/Alternative
1,101
56,252,424
15.17
No
Documentation
420
24,508,116
6.61
Stated
Income Stated Assets
352
21,937,291
5.92
No
Income Stated Assets
45
3,768,930
1.02
No
Income No Assets
16
1,022,575
0.28
Verified
Income Stated Assets
16
523,197
0.14
Reduced
3
261,637
0.07
Total:
5,767
$
370,848,626
100.00
%
FICO
Score for the Borrowers of the Mortgage
Loans
FICO
Score
Number
of Mortgage Loans
Aggregate
Principal
Balance Outstanding as of
the
Cut-off Date
%
of Aggregate
Principal
Balance
Outstanding
as of
the
Cut-off Date
600
- 624
43
$
2,191,655
0.59
%
625
- 649
247
12,398,660
3.34
650
- 674
1,012
62,052,962
16.73
675
- 699
1,509
101,066,249
27.25
700
- 724
1,052
69,663,892
18.78
725
- 749
866
56,320,949
15.19
750
- 774
635
41,111,258
11.09
775
- 799
312
19,151,979
5.16
800
- 824
91
6,891,021
1.86
Total:
5,767
$
370,848,626
100.00
%
Loan
Purpose of the Mortgage
Loans
Loan
Purpose
Number
of Mortgage Loans
Aggregate
Principal
Balance Outstanding as of
the
Cut-off Date
%
of Aggregate Principal Balance Outstanding as of
the
Cut-off Date
Purchase
3,904
$
248,792,722
67.09
%
Refinance
- Cashout
1,630
110,016,970
29.67
Refinance
- Rate Term
233
12,038,934
3.25
Total:
5,767
$
370,848,626
100.00
%
S-30
Occupancy
Status of the Mortgage
Loans
Occupancy
Status
Number
of Mortgage Loans
Aggregate
Principal
Balance Outstanding as of
the
Cut-off Date
%
of Aggregate
Principal
Balance
Outstanding
as of
the
Cut-off Date
Primary
3,997
$
286,214,234
77.18
%
Investment
1,367
57,093,564
15.40
Second
Home
403
27,540,828
7.43
Total:
5,767
$
370,848,626
100.00
%
The
occupancy status of a Mortgaged Property is as represented by the mortgagor
in
its loan application.
Prepayment
Penalty Months of the Mortgage Loans at
Origination
Prepayment
Penalty Months
at
Origination
Number
of
Mortgage
Loans
Aggregate
Principal
Balance Outstanding as of
the
Cut-off Date
%
of Aggregate
Principal
Balance
Outstanding
as of
the
Cut-off Date
None
5,575
$
355,666,347
95.91
%
12
11
764,797
0.21
24
143
11,884,210
3.20
36
38
2,533,273
0.68
Total:
5,767
$
370,848,626
100.00
%
Originator
of the Mortgage Loans
Originator
Number
of Mortgage Loans
Aggregate
Principal
Balance Outstanding as of
the
Cut-off Date
%
of Aggregate
Principal
Balance
Outstanding
as of
the
Cut-off Date
American
Home Mortgage
3,770
$
251,480,115
67.81
%
New
Century Mortgage Corporation
667
38,142,432
10.29
Quicken
Loans
372
20,112,907
5.42
People’s
Choice Home Loan, Inc.
250
18,938,160
5.11
Option
One Mortgage Corporation
333
16,789,185
4.53
MortgageIT
176
9,814,578
2.65
Lancaster
Mortgage
97
7,844,786
2.12
Fidelity
& Trust
93
7,158,351
1.93
First
Financial Equities, Inc.
9
568,112
0.15
Total:
5,767
$
370,848,626
100.00
%
S-31
Underwriting
Standards
The
principal originator of the Mortgage Loans, American Home Mortgage Corp.,
originated or acquired approximately 67.81% of the Mortgage Loans by aggregate
principal balance as of the Cut-off Date. New Century Mortgage Corporation
originated or acquired approximately 10.29% of the Mortgage Loans by aggregate
principal balance as of the Cut-off Date. The remainder of the Mortgage Loans
were originated or acquired by various originators, none of which have
originated more than 10% of the Mortgage Loans, by aggregate outstanding
principal balance as of the Cut-off Date.
General
Underwriting Standards
The
mortgage loans have been purchased by the seller from various banks, savings
and
loan associations, mortgage bankers and other mortgage loan originators and
purchasers of mortgage loans in the secondary market, and were originated
generally in accordance with the underwriting criteria described in this
section.
All
of
the mortgage loans are “conventional mortgage loans” (i.e., loans which are not
insured by the Federal Housing Authority or partially guaranteed by the
Department of Veterans Affairs).
The
underwriting standards applicable to the mortgage loans typically differ from,
and are, with respect to a substantial number of mortgage loans, generally
less
stringent than, the underwriting standards established by Fannie Mae or Freddie
Mac primarily with respect to original principal balances, loan-to-value ratios,
borrower income, credit score, required documentation, interest rates, borrower
occupancy of the mortgaged property and/or property types. To the extent the
programs reflect underwriting standards different from those of Fannie Mae
and
Freddie Mac, the performance of the mortgage loans thereunder may reflect higher
delinquency rates and/or credit losses. In addition, certain exceptions to
the
underwriting standards described in this confidential offering circular are
made
in the event that compensating factors are demonstrated by a prospective
borrower.
Generally,
each borrower will have been required to complete an application designed to
provide to the original lender pertinent credit information concerning the
borrower. As part of the description of the borrower’s financial condition, the
borrower generally will have furnished certain information with respect to
its
assets, liabilities, income (except as described below), credit history,
employment history and personal information, and furnished an authorization
to
apply for a credit report which summarizes the borrower’s credit history with
local merchants and lenders and any record of bankruptcy. The borrower may
also
have been required to authorize verifications of deposits at financial
institutions where the borrower had demand or savings accounts. In the case
of
investment properties and two- to four-unit dwellings, income derived from
the
mortgaged property may have been considered for underwriting purposes, in
addition to the income of the borrower from other sources. With respect to
mortgaged properties consisting of vacation or second homes, no income derived
from the property generally will have been considered for underwriting purposes.
In the case of certain borrowers with acceptable compensating factors, income
and/or assets may not be required to be stated (or verified) in connection
with
the loan application.
Based
on
the data provided in the application and certain verifications (if required),
a
determination is made by the original lender that the borrower’s monthly income
(if required to be stated) will be sufficient to enable the borrower to meet
its
monthly obligations on the mortgage loan and other expenses related to the
property such as property taxes, utility costs, standard hazard insurance and
other fixed obligations other than housing expenses. Generally, scheduled
payments on a mortgage loan during the first year of its term plus taxes and
insurance and all scheduled payments on obligations that extend beyond ten
months equal no more than a specified percentage not in excess of 60% of the
prospective borrower’s gross income. The percentage applied varies on a
case-by-case basis depending on a number of underwriting criteria, including,
without limitation, the loan-to-value ratio of the mortgage loan. The originator
may also consider the amount of liquid assets available to the borrower after
origination. Generally, the borrower on a second lien mortgage loan is not
required to obtain a mortgage insurance policy, but is required to obtain title
insurance to validate the lien position on the related mortgaged
property.
S-32
The
adequacy of the mortgaged property as security for repayment of the related
mortgage loan will generally have been determined by an appraisal in accordance
with pre-established appraisal procedure standards for appraisals established
by
or acceptable to the originator. All appraisals conform to the Uniform Standards
of Professional Appraisal Practice adopted by the Appraisal Standards Board
of
the Appraisal Foundation and must be on forms acceptable to Fannie Mae and/or
Freddie Mac. Appraisers may be staff appraisers employed by the originator
or
independent appraisers selected in accordance with pre-established appraisal
procedure standards established by the originator. The appraisal procedure
standards generally will have required the appraiser or an agent on its behalf
to personally inspect the mortgaged property and to verify whether the mortgaged
property was in good condition and that construction, if new, had been
substantially completed. The appraisal generally will have been based upon
a
market data analysis of recent sales of comparable properties and, when deemed
applicable, an analysis based on the current cost of constructing or purchasing
a similar property.
Modified
Standards
In
comparison to the “general” underwriting standards described above, the
underwriting standards applicable to mortgage loans under an “alternative”
mortgage loan underwriting program permit different underwriting criteria,
additional types of mortgaged properties or categories of borrowers such as
“foreign nationals” without a credit score who hold certain types of visas and
have acceptable credit references and include certain other less restrictive
parameters. Generally, relative to the “general” underwriting standards, these
standards include higher loan amounts, higher maximum loan-to-value ratios,
higher maximum “combined” loan-to-value ratios (in each case, relative to
mortgage loans with otherwise similar characteristics) in cases of simultaneous
primary and secondary financings, less restrictive requirements for “equity take
out” refinancings, the removal of limitations on the number of permissible
mortgage loans that may be extended to one borrower and the ability to originate
mortgage loans with combined loan-to-value ratios in excess of 80%. In addition,
as it pertains to second liens, with respect to eligible borrowers who meet
certain underwriting criteria, mortgage loans may be originated with
combined-loan-to-value ratios of up to approximately 100% with no down payment
or a nominal down payment.
Certain
of the mortgage loans have been originated under reduced documentation,
no-documentation or no-ratio programs, which require less documentation and
verification than do traditional full documentation programs. Generally, under
a
reduced documentation program, verification of either a borrower’s income or
assets, but not both, is undertaken by the originator. Under a no-ratio program,
certain borrowers with acceptable compensating factors will not be required
to
provide any information regarding income and no other investigation regarding
the borrower’s income will be undertaken. Under a no-documentation program, no
verification of a borrower’s income or assets is undertaken by the originator.
The underwriting for such mortgage loans may be based primarily or entirely
on
an appraisal of the mortgaged property, the loan-to-value ratio at origination
and/or the borrower’s credit score.
Investors
should note that changes in the values of mortgaged properties may have a
greater effect on the delinquency, foreclosure, bankruptcy and loss experience
of the mortgage loans included in the mortgage pool than on mortgage loans
originated in a more traditional manner. No assurance can be given that the
values of the related mortgaged properties have remained or will remain at
the
levels in effect on the dates of origination of the related mortgage
loans.
S-33
The
information set forth below under “American
Home Mortgage Corp.”
has been
provided by American Home Mortgage Corp. because 20% or more of the Mortgage
Loans, by aggregate principal balance as of the Cut-off Date, have been
originated by American Home Mortgage Corp.
American
Home Mortgage Corp.
General
American
Home Mortgage Corp. (“American Home”) is a New York corporation. American Home
conducts lending through retail and wholesale loan production offices and its
correspondent channel as well as its direct-to-consumer channel supported by
American Home's call center. American Home operates more than 550 retail and
wholesale loan production offices located in 47 states and the District of
Columbia and makes loans throughout all 50 states and the District of Columbia.
American Home has been originating mortgage loans since its incorporation in
1988, and has been originating second-lien mortgage loans since such date.
The
principal executive offices of American Home are located at 538 Broadhollow
Road, Melville, New York11747.
The
following table reflects American Home’s originations of second-lien mortgage
loans for the past three years:
American
Home is not aware of any material legal proceedings pending against it or
against any of its property, including any proceedings known to be contemplated
by governmental authorities material to the holders of the
Certificates.
Underwriting
Criteria
The
following information generally describes American Home’s underwriting
guidelines with respect to second-lien mortgage loans originated pursuant to
its
“conforming” or “prime” underwriting guidelines and its Alt-A underwriting
guidelines.
The
mortgage loans have been purchased or originated, underwritten and documented
in
accordance with the guidelines of Fannie Mae and Freddie Mac, the underwriting
guidelines of specific private investors, and the non-conforming or Alt-A
underwriting guidelines established by American Home.
American
Home’s second-lien non-conforming underwriting guidelines are similar to those
of the government sponsored enterprises Fannie Mae and Freddie Mac, but these
loans are “non-conforming” in that they may not conform to the maximum loan
amounts and in some cases to the underwriting guidelines of Fannie Mae and
Freddie Mac. These non-conforming loans do not conform to and are not insurable
by the Federal Housing Administration nor can they be guaranteed by the U.S.
Department of Veterans Affairs.
S-34
American
Home’s underwriting philosophy is to weigh all risk factors inherent in the loan
file, giving consideration to the individual transaction, borrower profile,
the
level of documentation provided and the property used to collateralize the
debt.
These standards are applied in accordance with applicable federal and state
laws
and regulations. Exceptions to the underwriting standards may be permitted
where
compensating factors are present. In the case of investment properties and
two-
to four-unit dwellings, income derived from the mortgage property may have
been
considered for underwriting purposes, in addition to the income of the mortgagor
from other sources. With respect to second homes and vacation properties, no
income derived from the property will have been considered for underwriting
purposes. Because each loan is different, American Home expects and encourages
underwriters to use professional judgment based on their experience in making
a
lending decision.
American
Home underwrites a borrower’s creditworthiness based solely on information that
American Home believes is indicative of the applicant’s willingness and ability
to pay the debt they would be incurring.
Non-conforming
loans are generally documented to the requirements of Fannie Mae and Freddie
Mac, in that the borrower provides the same information on the loan application
along with documentation to verify the accuracy of the information on the
application such as income, assets, other liabilities, etc. Certain
non-conforming stated income or stated asset products allow for less
verification documentation than Fannie Mae or Freddie Mac require. Certain
non-conforming Alt-A products also allow for less verification documentation
than Fannie Mae or Freddie Mac require. For these Alt-A products, the borrower
may not be required to verify employment income, assets required to close or
both. For some other Alt-A products, the borrower is not required to provide
any
information regarding employment income, assets required to close or both.
Alt-A
products with less verification documentation generally have other compensating
factors such as higher credit score or lower combined loan-to-value
requirements.
American
Home obtains a credit report for each borrower that summarizes each borrower’s
credit history. The credit report contains information from the three major
credit repositories, Equifax, Experian and TransUnion. These companies have
developed scoring models to identify the comparative risk of delinquency among
applicants based on characteristics within the applicant’s credit report. A
borrower’s credit score represents a comprehensive view of the borrower’s credit
history risk factors and is indicative of whether a borrower is likely to
default on a loan. Some of the factors used to calculate credit scores are
a
borrower’s incidents of previous delinquency, the number of credit accounts a
borrower has, the amount of available credit that a borrower has utilized,
the
source of a borrower’s existing credit, and recent attempts by a borrower to
obtain additional credit. Applicants who have higher credit scores will, as
a
group, have fewer defaults than those who have lower credit scores. The minimum
credit score allowed by American Home non-conforming loan guidelines for these
loans is 620 and the average is typically over 700. For American Home Alt-A
products, the minimum credit score is generally 580. If the borrowers do not
have a credit score they must have an alternative credit history showing at
least three trade lines with no payments over 60 days past due in the last
twelve months.
In
addition to reviewing the borrower’s credit history and credit score, American
Home underwriters closely review the borrower’s housing payment history. In
general, for non-conforming loans the borrower should not have made any mortgage
payments over 30 days after the due date for the most recent twelve months.
In
general, for Alt-A loans, the borrower may have no more than one payment that
was made over 30 days after the due date for the most recent twelve
months.
In
order
to determine if a borrower qualifies for a second-lien non-conforming loan,
the
loans have been either approved by Fannie Mae’s Desktop Underwriter, Freddie
Mac’s Loan Prospector automated underwriting systems, a customized form of
Fannie Mae’s Desktop Underwriter called Custom Desktop Underwriter, or they have
been manually underwritten by American Home’s underwriters. American Home’s
Alt-A loan products generally have been approved manually by American Home’s
senior underwriters. For manually underwritten loans, the underwriter must
ensure that the borrower’s income will support the total housing expense on an
ongoing basis. Underwriters may give consideration to borrowers who have
demonstrated an ability to carry a similar or greater housing expense for an
extended period. In addition to the monthly housing expense, the underwriter
must evaluate the borrower’s ability to manage all recurring payments on all
debts, including the monthly housing expense. When evaluating the ratio of
all
monthly debt payments to the borrower’s monthly income (debt-to-income ratio),
the underwriter should be aware of the degree and frequency of credit usage
and
its impact on the borrower’s ability to repay the loan. For example, borrowers
who lower their total obligations should receive favorable consideration and
borrowers with a history of heavy usage and a pattern of slow or late payments
should receive less flexibility.
S-35
Every
mortgage loan is secured by a property that has been appraised by a licensed
appraiser in accordance with the Uniform Standards of Professional Appraisal
Practice of the Appraisal Foundation. The appraisers perform on-site inspections
of the property and report on the neighborhood and property condition in factual
and specific terms. Each appraisal contains an opinion of value that represents
the appraiser’s professional conclusion based on market data of sales of
comparable properties and a logical analysis with adjustments for differences
between the comparable sales and the subject property and the appraiser’s
judgment. In addition, each appraisal is reviewed for accuracy and consistency
by American Home’s vendor management company or an underwriter of American Home
or a mortgage insurance company contract underwriter.
The
appraiser’s value conclusion is used to calculate the ratio (combined
loan-to-value) of the loan amount(s) to the value of the property. For loans
made to purchase a property, this ratio is based on the lower of the sales
price
of the property and the appraised value. American Home sets various maximum
combined loan-to-value ratios based on the loan amount, property type, loan
purpose and occupancy of the subject property securing the loan. In general,
American Home requires lower combined loan-to-value ratios for those loans
that
are perceived to have a higher risk, such as high loan amounts, loans in which
additional cash is being taken out on a refinance transaction, loans on second
homes or loans on investment properties. A lower combined loan-to-value ratio
requires a borrower to have more equity in the property, which is a significant
additional incentive to the borrower to avoid default on the loan.
American
Home realizes that there may be some acceptable quality loans that fall outside
published guidelines and encourages “common sense” underwriting. Because a
multitude of factors are involved in a loan transaction, no set of guidelines
can contemplate every potential situation. Therefore, each case is weighed
individually on its own merits and exceptions to American Home’s underwriting
guidelines are allowed if sufficient compensating factors exist to offset any
additional risk due to the exception.
Additional
Information Concerning the Mortgage Loans
The
description in this prospectus supplement of the Mortgage Pool and the Mortgaged
Properties is based upon the Mortgage Pool as constituted as of the close of
business on the Cut-off Date, as adjusted for the scheduled principal payments
due on or before such date. Prior to the issuance of the certificates, Mortgage
Loans may be removed from the Mortgage Pool as a result of incomplete
documentation or otherwise if the Depositor deems the removal necessary or
desirable, and may be prepaid at any time. A limited number of other mortgage
loans may be included in the Mortgage Pool prior to the issuance of the
certificates unless including these mortgage loans would materially alter the
characteristics of the Mortgage Pool as described in this prospectus supplement.
The Depositor believes that the information set forth in this prospectus
supplement will be representative of the characteristics of the Mortgage Pool
as
it will be constituted at the time the certificates are issued, although the
range of Mortgage Rates and maturities and other characteristics of the Mortgage
Loans may vary. If, as of the Closing Date, any material pool characteristic
differs by 5% or more from the description in this prospectus supplement,
revised disclosure will be provided either in a supplement to this prospectus
supplement or in a Current Report on Form 8-K.
S-36
YIELD
ON THE CERTIFICATES
General
Prepayment Considerations
The
rate
of principal payments on the Offered Certificates, the aggregate amount of
distributions on such certificates and the yield to maturity of such
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 rate of principal prepayments thereon (including for
this purpose, payments resulting from refinancings, liquidations of the Mortgage
Loans due to defaults, casualties, condemnations and repurchases, whether
optional or required, by the Depositor, the Servicer or the Sponsor). The
Mortgage Loans may be prepaid by the mortgagors at any time; however, as
described under “The Mortgage Pool” in this prospectus supplement, with respect
to approximately 4.09% of the Mortgage Loans, in each case by related aggregate
principal balance as of the Cut-off Date, a prepayment may subject the related
mortgagor to a Prepayment Charge.
Prepayments,
liquidations and repurchases of the Mortgage Loans will result in distributions
in respect of principal to the holders of the class or classes of Offered
Certificates then entitled to receive distributions that otherwise would be
distributed over the remaining terms of the Mortgage Loans. Since the rates
of
payment of principal on the Mortgage Loans will depend on future events and
a
variety of factors, no assurance can be given as to that rate or the rate of
principal prepayments. The extent to which the yield to maturity of any class
of
Offered Certificates may vary from the anticipated yield will depend upon the
degree to which the Offered Certificates are purchased at a discount or premium
and the degree to which the timing of payments thereon is sensitive to
prepayments on the Mortgage Loans. Further, an investor should consider, in
the
case of any Offered Certificate purchased at a discount, the risk that a slower
than anticipated rate of principal payments on the Mortgage Loans could result
in an actual yield to the investor that is lower than the anticipated yield.
In
the case of any Offered Certificate purchased at a premium, there is a risk
that
a faster than anticipated rate of principal payments could result in an actual
yield to the investor that is lower than the anticipated yield. In general,
the
earlier prepayments of principal are made on the Mortgage Loans, the greater
the
effect on the yield to maturity of the Offered Certificates. As a result, the
effect on an investors’ yield of principal payments occurring at a rate higher
(or lower) than the rate anticipated by the investor during the period
immediately following the issuance of the Offered Certificates would not be
fully offset by a subsequent like reduction (or increase) in the rate of
principal payments.
It
is
highly unlikely that the Mortgage Loans will prepay at any constant rate until
maturity or that all of the Mortgage Loans will prepay at the same rate.
Moreover, the timing of prepayments on the Mortgage Loans may significantly
affect the yield to maturity on the Offered Certificates, even if the average
rate of principal payments experienced over time is consistent with an
investor’s expectation.
The
rate
of payments (including prepayments) on pools of mortgage loans is influenced
by
a variety of economic, geographic, social and other factors. If prevailing
mortgage rates fall significantly below the Mortgage Rates on the Mortgage
Loans, the rate of prepayment and refinancing would be expected to increase.
Conversely, if prevailing mortgage rates rise significantly above the Mortgage
Rates on the Mortgage Loans, the rate of prepayment on the Mortgage Loans would
be expected to decrease. Other factors affecting prepayment of mortgage loans
include changes in mortgagors’ housing needs, job transfers, unemployment,
mortgagors’ net equity in the mortgaged properties and servicing decisions.
There can be no certainty as to the rate of prepayments on the Mortgage Loans
during any period or over the life of the certificates. See “Yield
Considerations” in the prospectus.
S-37
Because
principal distributions are paid to certain classes of Offered Certificates
before other classes, holders of classes of Offered Certificates having a later
priority of payment bear a greater risk of losses than holders of classes having
earlier priorities for distribution of principal. This is because the
certificates having a later priority of payment will represent an increasing
percentage interest in the trust fund during the period prior to the
commencement of distributions of principal on these certificates. As described
under “Description of the Certificates—Principal Distributions on the
Certificates” in this prospectus supplement, prior to the Stepdown Date, all
principal payments on the Mortgage Loans will be allocated to the Class A
Certificates. Thereafter, as further described in this prospectus supplement,
during certain periods, subject to certain delinquency triggers described in
this prospectus supplement, all principal payments on the Mortgage Loans will
be
allocated among the Class A Certificates and all classes of the Mezzanine
Certificates in the priorities described under “Description of the
Certificates—Principal Distributions on the Certificates” in this prospectus
supplement.
In
general, defaults on mortgage loans are expected to occur with greater frequency
in their early years. In addition, default rates may be higher for mortgage
loans used to refinance an existing mortgage loan. In the event of a mortgagor’s
default on a Mortgage Loan, there can be no assurance that recourse will be
available beyond the specific Mortgaged Property pledged as security for
repayment. See “The Mortgage Pool—Underwriting Standards” in this prospectus
supplement.
Special
Yield Considerations
The
Mortgage Rates on the Mortgage Loans are fixed and will not vary with any index.
The Pass-Through Rate on the Offered Certificates will adjust monthly based
upon
One-Month LIBOR, subject to the Net WAC Pass-Through Rate (as defined under
“Description of the Certificates—Glossary” in this prospectus supplement), with
the result that increases in the Pass-Through Rates on such certificates may
be
limited for extended periods in a rising interest rate environment. The interest
due on the Mortgage Loans during any Due Period, net of the expenses of the
trust and the supplemental interest trust (including any Net Swap Payment and
any Swap Termination Payment payable to the Swap Provider which was not caused
by the occurrence of a Swap Provider Trigger Event), may not equal the amount
of
interest that would accrue at One-Month LIBOR plus the applicable spread on
the
Offered Certificates during the related Interest Accrual Period; however, any
shortfall of this kind will be payable to the holders of such certificates,
but
only to the extent and in the priority described under “Description of the
Certificates—Overcollateralization Provisions”, “Description of the
Certificates—The Interest Rate Swap Agreement and the Swap Provider”, and
(solely with respect to the Class A Certificates) “The Policy” in this
prospectus supplement.
If
the
pass-through rates on the Class A Certificates or Mezzanine Certificates are
limited by the Net WAC Pass-Through Rate for any Distribution Date, the
resulting interest shortfalls, which are referred to in this prospectus
supplement as “Net WAC Rate Carryover Amounts”, may be recovered by the holders
of such certificates on such Distribution Date or on future Distribution Dates,
to the extent that on such 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 trust
and the supplemental interest trust (including any Net Swap Payment payable
to
the Swap Provider and any Swap Termination Payment payable to the Swap Provider
which was not caused by the occurrence of a Swap Provider Trigger Event). In
addition, any Net Swap Payment payable by the Swap Provider on any given
Distribution Date will be available to pay any Net WAC Rate Carryover Amounts
remaining unpaid on such Distribution Date after taking into account any amounts
paid in respect thereof from collections, advances and other recoveries on
the
Mortgage Loans. The Policy will not cover any Net WAC Rate Carryover Amounts.
The ratings on the Class A Certificates and Mezzanine Certificates will not
address the likelihood of any such recovery of such interest shortfalls by
holders of those certificates from amounts received or advanced on the Mortgage
Loans.
S-38
As
described under “Description of the Certificates—Allocation of Losses;
Subordination”, amounts otherwise distributable to holders of the Mezzanine
Certificates and the Class CE Certificates may be made available to protect
the
holders of the Class A Certificates against interruptions in distributions
due
to certain mortgagor delinquencies, to the extent not covered by P&I
Advances. Such delinquencies may affect the yield to investors in the Mezzanine
Certificates and, even if subsequently cured, will affect the timing of the
receipt of distributions by the holders of the Mezzanine Certificates. In
addition, the rate of delinquencies or losses will affect the rate of principal
payments on the Mezzanine Certificates. See “Description of the
Certificates—Principal Distributions on the Certificates” in this prospectus
supplement.
Weighted
Average Lives
Weighted
average life refers to the average amount of time that will elapse from the
date
of issuance of a security until each dollar of principal of that security will
be repaid to the investor. The weighted average life of the Offered Certificates
will be influenced by the rate at which principal on the Mortgage Loans is
paid,
which may be in the form of scheduled payments or prepayments (including
repurchases and prepayments of principal by the mortgagor as well as amounts
received by virtue of condemnation, insurance or foreclosure with respect to
the
Mortgage Loans), and the timing of these payments. The “Scheduled Final
Distribution Date” for each class of the Offered Certificates is the
Distribution Date occurring in April 2037, which is the Distribution Date in
the
month following the latest scheduled maturity date of all of the Mortgage Loans.
Since the rate of payment (including prepayments) of principal on the Mortgage
Loans can be expected to exceed the scheduled rate of payments, and could exceed
the scheduled rate by a substantial amount, the disposition of the last
remaining Mortgage Loan may be earlier, and could be substantially earlier,
than
the Scheduled Final Distribution Date.
Prepayments
on mortgage loans are commonly measured relative to a prepayment standard or
model. The prepayment assumption used in this prospectus supplement assumes
a
prepayment rate for the mortgage loans of 100% PPC. To assume 100% PPC is to
assume (i) a per annum prepayment rate of 10% of the then outstanding principal
balance of the mortgage loans in the first month of the life of the mortgage
loans, (ii) an additional 1.6364% (precisely 18%/11) per annum in each month
thereafter through the eleventh month, (iii) building to a constant prepayment
rate of 28% per annum beginning in the twelfth month and remaining constant
thereafter. No representation is made that the Mortgage Loans will prepay in
accordance with the prepayment model or any other rate. We refer to the
prepayment model herein as a “Prepayment Assumption”.
S-39
The
tables entitled “Percent of Initial Certificate Principal Balance Outstanding at
the Specified Percentages of the Prepayment Assumption” indicate the percentage
of the initial Certificate Principal Balance of the Offered Certificates that
would be outstanding after each of the dates shown at various percentages of
PPC, and the corresponding weighted average lives of these certificates. The
tables are based on the following assumptions (the “Modeling Assumptions”): (i)
the Mortgage Pool consists of 17 assumed mortgage loans with the characteristics
set forth below, (ii) distributions on the certificates are received, in cash,
on the 25th day of each month, commencing in May 2007; (iii) the Mortgage Loans
prepay at the percentages of PPC indicated; (iv) no defaults or delinquencies
occur in the payment by mortgagors of principal and interest on the Mortgage
Loans and no shortfalls due to the application of the Relief Act or similar
state or local laws are incurred; (v) none of the Depositor, the Servicer,
the
Master Servicer or any other person purchases from the trust fund any Mortgage
Loan under any obligation or option under the pooling and servicing agreement,
except as indicated in footnote two in the tables; (vi) scheduled monthly
payments on the Mortgage Loans are received on the first day of each month
commencing in May 2007, and are computed prior to giving effect to any
prepayments received in the prior month; (vii) prepayments representing payment
in full of individual Mortgage Loans are received on the last day of each month
commencing in April 2007, and include 30 days’ interest thereon; (viii) the
scheduled monthly payment for each Mortgage Loan is calculated based on the
assumed mortgage loan characteristics stated below; (ix) the certificates are
purchased on May 15, 2007; (x) One-Month LIBOR remains constant at 5.320% per
annum; (xi) rate at which the fee payable to the Servicer is calculated is
assumed to be equal to 0.500% per annum, the rate at which the fee payable
to
the Master Servicer is calculated is assumed to be equal to 0.009% per annum
and
the rate at which the fee payable to the Credit Risk Manager is calculated
is
assumed to be equal to 0.010% per annum; (xii) the Class P Certificates have
a
Certificate Principal Balance equal to zero; and (xiii) the premium payable
to
the Class A Certificate Insurer in connection with the Class A Certificates
is
0.230% calculated on an actual/360 basis of the outstanding principal balance
of
the Class A Certificates as of such distribution date (without giving
effect to any distributions thereon on that distribution date).
S-40
Principal
Balance
($)
Remaining
Term
to
Maturity
(Months)
Remaining
Amortization
Term
(Months)
Age
(Months)
Mortgage
Rate
(%)
39,878,829.89
356
356
4
11.007
26,448.98
357
357
3
9.990
194,337.04
357
357
3
9.992
274,332.38
355
355
5
13.659
9,700,164.28
191
191
3
9.902
71,630.03
217
217
3
9.832
306,087,352.76
176
356
4
11.565
140,622.41
176
356
4
11.633
525,930.94
177
357
3
12.557
98,243.27
176
356
4
14.500
86,292.72
176
356
4
11.700
985,623.73
176
356
4
10.290
68,910.49
176
356
4
11.500
10,522,596.58
176
356
4
11.087
138,943.63
176
356
4
10.071
34,455.25
176
356
4
11.500
2,013,911.94
177
357
3
11.662
S-41
There
will be discrepancies between the characteristics of the actual Mortgage Loans
and the characteristics assumed in preparing the tables entitled “Percent of
Initial Certificate Principal Balance Outstanding at the Specified Percentages
of the Prepayment Assumption”. Any discrepancy may have an effect upon the
percentages of the initial Certificate Principal Balance outstanding, and the
weighted average lives, of the Offered Certificates set forth in the tables.
In
addition, since the actual Mortgage Loans will have characteristics that differ
from those assumed in preparing the tables and since it is not likely the level
of One-Month LIBOR will remain constant as assumed, the Offered Certificates
may
mature earlier or later than indicated by the tables. In addition, as described
under “Description of the Certificates-Principal Distributions on the
Certificates” in this prospectus supplement, the occurrence of the Stepdown Date
or a Trigger Event will have the effect of accelerating or decelerating the
amortization of the Offered Certificates, affecting the weighted average lives
of such certificates. Based on the foregoing assumptions, the tables indicate
the weighted average lives of each class of Offered Certificates and set forth
the percentages of the initial Certificate Principal Balance of such
certificates that would be outstanding after each of the Distribution Dates
shown, at various percentages of the Prepayment Assumption. Neither the
prepayment model used in this prospectus supplement 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
mortgage loans, including the Mortgage Loans. Variations in the prepayment
experience and the balance of the Mortgage Loans that prepay may increase or
decrease the percentages of initial Certificate Principal Balances, and weighted
average lives, shown in the following tables. These variations may occur even
if
the average prepayment experience of all the Mortgage Loans equals any of the
specified percentages of Prepayment Assumption.
S-42
Percent
of Initial Certificate Principal Balance Outstanding
at
the Specified Percentages of the Prepayment
Assumption
*If
applicable, indicates a number that is greater than zero but less than
0.5%.
(1) The
weighted average life of a certificate is determined by (a) multiplying the
amount of each distribution of principal by the number of years from the date
of
issuance of the certificate to the related Distribution Date, (b) adding the
results and (c) dividing the sum by the aggregate amount of the distribution
of
principal described in clause (a) above.
(2) Assumes
that the Servicer
or the Master Servicer exercises
its option to purchase the Mortgage Loans on the earliest possible Distribution
Date on which it is permitted to exercise this option. See
“Pooling and Servicing Agreement—Termination” in this prospectus
supplement.
S-43
Percent
of Initial Certificate Principal Balance Outstanding
at
the Specified Percentages of the Prepayment
Assumption
*If
applicable, indicates a number that is greater than zero but less than
0.5%.
(1) The
weighted average life of a certificate is determined by (a) multiplying the
amount of each distribution of principal by the number of years from the date
of
issuance of the certificate to the related Distribution Date, (b) adding the
results and (c) dividing the sum by the aggregate amount of the distribution
of
principal described in clause (a) above.
(2) Assumes
that the Servicer or the Master Servicer exercises its option to purchase the
Mortgage Loans on the earliest possible Distribution Date on which it is
permitted to exercise this option. See
“Pooling and Servicing Agreement—Termination” in this prospectus
supplement.
S-44
Percent
of Initial Certificate Principal Balance Outstanding
at
the Specified Percentages of the Prepayment
Assumption
*If
applicable, indicates a number that is greater than zero but less than
0.5%.
(1) The
weighted average life of a certificate is determined by (a) multiplying the
amount of each distribution of principal by the number of years from the date
of
issuance of the certificate to the related Distribution Date, (b) adding the
results and (c) dividing the sum by the aggregate amount of the distribution
of
principal described in clause (a) above.
(2) Assumes
that the Servicer or the Master Servicer exercises its option to purchase the
Mortgage Loans on the earliest possible Distribution Date on which it is
permitted to exercise this option. See
“Pooling and Servicing Agreement—Termination” in this prospectus
supplement.
S-45
Percent
of Initial Certificate Principal Balance Outstanding
at
the Specified Percentages of the Prepayment
Assumption
*If
applicable, indicates a number that is greater than zero but less than
0.5%.
(1) The
weighted average life of a certificate is determined by (a) multiplying the
amount of each distribution of principal by the number of years from the date
of
issuance of the certificate to the related Distribution Date, (b) adding the
results and (c) dividing the sum by the aggregate amount of the distribution
of
principal described in clause (a) above.
(2) Assumes
that the Servicer or the Master Servicer exercises its option to purchase the
Mortgage Loans on the earliest possible Distribution Date on which it is
permitted to exercise this option. See
“Pooling and Servicing Agreement—Termination” in this prospectus
supplement.
S-46
There
is
no assurance that prepayments of the Mortgage Loans included in the Mortgage
Pool will conform to any of the levels of the Prepayment Assumption indicated
in
the immediately preceding tables, or to any other level, or that the actual
weighted average lives of the Class A Certificates and the Mezzanine
Certificates will conform to any of the weighted average lives set forth in
the
immediately preceding tables. Furthermore, the information contained in the
tables with respect to the weighted average lives of the Class A Certificates
and the Mezzanine Certificates is not necessarily indicative of the weighted
average lives that might be calculated or projected under different or varying
prepayment assumptions.
The
characteristics of the Mortgage Loans will differ from those assumed in
preparing the immediately preceding tables. In addition, it is unlikely that
any
Mortgage Loan will prepay at any constant percentage until maturity or that
all
of the Mortgage Loans will prepay at the same rate. The timing of changes in
the
rate of prepayments may significantly affect the actual yield to maturity to
investors, even if the average rate of principal prepayments is consistent
with
the expectations of investors.
Yield
Sensitivity of the Mezzanine Certificates
If
the
Certificate Principal Balances of the Class CE, Class M-4, Class M-3 and Class
M-2 Certificates have been reduced to zero, the yield to maturity on the Class
M-1 Certificates will become extremely sensitive to losses on the Mortgage
Loans
(and the timing thereof) that are covered by subordination, because the entire
amount of any Realized Losses (to the extent not covered by Net Monthly Excess
Cashflow or by amounts paid under the Interest Rate Swap Agreement and available
for that purpose) will be allocated to the Class M-1 Certificates. If the
Certificate Principal Balances of the Class CE, Class M-4 and Class M-3
Certificates have been reduced to zero, the yield to maturity on the Class
M-2
Certificates will become extremely sensitive to losses on the Mortgage Loans
(and the timing thereof) that are covered by subordination, because the entire
amount of any Realized Losses (to the extent not covered by Net Monthly Excess
Cashflow or by amounts paid under the Interest Rate Swap Agreement and available
for that purpose) will be allocated to the Class M-2 Certificates. If the
Certificate Principal Balances of the Class M-4 Certificates and Class CE
Certificates have been reduced to zero, the yield to maturity on the Class
M-3
Certificates will become extremely sensitive to losses on the Mortgage Loans
(and the timing thereof) that are covered by subordination, because the entire
amount of any Realized Losses (to the extent not covered by Net Monthly Excess
Cashflow or by amounts paid under the Interest Rate Swap Agreement and available
for that purpose) will be allocated to the Class M-3 Certificates. If the
Certificate Principal Balance of the Class CE Certificates has been reduced
to
zero, the yield to maturity on the Class M-4 Certificates will become extremely
sensitive to losses on the Mortgage Loans (and the timing thereof) that are
covered by subordination, because the entire amount of any Realized Losses
(to
the extent not covered by Net Monthly Excess Cashflow or by amounts paid under
the Interest Rate Swap Agreement and available for that purpose) will be
allocated to the Class M-4 Certificates. The initial undivided interests in
the
trust fund evidenced by the Class M-1, Class M-2, Class M-3, Class M-4 and
Class
CE Certificates are approximately
1.95%, approximately 3.10%, approximately 4.00%, approximately 4.50% and
approximately 0.95%,
respectively. Investors in the Mezzanine Certificates should fully consider
the
risk that Realized Losses on the Mortgage Loans could result in the failure
of
investors to fully recover their investments. In addition, except as otherwise
provided in this prospectus supplement under “Description of the
Certificates—Allocation of Losses”, once Realized Losses have been allocated to
the Mezzanine Certificates, their Certificate Principal Balances will be
permanently reduced by the amounts so allocated. Therefore, the amounts of
Realized Losses allocated to the Mezzanine Certificates will no longer accrue
interest nor will these amounts be reinstated (except in the case of subsequent
recoveries as described in this prospectus supplement). However, Allocated
Realized Loss Amounts may be paid to the holders of the Mezzanine Certificates
from Net Monthly Excess Cashflow and from payments received by the Securities
Administrator in respect of the Interest Rate Swap Agreement in the priorities
set forth under “Description of the Certificates—Overcollateralization
Provisions” and “Description of the Certificates—The Interest Rate Swap
Agreement and the Swap Provider” in this prospectus supplement.
S-47
Principal
distributions on the Mezzanine Certificates will only commence on or after
the
Stepdown Date and during periods in which a Trigger Event is not in effect.
As a
result, the weighted average lives of the Mezzanine Certificates will be longer
than would otherwise be the case if distributions of principal were allocated
on
a pro rata basis among all of the Class A Certificates and Mezzanine
Certificates. As a result of the longer weighted average lives of the Mezzanine
Certificates, the holders of such certificates have a greater risk of suffering
a loss on their investments. For additional considerations relating to the
yield
on the Mezzanine Certificates, see “Yield Considerations” in the
prospectus.
DESCRIPTION
OF THE CERTIFICATES
General
The
SunTrust Acquisition Closed-End Seconds Trust, Series 2007-1, Asset Backed
Pass-Through Certificates will consist of eight classes of certificates,
designated as (i) the Class A Certificates; (ii) the Class M-1, Class M-2,
Class
M-3 and Class M-4 Certificates (collectively, the “Mezzanine Certificates”);
(iii) the Class CE Certificates (together, with the Mezzanine Certificates,
the
“Subordinate Certificates”); (iv) the Class P Certificates; and (v) the Class R
Certificates (also referred to in this prospectus supplement as the “Residual
Certificates”). Only the Class A Certificates and the Class M-1, Class M-2 and
Class M-3 Certificates (collectively, the “Offered Certificates”) are offered by
this prospectus supplement.
Distributions
on the Class A Certificates and Mezzanine Certificates will be made on the
25th
day of each month, or, if that day is not a business day, on the next succeeding
business day, beginning in May 2007 to the persons in whose names such
certificates are registered at the close of business on the Record Date. The
“Record Date” for the Class A Certificates and the Mezzanine Certificates and
any Distribution Date is the business day immediately preceding such
Distribution Date, for so long as such Certificates are held in book-entry
form
and the last business day of the month immediately preceding the month in which
the related Distribution Date occurs if such certificates are held in physical
form.
The
certificates represent in the aggregate the entire beneficial ownership interest
in the trust fund consisting primarily of the Mortgage Pool of conventional,
one- to four-family, second lien, fixed-rate Mortgage Loans having original
terms to maturity of not greater than approximately 30 years. The Mortgage
Loans
have an aggregate principal balance as of the Cut-off Date of approximately
$370,848,626, subject to a permitted variance of plus or minus 5%.
The
Class
A Certificates and the Mezzanine Certificates will have the initial Certificate
Principal Balance set forth in the table appearing on the cover of this
prospectus supplement. The Pass-Through Rates on the Offered Certificates will
be calculated for each Distribution Date as described under “—Pass-Through
Rates” below. The Class A Certificates evidence an initial aggregate undivided
interest of approximately 85.50% in the trust fund, the Class M-1, Class M-2,
Class M-3 and Class M-4 Certificates evidence initial undivided interests of
approximately 1.95%, approximately 3.10%, approximately 4.00% and approximately
4.50%, respectively, in the trust fund and the Class CE Certificates evidence
an
initial undivided interest of approximately 0.95% in the trust
fund.
S-48
Book-Entry
Certificates
The
Offered Certificates will be book-entry Certificates (for so long as they are
registered in the name of the applicable depository or its nominee, the
“Book-Entry Certificates”). Persons acquiring beneficial ownership interests in
the Book-Entry Certificates (“Certificate Owners”) will hold such certificates
through The Depository Trust Company (“DTC”) in the United States, or
Clearstream Banking Luxembourg, formerly known as Cedelbank SA (“Clearstream”),
or the Euroclear System (“Euroclear”) in Europe, if they are participants of
such systems (“Clearstream Participants” or “Euroclear Participants”,
respectively), or indirectly through organizations which are Clearstream or
Euroclear Participants. The Book-Entry Certificates will be issued in one or
more certificates which equal the aggregate Certificate Principal Balance of
such Certificates and will initially be registered in the name of Cede &
Co., the nominee of DTC. Clearstream and Euroclear will hold omnibus positions
on behalf of their participants through customers’ securities accounts in
Clearstream’s and Euroclear’s names on the books of their respective
depositories which in turn will hold such positions in customers’ securities
accounts in the depositories, names on the books of DTC. Citibank, N.A. will
act
as depository for Clearstream, and JPMorgan Chase Bank, N.A. will act as
depository for Euroclear (in such capacities, individually the “Relevant
Depository” and collectively the “European Depositories”). Investors may hold
such beneficial interests in the Book-Entry Certificates in minimum dollar
denominations of $25,000 and integral multiples of $1.00 in excess thereof.
Except as described below, no Certificate Owner acquiring a Book-Entry
Certificate (each, a “beneficial owner”) will be entitled to receive a physical
certificate representing such Certificate (a “Definitive Certificate”). Unless
and until Definitive Certificates are issued, it is anticipated that the only
“Certificateholder” of the Offered Certificates will be Cede & Co., as
nominee of DTC. Certificate Owners will not be Certificateholders as that term
is used in the pooling and servicing agreement. Certificate Owners are only
permitted to exercise their rights indirectly through DTC and participants
of
DTC (“DTC Participants”).
The
Certificate Owner’s ownership of a Book-Entry Certificate will be recorded on
the records of the brokerage firm, bank, thrift institution or other financial
intermediary (each, a “Financial Intermediary”) that maintains the Certificate
Owner’s account for such purpose. In turn, the Financial Intermediary’s
ownership of such Book-Entry Certificate will be recorded on the records of
DTC
(or of a participating firm that acts as agent for the Financial Intermediary,
whose interest will in turn be recorded on the records of DTC, if the beneficial
owner’s Financial Intermediary is not a DTC Participant and on the records of
Clearstream or Euroclear, as appropriate).
Certificate
Owners will receive all distributions of principal of and interest on the
Book-Entry Certificates from the Securities Administrator through DTC and DTC
Participants. While the Book-Entry Certificates are outstanding (except under
the circumstances described below), under the rules, regulations and procedures
creating and affecting DTC and its operations (the “Rules”), DTC is required to
make book-entry transfers among DTC Participants on whose behalf it acts with
respect to the Book-Entry Certificates and is required to receive and transmit
distributions of principal of, and interest on, the Book-Entry Certificates.
DTC
Participants and indirect participants with whom Certificate Owners have
accounts with respect to Book-Entry Certificates are similarly required to
make
book-entry transfers and receive and transmit such distributions on behalf
of
their respective Certificate Owners. Accordingly, although Certificate Owners
will not possess certificates representing their respective interests in the
Book-Entry Certificates, the Rules provide a mechanism by which Certificate
Owners will receive distributions and will be able to transfer their
interest.
Certificate
Owners will not receive or be entitled to receive certificates representing
their respective interests in the Book-Entry Certificates, except under the
limited circumstances described below. Unless and until Definitive Certificates
are issued, Certificate Owners who are not DTC Participants may transfer
ownership of Book-Entry Certificates only through DTC Participants and indirect
participants by instructing such DTC Participants and indirect participants
to
transfer Book-Entry Certificates, by book-entry transfer, through DTC for the
account of the purchasers of such Book-Entry Certificates, which account is
maintained with their respective DTC Participants. Under the Rules and in
accordance with DTC’s normal procedures, transfers of ownership of Book-Entry
Certificates will be executed through DTC and the accounts of the respective
DTC
Participants at DTC will be debited and credited. Similarly, the DTC
Participants and indirect participants will make debits or credits, as the
case
may be, on their records on behalf of the selling and purchasing Certificate
Owners.
S-49
Because
of time zone differences, credits of securities received in Clearstream or
Euroclear as a result of a transaction with a DTC Participant will be made
during subsequent securities settlement processing and dated the business day
following the DTC settlement date. Such credits or any transactions in such
securities settled during such processing will be reported to the relevant
Euroclear Participants or Clearstream Participants (each as defined below)
on
such business day. Cash received in Clearstream or Euroclear as a result of
sales of securities by or through a Clearstream Participant 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 the DTC settlement date.
For
information with respect to tax documentation procedures relating to the
Certificates, see “Global Clearance and Settlement and Documentation
Procedures-Certain U.S. Federal Income Tax Documentation Requirements” in Annex
I hereto.
Transfers
between DTC Participants will occur in accordance with DTC rules. Transfers
between Clearstream Participants and Euroclear Participants will occur in
accordance with their respective rules and operating procedures.
Cross-market
transfers between persons holding directly or indirectly through DTC, on the
one
hand, and, directly or indirectly through Clearstream Participants or Euroclear
Participants, on the other, will be effected in DTC in accordance with DTC
rules
on behalf of the relevant European international clearing system by the Relevant
Depository; however, such cross market transactions will require delivery of
instructions to the relevant European international clearing system by the
counterparty in such system in accordance with its rules and procedures and
within its established deadlines (European time). The relevant European
international clearing system, if the transaction meets its settlement
requirements, will deliver instructions to the Relevant Depository 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 Depositories.
DTC
which
is a New York-chartered limited purpose trust company, performs services for
its
DTC Participants, some of which (and/or their representatives) own DTC. In
accordance with its normal procedures, DTC is expected to record the positions
held by each DTC Participant in the Book-Entry Certificates, whether held for
its own account or as a nominee for another person. In general, beneficial
ownership of Book-Entry Certificates will be subject to the rules of DTC, as
in
effect from time to time.
Clearstream,
67 Bd Grande-Duchesse Charlotte, L-1331 Luxembourg, was incorporated in 1970
as
a limited company under Luxembourg law. Clearstream is owned by banks,
securities dealers and financial institutions, and currently has about 100
shareholders, including U.S. financial institutions or their subsidiaries.
No
single entity may own more than five percent of Clearstream’s
stock.
S-50
Clearstream
is registered as a bank in Luxembourg, and as such is subject to regulation
by
the Institute Monetaire Luxembourgeois, the Luxembourg Monetary Authority,
which
supervises Luxembourg banks.
Clearstream
holds securities for its customers 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
the Euroclear Operator (as defined below) in Brussels to facilitate settlement
of trades between systems. Clearstream currently accepts over 70,000 securities
issues on its books.
Clearstream’s
customers are world-wide financial institutions including underwriters,
securities brokers and dealers, banks, trust companies and clearing
corporations. Clearstream’s United States customers are limited to securities
brokers and dealers and banks. Currently, Clearstream has approximately 3,000
customers located in over 60 countries, including all major European countries,
Canada, and the United States. Indirect access to Clearstream is available
to
other institutions which clear through or maintain a custodial relationship
with
an account holder of Clearstream.
Euroclear
was created in 1968 to hold securities for its participants and to clear and
settle transactions between Euroclear Participants through simultaneous
electronic book-entry delivery against payment, thereby eliminating the need
for
physical movement of certificates and any risk from lack of simultaneous
transfers of securities and cash. Transactions may be settled in any of 29
currencies, including United States dollars. Euroclear includes various other
services, including securities lending and borrowing and interfaces with
domestic markets in several countries generally similar to the arrangements
for
cross-market transfers with DTC described above. Euroclear is operated by the
Euroclear Bank S.A/N.V. (the “Euroclear Operator”), under contract with
Euroclear Clearance Systems S.C., a Belgian cooperative corporation (the
“Cooperative”). All operations are conducted by the Euroclear Operator, and all
Euroclear securities clearance accounts and Euroclear cash accounts are accounts
with the Euroclear Operator, not the Cooperative. The Cooperative establishes
policy for Euroclear on behalf of Euroclear Participants. Euroclear Participants
include banks (including central banks), securities brokers and dealers and
other professional financial intermediaries. Indirect access to Euroclear is
also available to other firms that clear through or maintain a custodial
relationship with a Euroclear Participant, either directly or
indirectly.
Securities
clearance accounts and cash accounts with the Euroclear Operator are governed
by
the Terms and Conditions Governing Use of Euroclear and the related Operating
Procedures of the Euroclear System and applicable Belgian law (collectively,
the
“Terms and Conditions”). The Terms and Conditions govern transfers of securities
and cash within Euroclear, withdrawals of securities and cash from Euroclear,
and receipts of payments with respect to securities in Euroclear. All securities
in Euroclear are held on a fungible basis without attribution of specific
certificates to specific securities clearance accounts. The Euroclear Operator
acts under the Terms and Conditions only on behalf of Euroclear Participants,
and has no record of or relationship with persons holding through Euroclear
Participants.
Distributions
on the Book-Entry Certificates will be made on each Distribution Date by the
Securities Administrator to Cede & Co. DTC will be responsible for crediting
the amount of such payments to the accounts of the applicable DTC Participants
in accordance with DTC’s normal procedures. Each DTC Participant will be
responsible for disbursing such payments to the Certificate Owners of the
Book-Entry Certificates that it represents and to each Financial Intermediary
for which it acts as agent. Each such Financial Intermediary will be responsible
for disbursing funds to the Certificate Owners of the Book-Entry Certificates
that it represents.
S-51
Under
a
book-entry format, Certificate Owners of the Book-Entry Certificates may
experience some delay in their receipt of payments, since such payments will
be
forwarded by the Securities Administrator to Cede & Co. Distributions with
respect to Certificates held through Clearstream or Euroclear will be credited
to the cash accounts of Clearstream Participants or Euroclear Participants
in
accordance with the relevant system’s rules and procedures, to the extent
received by the Relevant Depository. Such distributions will be subject to
tax
reporting in accordance with relevant United States tax laws and regulations.
See
“Material Federal Income Tax Considerations REMICS-Taxation of Certain Foreign
Investors” in the prospectus.
Because
DTC can only act on behalf of Financial Intermediaries, the ability of a
Certificate Owner to pledge Book-Entry Certificates to persons or entities
that
do not participate in the Depository system, or otherwise take actions in
respect of such Book-Entry Certificates, may be limited due to the lack of
physical certificates for such Book-Entry Certificates. In addition, issuance
of
the Book-Entry Certificates in book-entry form may reduce the liquidity of
such
Certificates in the secondary market since certain potential investors may
be
unwilling to purchase Certificates for which they cannot obtain physical
certificates.
DTC
has
advised the Securities Administrator that, unless and until Definitive
Certificates are issued, DTC will take any action permitted to be taken by
the
holders of the Book-Entry Certificates under the pooling and servicing agreement
only at the direction of one or more Financial Intermediaries to whose DTC
accounts the Book-Entry Certificates are credited, to the extent that such
actions are taken on behalf of Financial Intermediaries whose holdings include
such Book-Entry Certificates. Clearstream or the Euroclear Operator, as the
case
may be, will take any other action permitted to be taken by a Certificateholder
under the pooling 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 Depository to effect
such
actions on its behalf through DTC. DTC may take actions, at the direction of
the
related DTC Participants, with respect to some Book-Entry Certificates which
conflict with actions taken with respect to other Book-Entry
Certificates.
Definitive
Certificates will be issued to Certificate Owners of the Book-Entry
Certificates, or their nominees, rather than to DTC or its nominee, only if
(a)
DTC or the Depositor advises the Securities Administrator in writing that DTC
is
no longer willing, qualified or able to discharge properly its responsibilities
as nominee and depository with respect to the Book-Entry Certificates and the
Depositor is unable to locate a qualified successor, (b) the Depositor, at
its
sole option, with the consent of the Securities Administrator, elects to
terminate a book-entry system through DTC or (c) after the occurrence of an
Event of Default (as defined in the pooling and servicing agreement),
Certificate Owners having percentage interests aggregating not less than 51%
of
the Book-Entry Certificates advise the Securities Administrator and DTC through
the Financial Intermediaries and the DTC Participants in writing that the
continuation of a book-entry system through DTC (or a successor thereto) is
no
longer in the best interests of Certificate Owners.
Upon
the
occurrence of any of the events described in the immediately preceding
paragraph, the Securities Administrator will be required to cause DTC to notify
all Certificate Owners of the occurrence of such event and the availability
through DTC of Definitive Certificates. Upon surrender by DTC of the global
certificate or certificates representing the Book-Entry Certificates and
instructions for re-registration, the Securities Administrator will issue
Definitive Certificates, and thereafter the Securities Administrator will
recognize the holders of such Definitive Certificates as Certificateholders
under the pooling and servicing agreement.
In
the
event any Definitive Certificates are issued, surrender of such Definitive
Certificates shall occur at the office designated from time to time for such
purposes by the certificate registrar. As of the Closing Date, the certificate
registrar designates its offices located at Sixth Street and Marquette Avenue,
Minneapolis, Minnesota55479 for this purpose.
S-52
Although
DTC, Clearstream and Euroclear have agreed to the foregoing procedures in order
to facilitate transfers of Book-Entry Certificates among DTC Participants of
DTC, Clearstream and Euroclear, they are under no obligation to perform or
continue to perform such procedures and such procedures may be discontinued
at
any time.
None
of
the Depositor, the Servicer, the Master Servicer, the Securities Administrator
or the Trustee will have any responsibility for any aspect of the records
relating to or payments made on account of beneficial ownership interests of
the
Book-Entry Certificates held by Cede & Co., as nominee for DTC, or for
maintaining, supervising or reviewing any records relating to such beneficial
ownership interests or any transfers thereof.
Pass-Through
Rates
The
pass-through rate (the “Pass-Through Rate”) on the Class A Certificates will be
a rate per annum equal to the lesser of (i) One-Month LIBOR plus _____% in
the
case of each Distribution Date through and including the first Distribution
Date
on which the aggregate principal balance of the Mortgage Loans (and properties
acquired in respect thereof) remaining in the trust fund as of the last day
of
the related Due Period has been reduced to less than or equal to 10% of the
aggregate principal balance of the Mortgage Loans as of the Cut-off Date (the
“Optional Termination Date”), or One-Month LIBOR plus _____%, in the case of any
Distribution Date thereafter and (ii) the Net WAC Pass-Through Rate for the
Distribution Date.
The
Pass-Through Rate on the Class M-1 Certificates will be a rate per annum equal
to the lesser of (i) One-Month LIBOR plus _____% in the case of each
Distribution Date through and including the Optional Termination Date, or
One-Month LIBOR plus _____%, in the case of any Distribution Date thereafter
and
(ii) the Net WAC Pass-Through Rate for the Distribution Date.
The
Pass-Through Rate on the Class M-2 Certificates will be a rate per annum equal
to the lesser of (i) One-Month LIBOR plus _____% in the case of each
Distribution Date through and including the Optional Termination Date, or
One-Month LIBOR plus _____%, in the case of any Distribution Date thereafter
and
(ii) the Net WAC Pass-Through Rate for the Distribution Date.
The
Pass-Through Rate on the Class M-3 Certificates will be a rate per annum equal
to the lesser of (i) One-Month LIBOR plus _____% in the case of each
Distribution Date through and including the Optional Termination Date, or
One-Month LIBOR plus _____%, in the case of any Distribution Date thereafter
and
(ii) the Net WAC Pass-Through Rate for the Distribution Date.
The
Pass-Through Rate on the Class M-4 Certificates will be a rate per annum equal
to the lesser of (i) One-Month LIBOR plus _____% in the case of each
Distribution Date through and including the Optional Termination Date, or
One-Month LIBOR plus _____%, in the case of any Distribution Date thereafter
and
(ii) the Net WAC Pass-Through Rate for the Distribution Date.
Glossary
“Administration
Fee Rate”:
With
respect to each Mortgage Loan, the Administration Fee Rate is equal to the
sum
of (i) the Servicing Fee Rate, (ii) the rate at which the fee payable to the
Master Servicer is calculated and (iii) the rate at which the fee payable to
the
Credit Risk Manager is calculated.
S-53
“Allocated
Realized Loss Amount”:
The
Allocated Realized Loss Amount with respect to any class of Mezzanine
Certificates and any Distribution Date is an amount equal to the sum of any
Realized Loss allocated to that class of certificates on the Distribution Date
and any Allocated Realized Loss Amount for that class remaining unpaid from
the
previous Distribution Date.
“Available
Distribution Amount”:
The
Available Distribution Amount for any Distribution Date is equal to the sum,
net
of amounts payable or reimbursable therefrom to the Servicer, the Master
Servicer, the Securities Administrator, the Custodian, the Credit Risk Manager
or the Trustee, of an amount equal to (i) the aggregate amount of scheduled
monthly payments on the Mortgage Loans due on the related Due Date and received
on or prior to the related Determination Date; (ii) unscheduled payments in
respect of the Mortgage Loans (including principal prepayments received during
the related Prepayment Period, Compensating Interest payments received for
such
Distribution Date, insurance proceeds, liquidation proceeds, Subsequent
Recoveries and proceeds from repurchases of and substitutions for the Mortgage
Loans received during the related Prepayment Period); and (iii) all P&I
Advances with respect to the Mortgage Loans received for the Distribution
Date.
“Certificate
Principal Balance”:
The
Certificate Principal Balance of an Offered Certificate outstanding at any
time
represents the then maximum amount that the holder of such certificate is
entitled to receive as distributions allocable to principal from the cash flow
on the Mortgage Loans and the other assets in the trust fund. The Certificate
Principal Balance of an Offered Certificate as of any date of determination
is
equal to the initial Certificate Principal Balance of such certificate plus,
in
the case of a Mezzanine Certificate, any Subsequent Recoveries added to the
Certificate Principal Balance of such Certificate, as described under
“Description of the Certificates - Allocation of Losses; Subordination” in this
prospectus supplement and reduced by the aggregate of (i) all amounts allocable
to principal previously distributed with respect to that certificate and (ii)
any reductions in the Certificate Principal Balance of any Mezzanine Certificate
deemed to have occurred in connection with allocations of Realized Losses in
the
manner described in this prospectus supplement. The Certificate Principal
Balance of the Class CE Certificates as of any date of determination is equal
to
the excess, if any, of (i) the then aggregate principal balance of the Mortgage
Loans over (ii) the then aggregate Certificate Principal Balance of the Class
A
Certificates, Mezzanine Certificates and the Class P Certificates. The initial
Certificate Principal Balance of the Class P Certificates is equal to
$100.
“Charged
Off Mortgage Loan”:
A
Charged Off Mortgage Loan is a defaulted Mortgage Loan that the Servicer is
required to charge off once such Mortgage Loan becomes 180 days delinquent,
provided that such Mortgage Loan is not a Liquidated Mortgage Loan.
“Class
A Principal Distribution Amount”:
The
Class A Principal Distribution Amount is an amount equal to the excess of (x)
the Certificate Principal Balance of the Class A Certificates immediately prior
to the Distribution Date over (y) the lesser of (A) the product of (i)
approximately
71.00% and
(ii)
the aggregate principal balance of the Mortgage Loans as of the last day of
the
related Due Period (after giving effect to scheduled payments of principal
due
during the related Due Period, to the extent received or advanced, and
unscheduled collections of principal received during the related Prepayment
Period) and (B) the excess, if any, of (x) the aggregate principal balance
of
the Mortgage Loans as of the last day of the related Due Period (after giving
effect to scheduled payments of principal due during the related Due Period,
to
the extent received or advanced, and unscheduled collections of principal
received during the related Prepayment Period) minus (y) the product of (i)
0.50% and (ii) the aggregate principal balance of the Mortgage Loans as of
the
Cut-off Date.
“Class
M-1 Principal Distribution Amount”:
The
Class M-1 Principal Distribution Amount is an amount equal to the excess of
(x)
the sum of (i) the Certificate Principal Balance of the Class A Certificates
after taking into account the payment of the Class A Principal Distribution
Amount on the Distribution Date and (ii) the Certificate Principal Balance
of
the Class M-1 Certificates immediately prior to the Distribution Date over
(y)
the lesser of (A) the product of (i) approximately 74.90% and (ii) the aggregate
principal balance of the Mortgage Loans as of the last day of the related Due
Period (after giving effect to scheduled payments of principal due during the
related Due Period, to the extent received or advanced, and unscheduled
collections of principal received during the related Prepayment Period) and
(B)
the aggregate principal balance of the Mortgage Loans as of the last day of
the
related Due Period (after giving effect to scheduled payments of principal
due
during the related Due Period, to the extent received or advanced, and
unscheduled collections of principal received during the related Prepayment
Period) minus the product of (i) 0.50% and (ii) the aggregate principal balance
of the Mortgage Loans as of the Cut-off Date.
S-54
“Class
M-2 Principal Distribution Amount”:
The
Class M-2 Principal Distribution Amount is an amount equal to the excess of
(x)
the sum of (i) the Certificate Principal Balance of the Class A Certificates
after taking into account the payment of the Class A Principal Distribution
Amount on the Distribution Date, (ii) the Certificate Principal Balance of
the
Class M-1 Certificates after taking into account the payment of the Class M-1
Principal Distribution Amount on the Distribution Date and (iii) the Certificate
Principal Balance of the Class M-2 Certificates immediately prior to the
Distribution Date over (y) the lesser of (A) the product of (i) approximately
81.10% and (ii) the aggregate principal balance of the Mortgage Loans as of
the
last day of the related Due Period (after giving effect to scheduled payments
of
principal due during the related Due Period, to the extent received or advanced,
and unscheduled collections of principal received during the related Prepayment
Period) and (B) the aggregate principal balance of the Mortgage Loans as of
the
last day of the related Due Period (after giving effect to scheduled payments
of
principal due during the related Due Period, to the extent received or advanced,
and unscheduled collections of principal received during the related Prepayment
Period) minus the product of (i) 0.50% and (ii) the aggregate principal balance
of the Mortgage Loans as of the Cut-off Date.
“Class
M-3 Principal Distribution Amount”:
The
Class M-3 Principal Distribution Amount is an amount equal to the excess of
(x)
the sum of (i) the Certificate Principal Balance of the Class A Certificates
after taking into account the payment of the Class A Principal Distribution
Amount on the Distribution Date, (ii) the Certificate Principal Balance of
the
Class M-1 Certificates after taking into account the payment of the Class M-1
Principal Distribution Amount on the Distribution Date, (iii) the Certificate
Principal Balance of the Class M-2 Certificates after taking into account the
payment of the Class M-2 Principal Distribution Amount on the Distribution
Date
and (iv) the Certificate Principal Balance of the Class M-3 Certificates
immediately prior to the Distribution Date over (y) the lesser of (A) the
product of (i) approximately 89.10% and (ii) the aggregate principal balance
of
the Mortgage Loans as of the last day of the related Due Period (after giving
effect to scheduled payments of principal due during the related Due Period,
to
the extent received or advanced, and unscheduled collections of principal
received during the related Prepayment Period) and (B) the aggregate principal
balance of the Mortgage Loans as of the last day of the related Due Period
(after giving effect to scheduled payments of principal due during the related
Due Period, to the extent received or advanced, and unscheduled collections
of
principal received during the related Prepayment Period) minus the product
of
(i) 0.50% and (ii) the aggregate principal balance of the Mortgage Loans as
of
the Cut-off Date.
“Class
M-4 Principal Distribution Amount”:
The
Class M-4 Principal Distribution Amount is an amount equal to the excess of
(x)
the sum of (i) the Certificate Principal Balance of the Class A Certificates
after taking into account the payment of the Class A Principal Distribution
Amount on the Distribution Date, (ii) the Certificate Principal Balance of
the
Class M-1 Certificates after taking into account the payment of the Class M-1
Principal Distribution Amount on the Distribution Date, (iii) the Certificate
Principal Balance of the Class M-2 Certificates after taking into account the
payment of the Class M-2 Principal Distribution Amount on the Distribution
Date,
(iv) the Certificate Principal Balance of the Class M-3 Certificates after
taking into account the payment of the Class M-3 Principal Distribution Amount
on the Distribution Date and (v) the Certificate Principal Balance of the Class
M-4 Certificates immediately prior to the Distribution Date over (y) the lesser
of (A) the product of (i) approximately 98.10% and (ii) the aggregate principal
balance of the Mortgage Loans as of the last day of the related Due Period
(after giving effect to scheduled payments of principal due during the related
Due Period, to the extent received or advanced, and unscheduled collections
of
principal received during the related Prepayment Period) and (B) the aggregate
principal balance of the Mortgage Loans as of the last day of the related Due
Period (after giving effect to scheduled payments of principal due during the
related Due Period, to the extent received or advanced, and unscheduled
collections of principal received during the related Prepayment Period) minus
the product of (i) 0.50% and (ii) the aggregate principal balance of the
Mortgage Loans as of the Cut-off Date.
S-55
“Credit
Enhancement Percentage”:
The
Credit Enhancement Percentage for any Distribution Date is the percentage
obtained by dividing (x) the aggregate Certificate Principal Balance of the
Subordinate Certificates (which includes the Overcollateralization Amount)
by
(y) the aggregate principal balance of the Mortgage Loans, calculated after
taking into account distributions of principal on the Mortgage Loans and
distribution of the Principal Distribution Amount to the holders of the
certificates then entitled to distributions of principal on the Distribution
Date.
“Delinquency
Percentage”:
The
Delinquency Percentage with respect to any Distribution Date is the percentage
obtained by dividing (x) the aggregate principal amount of Mortgage Loans
delinquent 60 days or more using the OTS Method (including Mortgage Loans in
foreclosure, Mortgage Loans with respect to which the related Mortgaged
Properties have been converted to REO Properties and Mortgage Loans discharged
due to bankruptcy but excluding Charged Off Mortgage Loans) by (y) the aggregate
principal balance of all of the Mortgage Loans, in each case, as of the last
day
of the previous calendar month.
“Determination
Date”:
With
respect to any Distribution Date, the 15th
day of
the calendar month in which such Distribution Date occurs, or if such
15th
day is
not a business day, the business day immediately preceding such 15th
day.
“Due
Period”:
With
respect to any Distribution Date, the period commencing on the second day of
the
month immediately preceding the month in which the Distribution Date occurs
and
ending on the first day of the month in which the Distribution Date
occurs.
“Insurance
Agreement”:
As
defined under the section entitled “The Policy” in this prospectus
supplement.
“Insurer”:
XL
Capital Assurance Inc.
“Interest
Accrual Period”:
The
Interest Accrual Period for the Offered Certificates and any Distribution Date
is the period commencing on the Distribution Date of the month immediately
preceding the month in which such Distribution Date occurs (or, in the case
of
the first period, commencing on the Closing Date), and ending on the day
preceding such Distribution Date. All distributions of interest on such
certificates will be based on a 360-day year and the actual number of days
which
have elapsed in the applicable Interest Accrual Period.
“Interest
Carry Forward Amount”:
The
Interest Carry Forward Amount with respect to any class of Class A Certificates
or Mezzanine Certificates and any Distribution Date is equal to the amount,
if
any, by which the Interest Distribution Amount for that class of certificates
for the immediately preceding Distribution Date exceeded the actual amount
distributed on the certificates in respect of interest on the immediately
preceding Distribution Date, together with any Interest Carry Forward Amount
with respect to such class of certificates remaining unpaid from the previous
Distribution Date, plus interest accrued thereon at the related Pass-Through
Rate on the certificates for the most recently ended Interest Accrual
Period.
S-56
“Interest
Distribution Amount”:
The
Interest Distribution Amount for any class of Offered Certificates on any
Distribution Date is that portion of the Available Distribution Amount equal
to
interest accrued during the related Interest Accrual Period on the Certificate
Principal Balance of that class immediately prior to the Distribution Date
at
the Pass-Through Rate for that class reduced (to an amount not less than zero),
in the case of each such class, by the allocable share, if any, for that class
of Prepayment Interest Shortfalls to the extent not covered by Compensating
Interest paid by the Servicer or the Master Servicer and shortfalls resulting
from the application of the Relief Act or similar state or local
laws.
“Interest
Remittance Amount”:
The
Interest Remittance Amount for any Distribution Date is that portion of the
Available Distribution Amount for such Distribution Date that represents
interest received or advanced on the Mortgage Loans minus any amounts payable
or
reimbursable therefrom to the Servicer, the Trustee, the Custodian, the Master
Servicer, the Credit Risk Manager or the Securities Administrator.
“Liquidated
Mortgage Loan”:
A
Liquidated Mortgage Loan is a Mortgage Loan that was liquidated and for which
the Servicer has determined that it has received all amounts it expects to
receive in connection with such liquidation, including payments under any
related private mortgage insurance policy, hazard insurance policy or any
condemnation proceeds and amounts received in connection with the final
disposition of the related REO property.
“Net
Monthly Excess Cashflow”:
The
Net Monthly Excess Cashflow for any Distribution Date is equal to the sum of
(i)
any Overcollateralization Reduction Amount and (ii) the excess of (x) the
Available Distribution Amount for the Distribution Date over (y) the sum for
such Distribution Date of the aggregate of the Senior Interest Distribution
Amounts payable to the holders of the Class A Certificates, the aggregate of
the
Interest Distribution Amounts payable to the holders of the Mezzanine
Certificates, the Principal Remittance Amount, any Net Swap Payment or Swap
Termination Payment (not caused by the occurrence of a Swap Provider Trigger
Event) owed to the Swap Provider, the premium payable to the Class A Certificate
Insurer and any reimbursements payable to the Class A Certificate
Insurer.
“Net
WAC Pass-Through Rate”:
The
Net WAC Pass-Through Rate for any Distribution Date and the Offered
Certificates, is a rate per annum (adjusted for the actual number of days
elapsed in the related Interest Accrual Period) equal to the product of (i)
twelve and (ii) a fraction, expressed as a percentage, the numerator of which
is
the amount of interest which accrued on the Mortgage Loans in the prior calendar
month minus the fees payable to the Servicer, the Master Servicer and the Credit
Risk Manager with respect to the Mortgage Loans for such Distribution Date
and
the Net Swap Payment payable to the Swap Provider and any Swap Termination
Payment payable to the Swap Provider which was not caused by the occurrence
of a
Swap Provider Trigger Event (to the extent such amount has not been paid by
the
Securities Administrator from any upfront payment received pursuant to any
related replacement interest rate swap agreement that may be entered into by
the
Supplemental Interest Trust Trustee) and, the premium payable to the Class
A
Certificate Insurer, in each case for such Distribution Date and the denominator
of which is the aggregate principal balance of the Mortgage Loans as of the
Due
Date in the month preceding the month in which that Distribution Date occurs
(or
as of the Cut-off Date with respect to the first Distribution Date), after
giving effect to principal prepayments received during the Prepayment Period
that includes such Due Date.
S-57
“Net
WAC Rate Carryover Amount”:
With
respect to any class of the Class A Certificates or Mezzanine Certificates
and
any Distribution Date on which the Pass-Through Rate is limited to the
applicable Net WAC Pass-Through Rate, an amount equal to the sum of (i) the
excess of (x) the amount of interest such class would have been entitled to
receive on such Distribution Date had the applicable Net WAC Pass-Through Rate
not been applicable to such class on such Distribution Date over (y) the amount
of interest paid on such Distribution Date at the applicable Net WAC
Pass-Through Rate plus (ii) the related Net WAC Rate Carryover Amount for the
previous Distribution Date not previously distributed together with interest
thereon at a rate equal to the Pass-Through Rate for such class of certificates
for the most recently ended Interest Accrual Period determined without taking
into account the applicable Net WAC Pass-Through Rate.
“OTS
Method”:
The
Office of Thrift Supervision (OTS) Delinquency Calculation Method, pursuant
to
which a Mortgage Loan is considered delinquent if a monthly payment has not
been
received by the close of business on such Mortgage Loan's Due Date in the
following month. By way of example, a Mortgage Loan will be considered 30 days
delinquent if the borrower fails to make a scheduled payment due on July 1
by
the close of business on August 1. Such loan will be reported as current at
the
end of July and on the August statement to investors and will not be reported
as
delinquent until the end of August and on the September statement to investors.
“Overcollateralization
Amount”:
The
Overcollateralization Amount as of any Distribution Date is equal to the amount
by which the sum of the aggregate outstanding principal balance of the Mortgage
Loans as of the close of business on the Due Date in the month in which the
Distribution Date occurs after giving effect to principal prepayments received
during the Prepayment Period that includes such Due Date exceeds the sum of
the
Certificate Principal Balances of the Class A Certificates, Mezzanine
Certificates and Class P Certificates after taking into account all
distributions made on that Distribution Date.
“Overcollateralization
Increase Amount”:
An
Overcollateralization Increase Amount for any Distribution Date is the amount
by
which the Required Overcollateralization Amount for such Distribution Date
exceeds the Overcollateralization Amount (calculated for this purpose assuming
100% of the Principal Remittance Amount is distributed to the Class A
Certificates and the Mezzanine Certificates on such Distribution Date) for
such
Distribution Date.
“Overcollateralization
Reduction Amount”:
An
Overcollateralization Reduction Amount for any Distribution Date is the lesser
of (i) the amount by which the Overcollateralization Amount (calculated for
this
purpose assuming 100% of the Principal Remittance Amount is distributed to
the
Class A Certificates and the Mezzanine Certificates on such Distribution Date)
exceeds the Required Overcollateralization Amount and (ii) the Principal
Remittance Amount for such Distribution Date. The Overcollateralization
Reduction Amount is equal to zero when a Trigger Event is in
effect.
“Policy”:
The
certificate guaranty insurance policy provided by the Class A Certificate
Insurer with respect to the Class A Certificates.
“Premium”:
The
premium payable to the Class A Certificate Insurer under the
Policy.
“Prepayment
Period”:
With
respect to each Distribution Date, the calendar month preceding the month in
which such Distribution Date occurs.
“Principal
Distribution Amount”:
The
Principal Distribution Amount for any Distribution Date will be that portion
of
the Available Distribution Amount equal to the sum of (i) the principal portion
of all scheduled monthly payments on the Mortgage Loans due during the related
Due Period, whether or not received on or prior to the related Determination
Date; (ii) the principal portion of all proceeds received in respect of the
repurchase of a Mortgage Loan (or, in the case of a substitution, certain
amounts representing a principal adjustment) as required by the Pooling and
Servicing Agreement during the immediately preceding calendar month; (iii)
the
principal portion of all other unscheduled collections, including insurance
proceeds, liquidation proceeds and Subsequent Recoveries received during the
related Prepayment Period and all full and partial principal prepayments
received during the related Prepayment Period, to the extent applied as
recoveries of principal on the Mortgage Loans; (iv) the amount of any
Overcollateralization Increase Amount for such Distribution Date; minus (v)
the
amount of any Overcollateralization Reduction Amount for such Distribution
Date
minus any amounts payable or reimbursable therefrom to the Servicer, the
Trustee, the Custodian, the Master Servicer, the Credit Risk Manager or the
Securities Administrator. In no event will the Principal Distribution Amount
with respect to any Distribution Date be (x) less than zero or (y) greater
than
the then outstanding aggregate Certificate Principal Balance of the Offered
Certificates.
S-58
“Principal
Remittance Amount”:
The
Principal Remittance Amount for any Distribution Date will be the sum of the
amounts described in clauses (i) through (iii) of the definition of Principal
Distribution Amount net of any amounts payable or reimbursable therefrom to
the
Servicer, the Trustee, the Custodian, the Master Servicer, the Credit Risk
Manager or the Securities Administrator.
“Realized
Loss”:
A
Realized Loss is equal to (i) with respect to a Liquidated Mortgage Loan, the
unpaid principal balance of such Liquidated Mortgage Loan, plus interest thereon
from the date on which interest was last paid by the related mortgagor through
the last day of the month in which the related Mortgage Loan was finally
liquidated, less any liquidation proceeds received on such Liquidated Mortgage
Loan (net of amounts reimbursable to the Servicer or the Master Servicer for
P&I Advances, servicing advances and other related expenses, including
attorneys’ fees) and (ii) with respect to a Charged Off Mortgage Loan, the
unpaid principal balance of such Charged Off Mortgage Loan, plus interest
thereon from the date on which interest was last paid by the related mortgagor
through the last day of the month in which the related Mortgage Loan was charged
off, plus amounts reimbursable to the Servicer or the Master Servicer for
P&I Advances, servicing advances and other related expenses, including
attorneys’ fees.
“Required
Overcollateralization Amount”:
Initially shall mean an amount equal to the sum of (A) the product of (i) 0.95%
and (ii) the aggregate principal balance of the Mortgage Loans as of the Cut-off
Date, and (B) the cumulative amount of Net Monthly Excess Cashflow paid to
the
Class M-3 Certificates and/or the Class M-4 Certificates pursuant to clause
ninth
under
“—Overcollateralization Provisions” on all prior Distribution Dates, which may
be decreased as described under “—Overcollateralization Provisions” in this
prospectus supplement.
“Scheduled
Principal Balance”:
The
Scheduled Principal Balance of any Mortgage Loan as of any date of determination
is equal to the principal balance of the Mortgage Loan as of the Cut-off Date,
after application of all scheduled principal payments due on or before the
Cut-off Date, whether or not received, reduced by (i) the principal portion
of
all monthly payments due on or before the date of determination, whether or
not
received; (ii) all amounts allocable to unscheduled principal that were received
prior to the calendar month in which the date of determination occurs and (iii)
any Bankruptcy Loss occurring as a result of a Deficient Valuation that was
incurred prior to the calendar month in which the date of determination
occurs.
“Senior
Interest Distribution Amount”:
The
Senior Interest Distribution Amount for any Distribution Date is equal to the
sum of the Interest Distribution Amount for such Distribution Date for the
Class
A Certificates and the Interest Carry Forward Amount, if any, for such
Distribution Date for the Class A Certificates.
S-59
“Servicer
Remittance Date”:
With
respect to any Distribution Date, by 12:00 p.m. New York time on the 18th day
of
the month in which such Distribution Date occurs; provided that if such 18th
day
of a given month is not a Business Day, the Servicer Remittance Date for such
month shall be the Business Day immediately preceding such 18th
day.
“Stepdown
Date”:
The
Stepdown Date is the earlier to occur of (i) the later to occur of (x) the
Distribution Date occurring in May 2010 and (y) the first Distribution Date
on
which the Credit Enhancement Percentage (calculated for this purpose only after
taking into account distributions of principal on the Mortgage Loans, but prior
to any distribution of the Principal Distribution Amount to the holders of
the
certificates then entitled to distributions of principal on the Distribution
Date), is greater than or equal to 29.00% and (ii) the first Distribution Date
following the Distribution Date on which the Certificate Principal Balance
of
the Class A Certificates has been reduced to zero.
“Subsequent
Recoveries”:
As of
any Distribution Date, amounts received during the related Prepayment Period
by
the Servicer specifically related to a defaulted Mortgage Loan or disposition
of
an REO Property prior to the related Prepayment Period that resulted in a
Realized Loss (i) with respect to a Charged Off Mortgage Loan, after such
Mortgage Loan has been charged off by the Servicer and prior to it being
released from the Trust or (ii) with respect to a Liquidated Mortgage Loan,
after the liquidation or disposition of such defaulted Mortgage Loan, in each
case net of any amounts reimbursable to the Servicer related to obtaining such
Subsequent Recovery.
“Trigger
Event”:
With
respect to any Distribution Date, a Trigger Event is in effect if either (x)
the
Delinquency Percentage exceeds 4.50% or (y) the aggregate amount of Realized
Losses incurred since the Cut-off Date through the last day of the related
Due
Period divided by the aggregate principal balance of the Mortgage Loans as
of
the Cut-off Date exceeds the applicable percentages set forth below with respect
to such Distribution Date:
Distribution
Date
Percentages
May
2010 to April 2011
4.25%
plus 1/12 of 2.25% for each month thereafter
May
2011 to April 2012
6.50%
plus 1/12 of 0.75% for each month thereafter
May
2012 to April 2013
7.25%
plus 1/12 of 1.00% for each month thereafter
May
2013 and thereafter
8.25%
The
Interest Rate Swap Agreement and the Swap Provider
HSBC
Bank
USA, National Association as trustee (the “Supplemental Interest Trust Trustee”)
on behalf of a separate trust created under the pooling and servicing agreement
(the “Supplemental Interest Trust”) will enter into an interest rate swap
agreement (the “Interest Rate Swap Agreement”), with Bear Stearns Financial
Products Inc. (the “Swap Provider”). The Interest Rate Swap Agreement will be
held in the Supplemental Interest Trust. The Supplemental Interest Trust Trustee
will appoint the Securities Administrator to receive and distribute funds with
regards to the Interest Rate Swap Agreement on behalf of the Supplemental
Interest Trust. On each Distribution Date, the Securities Administrator will
deposit into an account held in the Supplemental Interest Trust, certain
amounts, if any, received from the Swap Provider. For the avoidance of doubt,
the Supplemental Interest Trust, the Interest Rate Swap Agreement, and the
account held in the Supplemental Interest Trust will not be assets of any
REMIC.
Pursuant
to the Interest Rate Swap Agreement, on each Distribution Date commencing on
the
Distribution Date occurring in May 2007 and terminating immediately following
the Distribution Date in September 2011, (i) the Securities Administrator (on
behalf of the Supplemental Interest Trust and from funds of such trust) will
be
obligated to pay to the Swap Provider, a fixed amount equal to the product
of
(x) a fixed rate equal to 5.065% per annum, (y) the Swap Notional Amount for
that Distribution Date (defined below) and (z) a fraction, the numerator of
which is 30, and the denominator of which is 360; and (ii) the Swap Provider
will be obligated to pay to the Supplemental Interest Trust for the benefit
of
the holders of the Offered Certificates, a floating amount equal to the product
of (x) one-month LIBOR (using as its basis for determination, the one-month
London interbank offered rate, as determined pursuant to the Interest Rate
Swap
Agreement), (y) the Swap Notional Amount (defined below), and (z) a fraction,
the numerator of which is the actual number of days elapsed from the previous
Distribution Date to but excluding the current Distribution Date, and the
denominator of which is 360. A net payment will be required to be made on each
Distribution Date (each such net payment, a “Net Swap Payment”) (a) by the
Securities Administrator to the Swap Provider, to the extent that the fixed
amount exceeds the corresponding floating amount, or (b) by the Swap Provider
to
the Securities Administrator, to the extent that the floating amount exceeds
the
corresponding fixed amount. For each Distribution Date in respect of which
the
Securities Administrator is required to make a Net Swap Payment to the Swap
Provider, the trust will be required to make a payment to the Securities
Administrator in the same amount.
S-60
The
Swap
Notional Amount for each Distribution Date, commencing with the Distribution
Date in May 2007, will be an amount set forth on the schedule set forth below
for such Distribution Date (the “Swap Notional Amount”). The Interest Rate Swap
Agreement will terminate immediately following the Distribution Date in
September 2011, unless terminated earlier upon the occurrence of a Swap Event
of
Default, a Swap Termination Event or a Swap Additional Termination Event (each
as defined below).
The
respective obligations of the Swap Provider and the Supplemental Interest Trust
to pay specified amounts due under the Interest Rate Swap Agreement (other
than
Swap Termination Payments (as defined below)) will be subject to the following
conditions precedent: (1) no Swap Event of Default or event that with the giving
of notice or lapse of time or both would become a Swap 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 Interest Rate Swap Agreement) has
occurred or been effectively designated.
Events
of
default under the Interest Rate Swap Agreement (each a “Swap Event of Default”)
include the following:
·
failure
to make a payment as required under the terms of the Interest Rate
Swap
Agreement,
·
failure
by the Swap Provider to comply with or perform certain agreements
or
obligations required under the terms of the Interest Rate 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
Interest Rate 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 Interest Rate Swap
Agreement,
S-62
·
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 Interest Rate Swap
Agreement,
·
certain
insolvency or bankruptcy events,
and
·
a
merger by a party to the Interest Rate Swap Agreement without an
assumption of such party’s obligations under the Interest Rate Swap
Agreement,
each
as
further described in the Interest Rate Swap Agreement.
Termination
events under the Interest Rate Swap Agreement (each a “Swap Termination Event”)
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 Interest Rate
Swap
Agreement),
·
tax event (which
generally relates to the application of certain withholding taxes
to
amounts payable under the Interest Rate Swap Agreement, as a result
of a
change in tax law or certain similar events),
and
·
tax
event upon merger (which generally relates to the application of
certain
withholding taxes to amounts payable under the Interest Rate Swap
Agreement as a result of a merger or similar
transaction);
each
as
further described in the Interest Rate Swap Agreement.
Additional
termination events under the Interest Rate Swap Agreement (each a “Swap
Additional Termination Event”), will generally include the following, among
others:
·
failure
of the Swap Provider to maintain certain credit ratings or otherwise
comply with the downgrade provisions of the Interest Rate Swap Agreement
(including certain collateral posting requirements), in each case
in
certain circumstances as specified in the Interest Rate Swap
Agreement,
·
failure
of the Swap Provider to comply with the Regulation AB provisions
of the
Interest Rate Swap Agreement (including, if applicable, the provisions
of
any additional agreement incorporated by reference into the Interest
Rate
Swap Agreement),
·
occurrence
of an optional termination of the securitization pursuant to the
terms of
the pooling and servicing agreement,
·
amendment
of the pooling and servicing agreement in a manner contrary to the
requirements of the Interest Rate Swap Agreement,
and
·
failure
of the Class A Certificate Insurer to pay certain amounts upon a
draw on
the Class A Certificate Insurance Policy to the Securities Administrator
on behalf of the Trustee for the benefit of the holders of the Class
A
Certificates as required under the Class A Certificate Insurance
Policy,
S-63
each
as
further described in the Interest Rate Swap Agreement.
If
the
Swap Provider’s credit ratings are withdrawn or reduced below certain ratings
thresholds specified in the Interest Rate Swap Agreement, the Swap Provider
may
be required, at its own expense and in accordance with the Interest Rate 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 Interest Rate Swap Agreement that meets
all
eligibility requirements provided therein or in any related
documentation.
Upon
the
occurrence of a Swap Event of Default, the non-defaulting party will have the
right to designate an early termination date (an “Early Termination Date”). Upon
the occurrence of a Swap Termination Event or a Swap Additional Termination
Event, an Early Termination Date may be designated by one of the parties as
specified in the Interest Rate Swap Agreement, and will occur only upon notice
(including, in some circumstances, notice to the rating agencies) and, in some
circumstances, after any affected party has used reasonable efforts to transfer
its rights and obligations under the Interest Rate Swap Agreement to a related
entity within a specified period after notice has been given of the Swap
Termination Event, and, in the case of downgrade below the second ratings
threshold, only if a firm offer remains capable of acceptance by the offeree,
all as set forth in the Interest Rate Swap Agreement. The occurrence of an
Early
Termination Date under the Interest Rate Swap Agreement will constitute a “Swap
Early Termination.”
Upon
a
Swap Early Termination, the Securities Administrator (on behalf of the
Supplemental Interest Trust) or the Swap Provider may be liable to make a swap
termination payment (the “Swap Termination Payment”) to the other, regardless,
if applicable, of which of the parties has caused the termination. The Swap
Termination Payment will be based on the value of the Interest Rate Swap
Agreement computed in accordance with the procedures set forth in the Interest
Rate Swap Agreement. In the event that the Securities Administrator is required
to make a Swap Termination Payment to the Swap Provider, the trust will be
required to make a payment to the Securities Administrator in the same amount
(to the extent such Swap Termination Payment has not been paid by the Securities
Administrator from any upfront payment received pursuant to any replacement
interest rate swap agreement that may be entered into by the Supplemental
Interest Trust Trustee). In the case of a Swap Termination Payment not triggered
by a Swap Provider Trigger Event (as defined in this prospectus supplement),
the
trust will be required to make such payment on the related distribution date,
and on any subsequent Distribution Dates until paid in full, prior to
distributions to certificateholders. In the case of a Swap Termination Payment
triggered by a Swap Provider Trigger Event, the trust’s obligation to make such
payment generally will be subordinated to distributions to the holders of the
Class A Certificates and Mezzanine Certificates to the extent described in
the
pooling and servicing agreement.
Upon
a
Swap Early Termination other than in connection with the optional termination
of
the trust, the Securities Administrator will use reasonable efforts to, at
the
direction of the depositor, appoint a successor swap provider to enter into
a
new interest rate swap agreement on terms substantially similar to the Interest
Rate Swap Agreement, with a successor swap provider meeting all applicable
eligibility requirements. If the Securities Administrator receives a Swap
Termination Payment from the Swap Provider in connection with such Swap Early
Termination, the Securities Administrator will apply such Swap Termination
Payment to any upfront payment required to appoint the successor swap provider.
If the Securities Administrator is required to pay a Swap Termination Payment
to
the Swap Provider in connection with such Swap Early Termination, the Securities
Administrator will apply any upfront payment received from the successor swap
provider to pay such Swap Termination Payment. If the Securities Administrator
is unable to appoint a successor swap provider within 30 days of the Swap Early
Termination, then the Securities Administrator will deposit any Swap Termination
Payment received from the original Swap Provider into a separate, non-interest
bearing reserve account and will, on each subsequent Distribution Date, withdraw
from the amount then remaining on deposit in such reserve account an amount
equal to the Net Swap Payment, if any, that would have been paid to the
Securities Administrator by the original Swap Provider calculated in accordance
with the terms of the original Interest Rate Swap Agreement, and distribute
such
amount in accordance with the terms of the pooling and servicing
agreement.
S-64
Upon
a
Swap Early Termination in connection with the optional termination of the trust,
if the Securities Administrator is required to make a Swap Termination Payment
to the Swap Provider, the party exercising such optional termination with
respect to the Mortgage Loans will be required to include in its payment an
amount equal to such Swap Termination Payment, as described in this prospectus
supplement. If the Securities Administrator receives a Swap Termination Payment
from the Swap Provider in connection with such Swap Early Termination, such
Swap
Termination Payment generally will not be available to certificateholders;
rather, the Securities Administrator will distribute such Swap Termination
Payment in accordance with the terms of the pooling and servicing
agreement.
A
“Swap
Provider Trigger Event” will mean: (i) a Swap Event of Default under the
Interest Rate Swap Agreement with respect to which the Swap Provider is a
Defaulting Party (as defined in the Interest Rate Swap Agreement), (ii) a Swap
Termination Event under the Interest Rate Swap Agreement with respect to which
the Swap Provider is the sole Affected Party (as defined in the Interest Rate
Swap Agreement) or (iii) a Swap Additional Termination Event under the Interest
Rate Swap Agreement with respect to which the Swap Provider is the sole Affected
Party.
The
significance percentage of the Interest Rate Swap Agreement, as calculated
in
accordance with Item 1115 of Regulation AB, is less than 10%. The Interest
Rate
Swap Agreement will provide that the Swap Provider may be replaced in certain
circumstances, including the aggregate significance percentage of the Interest
Rate Swap Agreement, is equal to or greater than 10%.
On
each
Distribution Date commencing on the Distribution Date occurring in May 2007
and
ending immediately following the Distribution Date in September 2011, to the
extent required, following the distribution of the Net Monthly Excess Cashflow
and withdrawals from the Reserve Fund, as described in “—Overcollateralization
Provisions” in this prospectus supplement, any Net Swap Payment payable to the
Securities Administrator on behalf of the Supplemental Interest Trust by the
Swap Provider will be distributed on the related Distribution Date in the
following order of priority:
first,
to the
Class A Certificates, the Senior Interest Distribution Amount remaining
undistributed after the distributions of the Interest Remittance Amount and
the
Net Monthly Excess Cashflow;
second,
sequentially, to the Class M-1, Class M-2, Class M-3 and Class M-4 Certificates,
in that order, the related Interest Distribution Amount and Interest Carry
Forward Amount, to the extent remaining undistributed after the distributions
of
the Interest Remittance Amount and the Net Monthly Excess Cashflow;
third,
to the
Class A Certificate Insurer, any remaining amounts owed to it under the
Insurance Agreement or the Pooling and Servicing Agreement or as reimbursement
for draws on the Policy;
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fourth,
to the
holders of the class or classes of Certificates then entitled to receive
distributions in respect of principal, in an amount necessary to maintain or
restore the Required Overcollateralization Amount after taking into account
distributions made pursuant to clause first
under
“—Overcollateralization Provisions;”
fifth,
sequentially to the Class M-1, Class M-2, Class M-3 and Class M-4 Certificates,
in that order, in each case up to the related Allocated Realized Loss Amount
related to such Certificates for such Distribution Date remaining undistributed
after distribution of the Net Monthly Excess Cashflow;
sixth,
to the
Class A Certificates, the related Net WAC Rate Carryover Amount, to the extent
remaining undistributed after distributions of amounts received by the
Securities Administrator in respect of the Net Monthly Excess Cashflow on
deposit in the Reserve Fund;
seventh,
sequentially, to the Class M-1, Class M-2, Class M-3 and Class M-4 Certificates,
in that order, the related Net WAC Rate Carryover Amount, to the extent
remaining undistributed after distributions of Net Monthly Excess Cashflow
on
deposit in the Reserve Fund;
eighth,
to the
Swap Provider, an amount equal to any Swap Termination Payment owed to the
Swap
Provider due to a Swap Provider Trigger Event pursuant to the Interest Rate
Swap
Agreement; and
ninth,
to the
Class CE Certificates, any remaining amounts.
Amounts
payable by the trust to the Securities Administrator in respect of Net Swap
Payments and Swap Termination Payments other than Swap Termination Payments
resulting from a Swap Provider Trigger Event (and to the extent not paid by
the
Securities Administrator from any upfront payment received pursuant to any
replacement interest rate swap agreement that may be entered into by the
Supplemental Interest Trust Trustee) will be deducted from related available
funds before distributions to the holders of the Offered Certificates. On each
Distribution Date, such amounts will be distributed by the trust to the
Securities Administrator, and paid by the Securities Administrator to the Swap
Provider as follows:
(i)first,
to make
any Net Swap Payment owed to the Swap Provider pursuant to the Interest Rate
Swap Agreement for such Distribution Date, and
(ii)second,
to make
any Swap Termination Payment not due to a Swap Provider Trigger Event owed
to
the Swap Provider pursuant to the Interest Rate Swap Agreement (to the extent
not paid by the Securities Administrator from any upfront payment received
pursuant to any replacement interest rate swap agreement that may be entered
into by the Securities Administrator).
Bear
Stearns Financial Products Inc. (“BSFP”) will be the Swap Provider. BSFP,
a Delaware corporation, is a bankruptcy remote derivatives product company
based in New York, New York that has been established as a wholly owned
subsidiary of The Bear Stearns Companies, Inc. BSFP engages in a wide
array of over-the-counter interest rate, currency, and equity derivatives,
typically with counterparties who require a highly rated derivative
provider. As of the date of this prospectus supplement, BSFP has a ratings
classification of “AAA” from Standard & Poor’s and “Aaa” from Moody’s
Investors Service. BSFP will provide upon request, without charge, to each
person to whom this prospectus supplement is delivered, a copy of (i) the
ratings analysis from each of Standard & Poor’s and Moody’s Investors
Service evidencing those respective ratings or (ii) the most recent audited
annual financial statements of BSFP. Request for information should be
directed to the DPC Manager of Bear Stearns Financial Products Inc. at (212)
272-4009 or in writing at 383 Madison Avenue, 36th Floor, New York, New York10179.
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BSFP
is
an affiliate of Bear, Stearns & Co. Inc., the Co-Manager in this
transaction.
The
information contained in the preceding paragraph has been provided by BSFP
for
use in this prospectus supplement. BSFP has not been involved in the preparation
of, and does not accept responsibility for, this prospectus supplement as a
whole or the accompanying prospectus.
The
Interest Rate Swap Agreement will be governed by and construed in accordance
with the laws of the State of New York. The obligations of the Swap Provider
are
limited to those specifically set forth in the Interest Rate Swap Agreement,
as
applicable.
Interest
Distributions on the Certificates
Holders
of the Class A Certificates and Mezzanine Certificates will be entitled to
receive on each Distribution Date, interest distributions in an aggregate amount
equal to interest accrued during the related Interest Accrual Period on the
Certificate Principal Balances thereof at the then-applicable Pass-Through
Rates
thereon, and the Class A Certificate Insurer will be entitled to distributions,
in the priorities set forth below.
On
each
Distribution Date, the Interest Remittance Amount will be distributed in the
following order of priority:
first,
to the
Class A Certificate Insurer, the Premium for such Distribution
Date;
second,
to the
Supplemental Interest Trust, an amount equal to the sum of any Net Swap Payment
owed to the Swap Provider and any Swap Termination Payment owed to the Swap
Provider not due to a Swap Provider Trigger Event (to the extent such amount
has
not been paid by the Securities Administrator from any upfront payment received
pursuant to any related replacement interest rate swap agreement that may be
entered into by the Supplemental Interest Trust Trustee);
third,
to the
holders of the Class A Certificates, the Senior Interest Distribution Amount
for
such Distribution Date;
fourth,
to the
Class A Certificate Insurer, any reimbursement amounts owed to the Class A
Certificate Insurer under the Insurance Agreement, the Policy or the Pooling
and
Servicing Agreement;
fifth,
sequentially, to the holders of the Class M-1, Class M-2, Class M-3 and Class
M-4 Certificates, in that order, the Interest Distribution Amount for such
Distribution Date and such class; and
sixth,
any
such Interest Remittance Amount remaining after application pursuant to clauses
first,
second,
third,
fourth
and
fifth,
above,
will be applied as part of Net Monthly Excess Cashflow for such Distribution
Date, as described under “—Overcollateralization
Provisions”
in
this
prospectus supplement.
On
any
Distribution Date, any shortfalls resulting from the application of the Relief
Act or any similar state or local law and any Prepayment Interest Shortfalls
to
the extent not covered by Compensating Interest paid by the Servicer or the
Master Servicer will be allocated to reduce the interest payable first,
on the
Class CE Certificates, second,
to the
Class M-4 Certificates, third,
to the
Class M-3 Certificates, fourth,
to the
Class M-2 Certificates, fifth,
to the
Class M-1 Certificates and sixth,
to the
Class A Certificates, in each case on such Distribution Date. The holders of
the
Class A Certificates and Mezzanine Certificates will be entitled to
reimbursement for any of these interest shortfalls, subject to available funds,
in the priorities described under “—Overcollateralization
Provisions”
in this
prospectus supplement.
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With
respect to any Distribution Date, to the extent that the aggregate Interest
Distribution Amount exceeds the Interest Remittance Amount, a shortfall in
interest distributions on one or more classes of Class A Certificates or
Mezzanine Certificates will result and payments of Interest Carry Forward
Amounts to such classes of Class A Certificates and Mezzanine Certificates
will
be made. The Interest Carry Forward Amount with respect to the Class A
Certificates, if any, is distributed as part of the Senior Interest Distribution
Amount on each Distribution Date. The Interest Carry Forward Amount with respect
to the Mezzanine Certificates, if any, may be carried forward to succeeding
Distribution Dates and, subject to available funds, will be distributed in
the
manner set forth in “—Overcollateralization
Provisions”
and
“—The
Interest Rate Swap Agreement and the Swap Provider”
in this
prospectus supplement.
Except
as
otherwise described in this prospectus supplement, on any Distribution Date,
distributions of the Interest Distribution Amount for a class of certificates
will be made in respect of that class of certificates, to the extent provided
in
this prospectus supplement, on a pari
passu basis,
based on the Certificate Principal Balance of the certificates of each
class.
Calculation
of One-Month LIBOR
With
respect to each Interest Accrual Period (other than the initial Interest Accrual
Period) and the Class A Certificates and Mezzanine Certificates, on the second
business day preceding such Interest Accrual Period, (each such date, an
“Interest Determination Date”), the Securities Administrator will determine
One-Month LIBOR for such Interest Accrual Period. With respect to the initial
Interest Accrual Period, on the Closing Date, the Securities Administrator
will
determine One-Month LIBOR for such Interest Accrual Period based on information
available on the second business day preceding the Closing Date (the related
“Interest Determination Date”). “One-Month LIBOR” means, as of any Interest
Determination Date, the London interbank offered rate for one-month U.S. dollar
deposits which appears on Reuters Screen LIBOR01 Page (as defined in this
prospectus supplement) as of 11:00 a.m. (London time) on such date. If such
rate
does not appear on Reuters Screen LIBOR01 Page, the rate for that day will
be
determined on the basis of the offered rates of the Reference Banks (as defined
in this prospectus supplement) for one-month U.S. dollar deposits, as of 11:00
a.m. (London time) on such Interest Determination Date. The Securities
Administrator will request the principal London office of each of the Reference
Banks to provide a quotation of its rate. If on such Interest Determination
Date
two or more Reference Banks provide such offered quotations, One-Month LIBOR
for
the related Interest Accrual Period shall be the arithmetic mean of such offered
quotations (rounded upwards if necessary to the nearest whole multiple of
0.0625%). If on such Interest Determination Date fewer than two Reference Banks
provide such offered quotations, One-Month LIBOR for the related Interest
Accrual Period shall be the higher of (x) One-Month LIBOR as determined on
the
previous Interest Determination Date and (y) the Reserve Interest Rate (as
defined in this prospectus supplement).
As
used
in this section, “business day” means a day on which banks are open for dealing
in foreign currency and exchange in London and New York; “Reuters Screen LIBOR01
Page” means the display page 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); “Reference Banks”
means leading banks selected by the Securities Administrator and engaged in
transactions in Eurodollar deposits in the international Eurocurrency market
(i)
with an established place of business in London, (ii) which have been designated
as such by the Securities Administrator and (iii) not controlling, controlled
by, or under common control with, the Depositor or the Securities Administrator,
and “Reserve Interest Rate” shall be the rate per annum that the Securities
Administrator determines to be either (i) the arithmetic mean (rounded upwards
if necessary to the nearest whole multiple of 0.0625%) of the one-month U.S.
dollar lending rates which New York City banks selected by the Securities
Administrator are quoting on the relevant Interest Determination Date to the
principal London offices of leading banks in the London interbank market or
(ii)
in the event that the Securities Administrator can determine no such arithmetic
mean, the lowest one-month U.S. dollar lending rate which New York City banks
selected by the Securities Administrator are quoting on such Interest
Determination Date to leading European banks.
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The
establishment of One-Month LIBOR on each Interest Determination Date by the
Securities Administrator and the Securities Administrator’s calculation of the
rate of interest applicable to the Class A Certificates and Mezzanine
Certificates for the related Interest Accrual Period shall (in the absence
of
manifest error) be final and binding.
Principal
Distributions on the Certificates
On
each
Distribution Date, the Principal Distribution Amount will be distributed to
the
holders of the Class A Certificates and Mezzanine Certificates then entitled
to
principal distributions. In no event will the Principal Distribution Amount
with
respect to any Distribution Date be (i) less than zero or (ii) greater than
the
then outstanding aggregate Certificate Principal Balance of the Class A
Certificates and Mezzanine Certificates.
(A)
On
each
Distribution Date (i) prior to the Stepdown Date or (ii) on which a Trigger
Event is in effect, distributions in respect of principal to the extent of
the
Principal Distribution Amount will be made in the following amounts and order
of
priority:
first,
to the
Class A Certificate Insurer, the amount owing to the Class A Certificate Insurer
under the Insurance Agreement for the Premium to the extent not paid from the
Interest Remittance Amount on such Distribution Date;
second,
to the
Supplemental Interest Trust, an amount equal to the sum of any Net Swap Payment
owed to the Swap Provider and any Swap Termination Payment owed to the Swap
Provider not due to a Swap Provider Trigger Event to the extent not paid from
the Interest Remittance Amount on such Distribution Date;
third,
to the
holders of the Class A Certificates, until the Certificate Principal Balance
of
the Class A Certificates has been reduced to zero;
fourth,
to the
Class A Certificate Insurer, to the extent not paid from the Interest Remittance
Amount on such Distribution Date, any reimbursement amounts owed to the Class
A
Certificate Insurer under the Insurance Agreement, the Policy or the Pooling
and
Servicing Agreement; and
fifth,
sequentially, to the holders of the Class M-1, Class M-2, Class M-3 and Class
M-4 Certificates, in that order, until the Certificate Principal Balance of
each
such class has been reduced to zero.
(B) On
each
Distribution Date (i) on or after the Stepdown Date and (ii) on which a Trigger
Event is not in effect, distributions in respect of principal to the extent
of
the Principal Distribution Amount will be made in the following amounts and
order of priority:
first,
to the
Class A Certificate Insurer, the amount owing to the Class A Certificate Insurer
under the Insurance Agreement for the Premium to the extent not paid from the
Interest Remittance Amount on such Distribution Date;
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second,
to the
Supplemental Interest Trust, an amount equal to the sum of any Net Swap Payment
owed to the Swap Provider and any Swap Termination Payment owed to the Swap
Provider not due to a Swap Provider Trigger Event to the extent not paid from
the Interest Remittance Amount on such Distribution Date;
third,
to the
holders of the Class A Certificates, the lesser of (x) the excess of (i) the
Principal Distribution Amount over (ii) the sum of the amounts distributed
to
the Class A Certificate Insurer under clause first
above
and to the Supplemental Interest Trust under clause second
above,
and (y) the Class A Principal Distribution Amount, until the Certificate
Principal Balance of the Class A Certificates has been reduced to
zero;
fourth,
to the
Class A Certificate Insurer, to the extent not paid from the Interest Remittance
Amount on such Distribution Date, any reimbursement amounts owed to the Class
A
Certificate Insurer under the Insurance Agreement, the Policy or the Pooling
and
Servicing Agreement; and
fifth,
to the
holders of the Class M-1 Certificates, the lesser of (x) the excess of (i)
the
Principal Distribution Amount over (ii) the sum of the amounts distributed
to
the Class A Certificate Insurer under clause first
above,
to the Supplemental Interest Trust under clause second
above,
to the holders of the Class A Certificates under clause third
above
and to the Class A Certificate Insurer under clause fourth
above,
and (y) the Class M-1 Principal Distribution Amount, until the Certificate
Principal Balance of the Class M-1 Certificates has been reduced to
zero;
sixth,
to the
holders of the Class M-2 Certificates, the lesser of (x) the excess of (i)
the
Principal Distribution Amount over (ii) the sum of the amounts distributed
to
the Class A Certificate Insurer under clause first
above,
to the Supplemental Interest Trust under clause second
above,
to the holders of the Class A Certificates under clause third
above,
to the Class A Certificate Insurer under clause fourth
above
and to the holders of the Class M-1 Certificates under clause fifth
above,
and (y) the Class M-2 Principal Distribution Amount, until the Certificate
Principal Balance of the Class M-2 Certificates has been reduced to zero;
seventh,
to the
holders of the Class M-3 Certificates, the lesser of (x) the excess of (i)
the
Principal Distribution Amount over (ii) the sum of the amounts distributed
to
the Class A Certificate Insurer under clause first
above,
to the Supplemental Interest Trust under clause second
above,
to the holders of the Class A Certificates under clause third
above,
to the Class A Certificate Insurer under clause fourth
above,
to the holders of the Class M-1 Certificates under clause fifth
above
and to the holders of the Class M-2 Certificates under clause sixth
above,
and (y) the Class M-3 Principal Distribution Amount, until the Certificate
Principal Balance of the Class M-3 Certificates has been reduced to zero; and
eighth,
to the
holders of the Class M-4 Certificates, the lesser of (x) the excess of (i)
the
Principal Distribution Amount over (ii) the sum of the amounts distributed
to
the Class A Certificate Insurer under clause first
above,
to the Supplemental Interest Trust under clause second
above,
to the holders of the Class A Certificates under clause third
above,
to the Class A Certificate Insurer under clause fourth
above,
to the holders of the Class M-1 Certificates under clause fifth
above,
to the holders of the Class M-2 Certificates under clause sixth
above
and to the holders of the Class M-3 Certificates under clause seventh
above,
and (y) the Class M-4 Principal Distribution Amount, until the Certificate
Principal Balance of the Class M-4 Certificates has been reduced to
zero.
The
allocation of distributions in respect of principal to the Class A Certificates
on each Distribution Date (a) prior to the Stepdown Date or (b) on which a
Trigger Event has occurred, will have the effect of accelerating the
amortization of the Class A Certificates while, in the absence of Realized
Losses, increasing the respective percentage interest in the principal balance
of the Mortgage Loans evidenced by the Mezzanine Certificates. Increasing the
respective percentage interest in the trust fund of the Mezzanine Certificates
relative to that of the Class A Certificates is intended to preserve the
availability of the subordination provided by the Mezzanine
Certificates.
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Table
of Fees and Expenses
The
following table indicates the fees and expenses to be paid from the cash flows
from the Mortgage Loans and other assets of the trust fund, while any class
of
Class A Certificates or Mezzanine Certificates are outstanding.
All
fees
are expressed in percentages, at an annualized rate, applied to the outstanding
aggregate principal balance of the Mortgage Loans.
Item
Fee
or
Expense
Paid
To
Paid
From
Frequency
Servicing
Fee(1)
0.500%
per annum of the Scheduled Principal Balance of each related Mortgage
Loan
Servicer
Mortgage
Loan interest collections
on
the related Mortgage Loans
Monthly
Master
Servicing Fee(2)
0.009%
per annum of the Scheduled Principal Balance of each Mortgage Loan
together with any interest or other income earned on funds held in
the
distribution account
Master
Servicer
Mortgage
Loan collections
Monthly
Credit
Risk Manager Fee(3)
0.010%
per annum of the Scheduled Principal Balance of each Mortgage
Loan
Credit
Risk Manager
Mortgage
Loan interest collections
Monthly
Class
A Certificate Insurer Premium
A
monthly premium equal to 0.230% per annum calculated on an actual/360
basis on the aggregate Certificate Principal Balance of the Class
A
Certificates as of the related Distribution Date
Class
A Certificate Insurer
Withdrawn
from amounts on deposit in the Distribution Account, before distributions
to Certificateholders.
Monthly
S-71
Item
Fee
or
Expense
Paid
To
Paid
From
Frequency
P&I
Advances and Servicing Advances
To
the extent of funds available, the amount of any advances and servicing
advances
The
Servicer or
Master
Servicer, as applicable
With
respect to each Mortgage Loan, late recoveries of the payments of
the
costs and expenses, liquidation proceeds, Subsequent Recoveries,
purchase
proceeds, repurchase proceeds for that Mortgage Loan or, with respect
to
P&I Advances, funds held for future distribution
Time
to Time
Nonrecoverable
Advances and Servicing Advances
The
amount of any advances and servicing advances deemed
nonrecoverable
The
Servicer or
Master
Servicer, as applicable
All
collections on the Mortgage Loans
Time
to Time
Recovery
fees in respect of Charged Off Mortgage Loans
30%
of any net proceeds received in respect of recoveries on any Charged
Off
Mortgage Loans
The
Servicer
Recoveries
on any Charged Off Mortgage Loans
Time
to Time
Reimbursement
for certain expenses, costs and liabilities incurred by the Servicer,
the
Master Servicer, the Securities Administrator, the Class A Certificate
Insurer, the Sponsor or the Depositor in connection with any legal
action
relating to the pooling and servicing agreement or the certificates
(4)
The
amount of the expenses, costs and liabilities incurred
The
Servicer, Master Servicer, Securities Administrator, Class A Certificate
Insurer, Sponsor or Depositor, as applicable
All
collections on the Mortgage Loans
Time
to Time
Indemnification
expenses
Amounts
for which the Sponsor, the Class A Certificate Insurer, the Servicer,
the
Master Servicer, the Securities Administrator, the Trustee, the Custodian
and the Depositor are entitled to indemnification (5)
The
Servicer, the Class A Certificate Insurer, Master Servicer, Securities
Administrator, the Trustee, the Custodian, the Sponsor or Depositor,
as
applicable
All
collections on the Mortgage Loans
Time
to Time
S-72
Item
Fee
or
Expense
Paid
To
Paid
From
Frequency
Reimbursement
for any amounts payable by the Trustee or Master Servicer for recording
of
assignments of mortgages to the extent not paid by the
Servicer
The
amounts paid by the Trustee or Master Servicer
Trustee
or Master Servicer
All
collections on the Mortgage Loans
Time
to Time
Reimbursement
for costs associated with the transfer of servicing or master servicing
in
the event of termination of the Master Servicer or the
Servicer
The
amount of costs incurred by the Master Servicer or the Trustee in
connection with the
transfer of servicing to the Master Servicer or a successor servicer
or by
the Trustee in the event of termination the Master Servicer, to the
extent
not paid by the terminated Servicer or Master Servicer
Trustee
or Master Servicer, as applicable
All
collections on the Mortgage Loans
Time
to Time
Reimbursement
for any expenses incurred by the Trustee or Securities Administrator
in
connection with a tax audit of the trust
The
amount incurred by the Trustee or Securities Administrator in connection
with a tax audit of the trust
Trustee
and Securities Administrator
All
collections on the Mortgage Loans
Time
to Time
____________________________
(1)
The
servicing fee is paid on a first priority basis from collections
allocable
to interest on the Mortgage Loans, prior to distributions to the
Certificateholders.
(2)
The
master servicing fee is paid on a first priority basis from collections
on
the Mortgage Loans, prior to distributions to the
Certificateholders.
(3)
The
credit risk manager fee is paid on a first priority basis from collection
allocable to interest on the Mortgage Loans, prior to distributions
to
Certificateholders.
(4)
The
Master Servicer pays trustee fees and ongoing custodial and safekeeping
fees out of its compensation.
(5)
See
“The
Securities Administrator and The Master Servicer” in this prospectus
supplement.
(6)
See
“The Trustee” and “The Custodian” in this prospectus
supplement.
Credit
Enhancement
The
credit enhancement provided for the benefit of the holders of the Class A
Certificates and the Class A Certificate Insurer includes subordination of
the
Subordinate Certificates, as described in this section and
overcollateralization, as described under “—Overcollateralization Provisions” in
this prospectus supplement.
The
rights of the holders of the Subordinate Certificates to receive distributions
will be subordinated, to the extent described in this section, to the rights
of
the holders of the Class A Certificates. This subordination is intended to
enhance the likelihood of regular receipt by the holders of the Class A
Certificates of the full amount of their scheduled monthly payments of interest
and principal and to afford holders of the Class A Certificates protection
against Realized Losses.
S-73
The
protection afforded to the holders of the Class A Certificates by means of
the
subordination of the Subordinate Certificates will be accomplished by (i) the
preferential right of the holders of the Class A Certificates to receive on
any
Distribution Date, prior to distribution on the Subordinate Certificates,
distributions in respect of interest and principal, subject to available funds
and (ii) if necessary, the right of the holders of the Class A Certificates
to
receive future distributions of amounts that would otherwise be payable to
the
holders of the Subordinate Certificates.
In
addition, (i) the rights of the holders of the Class M-1 Certificates will
be
senior to the rights of holders of the Class M-2, Class M-3, Class M-4 and
Class
CE Certificates, (ii) the rights of the holders of the Class M-2 Certificates
will be senior to the rights of the holders of the Class M-3, Class M-4 and
Class CE Certificates, (iii) the rights of the holders of the Class M-3
Certificates will be senior to the rights of the holders of the Class M-4
Certificates and the Class CE Certificates and (iv) the rights of the holders
of
the Class M-4 Certificates will be senior to the rights of the holders of the
Class CE Certificates, This subordination is intended to enhance the likelihood
of regular receipt by the holders of more senior certificates of distributions
in respect of interest and principal and to afford these holders protection
against Realized Losses.
Overcollateralization
Provisions
The
weighted average Mortgage Rate for the Mortgage Loans, less the Administration
Fee Rate and the amount, expressed as a per annum rate, of any Net Swap Payments
payable to the Swap Provider, any Swap Termination Payments payable to the
Swap
Provider not due to a Swap Provider Trigger Event and the premium payable to
the
Class A Certificate Insurer, is expected to be higher than the weighted average
of the Pass-Through Rates on the Offered Certificates, thus generating excess
interest collections which, in the absence of Realized Losses, will not be
necessary to fund interest distributions on the Offered Certificates. Additional
excess interest will be generated by the portion of the Mortgage Pool
represented by the Overcollateralization Amount. The pooling and servicing
agreement requires that, on each Distribution Date, the Net Monthly Excess
Cashflow, if any, be applied on the related Distribution Date as an accelerated
payment of principal on the class or classes of Offered Certificates then
entitled to receive distributions in respect of principal, but only to the
limited extent described in this section.
With
respect to any Distribution Date, any Net Monthly Excess Cashflow shall be
paid
as follows:
first,
to the
holders of the class or classes of certificates then entitled to receive
distributions in respect of principal, in an amount equal to the
Overcollateralization Increase Amount for such Distribution Date, owed to such
holders, to be paid as part of the Principal Distribution Amount;
second,
to the
holders of the Class A Certificates in an amount equal to the Senior Interest
Distribution Amount remaining undistributed;
third,
sequentially, to the holders of the Class M-1, Class M-2, Class M-3 and Class
M-4 Certificates, in that order, in an amount equal to the Interest Distribution
Amount and Interest Carry Forward Amount allocable to each such
class;
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fourth,
sequentially, to the holders of the Class M-1, Class M-2, Class M-3 and Class
M-4 Certificates, in that order, in an amount equal to the Allocated Realized
Loss Amount allocable to each such class;
fifth
to the
reserve fund (the “Reserve Fund”) established in accordance with the terms of
the pooling and servicing agreement, the amount by which the Net WAC Rate
Carryover Amounts, if any, with respect to the Class A Certificates and
Mezzanine Certificates exceeds any amounts in the Reserve Fund that were not
distributed on prior Distribution Dates;
sixth,
to the
holders of the Class A Certificates, in an amount equal to such certificates’
allocated share of any Prepayment Interest Shortfalls and any shortfalls
resulting from the application of the Relief Act or similar state or local
law
or the bankruptcy code with respect to the related Mortgage Loans;
seventh,
sequentially, to the holders of the Class M-1, Class M-2, Class M-3 and Class
M-4 Certificates, in that order, in an amount equal to each such certificates’
allocated share of any Prepayment Interest Shortfalls and any shortfalls
resulting from the application of the Relief Act or similar state or local
law
or the bankruptcy code with respect to the Mortgage Loans;
eighth,
to the
Supplemental Interest Trust, an amount equal to any Swap Termination Payment
owed to the Swap Provider, due to a Swap Provider Trigger Event pursuant to
the
Interest Rate Swap Agreement;
ninth,
to pay
the Class M-3 Certificates and the Class M-4 Certificates, sequentially, 90%
of
the amount of any Net Monthly Excess Cashflow remaining after payments pursuant
to clauses first
through
eighth
above,
in reduction of the certificate principal balance of each such class, until
reduced to zero;
tenth,
to the
holders of the Class P Certificates and Class CE Certificates as provided in
the
Pooling and Servicing Agreement; provided, however, that the Certificate
Principal Balance of the Class P Certificates will not be reduced until the
Distribution Date following the expiration of the latest prepayment charge
term
with respect to the Mortgage Loans; and
eleventh,
to the
holders of the Residual Certificates, any remaining amounts.
On
each
Distribution Date, any amounts deposited in the Reserve Fund from the Net
Monthly Excess Cashflow will be distributed as follows:
first,
to the
holders of the Class A Certificates, the related Net WAC Rate Carryover Amount
for such Distribution Date; and
second,
sequentially, to the holders of the Class M-1, Class M-2, Class M-3 and Class
M-4 Certificates, in that order, in respect of the related Net WAC Rate
Carryover Amount for each such class for such Distribution Date.
As
of the
Closing Date, the aggregate principal balance of the Mortgage Loans as of the
Cut-off Date will exceed the sum of the aggregate Certificate Principal Balances
of the Class
A
Certificates, Mezzanine Certificates and Class P Certificates
by an
amount equal to approximately $3,522,526, which is equal to the initial
Certificate Principal Balance of the Class CE Certificates. This amount
represents approximately 0.95% of the aggregate principal balance of the
Mortgage Loans as of the Cut-off Date, which is the initial amount of
overcollateralization required to be provided by the Mortgage Pool under the
pooling and servicing agreement. Under the pooling and servicing agreement,
the
Overcollateralization Amount is required to be maintained at the “Required
Overcollateralization Amount.” In
the
event that Realized Losses are incurred on the Mortgage Loans, such Realized
Losses may result in an overcollateralization deficiency since the Realized
Losses will reduce the principal balance of the Mortgage Loans without a
corresponding reduction to the aggregate Certificate Principal Balances of
the
Class A Certificates and Mezzanine Certificates. In the event of an
overcollateralization deficiency, the pooling and servicing agreement requires
the payment from Net Monthly Excess Cashflow and any Net Swap Payments received
from the Swap Provider in respect of the Interest Rate Swap Agreement, subject
to available funds, of an amount equal to the overcollateralization deficiency,
which shall constitute a principal distribution on the Class A Certificates
and
Mezzanine Certificates in reduction of the Certificate Principal Balances of
the
Offered Certificates. These payments have the effect of accelerating the
amortization of the Class A and Mezzanine Certificates relative to the
amortization of the Mortgage Loans, and of increasing the Overcollateralization
Amount.
S-75
On
and
after the Stepdown Date and provided that a Trigger Event is not in effect,
the
Required Overcollateralization Amount may be permitted to decrease (“step
down”), to a level equal to approximately 1.90% of the then current aggregate
outstanding principal balance of the Mortgage Loans (after giving effect to
principal payments to be distributed on the related Distribution Date) plus
the
cumulative amount of Net Monthly Excess Cashflow paid to the Class M-3
Certificates and/or Class M-4 Certificates pursuant to clause ninth
under
“—Overcollateralization Provisions” on all prior Distribution Dates, subject to
a floor equal to the product (i) 0.50% and (ii) the aggregate principal balance
of the Mortgage Loans as of the Cut-off Date. In the event that the Required
Overcollateralization Amount is permitted to step down on any Distribution
Date,
the Pooling and Servicing Agreement provides that a portion of the principal
which would otherwise be distributed to the holders of the Offered Certificates
on the related Distribution Date shall be distributed to the holders of the
Class CE Certificates pursuant to the priorities set forth above.
With
respect to each Distribution Date, the Overcollateralization Reduction Amount,
after taking into account all other distributions to be made on the related
Distribution Date, shall be distributed as Net Monthly Excess Cashflow pursuant
to the priorities set forth above. This has the effect of decelerating the
amortization of the Offered Certificates relative to the amortization of the
Mortgage Loans, and of reducing the Overcollateralization Amount. However,
if on
any Distribution Date a Trigger Event is in effect, the Required
Overcollateralization Amount will not be permitted to step down on the related
Distribution Date.
The
Class P Certificates
On
each
Distribution Date, all amounts representing Prepayment Charges in respect of
the
Mortgage Loans received during the related Prepayment Period will be withdrawn
from the Distribution Account and distributed to the Class P Certificates and
shall not be available for distribution to the holders of any other class of
certificates. The payment of such Prepayment Charges shall not reduce the
Certificate Principal Balance of the Class P Certificates.
On
the
Distribution Date occurring after the expiration of the latest Prepayment Charge
term on the Mortgage Loans, the Securities Administrator shall make a payment
of
principal to the Class P Certificates in reduction of the Certificate Principal
Balance thereof from Net Monthly Excess Cashflow pursuant to clause tenth
under
“—Overcollateralization Provisions” above.
Allocation
of Losses; Subordination
With
respect to any defaulted Mortgage Loan that is finally liquidated through
foreclosure sale or disposition of the related Mortgaged Property (if acquired
on behalf of the certificateholders by deed in lieu of foreclosure or
otherwise), the amount of loss realized, if any, will equal the portion of
the
unpaid principal balance remaining, if any, plus interest thereon through the
last day of the month in which the related Mortgage Loan was finally liquidated
or charged-off, after application of all amounts recovered (net of amounts
reimbursable to the Servicer or the Master Servicer for P&I Advances,
servicing advances and other related expenses, including attorneys’ fees)
towards interest and principal owing on the Mortgage Loan. With respect to
any
defaulted Mortgage Loan that is charged off, the amount of loss realized, if
any, will equal the portion of the unpaid principal balance remaining, plus
interest thereon from the date on which interest was last paid through the
last
day of the month in which the related Mortgage Loan was charged off, plus
amounts reimbursable to the Servicer or the Master Servicer for P&I
Advances, servicing advances and other related expenses, including attorneys’
fees. The amount of loss realized and any Bankruptcy Losses are referred to
in
this prospectus supplement as “Realized Losses.” In the event that amounts
recovered in connection with the final liquidation of a defaulted Mortgage
Loan
are insufficient to reimburse the Servicer or the Master Servicer for P&I
Advances, servicing advances and unpaid servicing fees, these amounts may be
reimbursed to the Servicer or the Master Servicer out of any funds in the
collection account prior to any remittance to the Securities Administrator
of
funds for distribution on the certificates. In addition, to the extent the
Servicer receives Subsequent Recoveries with respect to any defaulted Mortgage
Loan, the amount of the Realized Loss with respect to that defaulted Mortgage
Loan will be reduced to the extent such recoveries are applied to reduce the
Certificate Principal Balance of any class of Certificates on any Distribution
Date.
S-76
Any
Realized Losses on the Mortgage Loans will first,
reduce
the Net Monthly Excess Cashflow and second,
reduce
the Overcollateralization Amount. If on any Distribution Date, after all
distributions of interest and principal on the Certificates are made, the
aggregate Certificate Principal Balance of the Class A Certificates and the
Mezzanine Certificates exceeds the aggregate principal balance of the Mortgage
Loans as of the close of business on the Due Date in the month in which that
Distribution Date occurs, after giving effect to principal prepayments received
during the Prepayment Period that included such Due Date, such excess will
be
allocated first,
to the
Class M-4 Certificates until the Certificate Principal Balance of the Class
M-4
Certificates has been reduced to zero, second,
to the
Class M-3 Certificates until the Certificate Principal Balance of the Class
M-3
Certificates has been reduced to zero, third,
to the
Class M-2 Certificates until the Certificate Principal Balance of the Class
M-2
Certificates has been reduced to zero and fourth,
to the
Class M-1 Certificates until the Certificate Principal Balance of the Class
M-1
Certificates has been reduced to zero.
The
pooling and servicing agreement will not permit the allocation of Realized
Losses to the Class A Certificates or Class P Certificates. Investors in the
Class A Certificates should note that although Realized Losses cannot be
allocated to the Class A Certificates, under certain loss scenarios there will
not be enough principal and interest on the Mortgage Loans to pay the Class
A
Certificates all interest and principal amounts to which they are then
entitled.
Except
as
described below, once Realized Losses have been allocated to the Mezzanine
Certificates, such amounts with respect to such certificates will no longer
accrue interest, and such amounts will not be reinstated thereafter (except
in
the case of Subsequent Recoveries as described below). However, Allocated
Realized Loss Amounts may be paid to the holders of the Mezzanine Certificates
from Net Monthly Excess Cashflow and from amounts received by the Securities
Administrator under the Interest Rate Swap Agreement, according to the
priorities set forth under “—Overcollateralization Provisions” and “—The
Interest Rate Swap Agreement and the Swap Provider” above.
Any
allocation of a Realized Loss to a Mezzanine Certificate will be made by
reducing the Certificate Principal Balance of that certificate by the amount
so
allocated as of the Distribution Date in the month following the calendar month
in which the Realized Loss was incurred. Notwithstanding anything to the
contrary described in this prospectus supplement, in no event will the
Certificate Principal Balance of any Mezzanine Certificate be reduced more
than
once in respect of any particular amount both (i) allocable to such certificate
in respect of Realized Losses and (ii) payable as principal to the holder of
such certificate from Net Monthly Excess Cashflow and from amounts on deposit
in
the Supplemental Interest Trust.
S-77
A
“Bankruptcy Loss” is a Deficient Valuation or a Debt Service Reduction. With
respect to any Mortgage Loan, a “Deficient Valuation” is a valuation by a court
of competent jurisdiction of the Mortgaged Property in an amount less than
the
then outstanding indebtedness under the Mortgage Loan, which valuation results
from a proceeding initiated under the United States Bankruptcy Code. A “Debt
Service Reduction” is any reduction in the amount which a mortgagor is obligated
to pay on a monthly basis with respect to a Mortgage Loan as a result of any
proceeding initiated under the United States Bankruptcy Code, other than a
reduction attributable to a Deficient Valuation.
In
the
event that the Servicer receives any Subsequent Recoveries, such Subsequent
Recoveries will be distributed as part of the Available Distribution Amount
in
accordance with the priorities described under “Description of the Certificates”
in this prospectus supplement and the Certificate Principal Balance of each
class of Mezzanine Certificates that has been reduced by the allocation of
a
Realized Loss to such certificate will be increased, in order of seniority,
by
the amount of such Subsequent Recoveries but not by more than the amount of
Realized Losses previously allocated to reduce the Certificate Principal Balance
of such certificate, and only to the extent that such certificate has not been
reimbursed for the amount of such Realized Loss (or any portion thereof)
allocated to such certificate from Net Monthly Excess Cashflow as described
under “Description of the Certificates—Overcollateralization Provisions” and
from amounts on deposit in the Supplemental Interest Trust as described under
“Description of the Certificates—The Interest Rate Swap Agreement and the Swap
Provider” in this prospectus supplement. Holders of such certificates will not
be entitled to any payment in respect of current interest on the amount of
such
increases for any Interest Accrual Period preceding the Distribution Date on
which such increase occurs.
The
Policy
The
Class
A Certificate Insurer will issue a financial guaranty insurance policy (referred
to as the “Policy” in this prospectus supplement) for the benefit of the holders
of the Class A Certificates (the “Insured Certificates”). The following summary
of the provisions of the Policy does not purport to be complete and is qualified
in its entirety by reference to the Policy.
The
Class
A Certificate Insurer, in consideration of the payment of a premium and subject
to the terms of the Policy, unconditionally guarantees the payment of Insured
Amounts and Avoided Payments (to the extent described below) to the Securities
Administrator on behalf of the holders of the Insured Certificates. The Class
A
Certificate Insurer will pay Insured Amounts which are due for payment to the
Securities Administrator on the later of (1) the Distribution Date the Insured
Amount is distributable to the holders of the Insured Certificates under the
Pooling and Servicing Agreement, and (2) the business day following the business
day on which the Class A Certificate Insurer shall have received notice by
facsimile, simultaneously confirmed by telephone and subsequently confirmed
in
writing, or written notice delivered to the Class A Certificate Insurer at
its
office specified in the Policy, from the Securities Administrator specifying
that an Insured Amount is due in accordance with the terms of the Policy (a
“Notice”); provided that, if such Notice is received after 10:00 a.m., New York
City time, on such business day, it shall be deemed to be received at 9:00
a.m.
New York City time on the following business day.
Pursuant
to the Policy, the Class A Certificate Insurer will pay any Avoided Payment
on
the business day next following receipt on a business day by the Class A
Certificate Insurer of (i) a certified copy of a final order of a court or
other
body exercising jurisdiction in an Insolvency Proceeding to the effect that
the
Securities Administrator or holder of an Insured Certificate, as applicable,
is
required to return such Avoided Payment paid during the Term of the Policy
because such Avoided Payment was avoided under applicable law, with respect
to
which order the appeal period has expired without an appeal having been filed
(the “Final Order”), (ii) an assignment (in the form provided in the Policy)
properly completed and executed by the holder of an Insured Certificate,
irrevocably assigning to the Class A Certificate Insurer all rights and claims
of such holder relating to or arising under such Avoided Payment and (iii)
a
notice (in the form provided in the Policy) appropriately completed and executed
by the Securities Administrator on the Trustee’s behalf; provided that, if such
documents are received after 10:00 a.m. New York City time on such business
day,
they will be deemed to be received at 9:00 a.m. New York City time on the
following business day. All payments made by the Class A Certificate Insurer
in
respect of Avoided Payments will be disbursed to the receiver, conservator,
debtor-in-possession or trustee in bankruptcy named in the Final Order, and
not
to the Securities Administrator or the holders of the Insured Certificates
directly, unless the holder has previously paid such Avoided Payment to such
receiver, conservator, debtor-in-possession or trustee in bankruptcy named
in
the Final Order, in which case the Class A Certificate Insurer will pay the
Securities Administrator on behalf of such holder, subject to the delivery
of
(a) the items referred to in clauses (i), (ii), and (iii) above to the Class
A
Certificate Insurer and (b) evidence satisfactory to the Class A Certificate
Insurer that payment has been made to such receiver, conservator,
debtor-in-possession or trustee in bankruptcy named in the Final Order.
S-78
The
Class
A Certificate Insurer will not be obligated to make any payment in respect
of
any Insured Amount or Avoided Payment representing a payment of principal on
any
Insured Certificate prior to the time the Class A Certificate Insurer would
have
been required to make a payment in respect of such principal pursuant to the
Policy.
The
Class
A Certificate Insurer’s obligation under the Policy will be discharged to the
extent that funds are received by the Securities Administrator for payment
to
the holders of the Insured Certificates whether or not those funds are properly
distributed by the Securities Administrator. Payments of Insured Amounts and
Policy payments in respect of Avoided Payments will be made only at the times
for such payments set forth in the Policy, and no payments which become due
on
an accelerated basis for any reason, including an optional termination, will
be
made regardless of any acceleration of the Insured Certificates, unless the
Class A Certificate Insurer elects, in its sole discretion, to pay such amounts
in whole or in part (in which case the Insured Amounts will include such
accelerated payments as, when, and to the extent so elected by the Class A
Certificate Insurer).
For
purposes of the Policy, a holder does not and may not include any of the
Trustee, the Depositor, the Servicer, the Master Servicer, the Sponsor, the
Securities Administrator or any of their respective affiliates.
No
person
other than the Securities Administrator on the Trustee’s behalf will be entitled
to present the Notice.
The
Class
A Certificate Insurer will be subrogated to the rights of each holder of the
Insured Certificates to the extent of any payment by the Class A Certificate
Insurer under the Policy.
The
Class
A Certificate Insurer has agreed that if it is subrogated to the rights of
the
holders of the Insured Certificates, the rights of subrogation will be
subordinate and junior in right of payment to the prior indefeasible payment
in
full of any amounts due the holders on account of payments due under the Insured
Certificates. In so doing, the Class A Certificate Insurer does not waive its
rights to seek full payment of all Insurer Reimbursement Amounts owed to it
under the Insurance Agreement and the Pooling and Servicing Agreement.
The
Policy will not cover Net WAC Rate Carryover Amounts, Prepayment Interest
Shortfalls or any shortfalls resulting from the application of the Relief Act
or
similar state or local laws, regulations or ordinances allocated to the Insured
Certificates, nor does the Policy guarantee to the holders of the Insured
Certificates any particular rate of principal payment. In addition, the Policy
does not cover shortfalls, if any, attributable to the liability of the Trust,
any Certificateholder, any REMIC, the Securities Administrator for withholding
taxes, if any (including interest and penalties in respect of any liability
for
withholding taxes), nor any risk other than Nonpayment of Scheduled Payments,
including the failure of the Securities Administrator to make any distribution
required under the Pooling and Servicing Agreement to the holders of the Insured
Certificates.
S-79
The
following terms have the following meanings under the Policy:
“Avoided
Payment” means with respect to the Insured Certificates, any payment of
principal or interest previously distributed to a holder of an Insured
Certificate by or on behalf of the Trust formed pursuant to the Pooling and
Servicing Agreement that is voided as a result of any Insolvency Proceeding
and
which is returned by a holder of Insured Certificates as required by a final,
nonappealable order of a court of competent jurisdiction.
“Deficiency
Amount” means, as of any Distribution Date, the sum of the following amounts, in
each case after giving effect to distributions made on the Insured Certificates
on such Distribution Date from sources other than the Policy:
(i) the
excess, if any, of (A) the Interest Distribution Amount on such class of Insured
Certificates (calculated without regard to any step-up of the related
Pass-Through Rate following the first distribution date on which the optional
clean-up call is exercisable) over (B) the Interest Remittance Amount allocated
to pay such Interest Distribution Amount pursuant to the pooling and servicing
agreement;
(ii) if
such
Distribution Date is not the Final Maturity Date, the amount, if any, by which
the Certificate Principal Balance of the Class A Certificates (after giving
effect to all distributions to the Class A Certificates on such Distribution
Date) exceeds the aggregate principal balance of the Mortgage Loans as of the
last day of the related Due Period; and
(iii) the
Certificate Principal Balance of the Insured Certificates on its Final Maturity
Date.
“Final
Maturity Date” means the Distribution Date occurring in April 2037.
“Insolvency
Proceeding” means the commencement after the closing date of any bankruptcy,
insolvency, readjustment of debt, reorganization, marshalling of assets and
liabilities or similar proceedings by or against any person, the commencement,
after the date hereof, of any proceedings by or against any person for the
winding up or liquidation of its affairs, or the consent, after the date hereof,
to the appointment of a trustee, conservator, receiver or liquidator in any
bankruptcy, insolvency, readjustment of debt, reorganization, marshalling of
assets and liabilities or similar proceedings of or relating to any
person.
“Insurance
Agreement” means that certain Insurance and Indemnity Agreement, dated the
closing date, among the Class A Certificate Insurer, the Sponsor, the Servicer
and the Interim Seller, the depositor, the master servicer and the securities
administrator.
“Insured
Amounts” means, with respect to any Distribution Date and the Insured
Certificates, that portion of the Scheduled Payments that shall become due
for
payment but shall be unpaid by reason of Nonpayment on such Distribution Date
(which shall be equal to the amount of any related Deficiency
Amount).
S-80
“Insured
Payments” means, with respect to any Distribution Date, the aggregate amount
actually paid by the Class A Certificate Insurer to the Securities Administrator
in respect of Insured Amounts for such Distribution Date.
“Insurer
Reimbursement Amount” means as of any Distribution Date, the sum of (x)(i) all
Insured Payments and Avoided Payments paid by the Class A Certificate Insurer,
but for which the Class A Certificate Insurer has not been reimbursed prior
to
such Distribution Date, plus (ii) interest accrued on such Insured Payments
and
Avoided Payments not previously paid calculated at the Late Payment Rate, from
the date the Class A Certificate Insurer paid the related Insured Payments
or
Avoided Payments to the Securities Administrator or (in the case of Avoided
Payments) other authorized recipient, and (y) without duplication, (i) any
amounts then due and owing to the Class A Certificate Insurer under the
Insurance Agreement or the Pooling Agreement but for which the Class A
Certificate Insurer has not been paid or reimbursed prior to such Distribution
Date, plus (ii) interest on such amounts at the Late Payment Rate.
“Late
Payment Rate” means the lesser of (a) the greater of (i) the prime rate as
published in the Wall Street Journal (or if no such rate is published thereby,
in a publication selected by the Class A Certificate Insurer) (any change in
such rate of interest to be effective on the date such change is published)
plus
2%, and (ii) the highest rate of interest on any of the Insured Certificates
and
(b) the maximum rate permissible under applicable usury or similar laws limiting
interest rates. The Late Payment Rate shall be computed on the basis of the
actual number of days elapsed over a year of 360 days for any Distribution
Date.
“Nonpayment”
means, with respect to any Distribution Date, the failure of the Securities
Administrator to receive in full, in accordance with the terms of the Pooling
and Servicing Agreement, funds legally available to pay all or a portion of
the
Scheduled Payments that are due for payment on the Insured Certificates with
respect to such Distribution Date.
“Scheduled
Payments” means, with respect to any Distribution Date with respect to the
Insured Certificates during the Term of the Policy, (i) the Interest
Distribution Amount distributable in respect of such Class on such Distribution
Date (calculated without regard to any step-up following an optional termination
date) and (ii) for the Final Maturity Date, the Certificate Principal Balance
of
such Class outstanding on such Distribution Date, in each case, in accordance
with the original terms of such Class of the Insured Certificates and the
Pooling Agreement when the Insured Certificates were issued and without regard
to any subsequent amendment or modification of the Insured Certificates or
the
Pooling Agreement that has not been consented to in writing by the Class A
Certificate Insurer. Notwithstanding the foregoing, “Scheduled Payments” shall
in no event include payments which become due on an accelerated basis as a
result of any optional termination, in whole or in part, or any other cause,
unless the Class A Certificate Insurer elects, in its sole discretion, to pay
such amounts in whole or in part (in which event Scheduled Payments shall
include such accelerated payments as, when, and to the extent so elected by
the
Class A Certificate Insurer). In the event that the Class A Certificate Insurer
does not make such election, “Scheduled Payments” shall include payments due in
accordance with the original scheduled terms of the Insured Certificates without
regard to any acceleration. In addition, “Scheduled Payments” shall not include,
nor shall coverage be provided under the Policy in respect of (i) any amounts
due in respect of the Insured Certificates attributable to any increase in
interest rate, penalty or other sum payable by the Trust by reason of any
default or event of default in respect of the Insured Certificates, or by reason
of any deterioration of the creditworthiness of the Trust, (ii) any shortfalls
in interest arising out of the application of the Relief Act or any similar
state or local laws, regulations or ordinances, (iii) Prepayment Interest
Shortfalls, (iv) Net WAC Rate Carryover Amounts, or (v) any taxes, withholding
or other charge imposed by any governmental authority due in connection with
the
payment of any Scheduled Payment to any holder or owner of an Insured
Certificate.
S-81
“Term
of
the Policy” means the period from and including the Closing Date to and
including the first date on which (i) all Scheduled Payments have been paid
that
are required to be paid under the Pooling Agreement; (ii) any period during
which any Scheduled Payment could have been avoided in whole or in part as
a
preference payment under applicable bankruptcy, insolvency, receivership or
similar law has expired, and (iii) if any proceedings requisite to avoidance
as
a preference payment have been commenced prior to the occurrence of (i) and
(ii)
above, a final and nonappealable order in resolution of each such proceeding
has
been entered; provided, further, that if the holders of Insured Certificates
are
required to return any Avoided Payment as a result of such Insolvency
Proceeding, then the Term of the Policy shall terminate on the date on which
the
Class A Certificate Insurer has made all payments required to be made under
the
terms of the Policy in respect of all such Avoided Payments.
The
Policy will be issued under and will be construed under, the laws of the State
of New York.
THE
PROPERTY/CASUALTY INSURANCE SECURITY FUND SPECIFIED IN ARTICLE 76 OF THE NEW
YORK INSURANCE LAW DOES NOT COVER THE POLICY. THE FLORIDA INSURANCE GUARANTY
ASSOCIATION CREATED UNDER PART II OF CHAPTER 631 OF THE FLORIDA INSURANCE CODE
DOES NOT COVER THE POLICY. IN THE EVENT THAT THE CLASS A CERTIFICATE INSURER
WERE TO BECOME INSOLVENT, THE CALIFORNIA INSURANCE GUARANTY ASSOCIATION,
ESTABLISHED PURSUANT TO ARTICLE 14.2 OF CHAPTER 1 Of PART 2 OF DIVISION I OF
THE
CALIFORNIA INSURANCE CODE EXCLUDES FROM COVERAGE ANY CLAIMS ARISING UNDER THE
POLICY.
The
Policy will not be cancelable. The premium on the Policy will not be refundable
for any reason including payment, or provision being made for payment, prior
to
maturity of the Insured Certificates.
The
Policy and the obligations of the Class A Certificate Insurer thereunder will
terminate without any action on the part of the Class A Certificate Insurer
or
any other person on the last date of the Term of the Policy. Upon termination
of
the Policy, the Securities Administrator on behalf of the Trustee is required
to
deliver the original of the Policy to the Class A Certificate
Insurer.
Reports
to Certificateholders
On
each
Distribution Date, the Securities Administrator will make available to each
certificateholder, the Class A Certificate Insurer, the Swap Provider and the
Depositor a statement generally setting forth, among other
information:
1. the
applicable Interest Accrual Periods and general Distribution Dates;
2. the
total
cash flows received and the general sources thereof;
3. the
amount, if any, of fees or expenses accrued and paid, with an identification
of
the payee and the general purpose of such fees;
4. the
amount of the related distribution to holders of the Offered Certificates (by
class) allocable to principal, separately identifying (A) the aggregate amount
of any principal prepayments included therein, (B) the aggregate of all
scheduled payments of principal included therein and (C) any
Overcollateralization Increase Amount included therein;
S-82
5. the
amount of such distribution to holders of the Offered Certificates (by class)
allocable to interest and the portion thereof, if any, provided by the Interest
Rate Swap Agreement in the aggregate;
6. the
Interest Carry Forward Amounts and any Net WAC Rate Carryover Amounts for the
related Offered Certificates (if any);
7. the
Certificate Principal Balance of the related Offered Certificates before and
after giving effect to the distribution of principal and allocation of Allocated
Realized Loss Amounts on such distribution date;
8. the
number and Scheduled Principal Balance of all the Mortgage Loans for the
following Distribution Date;
9. the
Pass-Through Rate for each class of Offered Certificates for such Distribution
Date;
10. the
aggregate amount of advances included in the distributions on the Distribution
Date (including the general purpose of such advances);
11. the
number and aggregate principal balance of any Mortgage Loans (not including
any
Liquidated Mortgage Loans as of the end of the Prepayment Period) that were
delinquent (exclusive of Mortgage Loans in foreclosure) using the OTS Method
(1)
one scheduled payment is delinquent, (2) two scheduled payments are delinquent,
(3) three scheduled payments are delinquent and (4) foreclosure proceedings
have
been commenced, and loss information for the period;
12. the
amount of, if any, of excess cashflow or excess spread and the application
of
such excess cashflow;
13. with
respect to any Mortgage Loan that was liquidated during the preceding calendar
month, the loan number and Scheduled Principal Balance of, and Realized Loss
on,
such Mortgage Loan as of the end of the related Prepayment Period;
14. whether
the Stepdown Date has occurred and whether a Trigger Event is in
effect;
15. the
total
number and principal balance of any real estate owned, or REO, properties as
of
the end of the related Prepayment Period;
16. the
cumulative Realized Losses through the end of the preceding month;
17. the
three-month rolling average of the percent equivalent of a fraction, the
numerator of which is the aggregate Scheduled Principal Balance of the Mortgage
Loans that are 60 days or more delinquent or are in bankruptcy or foreclosure
or
are REO properties, and the denominator of which is the Scheduled Principal
Balances of all of the Mortgage Loans;
18. the
amount of the Prepayment Charges remitted by the Servicer; and
19. the
amount of any Net Swap Payment payable to the trust, any related Net Swap
Payment payable to the Swap Provider, any Swap Termination Payment payable
to
the trust and any related Swap Termination Payment payable to the Swap
Provider.
On
each
Distribution Date, the Securities Administrator will make the monthly statement
(and, at its option, any additional files containing the same information in
an
alternative format) available each month via the Securities Administrator’s
internet website. Assistance in using the website can be obtained by calling
the
Securities Administrator’s customer service desk at 1-866-864-4526. Parties that
are unable to use the above distribution options are entitled to have a paper
copy mailed to them via first class mail by calling the Securities
Administrator’s customer service desk and indicating such. The Securities
Administrator shall have the right to change the way such statements are
distributed in order to make such distribution more convenient and/or more
accessible to the above parties and the Securities Administrator shall provide
timely and adequate notification to all above parties regarding any such
changes.
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The
annual reports on Form 10-K, the distribution reports on Form 10-D, the current
reports on Form 8-K and amendments to those reports in each case, as prepared
and filed by the Securities Administrator with respect to the trust pursuant
to
section 13(a) or 15(d)of
the
Exchange Act will be made available on the website of the Securities
Administrator as soon as reasonably practicable after such material is
electronically filed with, or furnished to, the Securities and Exchange
Commission.
In
addition, within a reasonable period of time after the end of each calendar
year, the Securities Administrator will, upon written request, prepare and
deliver to each holder of a Certificate of record during the previous calendar
year a statement containing information necessary to enable Certificateholders
to prepare their tax returns. Such statements will not have been examined and
reported upon by an independent public accountant.
THE
ORIGINATORS
The
primary originator of the Mortgage Loans, American Home Mortgage Corp.,
originated or acquired approximately 67.81% of the Mortgage Loans by aggregate
principal balance as of the Cut-off Date. New Century Mortgage Corporation
originated or acquired approximately 10.29% of the Mortgage Loans by aggregate
principal balance as of the Cut-off Date. The remainder of the Mortgage Loans
were originated or acquired by various originators, none of which have
originated or acquired more than 10% of the Mortgage Loans by aggregate
outstanding principal balance as of the Cut-off Date.
Investors
should note that on April 2, 2007, New Century Financial Corporation and its
related entities, including New Century Mortgage Corporation, filed voluntary
petitions for relief under Chapter 11 of the United States Bankruptcy Code.
In
addition, on March 20, 2007, People’s Choice Home Loan, Inc., an originator of
approximately 5.11% of the Mortgage Loans by aggregate principal balance as
of
the Cut-off Date, and its related entities, filed voluntary petitions for relief
under Chapter 11 of the United States Bankruptcy Code.
For
a
description of the underwriting guidelines applicable to the Mortgage Loans
originated by American Home Mortgage Corp. and certain other information with
respect to this entity, see “Underwriting Standards” in this prospectus
supplement.
STATIC
POOL INFORMATION
Static
pool information material to this offering may be found at
http://regab.db.com.
Information
provided through the Internet address above will not be deemed to be a part
of
this prospectus or the registration statement for the securities offered hereby
if it relates to any prior securities pool or vintage formed before January1,2006, or with respect to the mortgage pool (if applicable) any period before
January 1, 2006.
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Delinquency
data available at the foregoing Internet address has been calculated using
the
OTS Method.
ISSUING
ENTITY
SunTrust
Acquisition Closed-End Seconds Trust, Series 2007-1 is a common law trust to
be
formed under the laws of the State of New York pursuant to the pooling and
servicing agreement among the Depositor, the Servicer, the Master Servicer,
the
Securities Administrator and the Trustee, dated as of April 1, 2007 (the
“Pooling and Servicing Agreement”). The Pooling and Servicing Agreement will
constitute the “governing instrument” under the laws of the State of New York.
After its formation, the Issuing Entity will not engage in any activity other
than (i) acquiring and holding the Mortgage Loans and the other assets of the
Trust and proceeds therefrom, (ii) issuing the Certificates, (iii) making
payments on the Certificates and (iv) engaging in other activities that are
necessary, suitable or convenient to accomplish the foregoing or are incidental
thereto or connected therewith. The foregoing restrictions will be contained
in
the Pooling and Servicing Agreement. These restrictions cannot be amended
without the consent of holders of Certificates evidencing at least 51% of the
voting rights. For a description of other provisions relating to amending the
Pooling and Servicing Agreement, please see “Description of the Agreements —
Amendment” in the prospectus.
The
assets of the SunTrust Acquisition Closed-End Seconds Trust, Series 2007-1
will
consist of the Mortgage Loans and certain related assets.
SunTrust
Acquisition Closed-End Seconds Trust, Series 2007-1’s fiscal year end is
December 31.
THE
DEPOSITOR
ACE
Securities Corp., the Depositor, is a special purpose corporation incorporated
in the State of Delaware on June 3, 1998. The principal executive offices of
the
Depositor are located at 6525 Morrison Boulevard, Suite 318, Charlotte, NorthCarolina28211. Its telephone number is (704) 365-0569. The Depositor does
not
have, nor is it expected in the future to have, any significant
assets.
The
limited purposes of the Depositor are, in general, to acquire, own and sell
mortgage loans and financial assets; to issue, acquire, own, hold and sell
securities and notes secured by or representing ownership interests in mortgage
loans and other financial assets, collections on the mortgage loans and related
assets; and to engage in any acts that are incidental to, or necessary, suitable
or convenient to accomplish, these purposes.
The
Depositor has been serving as a private secondary mortgage market conduit for
residential mortgage loans since 1999. Since that time it has been involved
in
the issuance of securities backed by residential mortgage loans in excess of
$30
billion.
After
issuance and registration of the securities contemplated in this prospectus
supplement, the Depositor will have no duties or responsibilities with respect
to the pool assets or securities other than any obligations with respect to
the
filing of any reports under the Exchange Act as set forth in the Pooling and
Servicing Agreement.
All
of
the shares of capital stock of the Depositor are held by Altamont Holdings
Corp., a Delaware corporation.
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THE
SPONSOR
SunTrust
Asset Funding, LLC (the "Sponsor") will act as sponsor of the Issuing Entity
issuing the Certificates. The Sponsor is a Delaware limited liability company
formed in August 2005. The Sponsor is a direct, wholly owned subsidiary of
SunTrust Bank, one of the nation's largest commercial banking organizations,
and
is affiliated with SunTrust Capital Markets, Inc., one of the Underwriters
of
the certificates. The principal offices of the Sponsor are located at 303
Peachtree Street, NE, 23rd Floor, Atlanta, Georgia30308. Its telephone number
is (404) 813-5123.
The
Sponsor is engaged in a variety of capital markets related activities, including
purchases and sales of loan portfolios, sales of assets for inclusion in
securitizations and acquisitions of loans and the related servicing rights
for
sale or securitization. The Sponsor has been involved in one prior
securitization that occurred in December 2005 and involved the securitization
of
approximately $688 million of residential mortgage loans. Since its formation,
the Sponsor has acquired approximately $1.3 billion of residential mortgage
loans, including approximately $450 million second lien mortgage loans. In
connection with securitizations, the Sponsor typically would be involved in
the
pooling of the mortgage loans, making certain loan level representations and
warranties and repurchasing mortgage loans in the event of certain material
breaches, selecting the servicer and other transaction parties in the
securitization and otherwise cooperating and participating in the securitization
process.
SERVICING
OF THE MORTGAGE LOANS
General
Primary
servicing of the Mortgage Loans will be provided by GMAC Mortgage, LLC (“GMAC”
or the “Servicer”). GMAC will service the Mortgage Loans in accordance with the
Pooling and Servicing Agreement. The Master Servicer will be required to monitor
the Servicer’s performance under the Pooling and Servicing Agreement and, in the
event of a default by the Servicer under the Pooling and Servicing Agreement,
the Master Servicer will enforce any remedies against the Servicer.
The
information set forth in the following paragraphs has been provided by
GMAC.
GMAC
Mortgage, LLC
General
GMAC
Mortgage, LLC is a Delaware limited liability company and a wholly-owned
subsidiary of GMAC Residential Holding Company, LLC, which is a wholly owned
subsidiary of Residential Capital, LLC ("ResCap"). ResCap is a wholly-owned
subsidiary of GMAC Mortgage Group, LLC, which is a wholly-owned subsidiary
of
GMAC, LLC ("GMAC").
GMAC
Mortgage, LLC began acquiring, originating and servicing residential mortgage
loans in 1985 through its acquisition of Colonial Mortgage Service Company,
which was formed in 1926, and the loan administration, servicing operations
and
portfolio of Norwest Mortgage, which entered the residential mortgage loan
business in 1906. These businesses formed the original basis of what is now
GMAC
Mortgage, LLC.
GMAC
Mortgage, LLC maintains its executive and principal offices at 100 Witmer Road,
Horsham, Pennsylvania19044. Its telephone number is (215) 682
1000.
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In
addition, GMAC Mortgage, LLC purchases mortgage loans originated by GMAC Bank,
which is wholly-owned by IB Finance Holding Company, LLC, a subsidiary of ResCap
and GMAC, LLC, and which is an affiliate of GMAC Mortgage, LLC. Formerly known
as GMAC Automotive Bank, GMAC Bank, a Utah industrial bank was organized in
2001. As of November 22, 2006, GMAC Bank became the successor to substantially
all of the assets and liabilities of GMAC Bank, a federal savings bank. All
of
the mortgage loans that GMAC Bank originates are originated in accordance with
GMAC Mortgage, LLC’s underwriting standards described below.
The
diagram below illustrates the ownership structure among certain parties
affiliated with GMAC Mortgage, LLC.
Servicing
Activities
GMAC
Mortgage, LLC generally retains the servicing rights with respect to loans
it
sells or securitizes, and also occasionally purchases mortgage servicing rights
from other servicers or acts as a subservicer of mortgage loans (and does not
hold the corresponding mortgage servicing right asset).
As
of
December 31, 2006, GMAC Mortgage, LLC acted as primary servicer and owned the
corresponding servicing rights on approximately 2,219,029 of residential
mortgage loans having an aggregate unpaid principal balance of approximately
$276 billion, and GMAC Mortgage, LLC acted as subservicer (and did not own
the
corresponding servicing rights) on approximately 328,865 loans having an
aggregate unpaid principal balance of over $61.4 billion.
The
following tables set forth the dollar amount of mortgage loans serviced by
GMAC
Mortgage, LLC for the periods indicated, and the number of such loans for the
same period. GMAC Mortgage, LLC was the servicer of a residential mortgage
loan
portfolio of approximately $150.4 billion, $12.5 billion, $21.2 billion and
$6.67 billion during the year ended December 31, 2002 backed by prime conforming
mortgage loans, prime non-conforming mortgage loans, government mortgage loans
and second-lien mortgage loans, respectively. GMAC Mortgage, LLC was the
servicer of a residential mortgage loan portfolio of approximately $203.9
billion, $32.2 billion, $18.8 billion and $21.0 billion during the year ended
December 31, 2006 backed by prime conforming mortgage loans, prime
non-conforming mortgage loans, government mortgage loans and second-lien
mortgage loans, respectively. The percentages shown under “Percentage Change
from Prior Year” represent the ratio of (a) the difference between the current
and prior year volume over (b) the prior year volume.
Billing
and Payment Procedures.
As
servicer, GMAC Mortgage, LLC collects and remits mortgage loan payments,
responds to borrower inquiries, accounts for principal and interest, holds
custodial and escrow funds for payment of property taxes and insurance premiums,
counsels or otherwise works with delinquent borrowers, supervises foreclosures
and property dispositions and generally administers the loans. GMAC Mortgage,
LLC sends monthly invoices or annual coupon books to borrowers to prompt the
collection of the outstanding payments. Borrowers may elect for monthly payments
to be deducted automatically from bank accounts on the same day every month
or
may take advantage of on demand ACH payments made over the internet or via
phone.
A
loan is
considered to be “30 to 59 days” or “30 or more days” delinquent when a payment
due on any due date remains unpaid as of the close of business on the last
business day immediately prior to the next following monthly due date. The
determination as to whether a loan falls into this category is made as of the
close of business on the last business day of each month. Grace periods and
partial payments do not affect these determinations.
As
servicer, GMAC Mortgage, LLC collects and remits mortgage loan payments,
responds to borrower inquiries, accounts for principal and interest, holds
custodial and escrow funds for payment of property taxes and insurance premiums,
counsels or otherwise works with delinquent borrowers, supervises foreclosures
and property dispositions and generally administers the loans. GMAC Mortgage,
LLC may, from time to time, outsource certain of its servicing functions, such
as contacting delinquent borrowers, property tax administration and hazard
insurance administration, although any such outsourcing will not relieve GMAC
Mortgage, LLC of any of its responsibilities or liabilities as the
servicer.
Servicing
and Other Compensation and Payment of Expenses
The
Servicer will provide customary servicing functions with respect to the Mortgage
Loans. Among other things, the Servicer is obligated under some circumstances
to
make P&I Advances with respect to the Mortgage Loans. In managing the
liquidation of defaulted Mortgage Loans, the Servicer will have sole discretion
to take such action in maximizing recoveries to the certificateholders
including, without limitation, selling defaulted Mortgage Loans and REO
properties as described in the Pooling and Servicing Agreement.
The
Servicer must charge off a Mortgage Loan at the time such Mortgage Loan becomes
180 days delinquent according to the OTS Method. Once a Mortgage Loan has been
charged off, the Servicer will discontinue making P&I Advances, the Servicer
will not be entitled to servicing fees (except as otherwise provided in the
Pooling and Servicing Agreement) and the Mortgage Loan will be treated as a
Charged Off Mortgage Loan giving rise to a Realized Loss.
Any
such
Mortgage Loan that is charged off may continue to be serviced by the Servicer
for the certificateholders using specialized collection procedures (including
foreclosure, if appropriate). For as long as such Charged Off Mortgage Loan
remains part of the Trust, the Servicer will be entitled to retain 30% of the
net proceeds received on such Charged Off Mortgage Loan; provided, that the
Servicer will not be entitled to any other servicing fees in connection with
such Mortgage Loans after the date of charge off. Any such Mortgage Loans
serviced in accordance with the specialized collection procedures will be
serviced until six months following the later of (i) the date on which such
Mortgage Loans were charged off and (ii) the date on which any collections
are
received on such Mortgage Loans. Any net recoveries (less the 30% recovery
fee
paid to the Servicer) received on such Mortgage Loans during such period will
be
included in the Interest Remittance Amount, to the extent allocable to interest
payments, and to the Principal Remittance Amount, to the extent allocable to
principal payments. On the date occurring six months following the later of
(i)
the date on which such Mortgage Loans were charged off and (ii) the date on
which any collections are received on such Mortgage Loans, such Charged Off
Mortgage Loans will be released to the Class CE Certificateholder and
thereafter, (i) the Class CE Certificateholder will be entitled to any amounts
subsequently received in respect of any such released loans, (ii) the holder
of
the majority of the Class CE Certificates may designate any servicer to service
any such released loan and (iii) the holder of the majority of the Class CE
Certificates may sell any such released loan to a third party.
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The
principal compensation to be paid to the Servicer in respect of the servicing
activities performed by the Servicer will be a servicing fee (the “Servicing
Fee”) calculated at a per annum rate (the “Servicing Fee Rate”) equal to 0.500%
with respect to each Mortgage Loan on the Scheduled Principal Balance of each
such Mortgage Loan. As additional servicing compensation, the Servicer is
entitled to retain all servicing-related fees, including assumption fees,
modification fees, extension fees, non-sufficient funds fees, late payment
charges and other ancillary fees and charges in respect of the Mortgage Loans
(with the exception of Prepayment Charges, which will be distributed to the
holders of the Class P Certificates), to the extent collected from mortgagors,
together with any interest or other income earned on funds held in the
collection account and any related escrow account.
The
Servicer is obligated to pay insurance premiums (other than the Premium) and
other ongoing expenses associated with the related Mortgage Loans in connection
with its responsibilities under the Pooling and Servicing Agreement and is
entitled to reimbursement for these expenses as provided in the Pooling and
Servicing Agreement. See “Description of the Agreements-Material Terms of the
Pooling and Servicing Agreements and Underlying Servicing Agreements-Retained
Interest, Servicing Compensation and Payment of Expenses” in the prospectus for
information regarding expenses payable by the Servicer.
The
Servicer and any director, officer, employee or agent of the Servicer will
be
indemnified and held harmless by the trust against any loss, liability or
expense as set forth in the Pooling and Servicing Agreement, subject to certain
limitations set forth therein.
Optional
Purchase of Defaulted Mortgage Loans
As
to any
Mortgage Loan which is delinquent in payment by 90 days or more (calculated
using the OTS Method), the Servicer may, at its option, purchase such delinquent
Mortgage Loan from the Trust at a purchase price and under the circumstances
described in the Pooling and Servicing Agreement.
Payments
on Mortgage Loans; Deposits to Collection Account
The
Servicer will establish and maintain or cause to be maintained a separate trust
account (a “Collection Account”) for the benefit of the certificateholders and
the Class A Certificate Insurer. The Collection Account will be an Eligible
Account (as defined in the Pooling and Servicing Agreement). Upon receipt by
the
Servicer of amounts in respect of the Mortgage Loans (excluding amounts
representing the Servicing Fees or other servicing compensation, reimbursement
for P&I Advances and servicing advances and insurance proceeds to be applied
to the restoration or repair of a Mortgaged Property or similar items), the
Servicer will deposit such amounts in the Collection Account. Amounts so
deposited by the Servicer may be invested in Permitted Investments maturing
no
later than one Business Day prior to the date on which the amount on deposit
therein is required to be remitted to the Securities Administrator. All
investment income on funds in a Collection Account shall be for the benefit
of
the Servicer.
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Any
one
or more of the following obligations or securities held in the name of the
Trustee for the benefit of the certificateholders will be considered a Permitted
Investment:
(i) obligations
of the United States or any agency thereof, provided such obligations are backed
by the full faith and credit of the United States;
(ii)
general
obligations of or obligations guaranteed by any state of the United States
or
the District of Columbia receiving the highest long-term debt rating of each
rating agency, or such lower rating as will not result in the downgrading or
withdrawal of the ratings then assigned to the certificates by each rating
agency, as evidenced in writing;
(iii)
commercial
or finance company paper which is then receiving the highest commercial or
finance company paper rating of each rating agency rating such paper, or such
lower rating as will not result in the downgrading or withdrawal of the ratings
then assigned to the certificates by each rating agency, as evidenced in
writing;
(iv)
certificates
of deposit, demand or time deposits, or bankers’ acceptances issued by any
depository institution or trust company incorporated under the laws of the
United States or of any state thereof and subject to supervision and examination
by federal and/or state banking authorities (including the trustee in its
commercial banking capacity), provided that the commercial paper and/or long
term unsecured debt obligations of such depository institution or trust company
are then rated one of the two highest long-term and the highest short-term
ratings of each such rating agency for such securities, or such lower ratings
as
will not result in the downgrading or withdrawal of the rating then assigned
to
the certificates by any rating agency, as evidenced in writing;
(v)
guaranteed
reinvestment agreements issued by any bank, insurance company or other
corporation containing, at the time of the issuance of such agreements, such
terms and conditions as will not result in the downgrading or withdrawal of
the
rating then assigned to the certificates by each rating agency, as evidenced
in
writing;
(vi)
repurchase
obligations with respect to any security described in clauses (i) and (ii)
above, in either case entered into with a depository institution or trust
company (acting as principal) described in clause (v) above;
(vii)
securities
(other than stripped bonds, stripped coupons or instruments sold at a purchase
price in excess of 115% of the face amount thereof) bearing interest or sold
at
a discount issued by any corporation incorporated under the laws of the United
States or any state thereof which, at the time of such investment, have one
of
the two highest short term ratings of each rating agency (except if the rating
agency is Moody’s, such rating will be the highest commercial paper rating of
Moody’s for any such securities), or such lower rating as will not result in the
downgrading or withdrawal of the rating then assigned to the certificates by
each rating agency, as evidenced by a signed writing delivered by each rating
agency;
(viii)
interests
in any money market fund (including any such fund managed or advised by the
trustee or any affiliate thereof) which at the date of acquisition of the
interests in such fund and throughout the time such interests are held in such
fund has the highest applicable short term rating by each rating agency or
such
lower rating as will not result in the downgrading or withdrawal of the ratings
then assigned to the certificates by each rating agency, as evidenced in
writing;
(ix)
short
term investment funds sponsored by any trust company or banking association
incorporated under the laws of the United States or any state thereof (including
any such fund managed or advised by the Trustee or the Master Servicer or any
affiliate thereof) which on the date of acquisition has been rated by each
rating agency in their respective highest applicable rating category or such
lower rating as will not result in the downgrading or withdrawal of the ratings
then assigned to the certificates by each rating agency, as evidenced in
writing; and
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(x)
such
other investments having a specified stated maturity and bearing interest or
sold at a discount acceptable to each rating agency and as will not result
in
the downgrading or withdrawal of the rating then assigned to the certificates
by
any rating agency, as evidenced by a signed writing delivered by each rating
agency.
Prepayment
Interest Shortfalls and Compensating Interest
When
a
principal prepayment in full is made on a Mortgage Loan, the mortgagor is
charged interest only for the period from the Due Date of the preceding monthly
payment up to the date of the prepayment, instead of for a full month. When
a
partial principal prepayment is made on a Mortgage Loan, the mortgagor is not
charged interest on the amount of the prepayment for the month in which the
prepayment is made. In addition, the application of the Servicemembers Civil
Relief Act (the “Relief Act”) and similar state or local laws to any Mortgage
Loan could adversely affect, for an indeterminate period of time, the ability
of
the Servicer to collect full amounts of interest on such Mortgage Loans. The
Servicer is obligated to pay from its own funds interest shortfalls attributable
to voluntary principal prepayments in full by the mortgagors on the Mortgage
Loans; provided, however that the obligation of the Servicer to remit the amount
of any shortfall in interest resulting from a principal prepayment in full
on a
Mortgage Loan shall be limited to the aggregate Servicing Fee (as defined in
this prospectus supplement) payable to the Servicer for the related Due Period.
The Servicer will not remit any shortfalls in interest attributable to the
application of the Relief Act or any similar state or local laws. Any interest
shortfalls attributable to voluntary principal prepayments required to be funded
but not funded by the Servicer will be required to be paid by the Master
Servicer, but only to the extent that such amount does not exceed the
compensation payable to the Master Servicer for the applicable Distribution
Date. Accordingly, the effect of interest shortfalls resulting from principal
prepayments in full or in part on the Mortgage Loans (each, a “Prepayment
Interest Shortfall”) to the extent that they exceed any payments by the Servicer
or the Master Servicer (“Compensating Interest”) or any shortfalls resulting
from the application of the Relief Act or similar state or local laws, will
be
to reduce the aggregate amount of interest collected that is available for
distribution to certificateholders. Any such shortfalls will be allocated among
the certificates as provided under “Description of the Certificates—Interest
Distributions on the Certificates” in this prospectus supplement. See “Certain
Legal Aspects of the Mortgage Loans—Servicemembers Civil Relief Act” in the
prospectus.
Advances
Subject
to the limitations set forth in the following paragraph, the Servicer will
be
obligated to advance or cause to be advanced on or before the Servicer
Remittance Date its own funds, or funds in the Collection Account that are
not
included in the Available Distribution Amount for the Distribution Date. The
amount of the related advance will be equal to the aggregate of all scheduled
payments of principal and interest, net of the related Servicing Fee, that
were
due during the related Due Period on the related Mortgage Loans and that were
delinquent on the related Determination Date, plus amounts representing assumed
payments not covered by any current net income on the Mortgaged Properties
acquired by foreclosure or deed in lieu of foreclosure (net of the Servicing
Fees). These advances are referred to in this prospectus supplement as “P&I
Advances”.
P&I
Advances are required to be made only to the extent they are deemed by the
Servicer to be recoverable from related late collections, insurance proceeds
or
liquidation proceeds on the related Mortgage Loan. The purpose of making the
P&I 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 to make any P&I Advances with respect to reductions in the amount
of the monthly payments on any Mortgage Loans due to bankruptcy proceedings
or
the application of the Relief Act or similar state or local laws. All P&I
Advances will be reimbursable to the Servicer or the Master Servicer from late
collections, insurance proceeds and liquidation proceeds from the Mortgage
Loan
as to which the unreimbursed P&I Advance was made. In addition, any P&I
Advances previously made in respect of any Mortgage Loan that are deemed by
the
Servicer or the Master Servicer to be nonrecoverable from related late
collections, insurance proceeds or liquidation proceeds may be reimbursed to
the
Servicer or the Master Servicer out of any funds in the Collection Account
prior
to the distributions on the certificates. In the event that the Servicer fails
in its obligation to make any required P&I Advance, a successor servicer
will be obligated to make the P&I Advance on the Distribution Date for which
the Servicer was required to make such P&I Advance, to the extent required
in the Pooling and Servicing Agreement.
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In
addition, the Servicer will be obligated to advance or cause to be advanced,
from time to time, its own funds, or funds in the Collection Account that are
not included in the Available Distribution Amount for the Distribution Date,
as
servicing advances pursuant to the Pooling and Servicing Agreement.
In
the
event that a Balloon Loan is not paid in full on its maturity date, the Servicer
will also be obligated to make advances with respect to the assumed monthly
payments that would have been due on such Balloon Loan based upon the original
amortization schedule for the loan, unless the Servicer determines that the
advance would not be recoverable. In no event will the Servicer be obligated
to
advance the balloon payment due on any Balloon Loan.
Upon
an
Event of Default by the Servicer under the Pooling and Servicing Agreement,
the
Master Servicer may, with the prior written consent of the Class A Certificate
Insurer, or shall, at the prior written direction of the Class A Certificate
Insurer, in each case, so long as a default by the Class A Certificate Insurer
has not occurred and is not continuing, terminate the Servicer and appoint
a
successor servicer. Such successor servicer must meet the requirements for
successor servicers under the Pooling and Servicing Agreement (including receipt
of confirmation from each Rating Agency that the appointment of such successor
servicer would not lead to a qualification, downgrade or withdrawal of the
ratings then assigned to the Offered Certificates (without regard to the Class
A
Certificate insurance policy) in accordance with the terms and conditions of
the
Pooling and Servicing Agreement).
The
Pooling and Servicing Agreement may also provide that the Servicer may enter
into a facility with any person which provides that such person may fund P&I
Advances or servicing advances, although no such facility shall reduce or
otherwise affect the obligations of the Servicer to fund such P&I Advances
or servicing advances. Any P&I Advances or servicing advances funded by an
advancing person will be reimbursed to the advancing person in the same manner
as reimbursements would be made to the Servicer.
Modifications
In
instances in which a Mortgage Loan is in default or if default is reasonably
foreseeable, and if determined by the Servicer to be in the best interest of
the
certificateholders, the Servicer may permit servicing modifications of the
Mortgage Loan (however, if the aggregate principal balance of the Mortgage
Loans
subject to modification is greater than 5% of the initial aggregate principal
balance of the Mortgage Loans, such modification shall only be permitted with
the prior written consent of the Class A Certificate Insurer, so long as a
default by the Class A Certificate Insurer has not occurred and is not
continuing) rather than proceeding with foreclosure. However, the Servicer’s
ability to perform servicing modifications will be subject to some limitations,
including but not limited to the following: any amounts added to the principal
balance of the Mortgage Loan, or capitalized amounts added to the Mortgage
Loan,
will be required to be fully amortized over the remaining term, or the extended
term, of the Mortgage Loan; all capitalizations are to be implemented in
accordance with the Servicer’s standards and may be implemented only by the
Servicer for that purpose. Pursuant to the terms of the Pooling and Servicing
Agreement, unless a Mortgage Loan is in default or such default is reasonably
foreseeable, no servicing modification with respect to a Mortgage Loan will
have
the effect of (i) reducing the mortgage rate, (ii) reducing or increasing the
principal balance (except for reductions resulting from actual payments of
principal) or (iii) changing the final maturity date on such Mortgage Loan
(subject to certain exceptions) or that would both (A) effect an exchange or
reissuance of such Mortgage Loan under Section 1001 of the Code (or final,
temporary or proposed Treasury regulations promulgated thereunder) and (B)
cause
any Trust REMIC created under the Pooling and Servicing Agreement to fail to
qualify as a REMIC under the Code or the imposition of any tax on “prohibited
transactions” or “contributions after the startup date” under the REMIC
Provisions.
S-93
Any
advances made on any Mortgage Loan will be reduced to reflect any related
servicing modifications previously made. The Mortgage Rate and net Mortgage
Rate
as to any Mortgage Loan will be deemed not reduced by any servicing
modification, so that the calculation of the Interest Distribution Amount (as
defined in this prospectus supplement) payable on the Offered Certificates
will
not be affected by the servicing modification.
Evidence
as to Compliance
The
Pooling and Servicing Agreement will provide that each year on or before the
date set forth in the Pooling and Servicing Agreement, beginning with the first
year after the year in which the Cut-off Date occurs, each party responsible
for
the servicing function will provide to the Depositor, the Master Servicer and
the Securities Administrator a report on an assessment of compliance with the
minimum servicing criteria established in Item 1122(a) of Regulation AB (the
“AB
Servicing Criteria”). The AB Servicing Criteria include specific criteria
relating to the following areas: general servicing considerations, cash
collection and administration, investor remittances and reporting, and pool
asset administration. Such report will indicate that the AB Servicing Criteria
were used to test compliance on a platform level basis and will set out any
material instances of noncompliance.
The
Pooling and Servicing Agreement will also provide that each party responsible
for the servicing function will deliver along with its report on assessment
of
compliance, an attestation report from a firm of independent public accountants
on the assessment of compliance with the AB Servicing Criteria.
The
Pooling and Servicing Agreement will also provide for delivery to the Master
Servicer, the Securities Administrator and the Depositor, each year on or before
the date set forth in the Pooling and Servicing Agreement, of a separate annual
statement of compliance from each entity responsible for the servicing function
to the effect that, to the best knowledge of the signing officer, the Servicer
has fulfilled in all material respects its obligations under the Pooling and
Servicing Agreement throughout the preceding year or, if there has been a
material failure in the fulfillment of any obligation, the statement shall
specify such failure and the nature and status thereof. This statement may
be
provided as a single form making the required statements as to more than one
pooling and servicing agreement.
Copies
of
the annual reports of assessment of compliance, attestation reports, and
statements of compliance may be obtained by securityholders without charge
upon
written request to the Master Servicer at the address of the Master Servicer
set
forth under “The Securities Administrator and the Master Servicer” in this
prospectus supplement. These items will be filed with the Issuing Entity’s
annual report on Form 10-K, to the extent required under Regulation
AB.
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THE
SECURITIES ADMINISTRATOR AND THE MASTER SERVICER
Wells
Fargo Bank, National Association
General
The
information set forth in the following five paragraphs has been provided by
Wells Fargo Bank, National Association.
Wells
Fargo Bank, National Association (“Wells Fargo Bank”) will act as Securities
Administrator and Master Servicer under the Pooling and Servicing Agreement.
Wells Fargo Bank is a national banking association and a wholly-owned subsidiary
of Wells Fargo & Company. A diversified financial services company with
approximately $482 billion in assets, 23+ million customers and 158,000+
employees as of December 31, 2006, Wells Fargo & Company is a U.S. bank
holding company, providing banking, insurance, trust, mortgage and consumer
finance services throughout the United States and internationally. Wells Fargo
Bank provides retail and commercial banking services and corporate trust,
custody, securities lending, securities transfer, cash management, investment
management and other financial and fiduciary services. The Depositor, the
Sponsor and the Servicer may maintain banking and other commercial relationships
with Wells Fargo Bank and its affiliates. Wells Fargo Bank maintains principal
corporate trust offices located at 9062 Old Annapolis Road, Columbia, Maryland21045-1951 (among other locations) and its office for certificate transfer
services is located at Sixth Street and Marquette Avenue, Minneapolis, Minnesota55479.
Wells
Fargo Bank's assessment of compliance with applicable servicing criteria
relating to its provision of master servicing, trustee, securities
administration and paying agent services for the twelve months ended December31, 2006, furnished pursuant to Item 1122 of Regulation AB, discloses that
it
was not in compliance with the 1122(d)(3)(i) servicing criteria during that
reporting period. The assessment of compliance indicates that certain monthly
investor or remittance reports included errors in the calculation and/or the
reporting of delinquencies for the related pool assets, which errors may or
may
not have been material, and that all such errors were the result of data
processing errors and/or the mistaken interpretation of data provided by other
parties participating in the servicing function. The assessment further states
that all necessary adjustments to Wells Fargo Bank's data processing systems
and/or interpretive clarifications have been made to correct those errors and
to
remedy related procedures.
Wells
Fargo Bank serves or may have served within the past two years as loan file
custodian for various mortgage loans owned by the Sponsor or an affiliate of
the
Sponsor and anticipates that one or more of those mortgage loans may be included
in the Trust. The terms of any custodial agreement under which those services
are provided by Wells Fargo are customary for the mortgage-backed securitization
industry and provide for the delivery, receipt, review and safekeeping of
mortgage loan files.
Securities
Administrator.
Under
the terms of the Pooling and Servicing Agreement, Wells Fargo Bank also is
responsible for securities administration, which includes pool performance
calculations, distribution calculations and the preparation of monthly
distribution reports. As Securities Administrator, Wells Fargo Bank is
responsible for the preparation and filing of all REMIC tax returns on behalf
of
the trust and the preparation of monthly reports on Form 10-D, current reports
on Form 8-K and annual reports on Form 10-K that are required to be filed with
the Securities and Exchange Commission on behalf of the issuing trust. Wells
Fargo Bank has been engaged in the business of securities administration since
June 30, 1995. As of December 31, 2006, Wells Fargo Bank was acting as
securities administrator with respect to more than $1,006,418,000,000 of
outstanding residential mortgage-backed securities.
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Master
Servicer.
Wells
Fargo Bank acts as Master Servicer pursuant to the Pooling and Servicing
Agreement. The Master Servicer is responsible for the aggregation of monthly
servicer reports and remittances and for the oversight of the performance of
the
Servicer under the terms of the Pooling and Servicing Agreement. In particular,
the Master Servicer independently calculates monthly loan balances based on
servicer data, compares its results to servicer loan-level reports and
reconciles any discrepancies with the Servicer. The Master Servicer also reviews
the servicing of defaulted loans for compliance with the terms of the Pooling
and Servicing Agreement. In addition, upon the occurrence of certain servicer
events of default under the terms of the Pooling and Servicing Agreement, the
Master Servicer may, with the prior consent of the Class A Certificate Insurer,
and shall, at the direction of the Class A Certificate Insurer, in each case,
so
long as a default by the Class A Certificate Insurer has not occurred and is
not
continuing, enforce certain remedies on behalf of the Trust and against the
defaulting Servicer. Wells Fargo Bank has been engaged in the business of master
servicing since June 30, 1995. As of December 31, 2006, Wells Fargo Bank was
acting as master servicer for approximately 1,427 series of residential
mortgage-backed securities with an aggregate outstanding principal balance
of
approximately $748,854,000,000.
Master
Servicing and Other Compensation and Payment of Expenses
The
principal compensation to be paid to the Master Servicer in respect of its
master servicing activities for the certificates will be a master servicing
fee
equal to one-twelfth of the product of 0.009% multiplied by the Scheduled
Principal Balance of the Mortgage Loans as of the Due Date in the preceding
calendar month. In addition, the Master Servicer will be entitled to any
interest or other income earned on funds held in the Distribution
Account.
In
the
event that the Servicer fails to pay the amount of any Prepayment Interest
Shortfall required to be paid on any Distribution Date, the Master Servicer
shall pay such amount up to the master servicing compensation payable to the
Master Servicer on such Distribution Date.
The
Distribution Account
The
Securities Administrator will establish an account (the “Distribution Account”)
into which will be deposited amounts remitted to it by the Servicer for
distribution to certificateholders on a Distribution Date and payment of certain
fees and expenses of the trust. The Distribution Account will be an Eligible
Account (as defined in the Pooling and Servicing Agreement). Amounts on deposit
therein may be invested in Permitted Investments (as defined under “Servicing of
the Mortgage Loans—Payments on Mortgage Loans; Deposits to Collection Account”
in this prospectus supplement) maturing on or before the Business Day prior
to
the related Distribution Date unless such Permitted Investments are invested
in
investments managed or advised by the Securities Administrator or an affiliate
thereof, in which case such Permitted investments may mature on the related
Distribution Date.
Transfer
of Master Servicing
The
Master Servicer may sell and assign its rights and delegate its duties and
obligations in its entirety as Master Servicer under the Pooling and Servicing
Agreement; provided, however, that: (i) the purchaser or transferee accept
in
writing such assignment and delegation and assume the obligations of the Master
Servicer under the Pooling and Servicing Agreement (a) shall have a net worth
of
not less than $25,000,000 (unless otherwise approved by each Rating Agency
pursuant to clause (ii) below); (b) shall be reasonably satisfactory to the
Trustee (as evidenced in a writing signed by the Trustee); and (c) shall execute
and deliver to the Trustee an agreement, in form and substance reasonably
satisfactory to the Trustee, which contains an assumption by such Person of
the
due and punctual performance and observance of each covenant and condition
to be
performed or observed by it as Master Servicer under the Pooling and Servicing
Agreement; (ii) each Rating Agency shall be given prior written notice of the
identity of the proposed successor to the Master Servicer and each Rating
Agency’s rating of the Certificates in effect immediately prior to such
assignment, sale and delegation will not be downgraded, qualified or withdrawn
as a result of such assignment, sale and delegation, as evidenced by a letter
to
such effect delivered to the Master Servicer and the Trustee; and (iii) the
Master Servicer assigning and selling the master servicing shall deliver to
the
Trustee an officer’s certificate and an opinion of independent counsel, each
stating that all conditions precedent to such action under the Pooling and
Servicing Agreement have been completed and such action is permitted by and
complies with the terms of the Pooling and Servicing Agreement. No such
assignment or delegation shall affect any liability of the Master Servicer
arising out of acts or omissions prior to the effective date
thereof.
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Indemnification
The
Master Servicer and any director, officer, employee or agent of the Master
Servicer will be indemnified and held harmless by the trust against any loss,
liability or expense as set forth in the Pooling and Servicing Agreement,
subject to certain limitations set forth therein.
The
Securities Administrator and any director, officer, employee or agent of the
Securities Administrator will be indemnified and held harmless by the trust
against any loss, liability or expense as set forth in the Pooling and Servicing
Agreement, subject to certain limitations set forth therein.
THE
CUSTODIAN
Deutsche
Bank National Trust Company
General
The
information set forth in the following paragraph has been provided by Deutsche
Bank National Trust Company (“DBNTC”).
DBNTC
has
performed a custodial role in numerous mortgage-backed transactions since 1991.
DBNTC will maintain the mortgage files in secure, fire-resistant facilities.
DBNTC will not physically segregate the mortgage files from other mortgage
files
in DBNTC’s custody but will be kept in shared facilities. However, DBNTC’s
proprietary document tracking system will show the location within DBNTC’s
facilities of each mortgage file and will show that the mortgage loan documents
are held by the Trustee on behalf of the trust. DBNTC has no pending legal
proceedings that would materially affect its ability to perform its duties
as
custodian on behalf of the Holders. DBNTC may perform certain of its obligations
through one or more third party vendors. However, DBNTC shall remain liable
for
the duties and obligations required of it under its custodial
agreement.
DBNTC
is
providing the information in the foregoing paragraph at the Depositor’s request
in order to assist the Depositor with the preparation of its disclosure
documents to be filed with the SEC pursuant to Regulation AB. Otherwise, DBNTC
has not participated in the preparation of such disclosure documents and assumes
no responsibility or liability for their contents.
All
of
the mortgage loan files with respect to the Mortgage Loans will be held by
DBNTC
pursuant to a custodial agreement to be entered into among HSBC Bank USA,
National Association, as Trustee, DBNTC, as custodian and the
Servicer.
S-97
The
Custodian and any director, officer, employee or agent of the Custodian will
be
indemnified and held harmless by the trust against any loss, liability or
expense as set forth in the Custodial Agreement, subject to certain limitations
set forth therein.
THE
TRUSTEE
HSBC
Bank
USA, National Association will be the Trustee under the Pooling and Servicing
Agreement. The Depositor and the Master Servicer may maintain other banking
relationships in the ordinary course of business with the Trustee. The Trustee’s
corporate trust office is located at 452 Fifth Avenue, New York, New York10018,
Attention: CTLA - Structured Finance/STACS 2007-1 or at such other address
as
the Trustee may designate from time to time.
HSBC
Bank
USA, National Association, has been and currently is, serving as Trustee for
numerous securities transactions involving similar pool assets to those found
in
this transaction.
The
Trustee, prior to the occurrence of an Event of Default and after the curing
or
waiver of all Events of Default which may have occurred, undertakes to perform
such duties and only such duties as are specifically set forth in the Pooling
and Servicing Agreement as duties of the Trustee, including the
following:
1.
Upon
receipt of all resolutions, certificates, statements, opinions, reports,
documents, orders or other instruments which are specifically required to be
furnished to the Trustee pursuant to the Pooling and Servicing Agreement, the
Trustee (or the Custodian) shall examine them to determine whether they are
in
the required form; provided, however, that the Trustee shall not be responsible
for the accuracy or content of any resolution, certificate, statement, opinion,
report, document, order or other instrument furnished hereunder; provided,
further, that the Trustee shall not be responsible for the accuracy or
verification of any calculation provided to it pursuant to the Pooling and
Servicing Agreement.
2.
The
Trustee shall promptly remit to the Servicer any complaint, claim, demand,
notice or other document (collectively, the “Notices”) delivered to the Trustee
as a consequence of the assignment of any Mortgage Loan hereunder and relating
to the servicing of the Mortgage Loans; provided than any such notice (i) is
delivered to the Trustee at its Corporate Trust Office, (ii) contains
information sufficient to permit the Trustee to make a determination that the
real property to which such document relates is a Mortgaged Property (as defined
in the Pooling and Servicing Agreement). The Trustee shall have no duty
hereunder with respect to any Notice it may receive or which may be alleged
to
have been delivered to or served upon it unless such Notice is delivered to
it
or served upon it at its Corporate Trust Office and such Notice contains the
information required pursuant to clause (ii) of the preceding
sentence.
3.
Except
for those actions that the Trustee is required to take under the Pooling and
Servicing Agreement, the Trustee shall not have any obligation or liability
to
take any action or to refrain from taking any action in the absence of written
direction as provided in the Pooling and Servicing Agreement.
If
an
Event of Default has occurred and has not been cured or waived, the Trustee
shall exercise such of the rights and powers vested in it by the Pooling and
Servicing Agreement, using the same degree of care and skill in their exercise,
as a prudent person would exercise under the circumstances in the conduct of
his
own affairs.
Without
limiting the generality of the foregoing, if an Event of Default shall occur,
the Trustee shall, at the direction of the Class A Certificate Insurer or
holders of at least 51% of the voting rights, by notice in writing to the Master
Servicer, to the Depositor and, in the case of such notice being provided by
holders, the Class A Certificate Insurer, with a copy to each Rating Agency,
terminate all of the rights and obligations of the Master Servicer in its
capacity as Master Servicer under the Pooling and Servicing Agreement, to the
extent permitted by law, and in and to the Mortgage Loans and the proceeds
thereof. On or after the receipt by the Master Servicer of such written notice,
all authority and power of the Master Servicer with respect to the Certificates
(other than as a holder of any Certificate) or the Mortgage Loans or otherwise
including, without limitation, the compensation payable to the Master Servicer
under the Pooling and Servicing Agreement, shall pass to and be vested in the
Trustee, and, without limitation, the Trustee shall be authorized and empowered,
as attorney-in-fact or otherwise, to execute and deliver, on behalf of and
at
the expense of the Master Servicer, any and all documents and other instruments
and to do or accomplish all other acts or things necessary or appropriate to
effect the purposes of such notice of termination, whether to complete the
transfer and endorsement or assignment of the Mortgage Loans and related
documents, or otherwise. Notwithstanding the foregoing, the Trustee may, if
it
shall be unwilling to so act, or shall, if it is legally unable to act, appoint
(with
the
prior written consent of the Class A Certificate Insurer, so long as a default
by the Class A Certificate Insurer has not occurred and is not
continuing),
or
petition a court of competent jurisdiction to appoint (with the prior written
consent of the Class A certificate insurer), a successor master servicer in
accordance with the terms of the Pooling and Servicing Agreement.
S-98
To
the
extent that the costs and expenses of the Trustee related to the termination
of
the Master Servicer, appointment of a successor master servicer or the transfer
and assumption of the master servicing by the Trustee (including, without
limitation, (i) all legal costs and expenses and all due diligence costs and
expenses associated with an evaluation of the potential termination of the
Master Servicer as a result of an Event of Default and (ii) all costs and
expenses associated with the complete transfer of the master servicing,
including all servicing files and all servicing data and the completion,
correction or manipulation of such servicing data as may be required by the
successor master servicer to correct any errors or insufficiencies in the
servicing data or otherwise to enable the successor master servicer to master
service the Mortgage Loans in accordance with the Pooling and Servicing
Agreement) are not fully and timely reimbursed by the terminated master
servicer, the Trustee shall be entitled to reimbursement of such costs and
expenses from the Distribution Account subject to certain limitations set forth
in the pooling and servicing agreement.
For
further discussion of the duties of the Trustee, please see “Description of the
Agreements—Material Terms of the Pooling and Servicing Agreements and Underlying
Servicing Agreements—Duties of the Trustee” in the prospectus.
The
Master Servicer will pay the Trustee the trustee’s fee in respect of its
obligations under the Pooling and Servicing Agreement. The Pooling and Servicing
Agreement will provide that (subject to certain limitations set forth therein)
the Trustee and any director, officer, employee or agent of the Trustee will
be
indemnified by the trust and will be held harmless against any loss, liability,
expense or cost including, but not limited to, attorneys fees and expenses
(not
including expenses and disbursements incurred or made by the Trustee in the
ordinary course of the Trustee’s performance in accordance with the provisions
of the Pooling and Servicing Agreement) incurred by the Trustee in connection
with any pending or threatened legal action or arising out of or in connection
with the acceptance or administration of its obligations and duties under the
Pooling and Servicing Agreement, the Certificates or the Custodial Agreement,
other than any loss, liability or expense (i) resulting from a breach of the
related obligations and duties of the Servicer under the Pooling and Servicing
Agreement (for which the Trustee receives indemnity from the Servicer) or (ii)
incurred by reason of willful misfeasance, bad faith or negligence in the
performance of the Trustee’s duties under the Pooling and Servicing Agreement,
the Certificates or the Custodial Agreement or by reason of reckless disregard,
of the Trustee’s obligations and duties under the Pooling and Servicing
Agreement, the Certificates or the Custodial Agreement.
S-99
The
Trustee may resign at any time, in which event the Depositor will be obligated
to appoint a successor trustee. The Depositor may, with the prior written
consent of the Class A Certificate Insurer, or shall, at the prior written
direction of the Class A Certificate Insurer, in each case, so long as a default
by the Class A Certificate Insurer has not occurred and is not continuing,
also
remove the Trustee if the Trustee ceases to be eligible to continue under the
Pooling and Servicing Agreement or if the Trustee becomes insolvent. Upon
becoming aware of the circumstances, the Depositor will be obligated to appoint
a successor trustee. The Trustee may also be removed at any time by the holders
of the certificates evidencing not less than a majority of the voting rights
in
the trust fund. Any resignation or removal of the Trustee and appointment of
a
successor trustee will not become effective until acceptance of the appointment
by the successor trustee. If the Trustee resigns, the expenses associated with
the change of trustee in connection with such resignation will be paid by the
former trustee. If the Depositor removes the Trustee, the expenses associated
with the change of trustees in connection with such removal will be paid from
the Distribution Account. If the Trustee is removed by holders of certificates,
such holders shall be responsible for paying any compensation payable to a
successor trustee, in excess of the amount paid to the predecessor
trustee.
THE
CREDIT RISK MANAGER
Clayton
Fixed Income Services Inc., as credit risk manager for the trust (the “Credit
Risk Manager”) will monitor the performance of the Servicer, and make
recommendations to the Servicer and/or Master Servicer regarding certain
delinquent and defaulted Mortgage Loans and will report to the Depositor on
the
performance of the Mortgage Loans, pursuant to a Credit Risk Management
Agreement to be entered into by the Credit Risk Manager and the Servicer and/or
Master Servicer on or prior to the Closing Date. The Credit Risk Manager will
rely upon mortgage loan data that is provided to it by the Servicer and/or
Master Servicer in performing its advisory and monitoring functions. The Credit
Risk Manager will be entitled to receive a “Credit Risk Manager’s Fee” until the
termination of the trust or until its removal by a vote of at least 66 2/3%
of
the Certificateholders. Such fee will be paid by the trust and will be equal
to
one-twelfth of the product of 0.010% multiplied by the then current aggregate
principal balance of the Mortgage Loans.
THE
CLASS A CERTIFICATE INSURER
The
information set forth in the following paragraphs has been provided by XL
Capital Assurance Inc. (“XLCA” or the “Class A Certificate Insurer”) for
inclusion in this prospectus supplement. XLCA does not accept any responsibility
for the accuracy or completeness of this prospectus supplement or any
information or disclosure contained in this prospectus supplement, or omitted
herefrom, other than with respect to the accuracy of the information regarding
XLCA set forth under the heading “The Class A Certificate Insurer” in this
prospectus supplement. Additionally, XLCA makes no representation regarding
the
Certificates or the advisability of investing in the Certificates.
General
XLCA
is a
monoline financial guaranty insurance company incorporated under the laws of
the
State of New York. The Class A Certificate Insurer is currently licensed to
do
insurance business in, and is subject to the insurance regulation and
supervision by, all 50 states, the District of Columbia, Puerto Rico, the U.S.
Virgin Islands and Singapore.
The
Class
A Certificate Insurer is an indirect wholly owned subsidiary of Security Capital
Assurance Ltd (“SCA”), a company organized under the laws of Bermuda. Through
its subsidiaries, SCA provides credit enhancement and protection products to
the
public finance and structured finance markets throughout the United States
and
internationally. XL Capital Ltd. beneficially owns approximately 63% of SCA’s
outstanding shares. The common shares of SCA are publicly traded in the United
States and listed on the New York Stock Exchange (NYSE: SCA). SCA
is not obligated to pay the debts of or claims against the Class A Certificate
Insurer.
S-100
Financial
Strength and Financial Enhancement Ratings of XLCA
The
Class
A Certificate Insurer’s insurance financial strength is rated “Aaa” by Moody’s
and “AAA” by S&P and Fitch, Inc. (“Fitch”). In addition, the Class A
Certificate Insurer has obtained a financial enhancement rating of “AAA” from
S&P. These ratings reflect Moody’s, S&P’s and Fitch’s current assessment
of the Class A Certificate Insurer’s creditworthiness and claims-paying ability
as well as the reinsurance arrangement with XL Financial Assurance Ltd. (“XLFA”)
described under “Reinsurance” below.
The
above
ratings are not recommendations to buy, sell or hold securities, including
the
Offered Certificates and are subject to revision or withdrawal at any time
by
Moody’s, S&P or Fitch. Any downward revision or withdrawal of these ratings
may have an adverse effect on the market price of the Offered Certificates.
The
Class A Certificate Insurer does not guaranty the market price of the Offered
Certificates nor does it guaranty that the ratings on the Offered Certificates
will not be revised or withdrawn.
Reinsurance
The
Class
A Certificate Insurer has entered into a facultative quota share reinsurance
agreement with XLFA, an insurance company organized under the laws of Bermuda,
and an affiliate of the Class A Certificate Insurer. Pursuant to this
reinsurance agreement, the Class A Certificate Insurer expects to cede up to
75%
of its business to XLFA. The Class A Certificate Insurer may also cede
reinsurance to third parties on a transaction-specific basis, which cessions
may
be any or a combination of quota share, first loss or excess of loss. Such
reinsurance is used by the Class A Certificate Insurer as a risk management
device and to comply with statutory and rating agency requirements and does
not
alter or limit the Class A Certificate Insurer’s obligations under any financial
guaranty insurance policy. With respect to any transaction insured by XLCA,
the
percentage of risk ceded to XLFA may be less than 75% depending on certain
factors including, without limitation, whether XLCA has obtained third party
reinsurance covering the risk. As a result, there can be no assurance as to
the
percentage reinsured by XLFA of any given financial guaranty insurance policy
issued by XLCA, including the Policy.
Based
on
the audited financial statements of XLFA, as of December 31, 2006, XLFA had
total assets, liabilities, redeemable preferred shares and shareholders’ equity
of $2,007,395,000, $874,028,000, $54,016,000 and $1,079,351,000, respectively,
determined in accordance with generally accepted accounting principles in the
United States (“U.S. GAAP”). XLFA’s insurance financial strength is rated “Aaa”
by Moody’s and “AAA” by S&P and Fitch Inc. In addition, XLFA has obtained a
financial enhancement rating of “AAA” from S&P.
The
ratings of XLFA or any other member of the SCA group of companies are not
recommendations to buy, sell or hold securities, including the Offered
Certificates and are subject to revision or withdrawal at any time by Moody’s,
S&P or Fitch.
Notwithstanding
the capital support provided to the Class A Certificate Insurer described in
this section, the holders of the Offered Certificates will have direct recourse
against the Class A Certificate Insurer only, and XLFA will not be directly
liable to the holders of the Offered Certificates.
S-101
Capitalization
of the Class A Certificate Insurer
Based
on
the audited financial statements of XLCA, as of December 31, 2006, XLCA had
total assets, liabilities, and shareholder’s equity of $1,224,735,000,
$974,230,000, and $250,505,000, respectively, determined in accordance with
U.S.
GAAP.
Based
on
the unaudited statutory financial statements for XLCA as of December 31, 2006
filed with the State of New York Insurance Department, XLCA has total admitted
assets of $429,073,000, total liabilities of $222,060,000, total capital and
surplus of $207,013,000 and total contingency reserves of $20,876,000 determined
in accordance with statutory accounting practices prescribed or permitted by
insurance regulatory authorities (“SAP”).
Based
on
the audited statutory financial statements for XLCA as of December 31, 2005
filed with the State of New York Insurance Department, XLCA has total admitted
assets of $328,231,000, total liabilities of $139,392,000, total capital and
surplus of $188,839,000 and total contingency reserves of $13,031,000 determined
in accordance with SAP.
Incorporation
by Reference of Financials
For
further information concerning XLCA and XLFA, see the financial statements
of
XLCA and XLFA, and the notes thereto, incorporated by reference in this
prospectus supplement. The financial statements of XLCA and XLFA are included
as
exhibits to the periodic reports filed with the Securities and Exchange
Commission (the “Commission”) by SCA and may be reviewed at the EDGAR website
maintained by the Commission. All financial statements of XLCA and XLFA included
in, or as exhibits to, documents filed by SCA or XLCA pursuant to Section 13(a),
13(c), 14 or 15(d) of the Securities Exchange Act of 1934 on or prior to the
date of this prospectus supplement, or after the date of this prospectus
supplement but prior to termination of the offering of the Offered Certificates,
shall be deemed incorporated by reference in this prospectus supplement. Any
statement contained in a document incorporated or deemed to be incorporated
by
reference herein, or contained in this prospectus supplement, shall be deemed
to
be modified or superseded for purposes of this prospectus supplement to the
extent that a statement contained herein or in any other subsequently filed
document which also is or is deemed to be incorporated by reference herein
modifies or supersedes such statement. Any such statement so modified or
superseded shall not be deemed, except as so modified or superseded, to
constitute a part of this prospectus supplement. Except for the financial
statements of XLCA and XLFA, no other information contained in the reports
filed
with the Commission by SCA or XLCA is incorporated by reference. Copies of
the
statutory quarterly and annual statements filed with the State of New York
Insurance Department by XLCA are available upon request to the State of New
York
Insurance Department.
Regulation
of the Class A Certificate Insurer
The
Class
A Certificate Insurer is regulated by the Superintendent of Insurance of the
State of New York. In addition, the Class A Certificate Insurer is subject
to
regulation by the insurance laws and regulations of the other jurisdictions
in
which it is licensed. As a financial guaranty insurance company licensed in
the
State of New York, the Class A Certificate Insurer is subject to Article 69
of
the New York Insurance Law, which, among other things, limits the business
of
each insurer to financial guaranty insurance and related lines, prescribes
minimum standards of solvency, including minimum capital requirements,
establishes contingency, loss and unearned premium reserve requirements,
requires the maintenance of minimum surplus to policyholders and limits the
aggregate amount of insurance which may be written and the maximum size of
any
single risk exposure which may be assumed. The Class A Certificate Insurer
is
also required to file detailed annual financial statements with the New York
Insurance Department and similar supervisory agencies in each of the other
jurisdictions in which it is licensed.
S-102
The
extent of state insurance regulation and supervision varies by jurisdiction,
but
New York and most other jurisdictions have laws and regulations prescribing
permitted investments and governing the payment of dividends, transactions
with
affiliates, mergers, consolidations, acquisitions or sales of assets and
incurrence of liabilities for borrowings.
THE
FINANCIAL GUARANTY INSURANCE POLICIES ISSUED BY THE CLASS A CERTIFICATE INSURER,
INCLUDING THE POLICY, ARE NOT COVERED BY THE PROPERTY/CASUALTY INSURANCE
SECURITY FUND SPECIFIED IN ARTICLE 76 OF THE NEW YORK INSURANCE
LAW.
The
principal executive offices of the Class A Certificate Insurer are located
at
1221 Avenue of the Americas, New York, New York10020 and its telephone number
at this address is (212) 478-3400.
POOLING
AND SERVICING AGREEMENT
General
The
certificates will be issued under the Pooling and Servicing Agreement, a form
of
which is filed as an exhibit to the registration statement. A Current Report
on
Form 8-K relating to the certificates containing a copy of the Pooling and
Servicing Agreement as executed will be filed by the Depositor with the
Securities and Exchange Commission (“SEC”) following the initial issuance of the
certificates. 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 of the Mortgage Loans;
(iii) any Mortgaged Properties acquired on behalf of certificateholders by
foreclosure or by deed in lieu of foreclosure, and any revenues received on
these mortgaged properties; (iv) the rights of the Trustee under all insurance
policies required to be maintained under the Pooling and Servicing Agreement;
(v) the rights of the Depositor under the mortgage loan purchase and sale
agreement pursuant to which the Sponsor will sell the Mortgage Loans to the
Interim Seller on the Closing Date, which agreement will be assigned by the
Interim Seller to the Depositor pursuant to an assignment, assumption and
recognition agreement; (vi) the Reserve Fund and any amounts on deposit in
the
Reserve Fund from time to time and any proceeds thereof; and (vii) the right
to
any Net Swap Payment and any Swap Termination Payment made by the Swap Provider
under the Interest Rate Swap Agreement. For the avoidance of doubt, the trust
fund does not include the Supplemental Interest Trust. Reference is made to
the
prospectus for important information in addition to that set forth in this
prospectus supplement regarding the trust fund, the terms and conditions of
the
Pooling and Servicing Agreement and the Offered Certificates. The Depositor
will
provide to a prospective or actual certificate holder without charge, on written
request, a copy, without exhibits, of the Pooling and Servicing Agreement.
Requests should be addressed to 6525 Morrison Blvd., Suite 318, Charlotte,
NorthCarolina28211.
The
Class
A Certificate Insurer will be a third party beneficiary of the Pooling and
Servicing Agreement to the extent set forth in the Pooling and Servicing
Agreement. In addition, the Class A Certificate Insurer will have various rights
under the Pooling and Servicing Agreement.
S-103
Assignment
of the Mortgage Loans
On
the
Closing Date, the Depositor will transfer to the trust all of its right, title
and interest in and to each Mortgage Loan, the related mortgage note, mortgage,
assignment of mortgage in recordable form in blank 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 will be identified on a schedule
(the “Mortgage Loan Schedule”) delivered to the Trustee and the Servicer
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 Rate as well as other information with respect
to
each Mortgage Loan.
The
Pooling and Servicing Agreement will require that, prior to the Closing Date,
the Depositor will deliver or cause to be delivered to the Trustee (or the
Custodian, as the Trustee’s agent for such purpose) the mortgage notes endorsed
in blank and the Related Documents. In lieu of delivery of original mortgages
or
mortgage notes, if such original is not available or lost, the Depositor may
deliver or cause to be delivered true and correct copies thereof, or, with
respect to a lost mortgage note, a lost note affidavit. The assignments of
mortgage are generally not required to be recorded by or on behalf of the
Depositor in the appropriate offices for real property records, except in states
where recordation is required by the Rating Agencies to obtain the initial
rating of the certificates and in any event is not required with respect to
any
Mortgage Loan electronically registered through the Mortgage Electronic
Registration Systems, Inc.
On
or
prior to the Closing Date, the Trustee or the Custodian on its behalf will
review the Mortgage Loans and the Related Documents pursuant to the Custodial
Agreement and, if any Mortgage Loan or Related Document is found to be defective
in any material respect and such defect is not cured within 90 days following
notification thereof to the Sponsor by the Trustee or the Servicer, the Sponsor
will be obligated either to (i) substitute for such Mortgage Loan a Qualified
Substitute Mortgage Loan; however, such substitution is permitted only within
two years of the Closing Date and may not be made unless an opinion of counsel
is provided to the effect that such substitution will not disqualify any of
the
REMICs (as defined in the Pooling and Servicing Agreement) as a REMIC or result
in a prohibited transaction tax under the Code; or (ii) purchase such Mortgage
Loan at a price (the “Purchase Price”) equal to the outstanding principal
balance of such Mortgage Loan as of the date of purchase, plus all accrued
and
unpaid interest thereon, computed at the Mortgage Rate through the end of the
calendar month in which the purchase is effected, plus the amount of any unpaid
Servicing Fees or unreimbursed P&I Advances and servicing advances made by
the Servicer plus all unreimbursed costs and damages incurred by the trust
and
the Trustee in connection with any violation by any such Mortgage Loan of any
predatory or abusive lending law. The Purchase Price will be required to be
remitted to the Servicer for deposit in the Collection Account (as defined
in
this prospectus supplement) for remittance to the Securities Administrator
prior
to the next succeeding Distribution Date after such obligation arises. The
obligation of the Sponsor to repurchase or substitute for a Deleted Mortgage
Loan (as defined in this prospectus supplement) is the sole remedy regarding
any
defects in the Mortgage Loans and Related Documents available to the
certificateholders and the Class A Certificate Insurer.
In
connection with the substitution of a Qualified Substitute Mortgage Loan, the
Sponsor will be required to remit to the Servicer for deposit in the Collection
Account for remittance to the Securities Administrator prior to the next
succeeding Distribution Date after such obligation arises an amount (the
“Substitution Shortfall Amount”) equal to the excess of the principal balance of
the related Deleted Mortgage Loan over the principal balance of such Qualified
Substitute Mortgage Loan.
S-104
A
“Qualified Substitute Mortgage Loan” is a mortgage loan substituted for a
Deleted Mortgage Loan which must, on the date of such substitution, (i) have
an
outstanding principal balance (or in the case of a substitution of more than
one
Mortgage Loan for a Deleted Mortgage Loan, an aggregate principal balance),
not
in excess of the principal balance of the Deleted Mortgage Loan; (ii) have
a
Mortgage Rate not less than the Mortgage Rate of the Deleted Mortgage Loan
and
not more than 1% in excess of the Mortgage Rate of such Deleted Mortgage Loan;
(iii) have the same Due Date as the Deleted Mortgage Loan; (v) have a remaining
term to maturity not more than one year earlier and not later than the remaining
term to maturity of the Deleted Mortgage Loan; (v) comply with each
representation and warranty as to the Mortgage Loans set forth in the mortgage
loan purchase and sale agreement (deemed to be made as of the date of
substitution); (vi) be of the same or better credit quality as the Mortgage
Loan
being replaced; (vii) have the same lien priority on the related mortgaged
property as the Mortgage Loan being replaced and (viii) satisfy certain other
conditions specified in the Pooling and Servicing Agreement.
Mortgage
Loans required to be transferred to the Sponsor as described in the preceding
paragraphs are referred to as “Deleted Mortgage Loans.”
Events
of Default
Upon
the
occurrence of events of default described under “Description of the
Agreements-Material Terms of the Pooling and Servicing Agreements and Underlying
Servicing Agreements-Events of Default under the Agreement” and “-Rights Upon
Events of Default under the Agreements” in the prospectus, the Servicer may be
removed as the servicer of the Mortgage Loans in accordance with the terms
of
the Pooling and Servicing Agreement. Without limiting the generality of the
foregoing, if an Event of Default shall occur, the Trustee shall, at the
direction of the Class A Certificate Insurer or at least 51% of holders of
the
voting rights, by notice in writing to the Servicer, to the Depositor and,
in
the case of such notice being provided by holders, the Class A Certificate
Insurer, with a copy to each Rating Agency, terminate all of the rights and
obligations of the Servicer in its capacity as Servicer under the Pooling and
Servicing Agreement, to the extent permitted by law, and in and to the Mortgage
Loans and the proceeds thereof. On or after the receipt by the Servicer of
such
written notice, all authority and power of the Servicer with respect to the
Certificates (other than as a holder of any Certificate) or the Mortgage Loans
or otherwise including, without limitation, the compensation payable to the
Servicer under the Pooling and Servicing Agreement, shall pass to and be vested
in a successor to the Servicer (which may be the Master Servicer), and, without
limitation, the successor servicer shall be authorized and empowered, as
attorney-in-fact or otherwise, to execute and deliver, on behalf of and at
the
expense of the Servicer, any and all documents and other instruments and to
do
or accomplish all other acts or things necessary or appropriate to effect the
purposes of such notice of termination. See “Description of the
Agreements-Material Terms of the Pooling and Servicing Agreements and Underlying
Servicing Agreements-Events of Default under the Agreement” and “-Rights Upon
Events of Default under the Agreements” in the prospectus.
S-105
Voting
Rights
At
all
times, 98% of all voting rights will be allocated among the holders of the
Class
A Certificates, the Mezzanine Certificates and the Class CE Certificates in
proportion to the then outstanding Certificate Principal Balances of their
respective certificates, 1% of all voting rights will be allocated to the
holders of the Class P Certificates in proportion to the then outstanding
Certificate Principal Balances of their respective certificates and 1% of all
voting rights will be allocated to the holders of the Residual Certificates.
Notwithstanding the foregoing, unless a Class A Certificate Insurer default
exists, the Class A Certificate Insurer will be entitled to exercise all voting
rights of the holders of the Class A Certificates.
Termination
The
circumstances under which the obligations created by the Pooling and Servicing
Agreement will terminate in respect of the certificates are described in
“Description of the Securities-Termination” in the prospectus. The Servicer will
have the right to purchase all remaining Mortgage Loans on a servicing retained
basis and any properties acquired in respect thereof and thereby effect early
retirement of the certificates on any Distribution Date following the Due Period
during which the aggregate principal balance of the Mortgage Loans and
properties acquired in respect thereof remaining in the trust fund at the time
of purchase is reduced to less than or equal to 10% of the aggregate principal
balance of the Mortgage Loans as of the Cut-off Date. In the event the Servicer
does not exercise such right to purchase, within 90 days after the first date
that it is able to exercise such right, the Master Servicer may exercise such
right to purchase, subject to the conditions set forth in the Pooling and
Servicing Agreement. If either the Servicer or the Master Servicer exercises
the
right to purchase, such party must obtain the consent of the Class A Certificate
Insurer if (i) any amounts are owed to the Class A Certificate Insurer or (ii)
the purchase would result in a draw on the Policy. In the event the Master
Servicer or the Servicer (in each case, the “Terminator”) exercises its option,
the purchase price payable in connection with the option will be equal to par
with respect to the Mortgage Loans and the fair market value of all properties
acquired by the trust in respect of any Mortgage Loans, plus accrued interest
for each Mortgage Loan at the related Mortgage Rate to but not including the
first day of the month in which the repurchase price is distributed, together
with (to the extent not covered by the foregoing) all amounts due and owing
to
the Trustee, the Servicer, the Master Servicer, the Securities Administrator
and
the Swap Provider as of the termination date and pursuant to the Pooling and
Servicing Agreement and the Interest Rate Swap Agreement. In the event the
Terminator exercises this option, the portion of the purchase price allocable
to
the Class A Certificates and Mezzanine Certificates will be, to the extent
of
available funds, (i) 100% of the then outstanding Certificate Principal Balance
of the Class A Certificates and Mezzanine Certificates, plus (ii) one month’s
interest on the then outstanding Certificate Principal Balance of the Class
A
Certificates and Mezzanine Certificates at the then applicable Pass-Through
Rate
for each such class, plus (iii) any previously accrued but unpaid interest
thereon to which the holders of the Class A Certificates and Mezzanine
Certificates are entitled, together with the amount of any Net WAC Rate
Carryover Amounts. In no event will the trust created by the Pooling and
Servicing Agreement continue beyond the expiration of 21 years from the death
of
the survivor of the persons named in the Pooling and Servicing Agreement. See
“Description of the Securities-Termination” in the prospectus.
S-106
The
Securities Administrator shall give notice of any termination to the
Certificateholders and the Swap Provider, upon which the Certificateholders
shall surrender their Certificates to the Securities Administrator for payment
of the final distribution and cancellation. Such notice shall be given by
letter, mailed not earlier than the 15th day and not later than the 25th day
of
the month next preceding the month of such final distribution, and shall specify
(i) the Distribution Date upon which final payment of the Certificates will
be
made upon presentation and surrender of the Certificates at the office of the
Securities Administrator therein designated, (ii) the amount of any such final
payment and (iii) that the Record Date otherwise applicable to such Distribution
Date is not applicable, payments being made only upon presentation and surrender
of the Certificates at the office of the Securities Administrator therein
specified.
In
the
event such notice is given in connection with the purchase of all of the
Mortgage Loans by the Terminator, the Terminator shall deliver to the Securities
Administrator for deposit in the Distribution Account not later than the
Business Day prior to the Distribution Date on which the final distribution
on
the certificates an amount in immediately available funds equal to the
above-described Termination Price. The Securities Administrator shall remit
to
the Servicer, the Master Servicer, the Trustee and the Custodian from such
funds
deposited in the Distribution Account (i) any amounts which the Servicer would
be permitted to withdraw and retain from the Collection Account as if such
funds
had been deposited therein (including all unpaid Servicing Fees, Master
Servicing Fees and all outstanding P&I Advances and Servicing Advances) and
(ii) any other amounts otherwise payable by the Securities Administrator to
the
Master Servicer, the Trustee, the Custodian, the Servicer and the Swap Provider
from amounts on deposit in the Distribution Account pursuant to the terms of
the
Pooling and Servicing Agreement prior to making any final distributions. Upon
certification to the Trustee by the Securities Administrator of the making
of
such final deposit, the Trustee shall promptly release or cause to be released
to the Terminator the Mortgage Files for the remaining Mortgage Loans, and
Trustee shall execute all assignments, endorsements and other instruments
delivered to it and necessary to effectuate such transfer.
Upon
presentation of the Certificates by the Certificateholders on the final
Distribution Date, the Securities Administrator shall distribute to each
Certificateholder so presenting and surrendering its Certificates the amount
otherwise distributable on such Distribution Date in respect of the Certificates
so presented and surrendered. Any funds not distributed to any Holder or Holders
of Certificates being retired on such Distribution Date because of the failure
of such Holder or Holders to tender their Certificates shall, on such date,
be
set aside and held in trust and credited to the account of the appropriate
non-tendering Holder or Holders. If any Certificates as to which notice has
been
given shall not have been surrendered for cancellation within six months after
the time specified in such notice, the Securities Administrator shall mail
a
second notice to the remaining non-tendering Certificateholders to surrender
their Certificates for cancellation in order to receive the final distribution
with respect thereto. If within one year after the second notice all such
Certificates shall not have been surrendered for cancellation, the Securities
Administrator shall, directly or through an agent, mail a final notice to the
remaining non-tendering Certificateholders concerning surrender of their
Certificates. The costs and expenses of maintaining the funds in trust and
of
contacting such Certificateholders shall be paid out of the assets remaining
in
the trust funds. If within one (1) year after the final notice any such
Certificates shall not have been surrendered for cancellation, the Securities
Administrator shall pay to the Depositor all such amounts, and all rights of
non-tendering Certificateholders in or to such amounts shall thereupon cease.
No
interest shall accrue or be payable to any Certificateholder on any amount
held
in trust by the Securities Administrator as a result of such Certificateholder’s
failure to surrender its Certificate(s) on the final Distribution Date for
final
payment thereof. Any such amounts held in trust by the Securities Administrator
shall be held uninvested in an Eligible Account.
S-107
In
the
event that the Terminator purchases all the Mortgage Loans and any properties
acquired in respect thereof or the final payment on or other liquidation of
the
last Mortgage Loan, the Trust Fund shall be terminated in accordance with the
following additional requirements:
(i) The
Securities Administrator shall specify the first day in the 90-day liquidation
period in a statement attached to each Trust REMIC’s final Tax Return pursuant
to Treasury regulation Section 1.860F-1 and shall satisfy all requirements
of a
qualified liquidation under Section 860F of the Code and any regulations
thereunder, as evidenced by an opinion of counsel obtained by and at the expense
of the Terminator;
(ii) During
such 90-day liquidation period and, at or prior to the time of making of the
final payment on the Certificates, the Trustee shall sell all of the assets
of
REMIC I to the Terminator for cash; and
(iii) At
the
time of the making of the final payment on the Certificates, the Securities
Administrator shall distribute or credit, or cause to be distributed or
credited, to the Holders of the Residual Certificates all cash on hand in the
Trust Fund (other than cash retained to meet claims), and the Trust Fund shall
terminate at that time.
At
the
expense of the Terminator (or, if the Trust Fund is being terminated as a result
of the Last Scheduled Distribution Date, at the expense of the Trust Fund),
the
Terminator shall prepare or cause to be prepared the documentation required
in
connection with the adoption of a plan of liquidation of each Trust
REMIC.
By
their
acceptance of Certificates, the Holders thereof hereby agree to authorize the
Securities Administrator to specify the 90-day liquidation period for each
Trust
REMIC, which authorization shall be binding upon all successor
Certificateholders.
FEDERAL
INCOME TAX CONSEQUENCES
In
the
opinion of Thacher Proffitt & Wood llp,
counsel
to the Depositor, assuming compliance with the provisions of the Pooling and
Servicing Agreement, for federal income tax purposes, each of the REMICs
established under the Pooling and Servicing Agreement will qualify as a REMIC
under the Code.
For
federal income tax purposes (i) the Residual Certificates will represent the
“residual interests” in each REMIC elected by the trust and (ii) the Offered
Certificates and the Class CE Certificates (exclusive of any right of the holder
of such certificates to receive payments from or any obligation to make payments
to the Reserve Fund in respect of Net WAC Rate Carryover Amounts or the
Supplemental Interest Trust) and the Class P Certificates will represent the
“regular interests” in, and will be treated as debt instruments of, a REMIC. See
“Material Federal Income Tax Considerations-REMICs” in the
prospectus.
S-108
For
federal income tax purposes, certain classes of Offered Certificates may be
treated as having been issued with original issue discount. The prepayment
assumption that will be used in determining the rate of accrual of original
issue discount, market discount and premium, 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 rate equal to 100% PPC
(calculated based on the assumed prepayment rates set forth under “Yield on the
Certificates—Weighted Average Lives” in this prospectus supplement). No
representation is made that the Mortgage Loans will prepay at that rate or
at
any other rate. See “Material Federal Income Tax Consideration-General” and
“-REMICs-Taxation of Owners of Regular Securities” in the
prospectus.
The
holders of the Offered Certificates will be required to include in income
interest on their certificates in accordance with the accrual method of
accounting.
The
Internal Revenue Service (the “IRS”) has issued original issue discount
regulations (the “OID Regulations”) under sections 1271 to 1275 of the Code that
address the treatment of debt instruments issued with original issue discount,
Purchasers of the Offered Certificates should be aware that the OID Regulations
do not adequately address certain issues relevant to, or are not applicable
to,
prepayable securities such as the Offered Certificates. In addition, there
is
considerable uncertainty concerning the application of the OID Regulations
to
REMIC Regular Certificates that provide for payments based on an adjustable
rate
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 relating to debt instruments having an
adjustable rate of interest are limited in their application in ways that could
preclude their application to such certificates even in the absence of Section
1272(a)(6) of the Code, the IRS could assert that the Offered Certificates
should be treated as issued with original issue discount or should be governed
by the rules applicable to debt instruments having contingent payments or by
some other method not yet set forth in regulations. Prospective purchasers
of
the Offered Certificates are advised to consult their tax advisors concerning
the tax treatment of such certificates.
In
certain circumstances the OID Regulations permit the holder of a debt instrument
to recognize original issue discount under a method that differs from that
used
by the Issuing Entity. Accordingly, the holder of an Offered Certificate may
be
able to select a method for recognizing original issue discount that differs
from that used by the Trust in preparing reports to the certificateholders
and
the IRS.
If
the
method for computing original issue discount described above results in a
negative amount for any period with respect to a Certificateholder, the amount
of original issue discount allocable to that period would be zero and the
Certificateholder will be permitted to offset that negative amount only against
future original issue discount, if any, attributable to those
Certificates.
Certain
of the certificates may be treated for federal income tax purposes as having
been issued at a premium. Whether any holder of a certificate will be treated
as
holding such certificate with amortizable bond premium will depend on such
certificateholders purchase price and the distributions remaining to be made
on
such certificate at the time of its acquisition by such certificateholder.
Holders of such certificates should consult their own tax advisors regarding
the
possibility of making an election to amortize such premium. See “Material
Federal Income Tax Considerations- REMICs—Taxation of Owners of Regular
Securities” in the Prospectus.
Each
holder of an Offered Certificate is deemed to own an undivided beneficial
ownership interest in a REMIC regular interest and the right to receive payments
from either the Reserve Fund or the Supplemental Interest Trust in respect
of
any Net WAC Rate Carryover Amount or the obligation to make payments to the
Supplemental Interest Trust. The Reserve Fund, the Interest Rate Swap Agreement
and the Supplemental Interest Trust are not assets of any REMIC. The REMIC
regular interest corresponding to an Offered Certificate will be entitled to
receive interest and principal payments at the times and in the amounts equal
to
those made on the certificate to which it corresponds, except that (i) the
maximum interest rate of that REMIC regular interest will equal the Net WAC
Pass-Through Rate computed for this purpose by limiting the Swap 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
payable solely from Net Monthly Excess Cashflow. As a result of the foregoing,
the amount of distributions on the REMIC regular interest corresponding to
an
Offered Certificate may exceed the actual amount of distributions on the Offered
Certificate.
S-109
The
treatment of amounts received by a holder of an Offered Certificate under such
holder’s right to receive any Net WAC Rate Carryover Amount, will depend on the
portion, if any, of such holder’s purchase price allocable thereto. Under the
REMIC Regulations, each holder of an Offered Certificate must allocate its
purchase price for the Offered Certificate among its undivided interest in
the
regular interest of the related REMIC and its undivided interest in the right
to
receive payments from the Reserve Fund and the Supplemental Interest Trust
in
respect of any Net WAC Rate Carryover Amount in accordance with the relative
fair market values of each property right. The Securities Administrator will,
as
required, treat payments made to the holders of the Offered Certificates with
respect to any Net WAC Rate Carryover Amount, as includible in income based
on
the regulations relating to notional principal contracts (the “Notional
Principal Contract Regulations”). The OID Regulations provide that the Trust’s
allocation of the issue price is binding on all holders unless the holder
explicitly discloses on its tax return that its allocation is different from
the
Trust’s allocation. For tax reporting purposes, the right to receive payments
from the Reserve Fund and the Supplemental Interest Trust in respect of Net
WAC
Rate Carryover Amount with respect to the Offered Certificates may be treated
as
having more than a de
minimis
value as
provided in the pooling and servicing agreement. Upon request, the Securities
Administrator will make available information regarding such amounts as has
been
provided to it. Under the REMIC Regulations, the Securities Administrator is
required to account for the REMIC regular interest, the right to receive
payments from the Reserve Fund and the Supplemental Interest Trust in respect
of
any Net WAC Rate Carryover Amount as discrete property rights. 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 such Certificates. Treasury regulations have
been promulgated under Section 1275 of the Code generally providing for the
integration of a “qualifying debt instrument” with a hedge if the combined cash
flows of the components are substantially equivalent to the cash flows on a
variable rate debt instrument. However, such regulations specifically disallow
integration of debt instruments subject to Section 1272(a)(6) of the Code.
Therefore, holders of the Offered Certificates will be unable to use the
integration method provided for under such regulations with respect to those
Certificates. If the Securities Administrator’s treatment of payments of any Net
WAC Rate Carryover Amount is respected, ownership of the right to any Net WAC
Rate Carryover Amount will entitle the owner to amortize the price paid for
the
right to any Net WAC Rate Carryover Amount under the Notional Principal Contract
Regulations.
Any
payments made to a beneficial owner of an Offered Certificate in excess of
the
amounts payable on the corresponding REMIC 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 Net WAC Rate Carryover Amount, 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 will
represent a net deduction for that year. In addition, any amounts payable on
such REMIC 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 Net WAC Rate Carryover Amount for such
taxable year. Although not clear, net income or a net deduction with respect
to
any Net WAC Rate 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 a Swap Termination Payment.
S-110
Because
a
beneficial owner of any Net WAC Rate Carryover Amount will be required to
include in income the amount deemed to have been paid by such owner, but may
not
be able to deduct that amount from income, a beneficial owner of an Offered
Certificate may have income that exceeds cash distributions on the Offered
Certificate, in any period and over the term of the Offered Certificate. As
a
result, the Offered Certificates may not be a suitable investment for any
taxpayer whose net deduction with respect to any Net WAC Rate Carryover Amount
would be subject to the limitations described above.
Upon
the
sale of an Offered Certificate, the amount of the sale allocated to the selling
certificateholder’s right to receive payments from the Reserve Fund and the
Supplemental Interest Trust in respect of any Net WAC Rate Carryover Amount
would be considered a “termination payment” under the Notional Principal
Contract Regulations allocable to the related Offered Certificate, as the case
may be. A holder of an Offered Certificate will have gain or loss from such
a
termination of the right to receive payments from the Reserve Fund and the
Supplemental Interest Trust in respect of any Net WAC Rate Carryover Amount
equal to (i) any termination payment it received or is deemed to have received
minus (ii) the unamortized portion of any amount paid (or deemed paid) by the
certificateholder upon entering into or acquiring its interest in the right
to
receive payments from the Reserve Fund and the Supplemental Interest Trust
in
respect of any Net WAC Rate Carryover Amount.
Gain
or
loss realized upon the termination of the right to receive payments from the
Reserve Fund and the Supplemental Interest Trust in respect of any Net WAC
Rate
Carryover Amount will generally be treated as capital gain or loss. Moreover,
in
the case of a bank or thrift institution, Code Section 582(c) would likely
not
apply to treat such gain or loss as ordinary.
It
is
possible that the right to receive payments in respect of any Net WAC Rate
Carryover Amount 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 Net
WAC
Rate 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.
The
REMIC
regular interest component of each Offered Certificate will be treated as assets
described in Section 7701(a)(19)(C) of the Code, and as “real estate assets”
under Section 856(c)(5)(B) of the Code, generally, in the same proportion that
the assets of the Trust, exclusive of the assets not included in any REMIC,
would be so treated. In addition, the interest derived from the REMIC regular
interest component of each Offered Certificate will be interest on obligations
secured by interests in real property for purposes of section 856(c)(3) of
the
Code, subject to the same limitation in the preceding sentence. The Notional
Principal Contract component of each Regular Certificate will not qualify,
however, as an asset described in Section 7701(a)(19)(C) of the Code, as a
real
estate asset under Section 856(c)(5)(B) of the Code or as a “qualified mortgage”
within the meaning of Section 860G(a)(3) of the Code. As a result, the Offered
Certificates generally may not be a suitable investment for a REMIC, a real
estate investment trust or an entity intending to qualify under Section
7701(a)(19)(C) of the Code.
S-111
Because
any Net WAC Rate Carryover Amount is treated as separate rights of the Offered
Certificates not payable by any REMIC elected by the Trust, such rights will
not
be treated as qualifying assets for any certificateholder that is a mutual
savings bank, domestic building and loan association, real estate investment
trust, or REMIC. In addition, any amounts received from the Reserve Fund and
the
Supplemental Interest Trust will not be qualifying real estate income for real
estate investment trusts or qualifying income for REMICs.
For
further information regarding federal income tax consequences of investing
in
the Offered Certificates, see “Material Federal Income Tax
Considerations—REMICs” in the prospectus.
METHOD
OF DISTRIBUTION
Subject
to the terms and conditions set forth in an underwriting agreement, dated April30, 2007 among the Underwriters, the Co-Manager, the Sponsor and the Depositor,
the Underwriters and the Co-Manager have agreed to offer for sale to the public
on behalf of the Depositor, on a best efforts basis, in an agency capacity,
the
Offered Certificates. In this capacity, the Underwriters and the Co-Manager
are
acting as underwriters for purposes of the Securities Act of 1933, as amended
(the “Securities Act”). It is expected that delivery of the Offered Certificates
will be made only in book-entry form through the Same Day Funds Settlement
System of DTC on or about May 15, 2007, against payment therefor in immediately
available funds. The Underwriters and Co-Managers are not required to place
any
specific dollar amount of the Offered Certificates, but will use its best
efforts to place the Offered Certificates. The offering may be terminated at
any
time by the Depositor as to any unsold certificates. Proceeds of this offering
will not be placed in escrow, trust or similar arrangement.
The
Offered Certificates will be offered by the Underwriters and the Co-Manager
from
time to time to the public in negotiated transactions or otherwise at varying
prices to be determined at the time of sale. The Underwriters and the Co-Manager
will have the right to reject any offer to purchase the Offered Certificates
received by it. The proceeds to the Depositor from the sale of the Offered
Certificates, net of compensation to the Underwriters and the Co-Manager, are
expected to be approximately ___% of the aggregate initial Certificate Principal
Balance of the Offered Certificates, plus accrued interest from the Cut-off
Date
on the Agent Offered Certificates, less expenses expected to equal approximately
$______. Proceeds to the Depositor from the sale of the Offered Certificates
may
vary depending on actual sales. The sale of any of the Offered Certificates
to
any investor is not contingent on the settlement of any other sales.
The
underwriting agreement provides that the Depositor and the Sponsor will
indemnify each Underwriter and the Co-Manager and that under limited
circumstances each Underwriter and the Co-Manager will indemnify the Depositor
and the Sponsor against certain civil liabilities under the Securities Act,
or
will contribute to payments required to be made in respect thereof.
SECONDARY
MARKET
There
is
currently no secondary market for the Offered Certificates and there can be
no
assurance that a secondary market for the Offered Certificates will develop
or,
if it does develop, that it will continue. The Underwriters and Co-Manager
intend to establish a market in the Offered Certificates but are not obligated
to do so. There can be no assurance that any additional information regarding
the Offered Certificates will be available through any other source. In
addition, the Depositor is not aware of any source through which price
information about the Offered Certificates will be available on an ongoing
basis. The limited nature of the information regarding the Offered Certificates
may adversely affect the liquidity of the Offered Certificates, even if a
secondary market for the Offered Certificates becomes available. The primary
source of information available to investors concerning the Offered Certificates
will be the monthly statements discussed in this prospectus supplement under
“Description of the Certificates-Reports to Certificateholders” which will
include information as to the outstanding principal balance of the Offered
Certificates and the status of the applicable form of credit
enhancement.
S-112
LEGAL
MATTERS
Legal
matters relating to the Offered Certificates will be passed upon for the
Depositor and Deutsche Bank Securities Inc. as an Underwriter by Thacher
Proffitt & Wood llp,
New
York, New York and for the Sponsor by Hunton & Williams LLP.
RATINGS
It
is a
condition to the issuance of the certificates that the Offered Certificates
receive at least the following ratings from Standard & Poor’s Ratings
Service, a division of The McGraw-Hill Companies, Inc. (“S&P”) and DBRS,
Inc. (“DBRS”) and with respect to the Class A Certificates, from Moody’s
Investors Service, Inc. (“Moody’s”):
Offered
Certificates
S&P
Moody’s
DBRS
Class
A
AAA
Aaa
AAA
Class
M-1
A+
NR
A
(high)
Class
M-2
A-
NR
A
(low)
Class
M-3
BBB-
NR
BBB
(low)
The
ratings assigned to mortgage pass-through certificates address the likelihood
of
the receipt by certificateholders of all distributions to which the
certificateholders are entitled. The rating process addresses structural and
legal aspects associated with the certificates, including the nature of the
Mortgage Loans. The ratings assigned to mortgage pass-through certificates
do
not represent any assessment of the likelihood that principal prepayments will
be made by the mortgagors or the degree to which such prepayments will differ
from that originally anticipated. The ratings do not address the possibility
that certificateholders might suffer a lower than anticipated yield due to
non-credit events. In addition, the ratings on the Offered Certificates do
not
address the likelihood of receipt by the holders of such certificates of any
amounts in respect of Net WAC Rate Carryover Amounts from amounts received
or
advanced on the Mortgage Loans.
The
ratings assigned to the Class A Certificates will depend primarily upon the
creditworthiness of the Class A Certificate Insurer. Any reduction in a
rating assigned to the financial strength of the Class A Certificate Insurer
below the ratings initially assigned to the Class A Certificates may result
in a
reduction of one or more of the ratings assigned to the Class A
Certificates. Any downgrade revision or withdrawal of any of the ratings
assigned to the Class A Certificates may have an adverse affect on the market
price of the Class A Certificates. The Class A Certificate Insurer does
not guaranty the market price of the Class A Certificates nor does it guaranty
that the ratings on the Class A Certificates will not be revised or
withdrawn.
The
AAA
ratings by DBRS on the securities address the dual probability of default on
the
underlying mortgage loans and the non-payment by the Class A Certificate Insurer
under the certificate insurance policy.
S-113
A
security rating is not a recommendation to buy, sell or hold securities and
may
be subject to revision or withdrawal at any time by the assigning rating
organization. Each security rating should be evaluated independently of any
other security rating. In the event that the ratings initially assigned to
the
Offered Certificates are subsequently lowered for any reason, no person or
entity is obligated to provide any additional credit support or credit
enhancement with respect to the Offered Certificates.
The
Depositor has not requested that any rating agency rate the Offered Certificates
other than as stated above. However, there can be no assurance as to whether
any
other rating agency will rate the Offered Certificates, or, if it does, what
rating would be assigned by any other rating agency. A rating on the Offered
Certificates by another rating agency, if assigned at all, may be lower than
the
ratings assigned to the Offered Certificates as stated in this
section.
The
rating agencies have stated that it is their standard policy to monitor ratings
on publicly offered securities for which a rating has been provided, as to
each
rating agency rating each class of Offered Certificates in accordance with
the
rating agencies’ particular surveillance policies, unless the Issuing Entity
requests a rating without surveillance. A rating agency will monitor the rating
it issues on an ongoing basis and may update the rating after conducting its
regular review of the Issuing Entity’s creditworthiness or after conducting a
review of the status of the rating upon becoming aware of any information that
might reasonably be expected to result in a change of rating. The Depositor
has
not requested that any rating agency not monitor their ratings of the Offered
Certificates, and the Depositor has not requested that any rating agency use
any
monitoring procedures other than their standard monitoring
procedures.
LEGAL
PROCEEDINGS
There
are
no material legal proceedings pending against the Sponsor, the Depositor, the
Trustee, the Issuing Entity, the Master Servicer, the Servicer, American Home
Mortgage Corp., the Securities Administrator, the Custodian, the Swap Provider,
the Class A Certificate Insurer or with respect to which the property of any
of
the foregoing transaction parties is subject, that are material to the
Certificateholders. No legal proceedings against any of the foregoing
transaction parties is known to be contemplated by governmental authorities,
that are material to the Certificateholders.
AFFILIATIONS,
RELATIONSHIPS AND RELATED TRANSACTIONS
There
are
no affiliations between (a) the Depositor, Deutsche Bank National Trust Company,
as custodian or the Issuing Entity and (b) any of the Master Servicer, the
Securities Administrator, the Servicer, the Swap Provider, the Class A
Certificate Insurer, American Home Mortgage Corp. and the Trustee. There are
no
affiliations between the Sponsor and any of the foregoing transaction parties.
There are no affiliations among the Master Servicer or the Securities
Administrator and any of the Servicer, the Swap Provider, the Class A
Certificate Insurer, American Home Mortgage Corp., and the Trustee. There are
no
affiliations among the Servicer, the Swap Provider, the Class A Certificate
Insurer and the Trustee. Wells Fargo Bank, N.A., is serving as Master Servicer
and Securities Administrator. There are currently no business relationships,
agreements, arrangements, transactions or understandings between (a) the
Depositor, Deutsche Bank National Trust Company, as custodian or the Issuing
Entity and (b) any of the Master Servicer, the Securities Administrator, the
Servicer, the Swap Provider, the Class A Certificate Insurer, American Home
Mortgage Corp. or the Trustee, or any of their respective affiliates, or between
the Sponsor and any of the foregoing transaction parties, that were entered
into
outside the normal course of business or that contain terms other than would
be
obtained in an arm’s length transaction with an unrelated third party and that
are material to the investor's understanding of the Certificates, or that relate
to the Certificates or the pooled assets. No such business relationship,
agreement, arrangement, transaction or understanding has existed during the
past
two years.
S-114
LEGAL
INVESTMENT
The
Offered Certificates will not constitute “mortgage related securities” for
purposes of the Secondary Mortgage Market Enhancement Act of 1984.
Institutions
whose investment activities are subject to review by certain regulatory
authorities hereafter may be or may become subject to restrictions on investment
in the certificates, and such restrictions may be retroactively imposed. The
Federal Financial Institutions Examination Council, the Federal Deposit
Insurance Corporation, the Office of the Comptroller of the Currency, the Board
of Governors of the Federal Reserve System, the Office of Thrift Supervision,
or
OTS, and the National Credit Union Administration, or NCUA, have adopted
guidelines, and have proposed policies, regarding the suitability of investments
in various types of derivative mortgage-backed securities, including securities
such as the certificates.
For
example, on April 23, 1998, the Federal Financial Institutions Examination
Council issued a revised supervisory policy statement, referred to as the 1998
Policy Statement, applicable to all depository institutions, setting forth
guidelines for investments in “high-risk mortgage securities.” The 1998 Policy
Statement has been adopted by the Federal Reserve Board, the Office of the
Comptroller of the Currency, the Federal Deposit Insurance Corporation, the
NCUA
and the OTS. The 1998 Policy Statement rescinds a 1992 policy statement that
had
required, prior to purchase, a depository institution to determine whether
a
mortgage derivative product that it is considering acquiring is high-risk,
and,
if so, that the proposed acquisition would reduce the institution’s overall
interest rate risk. In addition, The 1998 Policy Statement eliminates former
constraints on investing in certain “high-risk” mortgage derivative products and
substitutes broader guidelines for evaluating and monitoring investment risk.
In
addition, the NCUA has issued regulations governing federal credit union
investments which prohibit investment in certain specified types of securities,
which may include the certificates. The NCUA has indicated that its regulations
will take precedence over the 1998 Policy Statement. Similar policy statements
and regulations have been issued by other regulators having jurisdiction over
other types of depository institutions.
The
OTS
has issued Thrift Bulletin 73a, or TB 73a, entitled “Investing in Complex
Securities”, effective December 18, 2001 which applies to savings associations
regulated by the OTS, and Thrift Bulletin 13a, or TB 13a, entitled “Management
of Interest Rate Risk, Investment Securities, and Derivatives Activities”,
effective December 1, 1998, which is applicable to thrift institutions regulated
by the OTS.
TB
73a
requires savings associations, prior to taking any investment position, to
determine that the investment position meets applicable regulatory and policy
requirements and internal guidelines, is suitable for the institution, and
is
safe and sound. The OTS recommends, with respect to purchases of specific
securities, additional analysis, including, among others, analysis of repayment
terms, legal structure, expected performance of the issuing entity and any
underlying assets as well as analysis of the effects of payment priority, with
respect to a security which is divided into separate tranches with unequal
payments, and collateral investment parameters, with respect to a security
that
is prefunded or involves a revolving period. TB 73a reiterates the OTS’s due
diligence requirements for investing in all securities and warns that if a
savings association makes an investment that does not meet the applicable
regulatory requirements, the savings association’s investment practices will be
subject to criticism, and the OTS may require divestiture of such securities.
The OTS also recommends, with respect to an investment in any “complex
securities,” that savings associations should take into account quality and
suitability, interest rate risk, and classification factors. For the purposes
of
each of TB 73a and TB 13a, “complex security” includes, among other things, any
collateralized mortgage obligation or real estate mortgage investment conduit
security, other than any “plain vanilla” mortgage pass-through security (that
is, securities that are part of a single class of securities in the related
pool
that are non-callable and do not have any special features). Accordingly, all
classes of Offered Certificates would likely be viewed as “complex securities.”
With respect to quality and suitability factors, TB 73a warns (i) that a savings
association’s sole reliance on outside ratings for material purchases of complex
securities is an unsafe and unsound practice, (ii) that a savings association
should only use ratings and analyses from nationally recognized rating agencies
in conjunction with, and in validation of, its own underwriting processes,
and
(iii) that it should not use ratings as a substitute for its own thorough
underwriting analyses. With respect the interest rate risk factor, TB 73a
recommends that savings associations should follow the guidance set forth in
TB
13a.
S-115
TB
13a
requires thrift institutions, prior to taking any investment position, to (i)
conduct a pre-purchase portfolio sensitivity analysis for any “significant
transaction” involving securities or financial derivatives, and (ii) conduct a
pre-purchase price sensitivity analysis of any “complex security” or financial
derivative. The OTS recommends that while a thrift institution should conduct
its own in-house pre-acquisition analysis, it may rely on an analysis conducted
by an independent third-party as long as management understands the analysis
and
its key assumptions. Further, TB 13a recommends that the use of “complex
securities with high price sensitivity” be limited to transactions and
strategies that lower a thrift institution’s portfolio interest rate risk. TB
13a warns that investment in complex securities by thrift institutions that
do
not have adequate risk measurement, monitoring and control systems may be viewed
by OTS examiners as an unsafe and unsound practice.
There
may
be other restrictions on the ability of some investors either to purchase some
classes of securities or to purchase any class of securities representing more
than a specified percentage of the investors’ assets. The Depositor will make no
representations as to the proper characterization of any class of securities
for
legal investment or other purposes, or as to the ability of particular investors
to purchase any class of securities under applicable legal investment
restrictions. These uncertainties may adversely affect the liquidity of any
class of securities. Accordingly, all investors whose investment activities
are
subject to legal investment laws and regulations, regulatory capital
requirements or review by regulatory authorities are encouraged to consult
with
their own legal advisors in determining whether and to what extent the
securities of any class constitute legal investments or are subject to
investment, capital or other restrictions.
CONSIDERATIONS
FOR BENEFIT PLAN INVESTORS
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 from engaging in certain transactions involving such
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 “disqualified persons” and employee
benefit plans or other arrangements (including, but not limited to, individual
retirement accounts) described under that section (collectively with employee
benefit plans subject to ERISA, “Plans”). 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 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 Offered Certificates. See “ERISA
Considerations” in the prospectus.
S-116
Certain
employee benefit plans, including governmental plans and certain church plans,
are not subject to ERISA’s requirements. Accordingly, assets of such plans may
be invested in Offered Certificates without regard to the ERISA considerations
described in this prospectus supplement and in the prospectus, subject to the
provisions of other applicable federal and state law. Any such plan which is
qualified and exempt from taxation under Sections 401(a) and 501(a) of the
Code
may nonetheless be subject to the prohibited transaction rules set forth in
Section 503 of the Code.
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 a class of 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.
The
U.S.
Department of Labor has issued an Exemption, as described under “ERISA
Considerations” in the prospectus, to certain of the Underwriters. The Exemption
generally exempts from the application of certain of the prohibited transaction
provisions of Section 406 of ERISA, and the excise taxes imposed on such
prohibited transactions by Section 4975(a) and (b) of the Code and Section
502(i) of ERISA, transactions relating to the purchase, sale and holding of
pass-through certificates rated at least “BBB-” (or its equivalent) by S&P,
Fitch Ratings, Moody’s Dominion Bond Rating Service Limited (known as DBRS
Limited) and Dominion Bond Rating Service Inc. (known as DBRS Inc.) at the
time
of purchase and underwritten by the Underwriters and the servicing and operation
of asset pools consisting of certain types of secured obligations, such as
mortgage loans, provided that the conditions of the Exemption are satisfied.
However, the Exemption contains a number of conditions which must be met for
the
Exemption, as amended, to apply (as described in the prospectus), including
the
requirement that any such Plan must be an “accredited investor” as defined in
Rule 501(a)(1) of Regulation D of the Securities and Exchange Commission under
the Securities Act of 1933, as amended. A fiduciary of a Plan contemplating
purchasing an Offered Certificate must make its own determination that the
conditions set forth in the Exemption, as amended, will be satisfied with
respect to such certificates, including the requirement that the rating on
a
particular class of certificates be “BBB-” or higher at the time of purchase.
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
may apply. Accordingly, no Plan or other person using assets of a Plan may
acquire or hold an Offered Certificate while the Supplemental Interest Trust
is
in existence, unless (1) such Plan is an accredited investor within the meaning
of the Exemption and (2) such acquisition or holding is eligible for the
exemptive relief available under PTCE 84-14 (for transactions by independent
“qualified professional asset managers”), 91-38 (for transactions by bank
collective investment funds), 90-1 (for transactions by insurance company pooled
separate accounts), 95-60 (for transactions by insurance company general
accounts) or 96-23 (for transactions effected by “in-house asset managers”). 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 (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 enumerated
above.
S-117
A
fiduciary of or other investor of Plan assets contemplating purchasing an
Offered Certificate should consult their legal counsel concerning the
availability of, and the scope of relief provided by, the Exemption and the
enumerated class Exemptions.
Each
beneficial owner of a Mezzanine Certificate or any interest therein that is
acquired after the termination of the Supplemental
Interest Trust (which holds the Interest Rate Swap Agreement) shall be deemed
to
have represented, by virtue of its acquisition or holding of that certificate
or
interest therein, that either (i) it is not a plan investor, (ii) it has
acquired and is holding such subordinated certificate in reliance on the
Exemption, and that it understands that there are certain conditions to the
availability of the Exemption, including that the subordinated certificate
must
be rated, at the time of purchase, not lower than “BBB-” (or its equivalent) by
Standard & Poor’s, Fitch Ratings or Moody’s or (iii) (1) it is an insurance
company, (2) the source of funds used to acquire or hold the certificate or
interest therein is an “insurance company general account”, as such term is
defined in Prohibited Transaction Class Exemption (“PTCE”) 95-60, and (3) the
conditions in Sections I and III of PTCE 95-60 have been satisfied.
If
any
Offered Certificate, or any interest therein, is acquired or held in violation
of the provisions of this section, 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 this section shall
indemnify to the extent permitted by law and hold harmless the Depositor, the
Sponsor, the Master Servicer, the Servicer, the Underwriters, the Co-Manager,
the Class A Certificate Insurer and the Trustee from and against any and all
liabilities, claims, costs or expenses incurred by such parties as a result
of
such acquisition or holding.
Plan
fiduciaries are encouraged to consult their legal counsel concerning the
availability of, and scope of relief provided by, the Exemption and the
enumerated class exemptions, 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.
The
sale
of any class of Offered Certificates to a Plan is in no respect a representation
by the Depositor, the Trustee, the Securities Administrator, the Master
Servicer, the Servicer, the Co-Manager, the Class A Certificate Insurer or
the
Underwriters that such an investment meets all relevant legal requirements
with
respect to investments by Plans generally or any particular Plan, or that such
an investment is appropriate for Plans generally or any particular
Plan.
AVAILABLE
INFORMATION
The
Depositor is subject to the informational requirements of the Exchange Act
and
in accordance therewith files reports and other information with the Commission.
Reports and other information filed by the Depositor can be inspected and copied
at the Public Reference Room maintained by the Commission at 100 F Street NE,
Washington, DC 20549,
and
its
Regional Offices located as follows: Chicago Regional Office, 500 West Madison,
14th Floor, Chicago, Illinois60661; New York Regional Office, 233 Broadway,
NewYork, New York10279. Copies of the material can also be obtained from the
Public Reference Section of the Commission, 100 F Street NE, Washington, DC
20549,
at
prescribed rates and electronically through the Commission’s Electronic Data
Gathering, Analysis and Retrieval system at the Commission’s Website
(http://www.sec.gov). Information about the operation of the Public Reference
Room may be obtained by calling the Securities and Exchange Commission at (800)
SEC-0330. Exchange Act reports as to any series filed with the Commission will
be filed under the issuing entity’s name. The Depositor does not intend to send
any financial reports to security holders.
S-118
The
Issuing Entity’s annual reports on Form 10-K (including reports of assessment of
compliance with the AB Servicing Criteria, attestation reports, and statements
of compliance, discussed in “Description of the Certificates — Reports to
Certificateholders” and “Servicing of the Mortgage Loans — Evidence as to
Compliance”, required to be filed under Regulation AB), periodic distribution
reports on Form 10-D, current reports on Form 8-K and amendments to those
reports, together with such other reports to security holders or information
about the securities as will have been filed with the Commission will be posted
on the Securities Administrator’s internet web site as soon as reasonably
practicable after it has been electronically filed with, or furnished to, the
Commission.
REPORTS
TO CERTIFICATEHOLDERS
So
long
as the Issuing Entity is required to file reports under the Exchange Act, those
reports will be made available as described above under “Available
Information”.
If
the
Issuing Entity is no longer required to file reports under the Exchange Act,
periodic distribution reports will be posted on the Securities Administrator’s
website referenced above under “Available Information” as soon as practicable.
Annual reports of assessment of compliance with the AB Servicing Criteria,
attestation reports, and statements of compliance will be provided to registered
holders of the related securities upon request free of charge. See “Servicing of
the Mortgage Loans — Evidence
as to Compliance” and
“Description
of the Certificates —
Reports
to Certificateholders.”
INCORPORATION
OF INFORMATION BY REFERENCE
There
are
incorporated into this prospectus supplement by reference all documents,
including but not limited to the financial statements and reports filed or
caused to be filed or incorporated by reference by the Depositor with respect
to
the trust fund pursuant to the requirements of Sections 13(a) or 15(d) of the
Exchange Act, prior to the termination of the offering of the Offered
Certificates. All documents subsequently filed by the Depositor pursuant to
Sections 13(a) or 15(d) of the Exchange Act in respect of the offering prior
to
the termination of the offering of the Offered Certificates will also be deemed
incorporated by reference into this prospectus supplement.
The
Depositor will provide or cause to be provided without charge to each person
to
whom this prospectus supplement is delivered in connection with the offering
of
one or more classes of Offered Certificates, upon written or oral request of
the
person, a copy of any or all the reports incorporated in this prospectus
supplement by reference, in each case to the extent the reports relate to one
or
more of such classes of the Offered Certificates, other than the exhibits to
the
documents, unless the exhibits are specifically incorporated by reference in
the
documents. Requests should be directed in writing to ACE Securities Corp.,
6525Morrison
Blvd., Suite 318, Charlotte, North Carolina28211, or by telephone at (704)
365-0569.
The
Depositor has determined that its financial statements will not be material
to
the offering of any Offered Certificates.
S-119
EXPERTS
The
consolidated balance sheets of XLCA and its subsidiary as of December 31, 2006
and 2005, and the related consolidated statements of operations and
comprehensive income, changes in shareholder's equity, and cash flows for each
of the three years in the period ended December 31, 2006, incorporated by
reference in this prospectus supplement, have been so incorporated in this
prospectus supplement in reliance on the report of PricewaterhouseCoopers LLP,
independent registered public accounting firm, given on the authority of that
firm as experts in accounting and auditing.
The
balance sheets of XLFA as of December 31, 2006 and 2005, and the related
statements of operations and comprehensive income, changes in shareholder's
equity, and cash flows for each of the three years in the period ended December31, 2006, incorporated by reference in this prospectus supplement, have been
so
incorporated in this prospectus supplement in reliance on the report of
PricewaterhouseCoopers, independent registered public accounting firm, given
on
the authority of that firm as experts in accounting and auditing.
S-120
ANNEX
I
GLOBAL
CLEARANCE AND SETTLEMENT AND DOCUMENTATION PROCEDURES
Except
in
certain limited circumstances, the Offered Certificates will be offered globally
(the “Global Securities”) and will be available only in book-entry form.
Investors in the Global Securities may hold such Global Securities through
any
of DTC, Clearstream or Euroclear. The Global Securities will be tradable as
home
market instruments in both the European and U.S. domestic markets. Initial
settlement and all secondary trades will settle in same-day funds.
Secondary
market trading between investors holding Global Securities through Clearstream
and Euroclear will be conducted in the ordinary way in accordance with their
normal rules and operating procedures and in accordance with conventional
eurobond practice (i.e., seven calendar day settlement).
Secondary
market trading between investors holding Global Securities through DTC will
be
conducted according to the rules and procedures applicable to U.S. corporate
debt obligations.
Secondary
cross market trading between Clearstream or Euroclear and DTC Participants
holding Certificates will be effected on a delivery-against-payment basis
through the respective Depositories of Clearstream and Euroclear (in such
capacity) and as DTC Participants.
Non-U.S.
holders (as described below) of Global Securities will be subject to U.S.
withholding taxes unless such holders meet certain requirements and deliver
appropriate U.S. tax documents to the securities clearing organizations or
their
participants.
Initial
Settlement
All
Global Securities will be held in book-entry form by DTC in the name of Cede
& Co. as nominee of DTC. Investors’ interests in the Global Securities will
be represented through financial institutions acting on their behalf as direct
and indirect Participants in DTC. As a result, Clearstream and Euroclear will
hold positions on behalf of their participants through their respective
Depositories, which in turn will hold such positions in accounts as DTC
Participants.
Investors
electing to hold their Global Securities through DTC will follow the settlement
practices applicable to conventional eurobonds, except that there will be no
temporary global security and no “lock-up” or restricted period. Investor
securities custody accounts will be credited with their holdings against payment
in same-day funds on the settlement date.
Investors
electing to hold their Global Securities through Clearstream or Euroclear
accounts will follow the settlement procedures applicable to conventional
eurobonds, except that there will be no temporary global security and no “lock
up” or restricted period. Global Securities will be credited to the securities
custody accounts on the settlement date against payment in same-day
funds.
Secondary
Market Trading
Since
the
purchaser determines the place of delivery, it is important to establish at
the
time of the trade where both the purchaser’s and sellers accounts are located to
ensure that settlement can be made on the desired value date.
I-1
Trading
between DTC Participants.
Secondary market trading between DTC Participants will be settled using the
procedures applicable to prior mortgage loan asset backed certificates issues
in
same-day funds.
Trading
between Clearstream and/or Euroclear Participants.
Secondary market trading between Clearstream Participants or Euroclear
Participants will be settled using the procedures applicable to conventional
eurobonds in same-day funds.
Trading
between DTC seller and Clearstream or Euroclear purchaser.
When
Global Securities are to be transferred from the account of a DTC Participant
to
the account of a Clearstream Participant or a Euroclear Participant, the
purchaser will send instructions to Clearstream or Euroclear through a
Clearstream Participant or Euroclear Participant at least one business day
prior
to settlement. Clearstream or Euroclear will instruct the respective Depository,
as the case may be, to receive the Global Securities against payment. Payment
will include interest accrued on the Global Securities from and including the
last coupon payment date to and excluding the settlement date, on the basis
of
the actual number of days in such accrual period and a year assumed to consist
of 360 days. For transactions settling on the 31st of the month, payment will
include interest accrued to and excluding the first day of the following month.
Payment will then be made by the respective Depository of the DTC Participant’s
account against delivery of the Global Securities. After settlement has been
completed, the Global Securities will be credited to the respective clearing
system and by the clearing system, in accordance with its usual procedures,
to
the Clearstream Participant’s or Euroclear Participant’s account. The securities
credit will appear the next day (European time) and the cash debt will be
back-valued to, and the interest on the Global Securities will accrue from,
the
value date (which would be the preceding day when settlement occurred in New
York). If settlement is not completed on the intended value date (i.e., the
trade fails), the Clearstream or Euroclear cash debt will be valued instead
as
of the actual settlement date.
Clearstream
Participants and Euroclear Participants will need to make available to the
respective clearing systems the funds necessary to process same-day funds
settlement. The most direct means of doing so is to preposition funds for
settlement, either from cash on hand or existing lines of credit, as they would
for any settlement occurring within Clearstream or Euroclear. Under this
approach, they may take on credit exposure to Clearstream or Euroclear until
the
Global Securities are credited to their accounts one day later.
As
an
alternative, if Clearstream or Euroclear has extended a line of credit to them,
Clearstream Participants or Euroclear Participants can elect not to preposition
funds and allow that credit line to be drawn upon the finance settlement. Under
this procedure, Clearstream Participants or Euroclear Participants purchasing
Global Securities would incur overdraft charges for one day, assuming they
cleared the overdraft when the Global Securities were credited to their
accounts. However, interest on the Global Securities would accrue from the
value
date. Therefore, in many cases the investment income on the Global Securities
earned during that one-day period may substantially reduce or offset the amount
of such overdraft charges, although this result will depend on each Clearstream
Participant’s or Euroclear Participant’s particular cost of funds.
Since
the
settlement is taking place during New York business hours, DTC Participants
can
employ their usual procedures for sending Global Securities to the respective
European Depository for the benefit of Clearstream Participants or Euroclear
Participants. The sale proceeds will be available to the DTC seller on the
settlement date. Thus, to the DTC Participants a cross-market transaction will
settle no differently than a trade between two DTC Participants.
Trading
between Clearstream or Euroclear Seller and DTC Purchaser. Due to time zone
differences in their favor, Clearstream Participants and Euroclear Participants
may employ their customary procedures for transactions in which Global
Securities are to be transferred by the respective clearing system, through
the
respective Depository, 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 Depository, as
appropriate, to deliver the Global Securities to the DTC Participant’s account
against payment. Payment will include interest accrued on the Global Securities
from and including the last coupon payment to and excluding the settlement
date
on the basis of the actual number of days in such accrual period and a year
assumed to consist of 360 days. For transactions settling on the 31st of the
month, payment will include interest accrued to and excluding the first day
of
the following month. The payment will then be reflected in the account of the
Clearstream Participant or Euroclear Participant the following day, and receipt
of the cash proceeds in the Clearstream Participant’s or Euroclear Participant’s
account would be back-valued to the value date (which would be the preceding
day, when settlement occurred in New York). Should the Clearstream Participant
or Euroclear Participant have a line of credit with its respective clearing
system and elect to be in debt in anticipation of receipt of the sale proceeds
in its account, the back valuation will extinguish any overdraft incurred over
that one-day period. If settlement is not completed on the intended value date
(i.e., the trade fails), receipt of the cash proceeds in the Clearstream
Participant’s or Euroclear Participant’s account would instead be valued as of
the actual settlement date.
I-2
Finally,
day traders that use Clearstream or Euroclear and that purchase Global
Securities from DTC Participants For deliver to Clearstream Participants or
Euroclear Participants should note that these trades would automatically fail
on
the sale side unless affirmative action were taken. At least three techniques
should be readily available to eliminate this potential problem:
(a) borrowing
through Clearstream or Euroclear for one day (until the purchase side of the
day
trade is reflected in their Clearstream or Euroclear accounts) in accordance
with the clearing system’s customary procedures;
(b) borrowing
the Global Securities in the U.S. from a DTC Participant no later than one
day
prior to settlement, which would give the Global Securities sufficient time
to
be reflected in their Clearstream or Euroclear account in order to settle the
sale side of the trade; or
(c) staggering
the value dates for the buy and sell sides of the trade so that the value date
for the purchase from the DTC Participant is at least one day prior to the
value
date for the sale to the Clearstream Participant or Euroclear
Participant.
Certain
U.S. Federal Income Tax Documentation Requirements
A
beneficial owner of Global Securities holding securities through Clearstream
or
Euroclear (or through DTC if the holder has an address outside the U.S.) will
be
subject to the 30% U.S. withholding tax that generally applies to payments
of
interest (including original issue discount) on registered debt issued by U.S.
Persons, unless (i) each clearing system, bank or other financial institution
that holds customers’ securities in the ordinary course of its trade or business
in the chain of intermediaries between such beneficial owner and the U.S. entity
required to withhold tax complies with applicable certification requirements
and
(ii) such beneficial owner takes one of the following steps to obtain an
exemption or reduced tax rate:
Exemption
for non-U.S. Persons (Form W-8BEN).
Beneficial owners of Global Securities that are non-U.S. Persons can obtain
a
complete exemption from the withholding tax by filing a signed Form W-8BEN
(Certificate of Foreign Status of Beneficial Owner for United States Tax
Withholding). If the information shown on Form W-8BEN changes, a new Form W-8BEN
must be filed within 30 days of such change.
I-3
Exemption
for non-U.S. Persons with effectively connected income (Form
W-8ECI).
A
non-U.S. Person, including a non-U.S. corporation or bank with a U.S. branch,
for which the interest income is ineffectively connected with its conduct of
a
trade or business in the United States, can obtain an exemption from the
withholding tax by filing Form W-8ECI (Certificate of Foreign Person’s Claim for
Exemption from Withholding on Income Effectively Connected with the Conduct
of a
Trade or Business in the United States).
Exemption
or reduced rate for non-U.S. Persons resident in treaty countries (Form
W-8BEN).
Non-U.S.
Persons that are Certificate Owners residing in a country that has a tax treaty
with the United States can obtain an exemption or reduced tax rate (depending
on
the treaty terms) by filing Form W-8BEN (Certificate of Foreign Status of
Beneficial Owner for United States Tax Withholding). Form W-8BEN may be filed
by
the Certificate Owners or his agent.
Exemption
or reduced rate for non-U.S. Persons subject to special U.S. federal income
tax
rules (Form W-8EXP). A
non-U.S. Person that is a foreign government, international organization,
foreign central bank of issue, foreign tax-exempt organization, foreign private
foundation or government of a U.S. possession may obtain an exemption or reduced
tax rate on certain income by filing Form W-8EXP (Certificate of Foreign
Government or Other Foreign Organization for United States Tax
Withholding).
Exemption
for U.S. Persons (Form W-9).
U.S.
Persons can obtain a complete exemption from the withholding tax by filing
Form
W-9 (Payers Request for Taxpayer Identification Number and
Certification).
U.S.
Federal Income Tax Reporting Procedure.
The
Certificate Owner of a Global Security files by submitting the appropriate
form
to the person through whom it holds (the clearing agency, in the case of persons
holding directly on the books of the clearing agency). Form W-8BEN and Form
W-8ECI are effective until the third succeeding calendar year from the date
such
form is signed.
The
term
“U.S. Person” means (i) a citizen or resident of the United States, (ii) a
corporation, partnership or other entity treated as a corporation or partnership
for United States federal income tax purposes organized in or under the laws
of
the United States or any state thereof or the District of Columbia (unless,
in
the case of a partnership, Treasury regulations provide otherwise), (iii) an
estate the income of which is includible in gross income for United States
tax
purposes, regardless of its source, or (iv) a trust if a court within the United
States is able to exercise primary supervision over the administration of the
trust and one or more United States persons have authority to control all
substantial decisions of the trust. Notwithstanding the preceding sentence,
to
the extent provided in Treasury regulations, certain trusts in existence on
August 20,1996, and treated as United States persons prior to such date, that
elect to continue to be treated as United States persons will also be a U.S.
Person. This summary does not deal with all aspects of U.S. Federal income
tax
withholding that may be relevant to foreign holders of the Global Securities.
Investors are advised to consult their own tax advisors for specific tax advice
concerning their holding and disposing of the Global Securities.
I-4
PROSPECTUS
Asset
Backed Certificates
Asset
Backed Notes
(Issuable
in Series)
ACE
Securities Corp.,
Depositor
The
Issuing
Entities:
Each
issuing entity will be established to hold assets transferred to it by ACE
Securities Corp. The assets in each issuing entity will generally consist of
one
or more of the following:
·
mortgage
loans, which may include closed-end and/or revolving home equity
loans or
balances thereof, secured by one- to four-family residential properties,
commercial properties, multifamily properties, mixed-use residential
and
commercial properties or unimproved
land;
·
unsecured
home improvement loans;
·
manufactured
housing installment sale contracts;
·
mortgage
pass-through notes or certificates issued or guaranteed by Ginnie
Mae,
Fannie Mae, or Freddie Mac; or
·
previously
issued asset-backed or mortgage-backed notes or certificates backed
by
mortgage loans secured by residential properties or participations
in
those types of loans.
The
assets in your issuing entity are specified in the prospectus supplement for
that particular issuing entity, while the types of assets that may be included
in an issuing entity, whether or not in your issuing entity, are described
in
greater detail in this prospectus.
The
Securities:
ACE
Securities Corp. will sell the notes or certificates, as applicable, pursuant
to
a prospectus supplement. The notes or certificates, as applicable, will be
grouped into one or more series, each having is own distinct designation. Each
series will be issued in one or more classes and will evidence beneficial
ownership of, or be secured by, the assets in the issuing entity’s trust fund
that the series relates to. A prospectus supplement for a series will specify
all of the terms of the series and of each of the classes in the
series.
Consider
carefully the risk factors beginning on Page 1 of this
prospectus:
Neither
the Securities and Exchange Commission nor any state securities commission
has
approved or disapproved of these securities or passed upon the adequacy or
accuracy of this prospectus. Any representation to the contrary is a criminal
offense.
The
following information, which you should carefully consider, identifies certain
significant sources of risk associated with an investment in the certificates
and the notes. You should also carefully consider the information set forth
under “Risk Factors” in the prospectus supplement.
The
mortgage loans
were underwritten to standards which do not conform to the standards
of
Fannie Mae or Freddie Mac.
The
underwriting standards of the originators are intended to assess
the
ability and willingness of the mortgagor to repay the debt and
to evaluate
the adequacy of the property as collateral for the mortgage loan.
The
originators consider, among other things, a mortgagor’s credit history,
repayment ability and debt service-to-income ratio, as well as
the value,
type and use of the mortgaged property. As further described in
this
prospectus, the underwriting standards of the originators do not
conform
to Fannie Mae and Freddie Mac guidelines.
In
addition, mortgage loans originated by the originators generally
bear
higher rates of interest than mortgage loans originated in accordance
with
Fannie Mae and Freddie Mac guidelines and may experience rates
of
delinquency, foreclosure and bankruptcy that are higher, and that
may be
substantially higher, than those experienced by mortgage loans
underwritten in accordance with Fannie Mae and Freddie Mac
guidelines.
Furthermore,
changes in the values of mortgaged properties may have a greater
effect on
the delinquency, foreclosure, bankruptcy and loss experience of
the
mortgage loans than on mortgage loans originated in accordance
with Fannie
Mae and Freddie Mac guidelines. No assurance can be given that
the values
of the related mortgaged properties have remained or will remain
at the
levels in effect on the dates of origination of the related Mortgage
Loans
The
Offered
Securities will be limited obligations solely of the issuing entity
and
not of any other party.
The
Offered Securities will not represent an interest in or obligation
of the
depositor, the servicer, the master servicer, the securities
administrator, the originators, the trustee or any of their respective
affiliates. Neither the Offered Securities nor the underlying mortgage
loans or contracts will be guaranteed or insured by any governmental
agency or instrumentality, or by the depositor, the servicer, the
master
servicer, the securities administrator, the originators, the trustee
or
any of their respective affiliates. Proceeds of the assets included
in the
issuing entity will be the sole source of payments on the Offered
Securities, and there will be no recourse to the depositor, the
servicer,
the originators, the master servicer, the securities administrator,
the
trustee or any other entity in the event that these proceeds are
insufficient or otherwise unavailable to make all payments provided
for
under the Offered Securities.
1
Violation
of consumer protection laws
may result in losses on the mortgage loans, the contracts and your
securities.
Applicable
state laws generally regulate interest rates and other charges,
require
certain disclosure, and require licensing of the originators. In
addition,
other state laws, public policy and general principles of equity
relating
to the protection of consumers, unfair and deceptive practices
and debt
collection practices may apply to the origination, servicing and
collection of the mortgage loans and contracts.
The
mortgage loans are also subject to federal laws, including:
·
the
Federal Truth-in-Lending Act and Regulation Z promulgated thereunder,
which require certain disclosures to the mortgagors regarding the
terms of
the mortgage loans or contracts;
·
the
Equal Credit Opportunity Act and Regulation B promulgated thereunder,
which prohibit discrimination on the basis of age, race, color,
sex,
religion, marital status, national origin, receipt of public assistance
or
the exercise of any right under the Consumer Credit Protection
Act, in the
extension of credit;
·
the
Fair Credit Reporting Act, which regulates the use and reporting
of
information related to the mortgagor’s credit experience; and
·
the
Depository Institutions Deregulation and Monetary Control Act of
1980,
which preempts certain state usury laws.
Violations
of certain provisions of these federal and state laws may limit
the
ability of the servicer to collect all or part of the principal
of or
interest on the related mortgage loans or contracts and in addition
could
subject the trust to damages and administrative enforcement. In
particular, the failure of the originators to comply with certain
requirements of the Federal Truth-in-Lending Act, as implemented
by
Regulation Z, could subject the trust to monetary penalties, and
result in
the mortgagors’ rescinding the mortgage loans or contracts against the
issuing entity. In addition to federal law, some states have enacted,
or
may enact, laws or regulations that prohibit inclusion of some
provisions
in mortgage loans or contracts that have interest rates or origination
costs in excess of prescribed levels, and require that mortgagors
be given
certain disclosures prior to the consummation of the mortgage loans
or
contracts and restrict the servicer’s ability to foreclose in response to
mortgagor defaults. The failure of the originators to comply with
these
laws could subject the trust to significant monetary penalties,
could
result in the mortgagors rescinding the mortgage loans or contracts
against the trust and/or limit the servicer’s ability to foreclose upon
the related mortgaged properties in the event of mortgagor
defaults.
2
The
sponsor will represent that each mortgage loan is in compliance
with
applicable federal and state laws and regulations. In the event
of a
breach of such representation, the sponsor will be obligated to
cure such
breach or repurchase or replace the affected mortgage loan in the
manner
described in the prospectus. If the sponsor is unable or otherwise
fails
to satisfy such obligations, the yield on the may be materially
and
adversely affected.
3
The
liquidity of your securities
may be limited.
The
underwriter has no obligation to make a secondary market in the
classes of
Offered Securities. There is therefore no assurance that a secondary
market will develop or, if it develops, that it will continue.
Consequently, you may not be able to sell your security 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.
The
secondary markets for asset-backed securities have experienced
periods of
illiquidity and can be expected to do so in the future. Illiquidity
can
have a severely adverse effect on the prices of securities that
are
especially sensitive to prepayment, credit or interest rate risk,
or that
have been structured to meet the investment requirements of limited
categories of investors.
The
return on your securities
could be reduced by shortfalls due to the application of the Relief
Act.
The
Relief Act and similar state or local laws provide relief to mortgagors
who enter active military service and to mortgagors in reserve
status who
are called to active military service after the origination of
their
mortgage loans or contracts. The ongoing military operations of
the United
States in Iraq and Afghanistan have caused an increase in the number
of
citizens in active military duty, including those citizens previously
in
reserve status. Under the Relief Act the interest rate applicable
to a
mortgage loan for which the related mortgagor is called to active
military
service will be reduced from the percentage stated in the related
mortgage
note to 6.00%. This interest rate reduction and any reduction provided
under similar state or local laws could result in an interest shortfall
because the master servicer, the servicer will not be able to collect
the
amount of interest which otherwise would be payable with respect
to such
mortgage loan if the Relief Act or similar state or local law was
not
applicable thereto. This shortfall will not be paid by the mortgagor
on
future due dates or advanced by the master servicer, the servicer
and,
therefore, will reduce the amount available to pay interest to
the
securityholders on subsequent Distribution Dates.
Possible
reduction or withdrawal of ratings on the Offered Securities.
Each
rating agency rating the Offered Securities may change or withdraw
its
initial ratings at any time in the future if, in its judgment,
circumstances warrant a change. No person is obligated to maintain
the
ratings at their initial levels. If a rating agency reduces or
withdraws
its rating on one or more classes of the Offered Securities, the
liquidity
and market value of the affected securities is likely to be
reduced.
Description
of the Issuing Entities’ Trust Funds
Assets
4
The
primary assets of each issuing entity’s trust fund (the “Assets”) will include
some or all of the following types of assets:
·
mortgage
loans on single family and multifamily residential properties, which
may
include Home Equity Loans, home improvement contracts and Land Sale
Contracts (each as defined in this prospectus), commercial properties,
unimproved land and mixed-use residential and commercial
properties;
·
home
improvement installment sales contracts or installment loans that
are
unsecured called unsecured home improvement
Loans;
·
manufactured
housing installment sale contracts or installment loan agreements
referred
to as contracts;
·
any
combination of “fully modified pass-through” mortgage-backed certificates
guaranteed by the Government National Mortgage Association (“Ginnie Mae”),
guaranteed mortgage pass-through securities issued by Fannie Mae
(“Fannie
Mae”) and mortgage participation certificates issued by the Federal Home
Loan Mortgage Corporation (“Freddie Mac”) (collectively, “Agency
Securities”);
·
previously
issued asset-backed certificates, collateralized mortgage obligations
or
participation certificates (each, and collectively, “Mortgage Securities”)
evidencing interests in, or collateralized by, mortgage loans or
Agency
Securities; or
·
a
combination of mortgage loans, unsecured home improvement loans,
contracts, Agency Securities and/or Mortgage
Securities.
The
mortgage loans will not be guaranteed or insured by ACE Securities Corp. 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 prospectus supplement. The depositor will select
each
Asset to include in an issuing entity’s trust fund from among those it has
purchased, either directly or indirectly, from a prior holder (an “Asset
Seller”), which may be an affiliate of the depositor and which prior holder may
or may not be the originator of that mortgage loan. As to each series of
securities, the mortgage loans will be selected for inclusion in the mortgage
pool based on rating agency criteria, compliance with representations and
warranties, and conformity to criteria relating to the characterization of
securities for tax, ERISA, SMMEA, Form S-3 eligibility and other legal
purposes.
The
Assets included in the issuing entity’s trust fund for your series may be
subject to various types of payment provisions:
·
“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;
·
“Adjustable
Rate Assets,” which may provide for periodic adjustments to their rates of
interest to equal the sum of a fixed margin and an
index;
·
“Buy
Down Assets,” which are Assets for which funds have been provided by
someone other than the related borrowers to reduce the borrowers’ monthly
payments during the early period after origination of those
Assets;
·
“Increasing
Payment Assets,” as described
below;
5
·
“Interest
Reduction Assets,” which provide for the one-time reduction of the
interest rate payable on these
Assets;
·
“GEM
Assets” which provide for (1) monthly payments during the first year after
origination that are at least sufficient to pay interest due on these
Assets, and (2) an increase in those monthly payments in later years
at a
predetermined rate resulting in full repayment over a shorter term
than
the initial amortization terms of those
Assets;
·
“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 their unpaid principal
balances, and this unpaid interest will be added to the principal
balances
of those Assets and will be paid, together with interest on the unpaid
interest, in later years;
·
“Step-up
Rate Assets” which provide for interest rates that increase over
time;
·
“Balloon
Payment Assets;”
·
“Convertible
Assets” which are Adjustable Rate Assets subject to provisions pursuant to
which, subject to limitations, the related borrowers may exercise
an
option to convert the adjustable interest rate to a fixed interest
rate;
and
·
“Bi-weekly
Assets,” which provide for payments to be made by borrowers on a bi-weekly
basis.
An
“Increasing Payment Asset” is an Asset that provides for monthly payments that
are fixed for an initial period to be specified in the 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 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 for
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 borrower’s monthly
payments referred to in the preceding sentence and (2) payments made by the
respective servicers pursuant to buy-down or subsidy agreements. The borrower’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 some number of percentage points below the Asset
Rate of that Increasing Payment Asset. The borrower’s monthly payments on each
Increasing Payment Asset, together with any payments made on the Increasing
Payment Asset by the related servicers pursuant to buy-down or subsidy
agreements, will in all cases be sufficient to allow payment of accrued interest
on the Increasing Payment Asset at the related interest rate, without negative
amortization. A borrower’s monthly payments on an Increasing Payment Asset may,
however, not be sufficient to result in any reduction of the principal balance
of that Asset until after the period when those payments may be
increased.
The
Notes
or Certificates, as applicable (as defined in this prospectus), will be entitled
to payment only from the assets of the related issuing entity and will not
be
entitled to payments from the assets of any other issuing entity established
by
the depositor. The assets of an issuing entity may consist of certificates
representing beneficial ownership interests in, or indebtedness of, another
issuing entity that contains the Assets, if specified in the prospectus
supplement.
6
Mortgage
Loans
General
Each
mortgage loan will generally be secured by a lien on (1) a one- to four-family
residential property (including a manufactured home) or a security interest
in
shares issued by a cooperative housing corporation (a “Single Family Property”),
(2) a primarily residential rental property that consists of five or more
residential dwelling units (“Multifamily Property”), (3) a retail, office,
agricultural or other commercial property, including but not limited to
partially improved or unimproved (“Commercial Property”), (4) a mixed
residential/commercial property (“Mixed-Use Property” and together with Single
Family Property, Multifamily Property and Commercial Property, the “Mortgaged
Properties”). 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 also include:
·
Apartment
buildings owned by cooperative housing corporations (“Cooperatives”);
and
·
Leasehold
interests in properties, the title to which is held by third party
lessors. The term of these leaseholds will exceed the term of the
related
mortgage note by at least five years or some other time period specified
in the prospectus supplement.
The
mortgage loans may include:
·
Closed-end
and/or revolving home equity loans or balances of these home equity
loans
(“Home Equity Loans”);
·
Secured
home improvement installment sales contracts and secured installment
loan
agreements, known as home improvement contracts;
and
·
Mortgage
loans evidenced by contracts (“Land Sale Contracts”) for the sale of
properties pursuant to which the borrower promises to pay the amount
due
on the mortgage loans to the holder of the Land Sale Contract with
fee
title to the related property held by that holder until the borrower
has
made all of the payments required pursuant to that Land Sale Contract,
at
which time fee title is conveyed to the
borrower.
The
originator of each mortgage loan will have been a person other than the
depositor. The prospectus supplement will indicate if any originator is an
affiliate of the depositor. The mortgage loans will be evidenced by mortgage
notes secured by mortgages, deeds of trust or other security instruments (the
“Mortgages”) creating a lien on the Mortgaged Properties. The Mortgaged
Properties will be located in any one of the fifty states, the District of
Columbia, Guam, Puerto Rico or any other territory of the United States. If
provided in the prospectus supplement, the mortgage loans may include loans
insured by the Federal Housing Administration (the “FHA”) or partially
guaranteed by the Veteran’s Administration (the “VA”). See “—FHA Loans and VA
Loans” below.
7
FICO
Scores
The
FICO
Score is a statistical ranking of likely future credit performance developed
by
Fair, Isaac & Company (“Fair, Isaac”) and the three national credit
repositories-Equifax, Trans Union and First American (formerly Experian which
was formerly TRW). The FICO Scores available from the three national credit
repositories are calculated by the assignment of weightings to the most
predictive data collected by the credit repositories and range from the 300’s to
the 900’s. Although the FICO Scores are based solely on the information at the
particular credit repository, such FICO Scores have been calibrated to indicate
the same level of credit risk regardless of which credit repository is used.
The
FICO Scores is used along with, but not limited to, mortgage payment history,
seasoning on bankruptcy and/or foreclosure, and is not a substitute for the
underwriter’s judgment.
Loan-to-Value
Ratio
The
“Loan-to-Value Ratio” of a mortgage loan at any particular time is the ratio
(expressed as a percentage) of the then outstanding principal balance of the
mortgage loan to the Value of the related Mortgaged Property. The “Value” of a
Mortgaged Property, other than for Refinance Loans, is generally the lesser
of
(a) the appraised value determined in an appraisal obtained by the originator
at
origination of that loan and (b) the sales price for that property. ”Refinance
Loans” are loans made to refinance existing loans. Unless otherwise specified in
the prospectus supplement, the Value of the Mortgaged Property securing a
Refinance Loan is the appraised value of the Mortgaged Property determined
in an
appraisal obtained at the time of origination of the Refinance Loan. The value
of a Mortgaged Property as of the date of initial issuance of the related series
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.
Primary
Mortgage Insurance
Except
in
the case of high loan-to-value loans and as otherwise specified in the related
prospectus supplement, each mortgage loan having a loan-to-value ratio at
origination in excess of 80%, is required to be covered by a primary mortgage
guaranty insurance policy insuring against default on such mortgage loan as
to
at least the principal amount thereof exceeding 75% of the value of the
mortgaged property at origination of the mortgage loan. This insurance must
remain in force at least until the mortgage loan amortizes to a level that
would
produce a loan-to-value ratio lower than 80%. See “Primary Mortgage Insurance
Policies”.
Mortgage
Loan Information in the Prospectus Supplements
Your
prospectus supplement will contain information, as of the dates specified in
that prospectus supplement and to the extent then applicable and specifically
known to the depositor, with respect to the mortgage loans,
including:
·
the
total outstanding principal balance and the largest, smallest and
average
outstanding principal balance of the mortgage loans as of, unless
otherwise specified in that prospectus supplement, the close of business
on the first day of the month of formation of the related issuing
entity
(the “Cut-off Date”);
·
the
type of property securing the mortgage
loans;
·
the
weighted average (by principal balance) of the original and remaining
terms to maturity of the mortgage
loans;
8
·
the
range of maturity dates of the mortgage
loans;
·
the
range of the Loan-to-Value Ratios at origination of the mortgage
loans;
·
the
mortgage rates or range of mortgage rates and the weighted average
mortgage rate borne by the mortgage
loans;
·
the
state or states in which most of the Mortgaged Properties are
located;
·
information
regarding the prepayment provisions, if any, of the mortgage
loans;
·
for
mortgage loans with adjustable mortgage rates (“ARM Loans”), the index,
the frequency of the adjustment dates, the range of margins added
to the
index, and the maximum mortgage rate or monthly payment variation
at the
time of any adjustment of and over the life of the ARM
Loan;
·
information
regarding the payment characteristics of the mortgage loans, including
balloon payment and other amortization
provisions;
·
the
number of mortgage loans that are delinquent and the number of days
or
ranges of the number of days those mortgage loans are delinquent;
and
·
the
material underwriting standards used for the mortgage
loans.
If
specific information respecting the mortgage loans is unknown to the depositor
at the time the Notes or Certificates, as applicable, 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
that will be available to purchasers of the related Notes or Certificates,
as
applicable, at or before the initial issuance of that Security and will be
filed
as part of a Current Report on Form 8-K with the Securities and Exchange
Commission (the “Commission”) within fifteen days after that initial issuance.
In the event that mortgage loans are added to or deleted from the issuing entity
after the date of the related prospectus supplement but on or before the date
of
issuance of the securities if any material pool characteristic differs by 5%
or
more from the description in the prospectus supplement, revised disclosure
will
be provided either in a supplement or in a Current Report on Form
8-K.
The
prospectus supplement will specify whether the mortgage loans include (1) Home
Equity Loans, which may be secured by Mortgages that are junior to other liens
on the related Mortgaged Property and/or (2) 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,
satellite dishes, kitchen and bathroom remodeling goods, solar heating panels,
patios, decks, room additions and garages. The prospectus supplement will
specify whether the home improvement contracts are FHA loans and, if so, the
limitations on any FHA insurance. In addition, the prospectus supplement will
specify whether the mortgage loans contain some 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 some other
interval as is specified in the prospectus supplement or for payments in another
manner described in the prospectus
9
supplement.
Each mortgage loan may provide for no
accrual of interest or for accrual of interest on the mortgage loan at a
mortgage 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 rate or a different
adjustable mortgage rate, or from a fixed to an adjustable mortgage rate, from
time to time pursuant to an election or as otherwise specified in the related
mortgage note, in each case as described in the 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 rate or to
reflect the occurrence of particular 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 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 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 Premium”) in connection
with a prepayment, in each case as described in the prospectus supplement.
If
the holders of any class or classes of Offered Notes or Offered Certificates,
as
applicable, are entitled to all or a portion of any Prepayment Premiums
collected from the mortgage loans, the prospectus supplement will specify the
method or methods by which any of these amounts will be allocated. See “—Assets”
above.
HELOCs
As
more
fully described in the prospectus supplement, the mortgage loans may consist,
in
whole or in part, of revolving Home Equity Loans or balances of these Home
Equity Loans (“HELOCs”). Interest on each HELOC, 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 that
loan.
From time to time before the expiration of the related draw period specified
in
a HELOC, principal amounts on that HELOC may be drawn down (up to a maximum
amount as set forth in the prospectus supplement) or repaid. If specified in
the
prospectus supplement, new draws by borrowers under the HELOCs will
automatically become part of the issuing entity described in the prospectus
supplement. As a result, the total balance of the HELOCs will fluctuate from
day
to day as new draws by borrowers are added to the issuing entity and principal
payments are applied to those balances and those amounts will usually differ
each day, as more specifically described in the prospectus supplement. Under
some circumstances, under a HELOC, 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 that 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, unsecured installment loans and unsecured home improvement
loans that are FHA loans. Except as otherwise described in the prospectus
supplement, the unsecured home improvement loans will be fully amortizing and
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
the
prospectus supplement and to the extent then applicable and specifically known
to the depositor, with respect to any unsecured home improvement loans,
including:
10
·
the
total 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;
·
the
weighted average, by principal balance, of the original and remaining
terms to maturity of the unsecured home improvement
loans;
·
the
earliest and latest origination date and maturity date of the unsecured
home improvements loans;
·
the
interest rates or range of interest rates and the weighted average
interest rates borne by the unsecured home improvement
loans;
·
the
state or states in which most of the unsecured home improvement loans
were
originated.
·
information
regarding the prepayment provisions, if any, of the unsecured home
improvement loans;
·
with
respect to the unsecured home improvement loans with adjustable interest
rates, called 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;
·
information
regarding the payment characteristics of the unsecured home improvement
loans;
·
the
number of unsecured home improvement loans that are delinquent and
the
number of days or ranges of the number of days that unsecured home
improvement loans are delinquent;
and
·
the
material underwriting standards used for the unsecured home improvement
loans.
If
specific information respecting the unsecured home improvement loans is unknown
to the depositor at the time Notes or Certificates, as applicable, 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 that will be available to purchasers of the related Notes or
Certificates, as applicable, at or before the initial issuance thereof and
will
be filed as part of a Current Report on Form 8-K with the Commission within
fifteen days after the related initial issuance.
Commercial,
Multifamily and Mixed-Use Mortgage Loans
The
mortgage loans may include mortgage loans secured by first or junior mortgages,
deeds of trust or similar security instruments on, or installment contracts
for
the sale of, fee simple or leasehold interests in commercial real property
(“Commercial Mortgage Loans” ), multifamily residential property (“Multifamily
Mortgage Loans” ), and/or mixed residential and commercial property (“Mixed-Use
Mortgage Loans” ), and related property and interests.
11
Certain
of the Commercial, Multifamily and Mixed-Use Mortgage Loans may be simple
interest loans, and other mortgage loans may provide for payment of interest
in
advance rather than in arrears.
Commercial,
Multifamily and Mixed-Use Mortgage Loans also may be secured by one or more
assignments of leases and rents, management agreements or operating agreements
relating to the Mortgaged Property and in some cases by certain letters of
credit, personal guarantees or both, and/or other collateral. Pursuant to an
assignment of leases and rents, the related borrower assigns its right, title
and interest as landlord under each related lease and the income derived
therefrom to the related lender, while retaining a license to collect the rents
for so long as there is no default. If the borrower defaults, the license
terminates and the related lender is entitled to collect the rents from tenants
to be applied to the monetary obligations of the borrower. State law may limit
the enforcement of the assignment of leases and rents by a lender until the
lender takes possession of the related mortgaged property and a receiver is
appointed. See “Certain Legal Aspects of the Mortgage Loans — Leases and
Rents.”
Certain
of the Commercial, Multifamily and Mixed-Use Mortgage Loans may require the
borrower to make an initial escrow deposit and/or an ongoing monthly deposit
to
fund a reserve for any of a variety of purposes, including repairs to the
Mortgaged Property or replacement of fixtures or equipment, tenant improvements,
and payment in the event of certain lease contingencies. In some cases, the
initial deposit amount may have been funded with a letter of credit in lieu
of a
cash deposit. These amounts may be held in a custodial account by the applicable
servicer or an agent. The loan documents will generally provide for release
of
the reserve amounts to the borrowers from time to time upon the satisfaction
of
certain conditions.
Such
amounts may not continue to be escrowed in the future. In some instances, the
borrower may be released from its obligation to fund a monthly reserve upon
specified conditions being met, such as a maximum escrow balance being attained,
a certain date being reached, or a certain tenant signing or extending its
lease. Likewise, there may be cases where, although there is currently no
monthly escrow amount, one may be required to be funded in the future, upon
certain trigger events. In the event of default by a borrower, amounts in a
related reserve account may generally be applied to pay amounts owed on the
mortgage loan.
Originators
of Commercial, Multifamily and Mixed-Use Mortgage Loans may include, among
others, commercial banks, savings and loan associations, other financial
institutions, insurance companies or real estate developers, which may apply
varying underwriting criteria in connection with originating mortgage
loans.
Commercial,
multifamily and mixed-use real estate lending is generally viewed as exposing
the lender to a greater risk of loss than one- to four-family residential
lending. Commercial, multifamily and mixed-use real estate lending typically
involves larger loans to single borrowers or groups of related borrowers than
residential one- to four-family mortgage loans. Furthermore, the repayment
of
loans secured by income producing properties is typically dependent upon the
successful operation of the related real estate project. If the cash flow from
the project is reduced, for example, if leases are not obtained or renewed,
the
borrower’s ability to repay the loan may be impaired. Commercial, multifamily
and mixed-use real estate can be affected significantly by supply and demand
in
the market for the type of property securing the loan and, therefore, may be
subject to adverse economic conditions. Market values may vary as a result
of
economic events or governmental regulations outside the control of the borrower
or lender, such as rent control laws, that affect the future cash flow of the
property. Corresponding to the greater lending risk is a generally higher
interest rate applicable to commercial, multifamily and mixed-use real estate
lending.
12
A
borrower (or the borrowers) under a Commercial, Multifamily or Mixed-Use
Mortgage Loan may be one or more individuals or may be a corporation or other
registered organization. In some cases a borrower, such as a special purpose
entity, will have no material assets other than the mortgaged property. In
addition, in some cases the loans will have been made on a non-recourse
basis — in the event of default by the borrower, the only source of
repayment will be the proceeds of liquidation of the related
property.
There
are various risks associated with different types of commercial, multifamily
and
mixed-use loans. For example, the performance of a multifamily loan and the
value of the related mortgaged property may be affected by many factors,
including:
·
local
and regional economic conditions;
·
the
physical condition of the property;
·
the
types of services and amenities
provided;
·
the
tenant population — i.e., predominantly students or elderly persons, or
workers in a particular industry;
·
availability
of alternative rental properties;
·
changes
in the surrounding neighborhood;
·
management;
·
the
level of mortgage interest rates;
·
dependence
upon government rent subsidies;
·
any
applicable rent control laws; and
·
state
and local regulations.
The
performance of a commercial loan secured by one or more retail properties and
the value of the related mortgaged property may be affected by many factors,
including:
·
the
quality and success of a retail property’s
tenants;
·
closing
of a major store in the shopping center where the related property
is
located;
·
changes
in consumer preferences;
·
declines
in consumer spending;
·
competition
from local merchants and from catalog and internet retailers;
and
·
product
obsolescence.
13
The
performance of a commercial loan secured by one or more office properties and
the value of the related mortgaged property may be affected by many factors,
including:
·
quality
and nature of tenants;
·
tenant
concentration — i.e., predominantly high tech firms, law firms, government
agencies, etc.;
·
the
physical condition of the property;
·
the
types of services and amenities
provided;
·
changes
in the surrounding neighborhood;
and
·
availability
of alternative office space.
The
performance of a commercial loan secured by one or more industrial properties
and the value of the related mortgaged property may be affected by many factors,
including:
·
the
design and adaptability of the
building;
·
success
or failure of the business of the tenant, which is frequently the
sole
tenant of the property;
·
availability
of alternative space; and
·
quality
of the local and regional transportation
system.
The
value of a commercial, multifamily or mixed-use property may also be affected
by
a variety of other factors. In general, such factors as location, changing
demographics or traffic patterns, increases in operating expenses, competitive
factors and economic conditions generally, among others, may affect the value
of
a commercial property.
Hospitals,
nursing homes and other health care properties may receive a substantial portion
of their revenues from government programs, which are subject to statutory
and
regulatory changes and funding limitations. With respect to commercial,
multifamily and mixed-use loans generally, such factors as the management skill,
experience and financial resources of the operator (which may be other than
the
borrower), national and regional economic conditions and other factors may
affect the ability of borrowers to make payments when due.
Unimproved
land generates no current income to support payment of the related mortgage
loan
and other expenses, may prove to be unsuitable for its intended purpose and
may
be difficult to sell for an amount at least equal to the unpaid principal
balance of the related loan.
Leasehold
mortgages are subject to risks not associated with mortgage loans secured by
a
lien on the fee estate of a borrower. If the borrower’s leasehold were to be
terminated upon a lease default, the leasehold mortgagee would lose its
security. However, such leases generally require the lessor to give the
leasehold mortgagee notice of lessee defaults and an opportunity to cure them,
and permit the leasehold estate to be assigned to and by the leasehold
mortgagee.
The
risk
that a mortgaged property may be, or become, contaminated with hazardous
materials is greater with respect to commercial and mixed-use loans than with
respect to residential mortgage loans. Under the laws of certain states,
contamination of a property may
14
give
rise to a lien on the property to assure the
costs of cleanup. In several states, such a lien has priority over the lien
of
an existing mortgage against such property. In addition, under the laws of
some
states and under the federal Comprehensive Environmental Response, Compensation
and Liability Act of 1980 (“CERCLA“), a lender may be liable, as an “owner” or
“operator,” for costs of addressing releases or threatened releases of hazardous
substances that require remedy at a property, if agents or employees of the
lender have become sufficiently involved in the operations of the borrower,
regardless of whether or not the environmental damage or threat was caused
by a
prior owner. See “Certain Legal Aspects of the Mortgage Loans — Environmental
Considerations.” A lender also risks such liability on foreclosure of the
mortgage. Any such lien arising with respect to a mortgaged property would
adversely affect the value of that mortgaged property and could make
impracticable the foreclosure on that mortgaged property in the event of a
default by the related borrower. In addition, certain environmental laws impose
liability for releases of asbestos into the air. Third parties may seek recovery
from owners or operators of real property for personal injury associated with
exposure to asbestos, lead paint, radon or other hazardous substances. Property
owners in some areas have been subject to liability claims associated with
mold.
Contracts
General
To
the
extent provided in the prospectus supplement, each contract will be secured
by a
security interest in a new or used manufactured home, called a Manufactured
Home. The contracts may include contracts that are FHA loans. The method of
computing the Loan-to-Value Ratio of a contract will be described in the
prospectus supplement.
Contract
Information in Prospectus Supplements
Each
prospectus supplement relating to an issuing entity whose assets include a
substantial proportion of contracts will contain certain information, as of
the
dates specified in that prospectus supplement and to the extent then applicable
and specifically known to the depositor, with respect to any contracts,
including:
·
the
total outstanding principal balance and the largest, smallest and
average
outstanding principal balance of the contracts as of the applicable
cut-off date;
·
whether
the manufactured homes were new or used as of the origination of
the
related contracts;
·
the
weighted average, by principal balance, of the original and remaining
terms to maturity of the contracts;
·
the
range of maturity dates of the
contracts;
·
the
range of the Loan-to-Value Ratios at origination of the
contracts;
·
the
annual percentage rate on each contract, called a contract rate,
or range
of contract rates and the weighted average contract rate borne by
the
contracts;
·
the
state or states in which most of the manufactured homes are located
at
origination;
·
information
regarding the prepayment provisions, if any, of the
contracts;
15
·
for
contracts with adjustable contract rates, referred to as 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;
·
the
number of contracts that are delinquent and the number of days or
ranges
of the number of days those contracts are
delinquent;
·
information
regarding the payment characteristics of the contracts;
and
·
the
material underwriting standards used for the
contracts.
If
specific information respecting the contracts is unknown to the depositor at
the
time the Notes or Certificates, as applicable, 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
that will be available to purchasers of the related Notes or Certificates,
as
applicable, at or before the initial issuance thereof and will be filed as
part
of a Current Report on Form 8-K with the Commission within fifteen days after
the related initial issuance. The characteristics of the contracts included
in
an issuing entity will not vary by more than five percent (by total principal
balance as of the cut-off date) from the characteristics thereof that are
described in the prospectus supplement.
The
information described above regarding the contracts in an issuing entity may
be
presented in the prospectus supplement in combination with similar information
regarding the mortgage loans in the issuing entity.
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 some other interval as is specified in the
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 a contract rate that is fixed over its term
or that adjusts from time to time, or as otherwise specified in the prospectus
supplement. 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 prospectus supplement.
Agency
Securities
The
Agency Securities will consist of any combination of Ginnie Mae certificates,
Fannie Mae certificates and Freddie Mac certificates, which may include Stripped
Agency Securities, as described below.
Ginnie
Mae
Ginnie
Mae is a wholly-owned corporate instrumentality of the United States within
the
Department of Housing and Urban Development. Section 306(g) of Title III of
the
Housing Act authorizes Ginnie Mae to guarantee the timely payment of the
principal of and interest on certificates that are based on and backed by a
pool
of FHA loans, VA loans or by pools of other eligible residential
loans.
Section
306(g) of the Housing Act provides that “the full faith and credit of the United
States is pledged to the payment of all amounts that may be required to be
paid
under any
16
guaranty
under this subsection.” To meet its
obligations under that guaranty, Ginnie Mae is authorized, under Section 306(d)
of the National Housing Act of 1934 (the “Housing Act”), to borrow from the
United States Treasury with no limitations as to amount, to perform its
obligations under its guarantee.
Ginnie
Mae Certificates
Each
Ginnie Mae certificate will be a “fully modified pass-through” mortgage-backed
certificate issued and serviced by an issuer approved by Ginnie Mae or Fannie
Mae as a seller-servicer of FHA loans or VA loans, except as described below
regarding Stripped Agency Securities (as defined below). The loans underlying
Ginnie Mae certificates may consist of FHA loans, VA loans and other loans
eligible for inclusion in loan pools underlying Ginnie Mae certificates. The
mortgage loans may be secured by Manufactured Homes, Single Family Property
or
Multifamily Property. Ginnie Mae certificates may be issued under either
or both of the Ginnie Mae I program and the Ginnie Mae II program, as described
in the prospectus supplement. If the issuing entity includes Ginnie Mae
certificates, your prospectus supplement will include any material additional
information regarding the Ginnie Mae guaranty program, the characteristics
of
the pool underlying those Ginnie Mae certificates, the servicing of the related
pool, the payment of principal and interest on Ginnie Mae certificates and
other
relevant matters regarding the Ginnie Mae certificates.
Except
as
otherwise specified in the prospectus supplement or as described below with
respect to Stripped Agency Securities, each Ginnie Mae certificate will provide
for the payment, by or on behalf of the issuer, to the registered holder of
that
Ginnie Mae certificate of monthly payments of principal and interest equal
to
the holder’s proportionate interest in the total amount of the monthly principal
and interest payments on each related FHA loan or VA loan, minus servicing
and
guaranty fees totaling the excess of the interest on that FHA loan or VA loan
over the Ginnie Mae certificates’ interest rate. In addition, each payment to a
holder of a Ginnie Mae certificate will include proportionate pass-through
payments to that holder of any prepayments of principal of the FHA loans or
VA
loans underlying the Ginnie Mae certificate and the holder’s proportionate
interest in the remaining principal balance in the event of a foreclosure or
other disposition of any related FHA loan or VA loan.
The
Ginnie Mae certificates do not constitute a liability of, or evidence any
recourse against, the issuer of the Ginnie Mae certificates, the depositor
or
any affiliates of the depositor, and the only recourse of a registered holder
(for example, the trustee) is to enforce the guaranty of Ginnie
Mae.
Ginnie
Mae will have approved the issuance of each of the Ginnie Mae certificates
included in an issuing entity in accordance with a guaranty agreement or
contract between Ginnie Mae and the issuer of the Ginnie Mae certificates.
Pursuant to that agreement, that issuer, in its capacity as servicer, is
required to perform customary functions of a servicer of FHA loans and VA loans,
including collecting payments from borrowers and remitting those collections
to
the registered holder, maintaining escrow and impoundment accounts of borrowers
for payments of taxes, insurance and other items required to be paid by the
borrower, maintaining primary hazard insurance, and advancing from its own
funds
to make timely payments of all amounts due on the Ginnie Mae certificate, even
if the payments received by that issuer on the loans backing the Ginnie Mae
certificate are less than the amounts due. If the issuer is unable to make
payments on a Ginnie Mae certificate as they become due, it must promptly notify
Ginnie Mae and request Ginnie Mae to make that payment. Upon that notification
and request, Ginnie Mae will make those payments directly to the registered
holder of the Ginnie Mae certificate. In the event no payment is made by the
issuer and the issuer fails to notify and request Ginnie Mae to make that
payment, the registered holder of the Ginnie Mae certificate has recourse
against only Ginnie Mae to obtain that payment. The trustee or its nominee,
as
registered holder of the Ginnie Mae certificates
17
included
in an issuing entity, is entitled to proceed
directly against Ginnie Mae under the terms of the guaranty agreement or
contract relating to the Ginnie Mae certificates for any amounts that are unpaid
when due under each Ginnie Mae certificate.
The
Ginnie Mae certificates included in an issuing entity may have other
characteristics and terms, different from those described above so long as
the
Ginnie Mae certificates and underlying residential loans meet the criteria
of
the rating agency or agencies. The Ginnie Mae certificates and underlying
residential loans will be described in the prospectus supplement.
Fannie
Mae
Fannie
Mae is a federally chartered and stockholder-owned corporation organized and
existing under the Federal National Mortgage Association Charter Act, as amended
(the “Charter Act”). Fannie Mae was originally established in 1938 as a United
States government agency to provide supplemental liquidity to the mortgage
market and was transformed into a stockholder-owned and privately managed
corporation by legislation enacted in 1968.
Fannie
Mae provides funds to the mortgage market by purchasing mortgage loans from
lenders. Fannie Mae acquires funds to purchase loans from many capital market
investors, thus expanding the total amount of funds available for housing.
Operating nationwide, Fannie Mae helps to redistribute mortgage funds from
capital-surplus to capital-short areas. In addition, Fannie Mae issues
mortgage-backed securities primarily in exchange for pools of mortgage loans
from lenders. Fannie Mae receives fees for its guaranty of timely payment of
principal and interest on its mortgage-backed securities.
Fannie
Mae Certificates
Fannie
Mae certificates are Guaranteed Mortgage Pass-Through Certificates typically
issued pursuant to a prospectus that is periodically revised by Fannie Mae.
Fannie Mae certificates represent fractional undivided interests in a pool
of
mortgage loans formed by Fannie Mae. Each mortgage loan must meet the applicable
standards of the Fannie Mae purchase program. Mortgage loans comprising a pool
are either provided by Fannie Mae from its own portfolio or purchased pursuant
to the criteria of the Fannie Mae purchase program. Mortgage loans underlying
Fannie Mae certificates included in an issuing entity will consist of
conventional mortgage loans secured by Single Family Property or Multifamily
Property, FHA loans, or VA loans. If the issuing entity includes Fannie Mae
certificates, your prospectus supplement will include any material additional
information regarding the Fannie Mae program, the characteristics of the pool
underlying the Fannie Mae certificates, the servicing of the related pool,
payment of principal and interest on the Fannie Mae certificates and other
relevant matters about the Fannie Mae certificates.
Except
as
described below with respect to Stripped Agency Securities, Fannie Mae
guarantees to each registered holder of a Fannie Mae certificate that it will
distribute amounts representing that holder’s proportionate share of scheduled
principal and interest at the applicable interest rate provided for by that
Fannie Mae certificate on the underlying mortgage loans, whether or not
received, and that holder’s proportionate share of the full principal amount of
any prepayment or foreclosed or other finally liquidated mortgage loan, whether
or not the related principal amount is actually recovered.
The
obligations of Fannie Mae under its guarantees are obligations solely of Fannie
Mae and are not backed by, nor entitled to, the full faith and credit of the
United States. If Fannie Mae were unable to satisfy those obligations,
distributions to the holders of Fannie Mae certificates would consist solely
of
payments and other recoveries on the underlying loans and, accordingly,
18
monthly
distributions to the holders of Fannie Mae
certificates would be affected by delinquent payments and defaults on those
loans.
Fannie
Mae certificates evidencing interests in pools of mortgage loans formed on
or
after May 1, 1985 (other than Fannie Mae certificates backed by pools containing
graduated payment mortgage loans or multifamily loans) are available in
book-entry form only. For a Fannie Mae certificate issued in book-entry form,
distributions on the Fannie Mae certificate will be made by wire, and for a
fully registered Fannie Mae certificate, distributions will be made by
check.
The
Fannie Mae certificates included in an issuing entity may have other
characteristics and terms, different from those described above, as long as
the
Fannie Mae certificates and underlying mortgage loans meet the criteria of
the
rating agency or agencies rating the Certificates. The Fannie Mae certificates
and underlying mortgage loans will be described in the prospectus
supplement.
Freddie
Mac
Freddie
Mac is a corporate instrumentality of the United States created pursuant to
Title III of the Emergency Home Finance Act of 1970, as amended (the “Freddie
Mac Act”). Freddie Mac was established primarily for the purpose of increasing
the availability of mortgage credit for the financing of needed housing. It
seeks to provide an enhanced degree of liquidity for residential mortgage
investments primarily by assisting in the development of secondary markets
for
conventional mortgages. The principal activity of Freddie Mac currently consists
of the purchase of first lien, conventional residential mortgage loans or
participation interests in those mortgage loans and the resale of the mortgage
loans so purchased in the form of mortgage securities, primarily Freddie Mac
certificates. Freddie Mac is confined to purchasing, so far as practicable,
mortgage loans and participation interests in mortgage loans which it deems
to
be of the quality, type and class as to meet generally the purchase standards
imposed by private institutional mortgage investors.
Freddie
Mac Certificates
Each
Freddie Mac certificate represents an undivided interest in a pool of
residential loans that may consist of first lien conventional residential loans,
FHA loans or VA loans (the “Freddie Mac Certificate Group”). Each of these
mortgage loans must meet the applicable standards set forth in the Freddie
Mac
Act. A Freddie Mac Certificate Group may include whole loans, participation
interests in whole loans and undivided interests in whole loans and/or
participations comprising another Freddie Mac Certificate Group. If the issuing
entity includes Freddie Mac certificates, your prospectus supplement will
include any material additional information regarding the Freddie Mac guaranty
program, the characteristics of the pool underlying that Freddie Mac
certificate, the servicing of the related pool, payment of principal and
interest on the Freddie Mac certificate and any other relevant matters about
the
Freddie Mac certificates.
Except
as
described below with respect to Stripped Agency Securities, Freddie Mac
guarantees to each registered holder of a Freddie Mac certificate the timely
payment of interest on the underlying mortgage loans to the extent of the
applicable interest rate on the registered holder’s pro rata share of the unpaid
principal balance outstanding on the underlying mortgage loans in the Freddie
Mac Certificate Group represented by that Freddie Mac certificate, whether
or
not received. Freddie Mac also guarantees to each registered holder of a Freddie
Mac certificate collection by that holder of all principal on the underlying
mortgage loans, without any offset or deduction, to the extent of that holder’s
pro rata share of the principal, but does not, except if and to the extent
specified in the prospectus supplement, guarantee the timely payment of
scheduled principal. Pursuant to its guarantees, Freddie Mac also guarantees
ultimate collection of scheduled principal payments, prepayments of principal
and the remaining principal balance in the
19
event
of a foreclosure or other disposition of a
mortgage loan. Freddie Mac may remit the amount due on account of its guarantee
of collection of principal at any time after default on an underlying mortgage
loan, but not later than 30 days following the latest of
(1) foreclosure
sale;
(2) payment
of the claim by any mortgage insurer; and
(3) the
expiration of any right of redemption, but in any event no later than one year
after demand has been made upon the borrower for accelerated payment of
principal.
In
taking
actions regarding the collection of principal after default on the mortgage
loans underlying Freddie Mac certificates, including the timing of demand for
acceleration, Freddie Mac reserves the right to exercise its servicing judgment
for the mortgage loans in the same manner as for mortgage loans that it has
purchased but not sold. The length of time necessary for Freddie Mac to
determine that a mortgage loan should be accelerated varies with the particular
circumstances of each borrower, and Freddie Mac has not adopted servicing
standards that require that the demand be made within any specified
period.
Freddie
Mac certificates are not guaranteed by the United States or by any Federal
Home
Loan Bank and do not constitute debts or obligations of the United States or
any
Federal Home Loan Bank. The obligations of Freddie Mac under its guarantee
are
obligations solely of Freddie Mac and are not backed by, nor entitled to, the
full faith and credit of the United States. If Freddie Mac were unable to
satisfy those obligations, distributions to holders of Freddie Mac certificates
would consist solely of payments and other recoveries on the underlying mortgage
loans and, accordingly, monthly distributions to holders of Freddie Mac
certificates would be affected by delinquent payments and defaults on those
mortgage loans.
The
Freddie Mac certificates included in an issuing entity may have other
characteristics and terms, different from those described above, so long as
the
Freddie Mac certificates and underlying mortgage loans meet the criteria of
the
rating agency or agencies rating the Notes or Certificates, as applicable.
The
Freddie Mac certificates and underlying mortgage loans will be described in
the
prospectus supplement.
Stripped
Agency Securities
The
Ginnie Mae certificates, Fannie Mae certificates or Freddie Mac certificates
may
be issued in the form of certificates (“Stripped Agency Securities”) that
represent an undivided interest in all or part of either the principal
distributions (but not the interest distributions) or the interest distributions
(but not the principal distributions), or in some specified portion of the
principal or interest distributions (but not all of those distributions), on
an
underlying pool of mortgage loans or other Ginnie Mae certificates, Fannie
Mae
certificates or Freddie Mac certificates. Ginnie Mae, Fannie Mae or Freddie
Mac,
as applicable, will guarantee each Stripped Agency Security to the same extent
as that entity guarantees the underlying securities backing the Stripped Agency
Securities or to the extent described above for a Stripped Agency Security
backed by a pool of mortgage loans, unless otherwise specified in the prospectus
supplement. If the issuing entity includes Stripped Agency Securities, your
prospectus supplement will include any material additional information regarding
the characteristics of the assets underlying the Stripped Agency Securities,
the
payments of principal and interest on the Stripped Agency Securities and other
relevant matters about the Stripped Agency Securities.
20
Mortgage
Securities
The
Mortgage Securities will represent beneficial interests in loans of the type
that would otherwise be eligible to be mortgage loans, unsecured home
improvement loans, contract or Agency Securities, or collateralized obligations
secured by mortgage loans, unsecured home improvement loans, contract or Agency
Securities. Although individual Underlying Loans may be insured or guaranteed
by
the United States or an agency or instrumentality of the United States, they
need not be, and Mortgage Securities themselves will not be so insured or
guaranteed. Except as otherwise set forth in the prospectus supplement, Mortgage
Securities will generally be similar to Notes or Certificates, as applicable,
offered under this prospectus.
The
depositor will register the offering of the relevant Mortgage Securities as
a
primary offering of such securities, unless the Mortgage Securities are
themselves exempt from registration under the Securities Act. The offering
of
Mortgage Securities included in a trust fund will not be separately registered
if all of the following are true:
(1)
neither the issuer of the Mortgage Securities nor any of its affiliates has
a
direct or indirect agreement, arrangement, relationship or understanding,
written or otherwise, relating to the Mortgage Securities and the related trust
fund;
(2)
neither the issuer of the Mortgage Securities nor any of its affiliates is
an
affiliate of the depositor, sponsor, issuing entity or any underwriter relating
to such trust fund and series of securities; and
(3)
the
depositor would be free to publicly resell the Mortgage Securities without
registration under the Securities Act.
If
all
the conditions for the Mortgage Securities described above are not met, the
offering of the relevant Mortgage Securities itself will be registered as a
primary offering of such securities under the Securities Act.
The
prospectus supplement for the Notes or Certificates, as applicable, of each
series evidencing interests in an issuing entity including Mortgage Securities
will include a description of the Mortgage Securities and any related credit
enhancement, and the related mortgage loans, unsecured home improvement loans,
contracts, or Agency Securities will be described together with any other
mortgage loans or Agency Securities included in the issuing entity of that
series. As used in this prospectus, the terms “mortgage loans,” unsecured home
improvement loans, contracts, include the mortgage loans, unsecured home
improvement loans, contracts, as applicable, underlying the Mortgage Securities
in your issuing entity. References in this prospectus to advances to be made
and
other actions to be taken by the master servicer in connection with the Assets
may include any advances made and other actions taken pursuant to the terms
of
the applicable Mortgage Securities.
FHA
Loans and VA Loans
FHA
loans
will be insured by the FHA as authorized under the Housing Act, and the United
States Housing Act of 1937, as amended. One- to four-family FHA loans will
be
insured under various FHA programs including the standard FHA 203-b programs
to
finance the acquisition of one- to four-family housing units and the FHA 245
graduated payment mortgage program. The FHA loans generally require a minimum
down payment of approximately 5% of the original principal amount of the FHA
loan. No FHA loan may have an interest rate or original principal balance
exceeding the applicable FHA limits at the time of origination of that FHA
loan.
21
Mortgage
loans, unsecured home improvement loans, contracts, that are FHA loans are
insured by the FHA (as described in the prospectus supplement, up to an amount
equal to 90% of the sum of the unpaid principal of the FHA loan, a portion
of
the unpaid interest and other liquidation costs) pursuant to Title I of the
Housing Act.
There
are
two primary FHA insurance programs that are available for multifamily loans.
Sections 221(d)(3) and (d)(4) of the Housing Act allow HUD to insure multifamily
loans that are secured by newly constructed and substantially rehabilitated
multifamily rental projects. Section 244 of the Housing Act provides for
co-insurance of those loans made under Sections 221(d)(3) and (d)(4) by HUD/FHA
and a HUD-approved co-insurer. Generally the term of this type of multifamily
loan may be up to 40 years and the ratio of the loan amount to property
replacement cost can be up to 90%.
Section
223(f) of the Housing Act allows HUD to insure multifamily loans made for the
purchase or refinancing of existing apartment projects that are at least three
years old. Section 244 also provides for co-insurance of mortgage loans made
under Section 223(f). Under Section 223(f), the loan proceeds cannot be used
for
substantial rehabilitation work, but repairs may be made for up to, in general,
the greater of 15% of the value of the project and a dollar amount per apartment
unit established from time to time by HUD. In general the loan term may not
exceed 35 years and a loan-to-value ratio refinancing of a project.
VA
loans
will be partially guaranteed by the VA under the Servicemen’s Readjustment Act
of 1944, as amended (the “Servicemen’s Readjustment Act”). The Servicemen’s
Readjustment Act permits a veteran (or in some instances the spouse of a
veteran) to obtain a mortgage loan guarantee by the VA covering mortgage
financing of the purchase of a one- to four-family dwelling unit at interest
rates permitted by the VA. The program has no mortgage loan limits, requires
no
down payment from the purchasers and permits the guarantee of mortgage loans
of
up to 30 years’ duration. However, no VA loan will have an original principal
amount greater than five times the partial VA guarantee for that VA loan. The
maximum guarantee that may be issued by the VA under this program will be set
forth in the prospectus supplement.
Pre-Funding
Accounts
To
the
extent provided in a prospectus supplement, a portion of the proceeds of the
issuance of Notes or Certificates, as applicable, may be deposited into an
account maintained with the trustee (a “Pre-Funding Account”). In that case, the
depositor will be obligated to sell at a predetermined price - and the issuing
entity for the related series of Notes or Certificates, as applicable, will
be
obligated to purchase - additional Assets (the “Subsequent Assets”) from time to
time, and as frequently as daily, within the period (not to exceed three months)
specified in the prospectus supplement (the “Pre-Funding Period”) after the
issuance of the Notes or Certificates, as applicable, having a total principal
balance approximately equal to the amount on deposit in the Pre-Funding Account
(the “Pre-Funded Amount”) for that series on the date of its issuance. The
Pre-Funded Amount for a series will be specified in the prospectus supplement,
and will not in any case exceed 50% of the proceeds of the offering of the
related Notes or Certificates, as applicable. Any Subsequent Assets will be
required to satisfy specific eligibility criteria more fully set forth in the
prospectus supplement, which criteria will be consistent with the eligibility
criteria of the Assets initially included in the issuing entity, subject to
those exceptions that are expressly stated in the prospectus supplement. In
addition, specific conditions must be satisfied before the Subsequent Assets
are
transferred into the issuing entity, for example, the delivery to the rating
agencies and to the trustee of any required opinions of counsel. See “ERISA
Considerations—Pre-Funding Accounts” for additional information regarding
Pre-Funding Accounts.
Except
as set forth in the following sentence, the
Pre-Funded Amount will be used only to purchase Subsequent Assets. The related
pooling and servicing agreement or other agreement
22
providing
for the transfer of Subsequent Assets will generally provide that the transfers
must be made within up to three months (with respect to any series of Notes
or
Certificates) or up to, but not in excess of, one year (with respect to any
series of Notes or Certificates) after the Closing Date, and that 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 Notes or
Certificates, as applicable, in the amounts and in the manner specified in
the
prospectus supplement. In addition, if specified in the 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 on the Notes or Certificates, as
applicable, 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 prospectus supplement.
Amounts
deposited in the Pre-Funding and Capitalized Interest Accounts will be permitted
to be invested, pending application, only in eligible investments authorized
by
each applicable rating agency.
Accounts
Each
issuing entity will include one or more accounts, established and maintained
on
behalf of the securityholders into which the person or persons designated in
the
prospectus supplement will, to the extent described in this prospectus and
in
the prospectus supplement deposit all payments and collections received or
advanced with respect to the Assets and other assets in the issuing entity.
This
type of account may be maintained as an interest bearing or a non-interest
bearing account, and funds held in that account may be held as cash or invested
in some short-term, investment grade obligations, in each case as described
in
the prospectus supplement. See “Description of the Agreements—Material Terms of
the Pooling and Servicing Agreements and Underlying Servicing
Agreements—Collection Account and Related Accounts.” Such accounts will be
established so as to comply with the standards of each Rating Agency that has
rated any one or more classes of securities of the related series. Such accounts
shall be maintained as Eligible Accounts, and the funds held therein may be
held
as cash or invested in Permitted Investments. The person designated in the
prospectus supplement will have sole discretion to determine the particular
investments made so long as it complies with the investment terms of the related
pooling and servicing agreement or the related servicing agreement and
indenture. Any Permitted Investments shall not cause the depositor to register
under the Investment Company Act of 1940. Any interest or other income earned
on
funds in such accounts will be paid to the related master servicer or trustee
as
additional compensation or will be available for payments on the securities
as
provided in the prospectus supplement. If permitted by the Rating Agency or
Agencies and so specified in the related prospectus supplement, such accounts
may contain funds relating to more than one series of Certificates and may
contain other funds representing payments on mortgages owned by the related
master servicer or serviced by it on behalf of others.
Credit
Support
If
so
provided in the prospectus supplement, partial or full protection against some
defaults and losses on the Assets in the related issuing entity may be provided
to one or more classes of Notes or Certificates, as applicable, in the related
series in the form of subordination of one or more other classes of Notes or
Certificates, as applicable, in that series or by one or more other types of
credit support, for example, a letter of credit, insurance policy, guarantee,
reserve fund or another type of credit support, or a combination of these (any
of these types of coverage for the Notes or Certificates, as applicable, of
any
series, is referred to generally as “credit support”). The amount and types of
coverage, the identification of the entity providing the coverage (if
applicable) and related information for each type of credit support, if any,
will be
23
described
in the prospectus supplement for a series
of Notes or Certificates, as applicable. See “Description of Credit
Support.”
Cash
Flow Agreements
If
so
provided in the prospectus supplement, the issuing entity may include guaranteed
investment contracts pursuant to which moneys held in the funds and accounts
established for the related series will be invested at a specified rate. The
issuing entity may also include one or more of only the following types of
agreements: interest rate swap agreements, interest rate cap or floor
agreements, currency swap agreements provided to reduce the effects of interest
rate or currency exchange rate fluctuations on the Assets or on one or more
classes of Notes or Certificates, as applicable. (Currency swap agreements
might
be included in the issuing entity if some or all of the Assets were denominated
in a non-United States currency.) The principal terms of any related
guaranteed investment contract or other agreement (any of these types of
agreement, a “Cash Flow Agreement”), including provisions relating to the
timing, manner and amount of payments under these documents and provisions
relating to the termination of these documents, will be described in the
prospectus supplement for the related series. In addition, the prospectus
supplement will provide information with respect to the borrower under any
Cash
Flow Agreement.
Use
of Proceeds
The
net
proceeds to be received from the sale of the Notes or Certificates, as
applicable, will be applied by the depositor to the purchase of Assets, or
the
repayment of the financing incurred in that purchase, and to pay for some of
the
expenses incurred in connection with that purchase of Assets and sale of Notes
or Certificates, as applicable. The depositor expects to sell the Notes or
Certificates, as applicable, from time to time, but the timing and amount of
offerings of Notes or Certificates, as applicable, 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 securityholder,
the
Interest 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 issuing entity (which may be affected by prepayments, defaults,
liquidations or repurchases).
Interest
Rate
Notes
or
Certificates, as applicable, of any class within a series may have fixed,
variable or adjustable Interest Rates, which may or may not be based upon the
interest rates borne by the Assets in the related issuing entity. The prospectus
supplement for any series will specify the Interest Rate for each class of
Notes
or Certificates, as applicable, or, in the case of a variable or adjustable
Interest Rate, the method of determining the Interest Rate; the effect, if
any,
of the prepayment of any Asset on the Interest Rate of one or more classes
of
Notes or Certificates, as applicable; and whether the distributions of interest
on the Notes or Certificates, as applicable, of any class will be dependent,
in
whole or in part, on the performance of any borrower under a Cash Flow
Agreement.
24
If
specified in the prospectus supplement, the effective yield to maturity to
each
holder of Notes or Certificates, as applicable, entitled to payments of interest
will be below that otherwise produced by the applicable Interest Rate and
purchase price of that Security because, while interest may accrue on each
Asset
during a period (each, an “Accrual Period”), the distribution of that interest
will be made on a day that may be several days, weeks or months following the
period of accrual.
Timing
of Payment of Interest
Each
payment of interest on the Notes or Certificates, as applicable, entitled to
distributions of interest (or addition to the Security Balance of a class of
Accrual Securities) will be made by or on behalf of the trustee each month
on
the date specified in the related prospectus supplement (each date, a
“Distribution Date”), and will include interest accrued during the Accrual
Period for that Distribution Date. As indicated above under “—Interest Rate,” if
the 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 those Notes or
Certificates, as applicable, may be lower than the yield that would result
if
the Accrual Period ended on the day before the Distribution Date.
Payments
of Principal; Prepayments
The
yield
to maturity on the Notes or Certificates, as applicable, will be affected by
the
rate of principal payments on the Assets (or, in the case of Mortgage Securities
and Agency Securities, the underlying assets related to the Mortgage Securities
and Agency Securities), including principal prepayments resulting from both
voluntary prepayments by the borrowers and involuntary liquidations. The rate
at
which principal prepayments occur will be affected by a variety of factors,
including the terms of the Assets (or, in the case of Mortgage Securities and
Agency Securities, the underlying assets related to the Mortgage Securities
and
Agency Securities), 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
interest rates on the Assets in a particular issuing entity (or, in the case
of
Mortgage Securities and Agency Securities, the underlying assets related to
the
Mortgage Securities and Agency Securities), those assets are likely to be the
subject of higher principal prepayments than if prevailing rates remain at
or
above the rates borne by those assets. However, you should note that some Assets
(or, in the case of Mortgage Securities and Agency Securities, the underlying
assets related to the Mortgage Securities and Agency Securities) may consist
of
loans with different interest rates. The rate of principal payment on Mortgage
Securities will also be affected by the allocation of principal payments on
the
underlying assets among the Mortgage Securities or Agency Securities and other
Mortgage Securities or Agency Securities of the same series. The rate of
principal payments on the Assets in the related issuing entity (or, in the
case
of Mortgage Securities and Agency Securities, the underlying assets related
to
the Mortgage Securities and Agency Securities) is likely to be affected by
the
existence of any Lock-out Periods and Prepayment Premium provisions of the
mortgage loans underlying or comprising those Assets, and by the extent to
which
the servicer of any of these mortgage loans is able to enforce these provisions.
Mortgage loans with a Lock-out Period or a Prepayment Premium provision, to
the
extent enforceable, generally would be expected to experience a lower rate
of
principal prepayments than otherwise identical mortgage loans without those
provisions, with shorter Lock-out Periods or with lower Prepayment
Premiums.
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 small effect on the amount of
25
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 some 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 (or, in the case of Mortgage
Securities and Agency Securities, the underlying assets related to the Mortgage
Securities and Agency Securities), 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 (or, in the case of Mortgage Securities and Agency Securities, the
underlying assets related to the Mortgage Securities and Agency Securities),
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 Notes or
Certificates, as applicable, the effect on yield on one or more classes of
the
Notes or Certificates, as applicable, of that series of prepayments of the
Assets in the related issuing entity may be mitigated or exacerbated by any
provisions for sequential or selective distribution of principal to those
classes.
When
a
full prepayment is made on a mortgage loan or a contract, the borrower is
charged interest on the principal amount of the mortgage loan or a contract
so
prepaid for the number of days in the month actually elapsed up to the date
of
the prepayment or some other period specified in the prospectus supplement.
Generally, the effect of prepayments in full will be to reduce the amount of
interest paid in the following month to holders of Notes or Certificates, as
applicable, entitled to payments of interest because interest on the principal
amount of any mortgage loan or a contract so prepaid will be paid only to the
date of prepayment rather than for a full month. A partial prepayment of
principal is applied so as to reduce the outstanding principal balance of the
related mortgage loan or a contract as of its due date in the month in which
the
partial prepayment is received or some other date as is specified in the
prospectus supplement.
The
timing of changes in the rate of principal payments on the Assets (or, in the
case of Mortgage Securities and Agency Securities, the underlying assets related
to the Mortgage Securities and Agency Securities) 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 that 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 particular period
may not be offset by a similar decrease (or increase) in the rate of principal
payments at a later time.
The
securityholder will bear the risk of not being able to reinvest principal
received from a Security at a yield at least equal to the yield on that
Security.
Prepayments—Maturity
and Weighted Average Life
The
rates
at which principal payments are received on the Assets included in or comprising
an issuing entity and the rate at which payments are made from any credit
support or Cash Flow Agreement for the related series of Notes or Certificates,
as applicable, may affect the ultimate maturity and the weighted average life
of
each class of that series. Prepayments on the mortgage loans or contracts
comprising or underlying the Assets in a particular issuing entity will
generally accelerate the rate at which principal is paid on some or all of
the
classes of the Notes or Certificates, as applicable, of the related
series.
26
If
so
provided in the prospectus supplement for a series of Notes or Certificates,
as
applicable, one or more classes of Notes or Certificates, as applicable, may
have a final scheduled Distribution Date, which is the date on or before which
the Security Balance of the class of Notes or Certificates, as applicable,
is
scheduled to be reduced to zero, calculated on the basis of the assumptions
applicable to that series. Weighted average life refers to the average amount
of
time that will elapse from the date of issue of a security until each dollar
of
principal of that security will be repaid to the investor. The weighted average
life of a class of Notes or Certificates, as applicable, of a series will be
influenced by the rate at which principal on the Assets is paid to that class,
which may be in the form of scheduled amortization or prepayments (for this
purpose, the term “prepayment” includes prepayments, in whole or in part, and
liquidations due to default).
In
addition, the weighted average life of the Notes or Certificates, as applicable,
may be affected by the varying maturities of the Assets in an issuing entity.
If
any Assets in a particular issuing entity have actual terms to maturity less
than those assumed in calculating final scheduled Distribution Dates for the
classes of Notes or Certificates, as applicable, of the related series, one
or
more classes of these Notes or Certificates, as applicable, may be fully paid
before 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 rates or contract rates and
maturities of the mortgage loans or contracts comprising or underlying those
Assets. See “Description of the Issuing Entities.”
Prepayments
on loans are also commonly measured relative to a prepayment standard or model,
such as the Constant Prepayment Rate (“CPR”) prepayment model or the Standard
Prepayment Assumption (“SPA”) 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 those loans. SPA represents an
assumed rate of prepayment each month relative to the then outstanding principal
balance of a pool of loans. A prepayment assumption of 100% of SPA assumes
prepayment rates of 0.2% per annum of the then outstanding principal balance
of
those loans in the first month of the life of the loans and an additional 0.2%
per annum in each month thereafter until the thirtieth month. Starting in the
thirtieth month and in each month thereafter during the life of the loans,
100%
of SPA assumes a constant prepayment rate of 6% per annum each
month.
Neither
CPR nor SPA nor any other prepayment model or assumption purports to be 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 for each series of Notes or Certificates, as applicable,
may contain tables, if applicable, setting forth the projected weighted average
life of each class of Offered Notes or Certificates, as applicable, of that
series and the percentage of the initial Security Balance of each class that
would be outstanding on specified Distribution Dates based on the assumptions
stated in the 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, SPA or some other standard
specified in the prospectus supplement. These tables and assumptions are
intended to illustrate the sensitivity of the weighted average life of the
Notes
or Certificates, as applicable, 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 Notes or Certificates, as
applicable. 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, SPA or any other rate specified in the prospectus
supplement.
27
Other
Factors Affecting Weighted Average Life
Type
of Loan
Mortgage
Loans secured by Multifamily Properties may have provisions that prevent
prepayment for a number of years and may provide for payments of interest only
during a certain period followed by amortization of principal on the basis
of a
schedule extending beyond the maturity of the related mortgage loan. There
can
be no assurance as to the respective rates of prepayment of these mortgage
loans
in either stable or changing interest rate environments.
Type
of Asset
If
specified in the prospectus supplement, a number of mortgage loans may have
balloon payments due at maturity (which, based on the amortization schedule
of
those mortgage loans, may be a substantial amount), and because the ability
of a
borrower to make a balloon payment typically will depend on 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 real estate values, the borrower’s
financial situation, prevailing mortgage loan interest rates, the borrower’s
equity in the related Mortgaged Property, tax laws and prevailing general
economic conditions. Neither the depositor, the servicer, the master servicer,
nor any of their affiliates will be obligated to refinance or repurchase any
mortgage loan or to sell the Mortgaged Property except to the extent provided
in
the prospectus supplement. In the case of defaults, recovery of proceeds may
be
delayed by, among other things, bankruptcy of the borrower or adverse conditions
in the market where the property is located. To minimize losses on defaulted
mortgage loans, the servicer may 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 Notes or Certificates, as applicable,
and may thus lengthen the period of time elapsed from the date of issuance
of a
Security until it is retired.
For
some
mortgage loans, including ARM Loans, the mortgage rate at origination may be
below the rate that would result if the index and margin relating to the
mortgage loan were applied at origination. For some contracts, the contract
rate
may be stepped up during its terms or may otherwise vary or be adjusted. Under
the applicable underwriting standards, the borrower under each mortgage loan
or
contract generally will be qualified on the basis of the mortgage rate or
contract rate in effect at origination. The repayment of any of these mortgage
loans or contracts may therefore be dependent on the ability of the borrower
to
make larger level monthly payments following the adjustment of the mortgage
rate
or contract rate. In addition, some mortgage loans may be subject to temporary
buydown plans (“Buydown Mortgage Loans”) pursuant to which the monthly payments
made by the borrower during the early years of the mortgage loan will be less
than the scheduled monthly payments on the mortgage loan (the “Buydown Period”).
The periodic increase in the amount paid by the borrower of a Buydown Mortgage
Loan during or at the end of the applicable Buydown Period may create a greater
financial burden for the borrower, who might not have otherwise qualified for
a
mortgage, and may accordingly increase the risk of default for the related
mortgage loan.
The
mortgage rates on some 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 rates are generally lower than the sum of the applicable
index
at origination and the related margin over that index at which interest
accrues), the amount of interest accruing on the principal balance of those
mortgage loans may exceed the amount of the minimum scheduled monthly payment
on
the mortgage loans. As a result, a portion of the accrued interest on negatively
amortizing mortgage loans may be added to
28
the
principal balance of those mortgage loans and
will bear interest at the applicable mortgage rate. The addition of any deferred
interest to the principal balance of any related class or classes of Notes
or
Certificates, as applicable, will lengthen the weighted average life of those
Notes or Certificates, as applicable, and may adversely affect yield to holders
of those Notes or Certificates, as applicable, depending on the price at which
those Notes or Certificates, as applicable, were purchased. In addition, for
some ARM Loans subject to negative amortization, during a period of declining
interest rates, it might be expected that each minimum scheduled monthly payment
on this type of mortgage loan would exceed the amount of scheduled principal
and
accrued interest on the principal balance of that mortgage loan, and since
that
excess will be applied to reduce the principal balance of the related class
or
classes of Notes or Certificates, as applicable, the weighted average life
of
those Notes or Certificates, as applicable, will be reduced and may adversely
affect yield to holders of those Notes or Certificates, as applicable, depending
on the price at which those Notes or Certificates, as applicable, were
purchased.
As
may be
described in the prospectus supplement, the related 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 HELOCs during a specified period (rather than used to fund payments
of principal to securityholders during that period) with the result that the
related Notes or Certificates, as applicable, possess an interest-only period,
also commonly referred to as a revolving period, which will be followed by
an
amortization period. Any of these interest-only or revolving periods may, upon
the occurrence of particular events to be described in the prospectus
supplement, terminate before the end of the specified period and result in
the
earlier than expected amortization of the related Notes or Certificates, as
applicable.
In
addition, and as may be described in the prospectus supplement, the related
Agreement may provide that all or some of this collected principal may be
retained by the trustee (and held in specific temporary investments, including
mortgage loans) for a specified period before being used to fund payments of
principal to securityholders.
The
result of the retention and temporary investment by the trustee of this
principal would be to slow the amortization rate of the related Notes or
Certificates, as applicable, relative to the amortization rate of the related
mortgage loans, or to attempt to match the amortization rate of the related
Notes or Certificates, as applicable, to an amortization schedule established
at
the time the Notes or Certificates, as applicable, are issued. Any similar
feature applicable to any Notes or Certificates, as applicable, may end on
the
occurrence of events to be described in the prospectus supplement, resulting
in
the current funding of principal payments to the related securityholders and
an
acceleration of the amortization of these Notes or Certificates, as
applicable.
Termination
If
specified in the prospectus supplement, a series of Notes or Certificates,
as
applicable, may be subject to optional early termination through the repurchase
of the Assets in the related issuing entity by the party specified in the
prospectus supplement, on any date on which the total Security Balance of the
Notes or Certificates, as applicable, of that series declines to a percentage
specified in the prospectus supplement (generally not to exceed 10%) of the
Initial Security Balance, under the circumstances and in the manner set forth
therein. In addition, if so provided in the prospectus supplement, some classes
of Notes or Certificates, as applicable, 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 Notes or
Certificates, as applicable. In general,
29
defaults
on mortgage loans or contracts are expected
to occur with greater frequency in their early years. The rate of default on
mortgage loans that 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 or contracts will be affected
by
the general economic condition of the region of the country in which the related
Mortgaged 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.
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 Notes or Certificates,
as applicable.
Refinancing
At
the
request of a borrower, the servicer may allow the refinancing of a mortgage
loan
or contract in any issuing entity by accepting prepayments on the mortgage
loan
and permitting a new loan secured by a mortgage on the same property. In the
event of that refinancing, the new loan would not be included in the related
issuing entity and, therefore, that 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. These
programs may include 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 those mortgage loans or contracts.
Due-on-Sale
Clauses
Acceleration
of mortgage payments as a result of 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, other than
FHA
loans and VA loans, 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.
For
any
mortgage loans, except as set forth in the prospectus supplement, 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 that 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
30
the
servicer upon any 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
some cases, the transfer may be made by a delinquent borrower 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
related contract, the servicer’s ability to do so will depend on the
enforceability under state law of the due-on-sale clause.
Static
Pool Information
For
each
mortgage pool, the issuing entity will provide static pool information with
respect to the experience of the sponsor, or other appropriate entity, in
securitizing asset pools of the same type to the extent material.
With
respect to each series of securities, the information referred to in this
section will be provided through an internet web site at the address disclosed
in the related prospectus supplement.
The
Sponsor
The
sponsor will be DB Structured Products, Inc., a Delaware corporation, referred
to herein as the Sponsor, for each series of securities unless otherwise
indicated in the related prospectus supplement. The Sponsor maintains its
principal office at 60 Wall Street, New York, New York10005. Its telephone
number is (212) 250-2500.
During
fiscal year 2005, the Sponsor and its affiliates securitized approximately
$18.4
billion of residential mortgages.
With
respect to any series of securities, if so specified in the related prospectus
supplement, the Sponsor will also act as servicer or master servicer for the
mortgage pool. If so, the Sponsor will service the Designated Mortgage Assets
in
accordance with the description of the applicable servicing procedures contained
in this prospectus under “Description of the Securities.”
The
Depositor
ACE
Securities Corp., the depositor, is a special purpose corporation incorporated
in the State of Delaware on June 3, 1998. The principal executive offices of
the
depositor are located at 6525 Morrison Boulevard, Suite 318, Charlotte, NorthCarolina28211. Its telephone number is (704) 365-0569. The depositor does
not
have, nor is it expected in the future to have, any significant
assets.
The
limited purposes of the depositor are, in general, to acquire, own and sell
mortgage loans and financial assets; to issue, acquire, own, hold and sell
securities and notes secured by or representing ownership interests in mortgage
loans and other financial assets, collections on the mortgage loans and related
assets; and to engage in any acts that are incidental to, or necessary, suitable
or convenient to accomplish, these purposes.
All
of
the shares of capital stock of the depositor are held by Altamont Holdings
Corp., a Delaware corporation.
31
Description
of the Securities
General
The
Securities issued in each series will include either asset-backed certificates
(the “Certificates”) or asset-backed notes (the “Notes”, and together with the
Certificates, the “Securities”). The Certificates of each series (including any
class of Certificates not offered by this prospectus) will represent the entire
beneficial ownership interest in the issuing entity created pursuant to the
related Agreement. The “Notes” of each series will represent indebtedness of the
related issuing entity and will be issued and secured pursuant to an indenture.
Each series of Notes or Certificates, as applicable, will consist of one or
more
of the following classes of Notes or Certificates:
Accretion
Directed
A
class of securities designated to receive principal payments primarily
from the interest that accrues on specified Accrual
Classes.
Accrual
A
class of securities where the accrued interest otherwise payable
to such
certificates or notes is allocated to specified classes of certificates
as
principal payments in reduction of their certificate principal balance
or
note principal balance. The certificate principal balance or note
principal balance of the Accrual Class will be increased to the extent
such accrued interest is so
allocated.
Companion
A
class that receives principal payments on any distribution date only
if
scheduled payments have been made on specified planned principal
classes,
targeted principal classes or scheduled principal
classes.
Component
A
class consisting of “components.” The components of a class of component
securities may have different principal and/or interest payment
characteristics but together constitute a single class. Each component
of
a class of component securities may be identified as falling into
one or
more of the categories in this
list.
Fixed
Rate
A
class with an interest rate that is fixed throughout the life of
the
class.
Floating
Rate
A
class that receives interest payments based on an interest rate that
fluctuates each payment period based on a designated index plus a
specified margin.
Interest
Only or IO
A
class of securities with no principal balance and which is not entitled
to
principal payments. Interest usually accrues based on a specified
notional
amount.
Inverse
Floating Rate
A
class of securities where the pass-through rate adjusts based on
the
excess between a specified rate and LIBOR or another
index.
32
Lock
Out
A
class of securities which is “locked out” of certain payments, usually
principal, for a specified period of
time.
Partial
Accrual
A
class that accretes a portion of the amount of accrued interest thereon,
which amount will be added to the principal balance of such class
on each
applicable distribution date, with the remainder of such accrued
interest
to be distributed currently as interest on such class. Such accretion
may
continue until a specified event has occurred or until such Partial
Accrual class is retired.
Principal
Only
A
class of securities which is not entitled to interest
payments.
Planned
Amortization Class
A
class of securities with a principal balance that is reduced based
on a
schedule of principal balances, assuming a certain range of prepayment
rates on the underlying assets.
Scheduled
Principal
A
class that is designed to receive principal payments using a predetermined
principal balance schedule but is not designated as a Planned Principal
Class or Targeted Principal Class. In many cases, the schedule is
derived
by assuming two constant prepayment rates for the underlying assets.
These
two rates are the endpoints for the “structuring range” for the scheduled
principal class.
Senior
Support
A
class that absorbs the realized losses other than excess losses that
would
otherwise be allocated to a Super Senior Class after the related
classes
of subordinated securities are no longer
outstanding.
Sequential
Pay
Classes
that receive principal payments in a prescribed sequence, that do
not have
predetermined principal balance schedules and that under all circumstances
receive payments of principal continuously from the first distribution
date on which they receive principal until they are retired. A single
class that receives principal payments before or after all other
classes
in the same series of securities may be identified as a sequential
pay
class.
Super
Senior
A
class that will not bear its proportionate share of realized losses
(other
than excess losses) as its share is directed to another class, referred
to
as the “support class” until the class principal balance of the support
class is reduced to zero.
Target
Amortization
A
class of securities with a principal balance that is reduced based
on a
scheduled of principal balances,
33
assuming a certain targeted rate of prepayments
on the
related collateral.
Variable
Rate
A
class with an interest rate that resets periodically and is calculated
by
reference to the rate or rates of interest applicable to specified
assets
or instruments (e.g., the Loan Rates borne by the underlying
loans).
If
specified in the prospectus supplement, distributions on one or more classes
of
a series of Notes or Certificates, as applicable, may be limited to collections
from a designated portion of the Assets in the related issuing entity (each
portion of the Assets, an “Asset Group”). Any of these classes may include
classes of Offered Notes or Offered Certificates, as applicable.
Each
class of Notes or Certificates, as applicable, offered by this prospectus and
the related prospectus supplement (the “Offered Notes” and the “Offered
Certificates,” respectively, and together, the “Offered Securities”) will be
issued in minimum denominations corresponding to the Security Balances or,
in
the case of some classes of Strip Securities, notional amounts or percentage
interests specified in the prospectus supplement. The transfer of any Offered
Notes or Offered Certificates, as applicable, may be registered and those Notes
or Certificates, as applicable, may be exchanged without the payment of any
service charge payable in connection with that registration of transfer or
exchange, but the depositor or the trustee or any agent of the depositor or
the
trustee may require payment of a sum sufficient to cover any tax or other
governmental charge. One or more classes of Notes or Certificates, as
applicable, of a series may be issued in fully registered, certificated form
(“Definitive Notes” or “Definitive Certificates,” and collectively, “Definitive
Securities”) or in book-entry form (“Book-Entry Notes” or “Book-Entry
Certificates,” and collectively, “Book-Entry Securities”), as provided in the
prospectus supplement. See “Description of the Securities—Book-Entry
Registration and Definitive Securities.” Definitive Notes or Definitive
Certificates, as applicable, will be exchangeable for other Notes or
Certificates, as applicable, of the same class and series of a similar total
Security Balance, notional amount or percentage interest but of different
authorized denominations.
Distributions
Distributions
on the Notes or Certificates, as applicable, of each series will be made by
or
on behalf of the trustee on each Distribution Date as specified in the
prospectus supplement from the Available Distribution Amount for that series
and
that Distribution Date. Distributions (other than the final distribution) will
be made to the persons in whose names the Notes or Certificates, as applicable,
are registered at the close of business on, unless a different date is specified
in the prospectus supplement, the last business day of the month preceding
the
month in which the Distribution Date occurs (the “Record Date”), and the amount
of each distribution will be determined as of the close of business on the
date
specified in the prospectus supplement (the “Determination Date”). All
distributions for each class of Notes or Certificates, as applicable, on each
Distribution Date will be allocated pro rata among the outstanding
securityholders in that class or by random selection or as described in the
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 for these payments, if that
securityholder has so notified the trustee or other person required to make
those payments no later than the date specified in the prospectus supplement
(and, if so provided in the prospectus supplement, holds Notes or Certificates,
as applicable, in the requisite amount specified in the prospectus supplement),
or by check mailed to the address of the person entitled to the payment as
it
appears on the Security Register; provided, however, that the final distribution
in retirement of the Notes or Certificates, as applicable, will be made only
upon presentation and surrender of the Notes or Certificates, as applicable,
at
the location specified in the notice to securityholders of that final
distribution.
34
Available
Distribution Amount
All
distributions on the Notes or Certificates, as applicable, of each series on
each Distribution Date will be made from the Available Distribution Amount
described below, subject to the terms described in the prospectus supplement.
Generally, the “Available Distribution Amount” for each Distribution Date equals
the sum of the following amounts:
(1) the
total amount of all cash on deposit in the related Collection Account as of
the
corresponding Determination Date, exclusive, unless otherwise specified in
the
prospectus supplement, of:
(a) all
scheduled payments of principal and interest collected but due on a date after
the related Due Period (unless a different period is specified in the prospectus
supplement, a “Due Period “ for any Distribution Date will begin on the second
day of the month in which the immediately preceding Distribution Date occurs,
or
the Cut-off Date in the case of the first Due 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 Premiums, all proceeds of any FHA insurance, VA Guaranty Policy
or
insurance policies to be maintained for each Asset (to the extent that 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 issuing entity (“Liquidation Proceeds”),
and other unscheduled recoveries received after the related Due Period, or
other
period specified in the prospectus supplement,
(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 prospectus supplement or that are payable in respect
of particular expenses of the related issuing entity, and
(d) all
amounts received for a repurchase of an Asset from the issuing entity for
defective documentation or a breach of representation or warranty received
after
the related Due Period, or other period specified in the prospectus
supplement;
(2) if
the 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;
(3) all
advances made by a servicer or the master servicer or any other entity as
specified in the prospectus supplement for that Distribution Date;
(4) if
and to the extent the prospectus supplement so provides, amounts paid by a
servicer or any other entity as specified in the prospectus supplement with
respect to interest shortfalls resulting from prepayments during the related
Prepayment Period; and
(5) 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 for that Distribution Date.
35
As
described below, unless otherwise specified in the prospectus supplement, the
entire Available Distribution Amount will be distributed among the related
Notes
or Certificates, as applicable (including any Notes or Certificates, as
applicable, not offered by this prospectus) on each Distribution Date, and
accordingly will be released from the issuing entity and will not be available
for any future distributions.
The
prospectus supplement for a series of Notes or Certificates, as applicable,
will
describe any variation in the calculation or distribution of the Available
Distribution Amount for that series.
Distributions
of Interest on the Securities
Each
class of Notes or Certificates, as applicable, (other than classes of Strip
Securities which have no Interest Rate), may have a different Interest Rate,
which will be a fixed, variable or adjustable rate at which interest will accrue
on that class or a component of that class (the “Interest Rate” in the case of
Certificates). The
indices applicable to variable rate and adjustable rate classes will only be
of
a type that are customarily used in the debt and fixed income markets to measure
the cost of borrowed funds and will not be indices linked to stocks or
commodities. The
prospectus supplement will specify the Interest Rate for each class or component
or, in the case of a variable or adjustable Interest Rate, the method for
determining the Interest Rate. Interest on the Notes or Certificates, as
applicable, will be calculated on the basis of a 360-day year consisting of
twelve 30-day months unless the prospectus supplement specifies a different
basis.
Distributions
of interest on the Notes or Certificates, as applicable, 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 starting only on
the
Distribution Date, or under the circumstances, specified in the prospectus
supplement, and any class of Strip Securities that are not entitled to any
distributions of interest) based on the Accrued Security Interest for that
class
and that Distribution Date, subject to the sufficiency of the portion of the
Available Distribution Amount allocable to that class on that Distribution
Date.
Before any interest is distributed on any class of Accrual Securities, the
amount of Accrued Security Interest otherwise distributable on that class will
instead be added to the Security Balance of that class on each Distribution
Date.
For
each
class of Notes or Certificates, as applicable, and each Distribution Date (other
than some classes of Strip Securities), “Accrued Security Interest” will be
equal to interest accrued during the related Accrual Period on the outstanding
Security Balance of the class of Notes or Certificates, as applicable,
immediately before the Distribution Date, at the applicable Interest Rate,
reduced as described below. Accrued Security Interest on some classes of Strip
Securities will be equal to interest accrued during the related Accrual Period
on the outstanding notional amount of the Strip Security immediately before
each
Distribution Date, at the applicable Interest Rate, reduced as described below,
or interest accrual in the manner described in the prospectus supplement. The
method of determining the notional amount for a particular class of Strip
Securities will be described in the prospectus supplement. Reference to notional
amount is solely for convenience in some of the calculations and does not
represent the right to receive any distributions of principal. Unless otherwise
provided in the prospectus supplement, the Accrued Security Interest on a series
of Notes or Certificates, as applicable, will be reduced in the event of
prepayment interest shortfalls, which are shortfalls in collections of interest
for a full accrual period resulting from prepayments before the due date in
that
accrual period on the mortgage loans or contracts comprising or underlying
the
Assets in the issuing entity for that series. The particular manner in which
these shortfalls are to be allocated among some or all of the classes of Notes
or Certificates, as applicable, of that series will be specified in the
prospectus supplement. The 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 Notes or Offered Certificates, as
applicable,
36
may
be reduced as a result of any other
contingencies, including delinquencies, losses and deferred interest on the
mortgage loans or contracts comprising or underlying the Assets in the related
issuing entity. Unless otherwise provided in the prospectus supplement, any
reduction in the amount of Accrued Security Interest otherwise distributable
on
a class of Notes or Certificates, as applicable, by reason of the allocation
to
that class of a portion of any deferred interest on the mortgage loans or
contracts comprising or underlying the Assets in the related issuing entity
will
result in a corresponding increase in the Security Balance of that class. See
“Yield Considerations.”
Distributions
of Principal of the Securities
The
Notes
or Certificates, as applicable, of each series, other than some 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 on principal
out
of the future cash flow on the Assets and other assets included in the related
issuing entity. The outstanding Security Balance of a Security will be
reduced:
·
to
the extent of distributions of principal on that Security from time
to
time and
·
if
and to the extent provided in the prospectus supplement, by the amount
of
losses incurred on the related
Assets.
The
outstanding Security Balance of a Security:
·
may
be increased in respect of deferred interest on the related mortgage
loans, to the extent provided in the prospectus supplement
and
·
in
the case of Accrual Securities, will be increased by any related
Accrued
Security Interest up until the Distribution Date on which distributions
of
interest are required to begin.
If
specified in the prospectus supplement, the initial total Security Balance
of
all classes of Notes or Certificates, as applicable, of a series will be greater
than the outstanding total principal balance of the related Assets as of the
applicable Cut-off Date. The initial total Security Balance of a series and
each
class of the series will be specified in the prospectus supplement.
Distributions of principal will be made on each Distribution Date to the class
or classes of Notes or Certificates, as applicable, in the amounts and in
accordance with the priorities specified in the prospectus supplement. Some
classes of Strip Securities with no Security Balance are not entitled to any
distributions of principal.
If
specified in the related prospectus supplement, the issuing entity may issue
notes or certificates, as applicable, from time to time and use the proceeds
of
this issuance to make principal payments with respect to a series.
Revolving
Period
The
applicable prospectus supplement may provide that all or a portion of the
principal collections may be applied by the trustee to the acquisition of
subsequent HELOCs or asset-backed or mortgage backed securities during a
specified period rather than used to distribute payments of principal to
noteholders or certificateholders, as applicable, during that period. These
notes or certificates, as applicable, would then possess an interest only
period, also commonly referred to as a “Revolving Period”, which will be
followed by an “Amortization Period”, during which principal will be paid. Any
interest only or revolving period may terminate prior to the end of the
37
specified
period and result in the earlier than
expected principal repayment of the notes or certificates, as
applicable.
Components
To
the
extent specified in the prospectus supplement, distribution on a class of Notes
or Certificates, as applicable, may be based on a combination of two or more
different components as described under “—General” above. To that 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 the component class of Notes or Certificates, as applicable. References
in
those sections to Security Balance may refer to the principal balance, if any,
of these components and reference to the Interest Rate may refer to the Interest
Rate, if any, on these components.
Distributions
on the Securities of Prepayment Premiums
If
so
provided in the prospectus supplement, Prepayment Premiums that are collected
on
the mortgage loans in the related issuing entity will be distributed on each
Distribution Date to the class or classes of Notes or Certificates, as
applicable, entitled to the distribution as described in the prospectus
supplement.
Allocation
of Losses and Shortfalls
If
so
provided in the prospectus supplement for a series of Notes or Certificates,
as
applicable, consisting of one or more classes of Subordinate Notes or
Subordinate Certificates, as applicable, on any Distribution Date in respect
of
which losses or shortfalls in collections on the Assets have been incurred,
the
amount of those losses or shortfalls will be borne first by a class of
Subordinate Notes or Subordinate Certificates, as applicable, in the priority
and manner and subject to the limitations specified in the prospectus
supplement. See “Description of Credit Support” for a description of the types
of protection that may be included in an issuing entity against losses and
shortfalls on Assets comprising that issuing entity. The prospectus supplement
for a series of Notes or Certificates, as applicable, will describe the
entitlement, if any, of a class of Notes or Certificates, as applicable, whose
Security Balance has been reduced to zero as a result of distributions or the
allocation of losses on the related Assets to recover any losses previously
allocated to that class from amounts received on the Assets. However, if the
Security Balance of a class of Notes or Certificates, as applicable, has been
reduced to zero as the result of principal distributions, the allocation of
losses on the Assets, an optional termination or an optional purchase or
redemption, that class will no longer be entitled to receive principal
distributions from amounts received on the assets of the related issuing entity,
including distributions in respect of principal losses previously allocated
to
that class.
Advances
in Respect of Delinquencies
If
so
provided in the prospectus supplement, the servicer or another entity described
in the prospectus supplement 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 related Collection Account that are not included in the
Available Distribution Amount for that Distribution Date, in an amount equal
to
the total of payments of (1) principal (other than any balloon payments) and
(2)
interest (net of related servicing fees and Retained Interest) that were due
on
the Assets in that issuing entity during the related Due Period and were
delinquent on the related Determination Date, subject to a good faith
determination that the advances will be reimbursable from Related Proceeds
(as
defined below). In the case of a series of Notes or Certificates, as applicable,
that includes one or more classes of Subordinate Notes or Subordinate
Certificates, as applicable, and if so provided in
38
the
prospectus supplement, the servicer’s (or another
entity’s) advance obligation may be limited only to the portion of those
delinquencies necessary to make the required distributions on one or more
classes of Senior Notes or Senior Certificates, as applicable, and/or may be
subject to a good faith determination that advances will be reimbursable not
only from Related Proceeds but also from collections on other Assets otherwise
distributable on one or more classes of those Subordinate Notes or Subordinate
Certificates, as applicable. See “Description of Credit Support.”
Advances
are intended to maintain a regular flow of scheduled interest and principal
payments to holders of the class or classes of Notes or Certificates, as
applicable, entitled to the payments, 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 those advances
were
made (as to any Assets, “Related Proceeds”) and from any other amounts specified
in the prospectus supplement, including out of any amounts otherwise
distributable on one or more classes of Subordinate Notes or Subordinate
Certificates, as applicable, of that series; provided, however, that any advance
will be reimbursable from any amounts in the related Collection Account before
any distributions being made on the Notes or Certificates, as applicable, to
the
extent that the servicer (or some other entity) determines in good faith that
that advance (a “Nonrecoverable Advance”) is not ultimately recoverable from
Related Proceeds or, if applicable, from collections on other Assets otherwise
distributable on the Subordinate Notes or Subordinate Certificates, as
applicable. If advances have been made by the servicer from excess funds in
the
related Collection Account, the servicer is required to replace these funds
in
that Collection Account on any future Distribution Date to the extent that
funds
in that Collection Account on that Distribution Date are less than payments
required to be made to securityholders on that date. If specified in the
prospectus supplement, the obligations of the servicer (or another entity)
to
make advances may be secured by 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 borrower on any surety
bond will be set forth in the prospectus supplement.
If
and to
the extent so provided in the prospectus supplement, the servicer (or another
entity) will be entitled to receive interest at the rate specified in the
prospectus supplement on its outstanding advances and will be entitled to pay
itself this interest periodically from general collections on the Assets before
any payment to securityholders or as otherwise provided in the related Agreement
and described in the prospectus supplement.
If
specified in the prospectus supplement, the master servicer or the trustee
will
be required to make advances, subject to specific 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 Notes or Certificates, as applicable,
of
a series, the servicer, the master servicer or the trustee, as provided in
the
prospectus supplement, will forward or cause to be forwarded to each holder,
to
the depositor and to any other parties as may be specified in the related
Agreement, a statement containing the information specified in the prospectus
supplement, or if no information is specified in the prospectus supplement,
generally setting forth, in each case to the extent applicable and
available:
(1) the
amount of that distribution to holders of Notes or Certificates, as applicable,
of that class applied to reduce the Security Balance of the Notes or
Certificates, as applicable,;
(2) the
amount of that distribution to holders of Notes or Certificates, as applicable,
of that class allocable to Accrued Security Interest;
39
(3) the
amount of that distribution allocable to Prepayment Premiums;
(4) the
amount of related servicing compensation and any other customary information
as
is required to enable securityholders to prepare their tax returns;
(5) the
total amount of advances included in that distribution, and the total amount
of
unreimbursed advances at the close of business on that Distribution
Date;
(6) the
total principal balance of the Assets at the close of business on that
Distribution Date;
(7) the
number and total principal balance of mortgage loans in respect of
which
(a) one
scheduled payment is delinquent,
(b) two
scheduled payments are delinquent,
(c) three
or more scheduled payments are delinquent and
(d) foreclosure
proceedings have begun;
(8) for
any mortgage loan or contract liquidated during the related Due Period, (a)
the
portion of the related liquidation proceeds payable or reimbursable to a
servicer (or any other entity) in respect of that mortgage loan and (b) the
amount of any loss to securityholders;
(9) with
respect to collateral acquired by the issuing entity through foreclosure or
otherwise (an “REO Property”) relating to a mortgage loan or contract and
included in the issuing entity as of the end of the related Due Period, the
date
of acquisition;
(10) for
each REO Property relating to a mortgage loan or contract and included in the
issuing entity as of the end of the related Due Period,
(a) the
book value,
(b) the
principal balance of the related mortgage loan or contract immediately following
that Distribution Date (calculated as if that mortgage loan or contract were
still outstanding taking into account limited modifications to the terms of
the
mortgage loan specified in the Agreement),
(c) the
total amount of unreimbursed servicing expenses and unreimbursed advances in
respect of the REO Property and
(d) if
applicable, the total amount of interest accrued and payable on related
servicing expenses and related advances;
(11) for
any REO Property sold during the related Due Period
(a) the
total amount of sale proceeds,
40
(b) the
portion of those sales proceeds payable or reimbursable to the master servicer
in respect of that 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;
(12) the
total Security Balance or notional amount, as the case may be, of each class
of
Notes or Certificates, as applicable (including any class of Notes or
Certificates, as applicable, not offered by this prospectus) at the close of
business on that Distribution Date, separately identifying any reduction in
that
Security Balance due to the allocation of any loss and increase in the Security
Balance of a class of Accrual Securities if any Accrued Security Interest has
been added to that balance;
(13) the
total amount of principal prepayments made during the related Due
Period;
(14) the
amount deposited in the reserve fund, if any, on that Distribution
Date;
(15) the
amount remaining in the reserve fund, if any, as of the close of business on
that Distribution Date;
(16) the
total unpaid Accrued Security Interest, if any, on each class of Notes or
Certificates, as applicable, at the close of business on that Distribution
Date;
(17) in
the case of Notes or Certificates, as applicable, with a variable Interest
Rate,
the Interest Rate applicable to that Distribution Date, and, if available,
the
immediately succeeding Distribution Date, as calculated in accordance with
the
method specified in the prospectus supplement;
(18) in
the case of Notes or Certificates, as applicable, with an adjustable Interest
Rate, for statements to be distributed in any month in which an adjustment
date
occurs, the adjustable Interest Rate applicable to that Distribution Date,
if
available, and the immediately succeeding Distribution Date as calculated in
accordance with the method specified in the prospectus supplement;
(19) as
to any series that includes credit support, the amount of coverage of each
instrument of credit support included as of the close of business on that
Distribution Date;
(20) 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;
(21) during
the Pre-Funding Period, the amount remaining in the Capitalized Interest
Account; and
(22) the
total amount of payments by the borrowers of
(a) default
interest,
(b) late
charges and
41
(c) assumption
and modification fees collected during the related Due Period.
Reports,
whether monthly or annual, will be transmitted in paper format to the holder
of
record of the class of securities contemporaneously with the distribution on
that particular class. In addition, the monthly reports will be posted on a
website as described below under “Available Information.”
Within
a
reasonable period of time after the end of each calendar year, the servicer,
the
master servicer or the trustee, as provided in the prospectus supplement, will
furnish to each securityholder of record at any time during the calendar year
the information required by the Internal Revenue Code of 1986, as amended (the
“Code”) and applicable regulations under the Code 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 related Agreement for each series of Notes or
Certificates, as applicable, will terminate upon the payment to securityholders
of that series of all amounts held in the Collection Accounts or by a servicer,
the master servicer, if any, or the trustee and required to be paid to them
pursuant to that Agreement following the earlier of (1) the final payment or
other liquidation of the last Asset subject to the related Agreement or the
disposition of all property acquired upon foreclosure of any mortgage loan
or
contract subject to the Agreement and (2) the purchase of all of the assets
of
the issuing entity by the party entitled to effect that termination, under
the
circumstances and in the manner set forth in the prospectus supplement. In
no
event, however, will the issuing entity continue beyond the date specified
in
the prospectus supplement. Written notice of termination of the Agreement will
be given to each securityholder, and the final distribution will be made only
upon presentation and surrender of the Notes or Certificates, as applicable,
at
the location to be specified in the notice of termination.
If
specified in the prospectus supplement, a series of Notes or Certificates,
as
applicable, may be subject to optional early termination through the purchase
of
the Assets in the related issuing entity by the party specified in the
prospectus supplement, under the circumstances and in the manner set forth
in
the prospectus supplement. If so provided in the prospectus supplement, upon
the
reduction of the Security Balance of a specified class or classes of Notes
or
Certificates, as applicable, by a specified percentage, the party specified
in
the prospectus supplement will solicit bids for the purchase of all assets
of
the issuing entity, or of a sufficient portion of those assets to retire that
class or classes or purchase that class or classes at a price set forth in
the
prospectus supplement, in each case, under the circumstances and in the manner
set forth in the prospectus supplement. That price will at least equal the
outstanding Security Balances and any accrued and unpaid interest on the
Security Balances (including any unpaid interest shortfalls for prior
Distribution Dates). Any sale of the Assets of the issuing entity will be
without recourse to the issuing entity or the securityholders. Any purchase
or
solicitation of bids may be made only when the total Security Balance of that
class or classes declines to a percentage of the Initial Security Balance of
those Notes or Certificates, as applicable (not to exceed 10%) specified in
the
prospectus supplement. In addition, if so provided in the prospectus supplement,
some classes of Notes or Certificates, as applicable, may be purchased or
redeemed in the manner set forth in the prospectus supplement at a price at
least equal to the outstanding Security Balance of each class so purchased
or
redeemed and any accrued and unpaid interest on the Security Balance (including
any unpaid interest shortfalls for prior Distribution Dates). In the event
that
any series of certificates or notes which provides for such a purchase, the
certificates or notes will use the word “Callable” in their title.
42
Optional
Purchases
Subject
to the provisions of the applicable Agreement, the depositor, the servicer
or
any other party specified in the prospectus supplement may, at that party’s
option, repurchase any mortgage loan that is in default or as to which default
is reasonably foreseeable if, in the depositor’s, the servicer’s or any other
party’s judgment, the related default is not likely to be cured by the borrower
or default is not likely to be averted, at a price equal to the unpaid principal
balance of the mortgage loan plus accrued interest on the mortgage loan and
under the conditions set forth in the prospectus supplement.
Book-Entry
Registration and Definitive Securities
General
If
provided for in the prospectus supplement, one or more classes of the Offered
Notes or Offered Certificates, as applicable, of any series will be issued
as
Book-Entry Notes or Book-Entry Certificates, as applicable, and each of these
classes will be represented by one or more single Notes or Certificates, as
applicable, registered in the name of a nominee for the depository, The
Depository Trust Company (“DTC”) and, if provided in the prospectus supplement,
additionally through Clearstream Luxembourg, société anonyme (“Clearstream
Luxembourg”) or the Euroclear System (“Euroclear”). Each class of Book-Entry
Notes or Book-Entry Certificates, as applicable, will be issued in one or more
certificates or notes, as the case may be, that equal the initial principal
amount of the related class of Offered Notes or Offered Certificates, as
applicable, and will initially be registered in the name of Cede &
Co.
No
person
acquiring an interest in a Book-Entry Security (each, a “Beneficial Owner”) will
be entitled to receive a Definitive Security, except as set forth below under
“—Definitive Securities.” Unless and until Definitive Notes or Definitive
Certificates, as applicable, are issued for the Book-Entry Notes or Book-Entry
Certificates, as applicable, under the limited circumstances described in the
applicable prospectus supplement or this prospectus, all references to actions
by securityholders with respect to the Book-Entry Notes or Book-Entry
Certificates, as applicable, will refer to actions taken by DTC, Clearstream
Luxembourg or Euroclear upon instructions from their Participants (as defined
below), and all references in this prospectus to distributions, notices, reports
and statements to securityholders with respect to the Book-Entry Notes or
Book-Entry Certificates, as applicable, will refer to distributions, notices,
reports and statements to DTC, Clearstream Luxembourg or Euroclear, as
applicable, for distribution to Beneficial Owners by DTC in accordance with
the
procedures of DTC and if applicable, Clearstream Luxembourg and
Euroclear.
Beneficial
Owners will hold their Book-Entry Notes or Book-Entry Certificates, as
applicable, through DTC in the United States, or, if the Offered Notes or
Offered Certificates, as applicable, are offered for sale globally, through
Clearstream Luxembourg or Euroclear in Europe if they are participating
organizations (“Participants”) of those systems. Participants include securities
brokers and dealers, banks, trust companies and clearing corporations and may
include some other organizations. Indirect access to the DTC, Clearstream
Luxembourg and Euroclear systems also is available to others, such as banks,
brokers, dealers and trust companies that clear through or maintain a custodial
relationship with a Participant, either directly or indirectly (“Indirect
Participants”).
DTC
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 Uniform Commercial Code (“UCC”) and a “clearing agency”
registered pursuant to the provisions
43
of
Section 17A of the Securities Exchange Act of
1934, as amended (the “Exchange Act”). DTC was created to hold securities for
its Participants, some of which (and/or their representatives) own DTC, and
facilitate the clearance and settlement of securities transactions between
its
Participants through electronic book-entry changes in their accounts, thus
eliminating the need for physical movement of securities. In accordance with
its
normal procedures, DTC is expected to record the positions held by each of
its
Participants in the Book-Entry Notes or Book-Entry Certificates, as applicable,
whether held for its own account or as a nominee for another person. In general,
beneficial ownership of Book-Entry Notes or Book-Entry Certificates, as
applicable, will be subject to the rules, regulations and procedures governing
DTC and its Participants as in effect from time to time.
Clearstream
Luxembourg
Clearstream
Banking, société anonyme, 67 Bd Grande-Duchesse Charlotte, L-2967 Luxembourg
(“Clearstream, Luxembourg”), was incorporated in 1970 as “Cedel S.A.”, a company
with limited liability under Luxembourg law (a société anonyme). Cedel S.A.
subsequently changed its name to Cedelbank. On January 10, 2000, Cedelbank’s
parent company, Cedel International, société anonyme (“CI”) merged its clearing,
settlement and custody business with that of Deutsche Börse Clearing AG (“DBC”).
The merger involved the transfer by CI of substantially all of its assets and
liabilities (including its shares in CB) to a new Luxembourg company, New Cedel
International, société anonyme (“New CI”), which is 50% owned by CI and 50%
owned by DBC’s parent company Deutsche Börse AG. The shareholders of these two
entities are banks, securities dealers and financial institutions. Cedel
International currently has 92 shareholders, including U.S. financial
institutions or their subsidiaries. No single entity may own more than 5 percent
of Cedel International’s stock.
Further
to the merger, the Board of Directors of New Cedel International decided to
rename the companies in the group in order to give them a cohesive brand name.
The new brand name that was chosen is “Clearstream”. With effect from January14, 2000 New CI has been renamed “Clearstream International, société anonyme”.
On January 18, 2000, Cedelbank was renamed “Clearstream Banking, société
anonyme”, and Cedel Global Services was renamed “Clearstream Services, société
anonyme”.
On
January 17, 2000 DBC was renamed “Clearstream Banking AG”. This means that there
are now two entities in the corporate group headed by Clearstream International
which share the name “Clearstream Banking”, the entity previously named
“Cedelbank” and the entity previously named “Deutsche Börse Clearing
AG”.
Clearstream,
Luxembourg holds securities for its customers (“Clearstream, Luxembourg
Participants”) and facilitates the clearance and settlement of securities
transactions between Clearstream, Luxembourg customers through electronic
book-entry changes in accounts of Clearstream, Luxembourg customers, thereby
eliminating the need for physical movement of certificates. Transactions may
be
settled by Clearstream, Luxembourg in any of 36 currencies, including United
States Dollars. Clearstream, Luxembourg provides to its customers, among other
things, services for safekeeping, administration, clearance and settlement
of
internationally traded securities and securities lending and borrowing.
Clearstream, Luxembourg also deals with domestic securities markets in over
30
countries through established depository and custodial relationships.
Clearstream, Luxembourg is registered as a bank in Luxembourg, and as such
is
subject to regulation by the Commission de Surveillance du Secteur Financier,
“CSSF”, which supervises Luxembourg banks. Clearstream, Luxembourg’s customers
are world-wide financial institutions including underwriters, securities brokers
and dealers, banks, trust companies and clearing corporations. Clearstream,
Luxembourg’s U.S. customers are limited to securities brokers and dealers, and
banks. Currently, Clearstream, Luxembourg has approximately 2,000 customers
located in over 80 countries, including all major European countries, Canada,
and the United
44
States.
Indirect access to Clearstream, Luxembourg is
available to other institutions that clear through or maintain a custodial
relationship with an account holder of Clearstream, Luxembourg. Clearstream,
Luxembourg has established an electronic bridge with Morgan Guaranty Trust
Company of New York as the Operator of the Euroclear System (MGT/EOC) in
Brussels to facilitate settlement of trades between Clearstream, Luxembourg
and
MGT/EOC.
Euroclear
Euroclear
was created in 1968 to hold securities for its Participants and to clear and
settle transactions between its Participants through simultaneous electronic
book-entry delivery against payment, thus eliminating the need for physical
movement of securities and any risk from lack of simultaneous transfers of
securities and cash. Transactions may be settled in any of 32 currencies,
including United States dollars. Euroclear includes various other services,
including securities lending and borrowing, and interfaces with domestic markets
in several countries generally similar to the arrangements for cross-market
transfers with DTC described above. Euroclear is operated by the Brussels,
Belgium office of Morgan Guaranty Trust Company of New York (the “Euroclear
Operator”), under contract with Euroclear Clearance Systems S.C., a Belgian
cooperative corporation (the “Cooperative Corporation”). All operations are
conducted by the Euroclear Operator, and all Euroclear securities clearance
accounts and Euroclear cash accounts are accounts with the Euroclear Operator,
not the Cooperative Corporation. The Cooperative Corporation establishes policy
for Euroclear on behalf of its 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 Participant of Euroclear, either directly or indirectly.
The
Euroclear Operator is the Belgian branch of a New York banking corporation
that
is a member bank of the Federal Reserve System, and is regulated and examined
by
the Board of Governors of the Federal Reserve System and the New York State
Banking Department, as well as the Belgian Banking Commission.
Securities
clearance accounts and cash accounts with the Euroclear Operator are governed
by
the Terms and Conditions Governing Use of Euroclear and the related Operating
Procedures of the Euroclear System and applicable Belgian law (collectively,
the
“Terms and Conditions”). The Terms and Conditions govern transfers of securities
and cash within Euroclear, withdrawals of securities and cash from Euroclear,
and receipts of payments with respect to securities in Euroclear. All securities
in Euroclear are held on a fungible basis without attribution of specific
securities to specific securities clearance accounts. The Euroclear Operator
acts under the Terms and Conditions only on behalf of its Participants, and
has
no record of or relationship with persons holding through Participants of
Euroclear.
Clearstream
Luxembourg and Euroclear will hold omnibus positions on behalf of their
Participants through customers’ securities accounts in Clearstream Luxembourg’s
and Euroclear’s names on the books of their respective depositaries which in
turn will hold positions in customers’ securities accounts in the depositaries
names on the books of DTC. Citibank will act as depositary for Clearstream
Luxembourg and JPMorgan Chase Bank will act as depositary for Euroclear
(individually the “Relevant Depositary” and collectively, the “European
Depositaries”).
Beneficial
Ownership of Book-Entry Securities
Except
as
described below, no Beneficial Owner will be entitled to receive a physical
certificate representing a Certificate, or note representing a Note. Unless
and
until Definitive Notes or Definitive Certificates, as applicable, are issued,
it
is anticipated that the only “securityholder” of the Offered Notes or Offered
Certificates, as applicable, will be Cede & Co., as nominee of
DTC.
45
Beneficial
Owners will not be “Certificateholders” as
that term is used in any Agreement, nor “Noteholders” as that term is used in
any indenture. Beneficial Owners are only permitted to exercise their rights
indirectly through Participants, DTC, Clearstream Luxembourg or Euroclear,
as
applicable.
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 Participant that acts as agent for the Financial Intermediary, whose interest
will in turn be recorded on the records of DTC, if the Beneficial Owner’s
Financial Intermediary is not a Participant of DTC and on the records of
Clearstream Luxembourg or Euroclear, as appropriate).
Beneficial
Owners will receive all distributions of principal of, and interest on, the
Offered Notes or Offered Certificates, as applicable, from the trustee through
DTC and its Participants. While the Offered Notes or Offered Certificates,
as
applicable, 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 Offered Notes or
Offered Certificates, as applicable, and is required to receive and transmit
distributions of principal of, and interest on, the Offered Notes or Offered
Certificates, as applicable. Participants and Indirect Participants with whom
Beneficial Owners have accounts with respect to Offered Notes or Offered
Certificates, as applicable, are similarly required to make book-entry transfers
and receive and transmit distributions on behalf of their respective Beneficial
Owners. Accordingly, although Beneficial Owners will not possess certificates
or
notes, the Rules provide a mechanism by which Beneficial Owners will receive
distributions and will be able to transfer their interest.
Beneficial
Owners will not receive or be entitled to receive certificates or notes
representing their respective interests in the Offered Notes or Offered
Certificates, as applicable, except under the limited circumstances described
below. Unless and until Definitive Notes or Definitive Certificates, as
applicable, are issued, Beneficial Owners who are not Participants may transfer
ownership of Offered Notes or Offered Certificates, as applicable, only through
Participants and Indirect Participants by instructing the Participants and
Indirect Participants to transfer Offered Notes or Offered Certificates, as
applicable, by book-entry transfer, through DTC for the account of the
purchasers of the Offered Notes or Offered Certificates, as applicable, which
account is maintained with their respective Participants. Under the Rules and
in
accordance with DTC’s normal procedures, transfer of ownership of Book-Entry
Notes or Book-Entry Certificates, as applicable, 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 Beneficial Owners.
Because
of time zone differences, any credits of securities received in Clearstream
Luxembourg 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
Participants of Clearstream Luxembourg or Euroclear on that business day. Cash
received in Clearstream Luxembourg or Euroclear as a result of sales of
securities by or through a Participant of Clearstream Luxembourg or Euroclear
to
a Participant of DTC will be received with value on the DTC settlement date
but
will be available in the relevant Clearstream Luxembourg 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 Notes or
Certificates, as applicable, see “Material Federal Income Tax Considerations —
Tax Treatment of Foreign Investors” in this prospectus and, if the Book-Entry
Notes or Book-Entry Certificates, as applicable,
46
are
globally offered and the prospectus supplement so
provides, see “Global Clearance, Settlement and Tax Documentation Procedures —
Certain U.S. Federal Income Tax Documentation Requirements” in Annex I to the
prospectus supplement.
Transfers
between Participants of DTC will occur in accordance with DTC Rules. Transfers
between Participants of Clearstream Luxembourg or Euroclear 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 Participants of Clearstream Luxembourg
or Euroclear, on the other, will be effected in DTC in accordance with the
DTC
Rules on behalf of the relevant European international clearing system by the
Relevant Depositary; however, cross-market transactions will require delivery
of
instructions to the relevant European international clearing system by the
counterparty in that system in accordance with its rules and procedures and
within its established deadlines (European time). The relevant European
international clearing system will, if the transaction meets its settlement
requirements, deliver instructions to the Relevant 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. Participants of Clearstream
Luxembourg or Euroclear may not deliver instructions directly to the European
Depositaries.
Distributions
on the Book-Entry Notes or Book-Entry Certificates, as applicable, will be
made
on each Distribution Date by the Trustee to DTC. DTC will be responsible for
crediting the amount of each distribution to the accounts of the applicable
Participants of DTC in accordance with DTC’s normal procedures. Each Participant
of DTC will be responsible for disbursing the distribution to the Beneficial
Owners of the Book-Entry Notes or Book-Entry Certificates, as applicable, 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 Notes or Book-Entry Certificates, as
applicable, that it represents.
Under
a
book-entry format, Beneficial Owners of the Book-Entry Notes or Book-Entry
Certificates, as applicable, may experience some delay in their receipt of
payments, because the distributions will be forwarded by the Trustee to Cede
& Co. Any distributions on Notes or Certificates, as applicable, held
through Clearstream Luxembourg or Euroclear will be credited to the cash
accounts of Participants of Clearstream Luxembourg or Euroclear 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 “Material
Federal Income Tax Considerations — REMICs — Taxation of Certain Foreign
Investors” in this prospectus. Because DTC can only act on behalf of Financial
Intermediaries, the ability of a Beneficial Owner to pledge Book-Entry Notes
or
Book-Entry Certificates, as applicable, to persons or entities that do not
participate in the depository system, or otherwise take actions in respect
of
Book-Entry Notes or Book-Entry Certificates, as applicable, may be limited
due
to the lack of physical securities for the Book-Entry Notes or Book-Entry
Certificates, as applicable. In addition, issuance of the Book-Entry Notes
or
Book-Entry Certificates, as applicable, in book-entry form may reduce the
liquidity of the securities in the secondary market since potential investors
may be unwilling to purchase Notes or Certificates, as applicable, for which
they cannot obtain physical securities.
Monthly
and annual reports will be provided to Cede & Co., as nominee of DTC, and
may be made available by Cede & Co. to Beneficial Owners upon request, in
accordance with the rules, regulations and procedures creating and affecting
the
depository, and to the Financial Intermediaries to whose DTC accounts the
Book-Entry Notes or Book-Entry Certificates, as applicable, of Beneficial Owners
are credited.
47
Generally,
DTC will advise the applicable trustee that unless and until Definitive Notes
or
Definitive Certificates, as applicable, are issued, DTC will take any action
permitted to be taken by the holders of the Book-Entry Notes or Book-Entry
Certificates, as applicable, under the Agreement or indenture, as applicable,
only at the direction of one or more Financial Intermediaries to whose DTC
accounts the Book-Entry Notes or Book-Entry Certificates, as applicable, are
credited, to the extent that actions are taken on behalf of Financial
Intermediaries whose holdings include the Book-Entry Notes or Book-Entry
Certificates, as applicable. If the Book-Entry Notes or Book-Entry Certificates,
as applicable, are globally offered, Clearstream Luxembourg or the Euroclear
Operator, as the case may be, will take any other action permitted to be taken
by a securityholder under the Agreement or indenture, as applicable, on behalf
of a Participant of Clearstream Luxembourg or Euroclear only in accordance
with
its relevant rules and procedures and subject to the ability of the Relevant
Depositary to effect those actions on its behalf through DTC. DTC may take
actions, at the direction of the related Participants, with respect to some
Offered Notes or Offered Certificates, as applicable, that conflict with actions
taken with respect to other Offered Notes or Offered Certificates, as
applicable.
Although
DTC, Clearstream Luxembourg and Euroclear have agreed to the foregoing
procedures in order to facilitate transfers of Book-Entry Notes or Book-Entry
Certificates, as applicable, among Participants of DTC, Clearstream Luxembourg
and Euroclear, they are under no obligation to perform or continue to perform
these procedures and the procedures may be discontinued at any
time.
None
of
the depositor, any master servicer, any servicer, the trustee, any securities
registrar or paying agent or any of their affiliates will have any
responsibility for any aspect of the records relating to or payments made on
account of beneficial ownership interests of the Book-Entry Notes or Book-Entry
Certificates, as applicable, or for maintaining, supervising or reviewing any
records relating to those beneficial ownership interests.
Definitive
Securities
Notes
or
Certificates, as applicable, initially issued in book-entry form will be issued
as Definitive Notes or Definitive Certificates, as applicable, to Beneficial
Owners or their nominees, rather than to DTC or its nominee only
(1) if
the depositor advises the trustee in writing that DTC is no longer willing
or
able to properly discharge its responsibilities as depository for the Notes
or
Certificates, as applicable, and the depositor is unable to locate a qualified
successor,
(2) if
the depositor, at its option, in writing, with the consent of the applicable
Participants, elects to end the book-entry system through DTC or
(3) in
accordance with any other provisions described in the prospectus
supplement.
Upon
the
occurrence of any of the events described in the immediately preceding
paragraph, DTC is required to notify all Participants of the availability
through DTC of Definitive Notes or Definitive Certificates, as applicable,
for
the Beneficial Owners. Upon surrender by DTC of the security or securities
representing the Book-Entry Notes or Book-Entry Certificates, as applicable,
together with instructions for registration, the trustee will issue (or cause
to
be issued) to the Beneficial Owners identified in those instructions the
Definitive Notes or Definitive Certificates, as applicable, to which they are
entitled, and thereafter the trustee will recognize the holders of those
Definitive Notes or Definitive Certificates, as applicable, as securityholders
under the Agreement.
48
Description
of the Agreements
Agreements
Applicable to a Series
REMIC
Securities and Grantor Trust Securities
Notes
or
Certificates, as applicable, representing interests in an issuing entity, or
a
portion of an issuing entity, that the trustee will elect to have treated as
a
real estate mortgage investment conduit (“REMIC”) under Sections 860A through
860G of the Code (“REMIC Securities”), or Grantor Trust Securities (as defined
in this prospectus), will be issued, and the related issuing entity will be
created, pursuant to a pooling and servicing agreement or trust agreement (in
either case, generally referred to in this prospectus as the “pooling and
servicing agreement”) among the depositor, the trustee and the sole servicer or
master servicer, as applicable. The Assets of that issuing entity will be
transferred to the issuing entity 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 that issuing entity, or in the event the Securities
consist of Notes, each servicer will perform its servicing functions pursuant
to
a related underlying servicing agreement. Forms of the agreements have been
filed as exhibits to the registration statement of which this prospectus is
a
part. However, the provisions of each agreement will vary depending upon the
nature of the related securities and the nature of the related issuing entity.
The summaries included herein describe provisions that may appear in a pooling
and servicing agreement with respect to a series of Certificates or in either
the servicing agreement or indenture with respect to a series of Notes. The
prospectus supplement for a series of securities will describe material
provisions of the related agreements that differ from and supplement the
description thereof set forth below. The depositor will provide a copy of each
agreement (without exhibits) that relates to any series of securities without
charge upon written request of a holder of an offered security of the series
addressed to it at its principal executive offices specified in this prospectus
under “The Depositor”. As to each series of securities, the related agreements
will be filed with the Commission in a current report on Form 8-K following
the
issuance of the securities to the extent required to comply with the Securities
Act of 1933 and Regulation AB.
Securities
That Are Partnership Interests for Tax Purposes and Notes
Certificates,
as applicable, that are intended to be treated as partnership interests for
tax
purposes will be issued, and the related issuing entity will be created,
pursuant to the pooling and servicing agreement or trust agreement.
A
series
of Notes issued by an issuing entity that is intended to be treated as a
partnership or disregarded entity for tax purposes will be issued pursuant
to an
indenture between the related issuing entity and an indenture trustee named
in
the prospectus supplement. The issuing entity will be established either as
a
statutory business trust under the law of the State of Delaware or as a common
law trust under the law of the State of New York pursuant to a trust agreement
between the depositor and an owner trustee specified in the prospectus
supplement relating to that series of Notes. The Assets securing payment on
the
Notes will be serviced in accordance with a sale and servicing agreement or
servicing agreement.
Material
Terms of the Pooling and Servicing Agreements and Underlying Servicing
Agreements
General
The
following summaries describe the material provisions that may appear in each
pooling and servicing agreement, sale and servicing agreement or servicing
agreement (each an
49
“Agreement”).
The prospectus supplement for a series
of Notes or Certificates, as applicable, will describe any provision of the
Agreement relating to that series that materially differs from the description
of those provisions contained in this prospectus. The summaries do not purport
to be complete and are subject to, and are qualified by reference to, all of
the
provisions of the Agreement for each issuing entity and the description of
those
provisions in the prospectus supplement. The provisions of each Agreement will
vary depending on the nature of the Notes or Certificates, as applicable, to
be
issued under the Agreement and the nature of the related issuing entity. As
used
in this prospectus for any series, the term “Security” refers to all of the
Notes or Certificates, as applicable, of that series, whether or not offered
by
this prospectus and by the 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
depositor will provide a copy of the pooling and servicing agreement (without
exhibits) relating to any series of Notes or Certificates, as applicable,
without charge upon written request of a securityholder of that series addressed
to ACE Securities Corp., 6525 Morrison Boulevard, Suite 318, Charlotte, NorthCarolina28211, Attention: Evelyn Echevarria.
The
servicer or master servicer and the trustee for any series of Notes or
Certificates, as applicable, will be named in the prospectus supplement. In
the
event there are multiple servicers for the Assets in an issuing entity, a master
servicer will perform some of the administration, calculation and reporting
functions for that issuing entity and will supervise the related servicers
pursuant to a pooling and servicing agreement. For a 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
prospectus supplement, a manager or administrator may be appointed pursuant
to
the pooling and servicing agreement for any issuing entity to administer that
issuing entity.
Assignment
of Assets; Repurchases
At
the
time of issuance of any series of Notes or Certificates, as applicable, the
depositor will assign (or cause to be assigned) to the designated trustee the
Assets to be included in the related issuing entity, together with all principal
and interest to be received on or with respect to those 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 that
assignment, deliver the Notes or Certificates, as applicable, to the depositor
in exchange for the Assets and the other assets comprising the issuing entity
for that series. Each Asset will be identified in a schedule appearing as an
exhibit to the related Agreement. That schedule will include detailed
information to the extent available and relevant
(1) in
respect of each mortgage loan included in the related issuing entity, including
the city and state of the related Mortgaged Property and type of that property,
the mortgage 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;
(2) in
respect of each contract included in the related issuing entity, including
the
outstanding principal amount and the contract rate; and
(3) in
respect of each Mortgage Security and Agency Security, the original and
outstanding principal amount, if any, and the interest rate on the Mortgage
Security or Agency Security.
For
each
mortgage loan, except as otherwise specified in the prospectus supplement,
the
depositor will deliver or cause to be delivered to the trustee (or to the
custodian hereinafter
50
referred
to) particular loan documents, which will
generally include the original mortgage note endorsed, without recourse, in
blank or to the order of the trustee, the original Mortgage (or a certified
copy
of the original Mortgage) with evidence of recording indicated on the original
Mortgage and an assignment of the Mortgage to the trustee in recordable form.
However, an issuing entity may include mortgage loans where the original
mortgage note is not delivered to the trustee if the depositor delivers to
the
trustee or the custodian a copy or a duplicate original of the mortgage note,
together with an affidavit certifying that the original of the mortgage note
has
been lost or destroyed. For those 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 prospectus supplement will be
required to agree to repurchase, or substitute for, each of these mortgage
loans
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 related Agreement will generally require the depositor or
another party specified in the prospectus supplement to promptly cause each
of
these assignments of Mortgage to be recorded in the appropriate public office
for real property records, except in the State of California or in other states
where, in the opinion of counsel acceptable to the trustee, recording is not
required to protect the trustee’s interest in the related mortgage loan against
the claim of any subsequent transferee or any successor to or creditor of the
depositor, the servicer, the relevant Asset Seller or any other prior holder
of
the mortgage loan.
The
trustee (or a custodian) will review the mortgage loan documents within a
specified period of days after receipt of the mortgage loan documents, and
the
trustee (or a custodian) will hold those documents in trust for the benefit
of
the securityholders. If any of these documents are found to be missing or
defective in any material respect, the trustee (or that custodian) will
immediately notify the servicer and the depositor, and the servicer will
immediately notify the relevant Asset Seller or other entity specified in the
prospectus supplement. If the Asset Seller cannot cure the omission or defect
within a specified number of days after receipt of that notice, then the Asset
Seller or other entity specified in the prospectus supplement will be obligated,
within a specified number of days of receipt of that notice, to either (1)
repurchase the related mortgage loan from the trustee at a price equal to the
sum of the unpaid principal balance of the mortgage loan, plus unpaid accrued
interest at the interest rate for that Asset from the date as to which interest
was last paid to the due date in the Due Period in which the relevant purchase
is to occur, plus servicing expenses that are payable to the servicer, or
another price as specified in the prospectus supplement (the “Purchase Price”)
or (2) substitute a new 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 that 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. To the extent specified in the prospectus supplement,
in
lieu of curing any omission or defect in the Asset or repurchasing or
substituting for that Asset, the Asset Seller or other named entity may agree
to
cover any losses suffered by the issuing entity as a result of that breach
or
defect.
Notwithstanding
the preceding three paragraphs, the documents for Home Equity Loans, home
improvement contracts and unsecured home improvements loans will be delivered
to
the trustee (or a custodian) only to the extent specified in the prospectus
supplement. Generally these 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 prospectus
supplement.
For
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
51
and
the security interest in the manufactured home
securing each contract. 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 executed 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 depositor
to
the issuing entity only to the extent specified in the prospectus supplement.
Therefore, if, through negligence, fraud or otherwise, a subsequent purchaser
were able to take physical possession of the contracts without notice of that
assignment, the interest of the trustee in the contracts could be
defeated.
While
the
contract documents will not be reviewed by the trustee or the servicer, if
the
servicer finds that any 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 prospectus
supplement. If the asset seller or some other entity cannot cure the omission
or
defect within a specified number of days after receipt of this notice, then
the
asset seller or that other entity will be obligated, within a specified number
of days of receipt of this notice, to repurchase the related contract from
the
trustee at the purchase price or substitute for that contract. There can be
no
assurance that an asset seller or any other entity will fulfill this repurchase
or substitution obligation, and neither the servicer nor the depositor will
be
obligated to repurchase or substitute for that contract if the asset seller
or
any 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 prospectus supplement, in lieu of curing any omission
or
defect in the asset or repurchasing or substituting for that asset, the asset
seller may agree to cover any losses suffered by the issuing entity as a result
of that breach or defect.
Mortgage
Securities and Agency Securities will be registered in the name of the trustee
or its nominee on the books of the issuer or guarantor or its agent or, in
the
case of Mortgage Securities and Agency Securities issued only in book-entry
form, through the depository with respect to the Mortgage Securities and Agency
Securities, in accordance with the procedures established by the issuer or
guarantor for registration of those certificates, and distributions on those
securities to which the issuing entity is entitled will be made directly to
the
trustee.
Representations
and Warranties; Repurchases
To
the
extent provided in the prospectus supplement the depositor will, for each Asset,
assign representations and warranties, as of a specified date (the person making
those representations and warranties, the “Warranting Party”) covering, by way
of example, the following types of matters:
·
the
accuracy of the information set forth for that Asset on the schedule
of
Assets appearing as an exhibit to the related
Agreement;
·
in
the case of a mortgage loan, the existence of title insurance insuring
the
lien priority of the mortgage loan and, in the case of a contract,
that
the contract creates a valid first security interest in or lien on
the
related manufactured home;
·
the
authority of the Warranting Party to sell the
Asset;
·
the
payment status of the Asset;
52
·
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
·
the
existence of hazard and extended perils insurance coverage on the
Mortgaged Property or manufactured
home.
Any
Warranting Party shall be an Asset Seller or an affiliate of the Asset Seller
or
any other person acceptable to the depositor and will be identified in the
prospectus supplement.
Representations
and warranties made in respect of an Asset may have been made as of a date
before the applicable Cut-off Date. A substantial period of time may have
elapsed between that date and the date of initial issuance of the related series
of Notes or Certificates, as applicable, evidencing an interest in that Asset.
In the event of a breach of any of these representations or warranties, the
Warranting Party will be obligated to reimburse the issuing entity for losses
caused by that breach or either cure that 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 that representation and warranty
only
if the relevant event that causes that breach occurs before that date. That
party would have no obligations if the relevant event that causes that breach
occurs after that date.
Each
Agreement will provide that the servicer and/or trustee or another entity
identified in the 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
that Asset or the interests in the prospectus supplement of the securityholders.
If the Warranting Party cannot cure that breach within a specified period
following the date on which that party was notified of that breach, then the
Warranting Party will be obligated to repurchase that Asset from the trustee
within a specified period from the date on which the Warranting Party was
notified of that 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 that series of Notes or Certificates,
as applicable, to cause the removal of that Asset from the issuing entity and
substitute in its place one or more other Assets, as applicable, in accordance
with the standards described in the prospectus supplement. If so provided in
the
prospectus supplement for a series, a Warranting Party, rather than repurchase
or substitute an Asset as to which a breach has occurred, will have the option
to reimburse the issuing entity or the securityholders for any losses caused
by
that breach. 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.
Neither
the depositor (except to the extent that it is the Warranting Party) nor the
servicer 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 the Warranting Parties will carry out those obligations with respect
to the Assets.
A
servicer will make representations and warranties regarding its authority to
enter into, and its ability to perform its obligations under, the related
Agreement. A breach of any representation of the servicer that materially and
adversely affects the interests of the securityholders and which continues
unremedied for the number of days specified in the Agreement after the discovery
of the breach by the servicer or the receipt of written notice of that breach
by
the servicer from the trustee, the depositor or the holders of Notes or
Certificates, as applicable, evidencing not less than 25% of the voting rights
or other percentage specified in the
53
related
Agreement, will constitute an Event of
Default under that Agreement. See “Events of Default under the Agreement” and
“Rights Upon Event of Default under the Agreements.”
Collection
Account and Related Accounts
General.
The
servicer and/or the trustee will, as to each issuing entity, 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 be an account or accounts that
either:
·
are
insured by the Bank Insurance Fund or the Savings Association Insurance
Fund of the Federal Deposit Insurance Corporation (“FDIC”) (to the limits
established by the FDIC) and the uninsured deposits in which are
otherwise
secured so that the securityholders have a claim with respect to
the funds
in the Collection Account or a perfected first priority security
interest
against any collateral securing those funds that is superior to the
claims
of any other depositors or general creditors of the institution with
which
the Collection Account is maintained,
or
·
are
maintained with a bank or trust company, and in a manner satisfactory
to
the rating agency or agencies rating any class of Notes or Certificates,
as applicable, of that series.
Investment
of amounts in the Collection Account is limited to United States government
securities and other investment grade obligations specified in the Agreement
(“Permitted Investments”). A Collection Account may be maintained as an interest
bearing or a non-interest bearing account and the funds held in the Collection
Account may be invested pending each succeeding Distribution Date in short-term
Permitted Investments. The master servicer will have sole discretion to
determine the particular investments made so long as it complies with the
investment terms of the related pooling and servicing agreement or the related
servicing agreement and indenture. Any interest or other income earned on funds
in the Collection Account will, unless otherwise specified in the prospectus
supplement, 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 that 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.
Deposits.
A
servicer or the trustee will deposit or cause to be deposited in the Collection
Account for one or more issuing entities on a daily basis, or any other period
provided in the related Agreement, the following payments and collections
received, or advances made, by the servicer or the trustee or on its behalf
after the Cut-off Date (other than payments due on or before the Cut-off Date,
and exclusive of any amounts representing a Retained Interest), except as
otherwise provided in the Agreement:
(1) all
payments on account of principal, including principal prepayments, on the
Assets;
(2) all
payments on account of interest on the Assets, including any default interest
collected, in each case net of any portion retained by a servicer as its
servicing compensation and net of any Retained Interest;
54
(3) 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;
(4) any
amounts paid under any instrument or drawn from any fund that constitutes credit
support for the related series of Notes or Certificates, as applicable, as
described under “Description of Credit Support;”
(5) any
advances made as described under “Description of the Securities—Advances in
Respect of Delinquencies;”
(6) any
amounts paid under any Cash Flow Agreement, as described under “Description of
the Issuing Entities—Cash Flow Agreements;”
(7) all
proceeds of any Asset or, with respect to a mortgage loan, property acquired
in
respect of the mortgage loan purchased by the depositor, any Asset Seller or
any
other specified person as described above under “—Assignment of Assets;
Repurchases” and “—Representations and Warranties; Repurchases,” all proceeds of
any defaulted mortgage loan purchased as described below under “—Realization
Upon Defaulted Assets,” and all proceeds of any Asset purchased as described
under “Description of the Securities—Termination;”
(8) any
amounts paid by a servicer to cover interest shortfalls arising out of the
prepayment of Assets in the issuing entity as described below under “—Retained
Interest; Servicing Compensation and Payment of Expenses;”
(9) to
the extent that any of these items do not constitute additional servicing
compensation to a servicer, any payments on account of modification or
assumption fees, late payment charges or Prepayment Premiums on the
Assets;
(10) all
payments required to be deposited in the Collection Account with respect to
any
deductible clause in any blanket insurance policy described below under “—Hazard
Insurance Policies;”
(11) 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
(12) any
other amounts required to be deposited in the Collection Account as provided
in
the related Agreement and described in the prospectus supplement.
Withdrawals.
A
servicer or the trustee may, from time to time as provided in the related
Agreement, make withdrawals from the Collection Account for each issuing entity
for any of the following purposes, except as otherwise provided in the
Agreement:
(1) to
make distributions to the securityholders on each Distribution
Date;
(2) to
reimburse a servicer for unreimbursed amounts advanced as described under
“Description of the Securities—Advances in Respect of Delinquencies,” which
reimbursement is to be made out of amounts received that 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
for which the advances were made or out of amounts drawn under any form of
credit support with respect to those Assets;
55
(3) to
reimburse a servicer for unpaid servicing fees earned and unreimbursed servicing
expenses incurred with respect to Assets and properties acquired in respect
of
the Assets, which reimbursement is 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, which
fees were earned or expenses were incurred or out of amounts drawn under any
form of credit support for those Assets and properties;
(4) to
reimburse a servicer for any advances described in clause (2) above and any
servicing expenses described in clause (3) above which, in the servicer’s good
faith judgment, will not be recoverable from the amounts described in those
clauses, which reimbursement is to be made from amounts collected on other
Assets or, if and to the extent so provided by the related Agreement and
described in the prospectus supplement, just from that portion of amounts
collected on other Assets that is otherwise distributable on one or more classes
of Subordinate Notes or Subordinate Certificates, as applicable, if any, remain
outstanding, and otherwise any outstanding class of Notes or Certificates,
as
applicable, of the related series;
(5) if
and to the extent described in the prospectus supplement, to pay a servicer
interest accrued on the advances described in clause (2) above and the servicing
expenses described in clause (3) above while those advances and servicing
expenses remain outstanding and unreimbursed;
(6) to
reimburse a servicer, the depositor, or any of their respective directors,
officers, employees and agents, as the case may be, for expenses, costs and
liabilities incurred by these parties, as and to the extent described below
under “—Certain Matters Regarding Servicers, the Master Servicer and the
Depositor;”
(7) if
and to the extent described in the prospectus supplement, to pay (or to transfer
to a separate account for purposes of escrowing for the payment of) the
trustee’s fees;
(8) to
reimburse the trustee or any of its directors, officers, employees and agents,
as the case may be, for expenses, costs and liabilities incurred by these
parties, as and to the extent described below under “—Certain Matters Regarding
the Trustee;”
(9) to
pay a servicer, as additional servicing compensation, interest and investment
income earned in respect of amounts held in the Collection Account;
(10) to
pay the person so entitled any amounts deposited in the Collection Account
that
were identified and applied by the servicer as recoveries of Retained
Interest;
(11) 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,
which payments are to be made out of income received on that
property;
(12) if
one or more elections have been made to treat the issuing entity or designated
portions of the issuing entity as a REMIC, to pay any federal, state or local
taxes imposed on the issuing entity or its assets or transactions, as and to
the
extent described under “Material Federal Income Tax Considerations—REMICs—Taxes
That May Be Imposed on the REMIC Pool” or in the prospectus supplement,
respectively;
56
(13) to
pay for the cost of an independent appraiser or other expert in real estate
matters retained to determine a fair sale price for a defaulted mortgage loan
or
a property acquired in respect of a mortgage loan in connection with the
liquidation of that mortgage loan or property;
(14) to
pay for the cost of various opinions of counsel obtained pursuant to the related
Agreement for the benefit of securityholders;
(15) to
pay for the costs of recording the related Agreement if that recordation
materially and beneficially affects the interests of securityholders, provided
that the payment shall not constitute a waiver with respect to the obligation
of
the Warranting Party to remedy any breach of representation or warranty under
the Agreement;
(16) to
pay the person so entitled any amounts deposited in the Collection Account
in
error, including amounts received on any Asset after its removal from the
issuing entity whether by reason of purchase or substitution as contemplated
above under “—Assignment of Assets; Repurchase” and “—Representations and
Warranties; Repurchases” or otherwise;
(17) to
make any other withdrawals permitted by the related Agreement; and
(18) to
clear and terminate the Collection Account at the termination of the issuing
entity.
Other
Collection Accounts.
If specified in the prospectus supplement, the Agreement for any series of
Notes or Certificates, as applicable, may provide for the establishment and
maintenance of a separate collection account into which the servicer will
deposit on a daily basis, or any other period as provided in the related
Agreement, the amounts described under “—Deposits” above for one or more series
of Notes or Certificates, as applicable. Any amounts on deposit in any of these
collection accounts will be withdrawn from these collection accounts and
deposited into the appropriate Collection Account by a time specified in the
prospectus supplement. To the extent specified in the prospectus supplement,
any
amounts that could be withdrawn from the Collection Account as described under
“—Withdrawals” above may also be withdrawn from any of these collection
accounts. The prospectus supplement will set forth any restrictions for any
of
these collection accounts, including investment restrictions and any
restrictions for financial institutions with which any of these collection
accounts may be maintained.
The
servicer will establish and maintain with the indenture trustee an account,
in
the name of the indenture trustee on behalf of the holders of Notes, into which
amounts released from the Collection Account for distribution to the holders
of
Notes will be deposited and from which all distributions to the holders of
Notes
will be made.
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
those collection procedures that it would follow with respect to assets that
are
comparable to the Assets and held for its own account, provided that those
procedures are consistent with
(1) the
terms of the related Agreement and any related hazard insurance policy or
instrument of credit support, if any, included in the related issuing entity
described in this prospectus or under “Description of Credit
Support,”
(2) applicable
law and
57
(3) the
general servicing standard specified in the prospectus supplement or, if no
standard is so specified, its normal servicing practices (in either case, the
“Servicing Standard”).
In
connection, 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.
Each
servicer will also be required to perform other customary functions of a
servicer of comparable assets, including maintaining hazard insurance policies
as described in this prospectus and in any prospectus supplement, and filing
and
settling claims under these policies; maintaining, to the extent required by
the
Agreement, escrow or impoundment accounts of borrowers for payment of taxes,
insurance and other items required to be paid by any borrower 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 some circumstances; and maintaining accounting records relating
to
the Assets. The servicer or any other entity specified in the 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.”
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 will not (1) affect the amount or timing of any scheduled payments
of
principal or interest on the Asset or (2) in its judgment, materially impair
the
security for the Asset or reduce the likelihood of timely payment of amounts
due
on the Asset. The servicer also may agree to any modification, waiver or
amendment that would so affect or impair the payments on, or the security for,
an Asset if (1) in its judgment, a material default on the Asset has occurred
or
a payment default is reasonably foreseeable and (2) in its judgment, that
modification, waiver or amendment is reasonably likely to produce a greater
recovery with respect to the Asset on a present value basis than would
liquidation. In the event of any modification, waiver or amendment of any Asset,
the servicer will furnish a copy of that modification, waiver or amendment
to
the trustee (or its custodian).
In
the
case of Multifamily, Commercial or Mixed-Use Mortgage Loans, a borrower’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
borrower under a Multifamily, Commercial or Mixed-Use 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,
Commercial or Mixed-Use 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 related Mortgaged Property, initiate
corrective action in cooperation with the borrower if cure is likely, inspect
the related Mortgaged Property and take those other actions as are consistent
with the related Agreement. A significant period of time may elapse before
the
servicer is able to assess the success of 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,
Commercial or Mixed-Use Mortgage Loan, the related Mortgaged Property, the
borrower, the presence of an acceptable party to assume the mortgage loan and
the laws of the jurisdiction in which the Mortgaged Property is
located.
58
Realization
Upon Defaulted Assets
Generally,
the servicer is required to monitor any Asset that is in default, initiate
corrective action in cooperation with the borrower if cure is likely, inspect
the Asset and take any 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 that corrective action or the need for additional
initiatives.
Any
Agreement relating to an issuing entity that includes mortgage loans or
contracts may grant to the servicer and/or the holder or holders of some classes
of Notes or Certificates, as applicable, a right of first refusal to purchase
from the issuing entity at a predetermined purchase price any mortgage loan
or
contract as to which a specified number of scheduled payments under the
Agreement are delinquent. Any right of first refusal granted to the holder
of an
Offered Security will be described in the prospectus supplement. The prospectus
supplement will also describe any similar right granted to any person if the
predetermined purchase price is less than the Purchase Price described above
under “—Representations and Warranties; Repurchases.”
If
specified in the 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
to that defaulted mortgage loan or contract, if and when the servicer
determines, consistent with the Servicing Standard, so that a sale would produce
a greater recovery on a present value basis than would liquidation through
foreclosure, repossession or similar proceedings. The related Agreement will
provide that any 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 that defaulted mortgage loan
or contract. If there is no bid that is determined to be fair, the servicer
will
proceed with respect to that defaulted mortgage loan or contract as described
below. Any bid in an amount at least equal to the Purchase Price described
above
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 that action is consistent
with the Servicing Standard and a default on that mortgage loan or contract
has
occurred or, in the servicer’s judgment, is imminent.
If
title
to any Mortgaged Property is acquired by an issuing entity as to which a REMIC
election has been made, the servicer, on behalf of the issuing entity, will
be
required to sell the Mortgaged Property within three years from the close of
the
calendar year of acquisition, unless (1) the Internal Revenue Service grants
an
extension of time to sell that property or (2) the trustee receives an opinion
of independent counsel to the effect that the holding of the property by the
issuing entity longer than three years after the close of the calendar year
of
its acquisition will not result in the imposition of a tax on the issuing entity
or cause the issuing entity to fail to qualify as a REMIC under the Code at
any
time that any Notes or Certificates, as applicable, are outstanding. Subject
to
the foregoing, the servicer will be required to (A) solicit bids for any
Mortgaged Property so acquired in that manner as will be reasonably likely
to
realize a fair price for that property and (B) 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 related Agreement and the REMIC provisions of the
Code (if a REMIC election has been made for the related issuing entity) on
the
ownership and
59
management
of any Mortgaged Property acquired on
behalf of the issuing entity may result in the recovery of an amount less than
the amount that would otherwise be recovered.
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 those 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
on
the defaulted Asset at the applicable interest rate, plus the total amount
of
expenses incurred by the servicer in connection with those proceedings and
which
are reimbursable under the Agreement, the issuing entity will realize a loss
in
the amount of that 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, before the distribution of those
Liquidation Proceeds to securityholders, amounts representing its normal
servicing compensation on the Security, unreimbursed servicing expenses incurred
with respect to the Asset and any unreimbursed advances of delinquent payments
made with respect to the Asset.
With
respect to a Multifamily Mortgage Loan, the market value of any property
obtained in foreclosure or by deed in lieu of foreclosure will be based
substantially on the operating income obtained by renting the dwelling units.
As
a default on a Multifamily Mortgage Loan is likely to have occurred because
operating income, net of expenses, is insufficient to make debt service payments
on the mortgage loan, it can be anticipated that the market value of the
property will be less than anticipated when the mortgage loan was originated.
To
the extent that equity does not cushion the loss in market value and the loss
is
not covered by other credit support, a loss may be experienced by the related
issuing entity.
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 (1)
that restoration will increase the proceeds to securityholders on liquidation
of
the Asset after reimbursement of the servicer for its expenses and (2) that
its
expenses will be recoverable by it from related Insurance Proceeds or
Liquidation Proceeds.
The
pooling and servicing agreement will require the trustee, if it has not received
a distribution for any Mortgage Security or Agency Security by the fifth
business day after the date on which that distribution was due and payable
pursuant to the terms of that Agency Security, to request the issuer or
guarantor, if any, of that Mortgage Security or Agency Security to make that
payment as promptly as possible and legally permitted to take legal action
against that issuer or guarantor as the trustee deems appropriate under the
circumstances, including the prosecution of any claims in connection therewith.
The reasonable legal fees and expenses incurred by the trustee in connection
with the prosecution of this legal action will be reimbursable to the trustee
out of the proceeds of that action and will be retained by the trustee before
the deposit of any remaining proceeds in the Collection Account pending
distribution of the Collection Account to securityholders of the related series.
If the proceeds of any legal action are insufficient to reimburse the trustee
for its legal fees and expenses, the trustee will be entitled to withdraw from
the Collection Account an amount equal to its expenses, and the issuing entity
may realize a loss in that amount.
As
servicer of the Assets, a servicer, on behalf of itself, the trustee and the
securityholders, will present claims to the borrower under each instrument
of
credit support, and will take those reasonable steps as are necessary to receive
payment or to permit recovery under these instruments for defaulted
Assets.
If
a
servicer or its designee recovers payments under any instrument of credit
support for any defaulted Assets, the servicer will be entitled to withdraw
or
cause to be withdrawn from
60
the
Collection Account out of those proceeds, before
distribution of the Collection Account to securityholders, amounts representing
its normal servicing compensation on that Asset, unreimbursed servicing expenses
incurred for 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 an issuing entity composed of mortgage loans
will require the servicer to cause the borrower on each mortgage loan to
maintain a hazard insurance policy (including flood insurance coverage, if
obtainable, to the extent the property is located in a federally designated
flood area, in an amount as is required under applicable guidelines) providing
for the level of coverage that is required under the related Mortgage or, if
any
Mortgage permits its holder to dictate to the borrower the insurance coverage
to
be maintained on the related Mortgaged Property, then the level of coverage
that
is consistent with the Servicing Standard. That coverage will be in general
in
an amount equal to the lesser of the principal balance owing on that 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 any other amount specified
in
the 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 borrowers. All amounts collected
by
the servicer under any of these policies (except for amounts to be applied
to
the restoration or repair of the Mortgaged Property or released to the borrower
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 in accordance with the related
Agreement.
The
Agreement may provide that the servicer may satisfy its obligation to cause
each
borrower to maintain a hazard insurance policy by the servicer’s maintaining a
blanket policy insuring against hazard losses on the mortgage loans. If the
blanket policy contains a deductible clause, the servicer will be required
to
deposit in the Collection Account from its own funds all sums that would have
been deposited in the Collection Account but for that clause.
In
general, the standard form of fire and extended coverage policy covers physical
damage to or destruction of the improvements of the property by fire, lightning,
explosion, smoke, windstorm and hail, and riot, strike and civil commotion,
subject to the conditions and exclusions specified in each policy. Although
the
policies relating to the mortgage loans will be underwritten by different
insurers under different state laws in accordance with different applicable
state forms, and therefore will not contain identical terms and conditions,
the
basic terms of the policies are dictated by respective state laws, and most
of
these 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 and other kinds of uninsured risks.
The
hazard insurance policies covering the Mortgaged Properties securing the
mortgage loans will typically contain a coinsurance clause that in effect
requires the insured at all times to carry insurance of a specified percentage
(generally 80% to 90%) of the full replacement value of the improvements on
the
property to recover the full amount of any partial loss. If the insured’s
coverage falls below this specified percentage, the coinsurance clause generally
provides that the insurer’s liability in the event of partial loss does not
exceed the lesser of (1) the replacement cost of the improvements less physical
depreciation and (2) that proportion of the loss as the amount of
61
insurance
carried bears to the specified percentage
of the full replacement cost of those improvements.
Each
Agreement for an issuing entity composed of mortgage loans will require the
servicer to cause the borrower on each mortgage loan to maintain all other
insurance coverage for 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 insurance policy will be added
to
the amount owing under the mortgage loan where the terms of the mortgage loan
so
permit; provided, however, that the addition of that cost will not be taken
into
account for purposes of calculating the distribution to be made to
securityholders. Those costs may be recovered by the servicer from the
Collection Account, with interest, as provided by the Agreement.
Under
the
terms of the mortgage loans, borrowers 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 those claims is dependent upon the extent
to
which information in this regard is furnished to the servicer by
borrowers.
Other
Hazard-Related Insurance; Liability Insurance
With
respect to Multifamily Loans, certain additional insurance policies may be
required with respect to the related Multifamily Property; for example, general
liability insurance for bodily injury or death and property damage occurring
on
the property or the adjoining streets and sidewalks, steam boiler coverage
where
a steam boiler or other pressure vessel is in operation, interest coverage
insurance, and rent loss insurance to cover operating income losses following
damage or destruction of the mortgaged property. With respect to a series for
which Multifamily Loans are included in the issuing entity, the prospectus
supplement will specify the required types and amounts of additional insurance
and describe the general terms of the insurance and conditions to payment
thereunder.
Contracts.
Generally, the terms of the agreement for an issuing entity composed of
contracts will require the servicer to maintain for each contract one or more
hazard insurance policies that 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 those policies
in
the state in which the manufactured home is located, and in an amount that
is
not less than the maximum insurable value of that manufactured home or the
principal balance due from the borrower on the related contract, whichever
is
less; provided, however, that the amount of coverage provided by each hazard
insurance policy must 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 must cause flood insurance to be maintained,
which coverage must be at least equal to the minimum amount specified in the
preceding sentence or any lesser amount as may be available under the federal
flood insurance program. Each hazard insurance policy caused to be maintained
by
the servicer must contain a standard loss payee clause in favor of the servicer
and its successors and assigns. If any borrower is in default in the payment
of
premiums on its hazard insurance policy or policies, the servicer must pay
those
premiums out of its own funds, and may add separately the premiums to the
borrower’s obligation as provided by the contract, but may not add the premiums
to the remaining principal balance of the contract.
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The
servicer may maintain, in lieu of causing individual hazard insurance policies
to be maintained for each manufactured home, and must maintain, to the extent
that the related contract does not require the borrower to maintain a hazard
insurance policy for the related manufactured home, one or more blanket
insurance policies covering losses on the borrower’s interest in the contracts
resulting from the absence or insufficiency of individual hazard insurance
policies. The servicer must pay the premium for that blanket policy on the
basis
described therein and must pay any deductible amount for claims under that
policy relating to the contracts.
FHA
Insurance and VA Guarantees
FHA
loans
will be insured by the FHA as authorized under the Housing Act. Some FHA loans
will be insured under various FHA programs including the standard FHA 203(b)
program to finance the acquisition of one- to four-family housing units, the
FHA
245 graduated payment mortgage program and the FHA Title I Program. These
programs generally limit the principal amount and interest rates of the mortgage
loans insured. The prospectus supplement for Notes or Certificates, as
applicable, of each series evidencing interests in an issuing entity including
FHA loans will set forth additional information regarding the regulations
governing the applicable FHA insurance programs. Except as otherwise specified
in the prospectus supplement, the following describes FHA insurance programs
and
regulations as generally in effect for FHA loans.
The
insurance premiums for FHA loans are collected by lenders approved by the
Department of Housing and Urban Development (“HUD”) or by the servicer and are
paid to the FHA. The regulations governing FHA single-family mortgage insurance
programs provide that insurance benefits are payable either upon foreclosure
(or
other acquisition of possession) and conveyance of the mortgaged premises to
the
United States of America or upon assignment of the defaulted loan to the United
States of America. For a defaulted FHA loan, the servicer is limited in its
ability to initiate foreclosure proceedings. When it is determined, either
by
the servicer or HUD, that default was caused by circumstances beyond the
borrower’s control, the servicer is expected to make an effort to avoid
foreclosure by entering, if feasible, into one of a number of available forms
of
forbearance plans with the borrower. Those plans may involve the reduction
or
suspension of regular mortgage payments for a specified period, with those
payments to be made on or before the maturity date of the mortgage, or the
recasting of payments due under the mortgage up to or, other than FHA loans
originated under the FHA Title I Program, beyond the maturity date. In addition,
when a default caused by those circumstances is accompanied by other criteria,
HUD may provide relief by making payments to the servicer in partial or full
satisfaction of amounts due under the FHA loan (which payments are to be repaid
by the borrower to HUD) or by accepting assignment of the loan from the
servicer. With some exceptions, at least three full monthly installments must
be
due and unpaid under the FHA loan, and HUD must have rejected any request for
relief from the borrower before the servicer may initiate foreclosure
proceedings.
HUD
has
the option, in most cases, to pay insurance claims in cash or in debentures
issued by HUD. Currently, claims are being paid in cash, and claims have not
been paid in debentures since 1965. HUD debentures issued in satisfaction of
FHA
insurance claims bear interest at the applicable HUD debentures interest rate.
To the extent specified in the prospectus supplement, the servicer of each
single family FHA loan will be obligated to purchase any debenture issued in
satisfaction of that FHA loan upon default for an amount equal to the principal
amount of that debenture.
Other
than in relation to the FHA Title I Program, the amount of insurance benefits
generally paid by the FHA is equal to the entire unpaid principal amount of
the
defaulted FHA loan adjusted to reimburse the servicer for some of its costs
and
expenses and to deduct amounts received or retained by the servicer after
default. When entitlement to insurance benefits results from foreclosure (or
other acquisition of possession) and conveyance to HUD, the servicer is
compensated for no more than two-thirds of its foreclosure costs, and is
compensated for interest
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accrued
and unpaid before that date but in general
only to the extent it was allowed pursuant to a forbearance plan approved by
HUD. When entitlement to insurance benefits results from assignment of the
FHA
loan to HUD, the insurance payment includes full compensation for interest
accrued and unpaid to the assignment date. The insurance payment itself, upon
foreclosure of an FHA loan, bears interest from a date 30 days after the
borrower’s first uncorrected failure to perform any obligation to make any
payment due under the mortgage and, upon assignment, from the date of assignment
to the date of payment of the claim, in each case at the same interest rate
as
the applicable HUD debenture interest rate as described above.
VA
loans
will be partially guaranteed by the VA under the Serviceman’s Readjustment Act
(a “VA Guaranty Policy”). For a defaulted VA loan, the servicer is, absent
exceptional circumstances, authorized to announce its intention to foreclose
only when the default has continued for three months. Generally, a claim for
the
guarantee is submitted after liquidation of the Mortgaged Property.
The
amount payable under the guarantee will be the percentage of the VA loan
originally guaranteed applied to indebtedness outstanding as of the applicable
date of computation specified in the VA regulations. Payments under the
guarantee will be equal to the unpaid principal amount of that VA loan, interest
accrued on the unpaid balance of that VA loan to the appropriate date of
computation and limited expenses of the mortgagee, but in each case only to
the
extent that those amounts have not been recovered through liquidation of the
Mortgaged Property. The amount payable under the guarantee may in no event
exceed the amount of the original guarantee.
Environmental
Insurance
If
specified in the applicable prospectus supplement, the trust or trustee will
be
the beneficiary, for the benefit of the securityholders, of insurance policies
(“Environmental Policies“) providing limited coverage against certain
environmental risks with respect to the mortgaged properties securing certain
Commercial, Multifamily and Mixed-Use Mortgage Loans. Subject to various
exceptions and exclusions (including asbestos and lead paint), Environmental
Policies will generally cover losses, clean-up costs, third-party claims and
legal expenses up to pre-determined limits. Subject to the terms of the
applicable policy, if a Mortgaged Property securing a covered loan is subject
to
environmental contamination, in the event of default by the borrower the
outstanding principal balance of the loan, plus accrued interest, will be
payable under the applicable Environmental Policy.
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 of these insuring against loss occasioned by fraud,
theft or other intentional misconduct of the officers, employees and agents
of
the servicer. The related Agreement will 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 the criteria set forth in the Agreement
are met.
Due-on-Sale
Clauses
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 clause that would:
64
·
adversely
affect or jeopardize coverage under any applicable insurance policy
or
·
materially
increase the risk of default or delinquency on, or materially impair
the
security for, that mortgage loan.
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 clauses requiring the consent of the mortgagee to
any
sale or other transfer of the related mortgaged property, or due-on-sale
clauses. The servicer will generally permit that transfer so long as the
transferee satisfies the servicer’s then applicable underwriting standards. The
purpose of those transfers is often to avoid a default by the transferring
borrower.
Retained
Interest; Servicing Compensation and Payment of Expenses
The
prospectus supplement for a series of Notes or Certificates, as applicable,
will
specify whether there will be any Retained Interest in the Assets, and, if
so,
the initial owner of this Retained Interest. If so, the Retained Interest will
be established on a loan-by-loan basis and will be specified on an exhibit
to
the related Agreement. A “Retained Interest” in an Asset represents a specified
portion of the interest payable on the Asset. The Retained Interest will be
deducted from borrower payments as received and will not be part of the related
issuing entity.
The
servicer’s primary servicing compensation for a series of Notes or Certificates,
as applicable, will come from the periodic payment to it of a portion of the
interest payment on each Asset or any other amount specified in the prospectus
supplement. Since any Retained Interest and a servicer’s primary compensation
are percentages of the principal balance of each Asset, those amounts will
decrease in accordance with the amortization of the Assets. The prospectus
supplement for a series of Notes or Certificates, as applicable, evidencing
interests in an issuing entity 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 Premiums collected from borrowers and any interest or other income
that may be earned on funds held in the Collection Account or any account
established by a servicer pursuant to the Agreement.
The
servicer may, to the extent provided in the prospectus supplement, pay from
its
servicing compensation expenses incurred in connection with its servicing and
managing of the Assets, including 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 prospectus supplement. Some other expenses, including
expenses relating to defaults and liquidations on the Assets and, to the extent
so provided in the prospectus supplement, interest on these expenses at the
rate
specified in the prospectus supplement may be borne by the issuing
entity.
If
and to
the extent provided in the prospectus supplement, the servicer may be required
to apply a portion of the servicing compensation otherwise payable to it in
respect of any Due Period to interest shortfalls resulting from the voluntary
prepayment of any Assets in the related issuing entity during that period before
their due dates.
Evidence
as to Compliance
Each
pooling and servicing agreement and servicing agreement will provide that on
or
before a specified date in March of each year, beginning with the first year
after the year in which
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the
cut-off date occurs, each party responsible for
the servicing function will provide to the depositor and the trustee a report
on
an assessment of compliance with the minimum servicing criteria established
in
Item 1122(a) of Regulation AB (the “AB Servicing Criteria”). The AB Servicing
Criteria include specific criteria relating to the following areas: general
servicing considerations, cash collection and administration, investor
remittances and reporting, and pool asset administration. Such report will
indicate that the AB Servicing Criteria were used to test compliance on a
platform level basis and will set out any material instances of
noncompliance.
Each
pooling and servicing agreement and servicing agreement will also provide that
the each party responsible for the servicing function will deliver along with
its report on assessment of compliance, an attestation report from a firm of
independent public accountants on the assessment of compliance with the AB
Servicing Criteria.
Each
pooling and servicing agreement and servicing agreement will also provide for
delivery to the trustee, on or before a specified date in March of each year,
of
a separate annual statement of compliance from each entity responsible for
the
servicing function to the effect that, to the best knowledge of the signing
officer, the servicer has fulfilled in all material respects its obligations
under the pooling and servicing agreement or servicing agreement throughout
the
preceding year or, if there has been a material failure in the fulfillment
of
any obligation, the statement shall specify such failure and the nature and
status thereof. This statement may be provided as a single form making the
required statements as to more than one pooling and servicing agreement or
servicing agreement.
Copies
of
the annual reports of assessment of compliance, attestation reports, and
statements of compliance may be obtained by securityholders without charge
upon
written request to the master servicer or trustee. These items will be filed
with the issuing entity’s annual report on Form 10-K, to the extent required
under Regulation AB.
Certain
Matters Regarding Servicers, the Master Servicer and the
Depositor
The
servicer or master servicer under each Agreement will be named in the 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. If applicable, reference in
this prospectus to the servicer will also be deemed to be to the master
servicer. Each Agreement will provide, in general, that:
·
The
servicer may resign from its obligations and duties under the Agreement
only upon a determination that its duties under the 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 that conflict being of
a type
and nature carried on by the servicer at the date of the Agreement.
No
resignation will become effective until the trustee or a successor
servicer has assumed the servicer’s obligations and duties under the
Agreement.
·
Neither
any servicer, the depositor nor any director, officer, employee,
or agent
of a servicer or the depositor will be under any liability to the
related
issuing entity or securityholders for any action taken, or for refraining
from the taking of any action, in good faith pursuant to the Agreement;
provided, however, that neither a servicer, the depositor nor any
other
person will be protected against any breach of a representation,
warranty
or covenant made in the related Agreement, or against any liability
specifically imposed by the Agreement, or against any liability that
would
otherwise be imposed by reason of willful misfeasance, bad faith
or gross
66
negligence in the performance of obligations or
duties
under the Agreement or by reason of reckless disregard of obligations
and
duties under the Agreement.
·
Any
servicer, the depositor and any director, officer, employee or agent
of a
servicer or the depositor will be entitled to indemnification by
the
related issuing entity and will be held harmless against any loss,
liability or expense incurred in connection with any legal action
relating
to the Agreement or the Notes or Certificates, as applicable; provided,
however, that that indemnification will not extend to any loss, liability
or expense
(1)
specifically
imposed by that Agreement or otherwise incidental to the performance
of
obligations and duties under the Agreement, including, in the case
of a
servicer, the prosecution of an enforcement action in respect of
any
specific mortgage loan or mortgage loans or contract or contracts
(except
as any loss, liability or expense will be otherwise reimbursable
pursuant
to that Agreement);
(2)
incurred
in connection with any breach of a representation, warranty or covenant
made in that Agreement;
(3)
incurred
by reason of misfeasance, bad faith or gross negligence in the performance
of obligations or duties under the Agreement, or by reason of reckless
disregard of those obligations or
duties;
(4)
incurred
in connection with any violation of any state or federal securities
law;
or
(5)
imposed
by any taxing authority if that loss, liability or expense is not
specifically reimbursable pursuant to the terms of the related
Agreement.
·
Neither
any servicer nor the depositor will be under any obligation to appear
in,
prosecute or defend any legal action that is not incidental to its
respective responsibilities under the Agreement and which in its
opinion
may involve it in any expense or liability. Any servicer or the depositor
may, however, in its discretion undertake any action which it may
deem
necessary or desirable with respect to the Agreement and the rights
and
duties of the parties to the Agreement and the interests of the
securityholders under the Agreement. In that event, the legal expenses
and
costs of that action and any liability resulting will be expenses,
costs
and liabilities of the securityholders, and the servicer or the depositor,
as the case may be, will be entitled to be reimbursed therefor and
to
charge 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, may be the successor of the servicer or the
depositor, as the case may be, under the terms of the related
Agreement.
Special
Servicers
If
and to
the extent specified in the prospectus supplement, a special servicer (a
“Special servicer”) may be a party to the related Agreement or may be appointed
by the servicer or another specified party to perform 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
67
the
prospectus supplement, and the servicer will be
liable for the performance of a Special servicer only if, and to the extent,
set
forth in the prospectus supplement.
Events
of Default under the Agreement
Events
of
default under the related Agreement will generally include:
·
any
failure by the servicer to distribute or cause to be distributed
to
securityholders, or to remit to the trustee for distribution to
securityholders, any required payment that continues after a grace
period,
if any;
·
any
failure by the servicer duly to observe or perform in any material
respect
any of its other covenants or obligations under the Agreement that
continues unremedied for 30 days after written notice of that 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 for that
series;
·
any
breach of a representation or warranty made by the servicer under
the
Agreement that materially and adversely affects the interests of
securityholders and which continues unremedied for 30 days after
written
notice of that 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 Notes or Certificates, as applicable, evidencing not less
than
25% of the voting rights for that series;
and
·
some
events of insolvency, readjustment of debt, marshaling of assets
and
liabilities or similar proceedings and actions by or on behalf of
the
servicer indicating its insolvency or inability to pay its
obligations.
Material
variations to the foregoing events of default (other than to shorten cure
periods or eliminate notice requirements) will be specified in the prospectus
supplement. The trustee will, not later than the later of 60 days or any other
period specified in the prospectus supplement after the occurrence of any event
that constitutes or, with notice or lapse of time or both, would constitute
an
event of default and five days after specific officers of the trustee become
aware of the occurrence of that event, transmit by mail to the depositor and
all
securityholders of the applicable series notice of that occurrence, unless
that
default has been cured or waived.
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 Notes or Certificates,
as
applicable, evidencing not less than 51% (or any other percentage specified
in
the Agreement) of the voting rights for that series, the trustee will terminate
all of the rights and obligations of the servicer under the 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 Agreement
(except that if the trustee is prohibited by law from obligating itself to
make
advances regarding delinquent Assets, or if the prospectus supplement so
specifies, then the trustee will not be obligated to make those advances) and
will be entitled to similar compensation arrangements. If the trustee is
unwilling or unable so to act, it may or, at the written request of the holders
of Notes or Certificates, as applicable, entitled to at least 51% (or any other
percentage specified in the Agreement) of the voting rights for that series,
it
must 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 that appointment of at least $15,000,000 (or any other
amount specified in the Agreement) to act as successor to the servicer
68
under
the Agreement. Pending that appointment, the
trustee is obligated to act in that capacity. The trustee and any successor
servicer 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
Agreement.
The
holders of Notes or Certificates, as applicable, representing at least 66 2/3%
(or any other percentage specified in the Agreement) of the voting rights
allocated to the respective classes of Notes or Certificates, as applicable,
affected by any event of default will be entitled to waive that event of
default; provided, however, that an Event of Default involving a failure to
distribute a required payment to securityholders described in clause (1) under
“Events of Default under the Agreements” may be waived only by all of the
securityholders. Upon any waiver of an event of default, that event of default
will cease to exist and will be deemed to have been remedied for every purpose
under the Agreement.
No
securityholders will have the right under any Agreement to institute any
proceeding with respect to the Agreement unless that holder previously has
given
to the trustee written notice of default and unless the holders of Notes or
Certificates, as applicable, evidencing not less than 25% (or any other
percentage specified in the Agreement) of the voting rights have made written
request upon the trustee to institute that proceeding in its own name as trustee
under the Agreement and have offered to the trustee reasonable indemnity, and
the trustee for 60 days (or any other number of days specified in the Agreement)
has neglected or refused to institute any 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 under the Agreement
or
to institute, conduct or defend any litigation under the Agreement or in
relation to the Agreement at the request, order or direction of any of the
securityholders covered by that Agreement, unless those securityholders have
offered to the trustee reasonable security or indemnity against the costs,
expenses and liabilities that may be incurred.
The
manner of determining the voting rights of a Security or class or classes of
Notes or Certificates, as applicable, will be specified in the
Agreement.
Amendment
In
general, each Agreement may be amended by the parties to it, without the consent
of any securityholders covered by the Agreement, to cure any ambiguity or
mistake;
(1) correct,
modify or supplement any provision in the Agreement that may be inconsistent
with any other provision in the Agreement or with the prospectus
supplement;
(2) make
any other provisions with respect to matters or questions arising under the
Agreement that are not materially inconsistent with the provisions of the
Agreement; or
(3) comply
with any requirements imposed by the Code; provided that, in the case of clause
(3), that amendment will not adversely affect in any material respect the
interests of any securityholders covered by the Agreement as evidenced either
by
an opinion of counsel to that 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 Notes or Offered Certificates, as
applicable, of the related series to the effect that that amendment or
supplement will not cause that rating agency to lower or withdraw the then
current rating assigned to those Notes or Certificates, as
applicable.
69
In
general, each Agreement may also be amended by the depositor, the servicer,
if
any, and the trustee, with the consent of the securityholders affected by the
amendment evidencing not less than 51% (or any other percentage specified in
the
Agreement) of the voting rights, for any purpose; provided, however, no
amendment may (1) reduce in any manner the amount of, or delay the timing of,
payments received or advanced on Assets that are required to be distributed
on
any Security without the consent of the securityholder or (2) reduce the consent
percentages described in this paragraph without the consent of all the
securityholders covered by the Agreement then outstanding. However, for any
series of Notes or Certificates, as applicable, as to which a REMIC election
is
to be made, the trustee will not consent to any amendment of the Agreement
unless it has first have received an opinion of independent counsel to the
effect that that amendment will not result in the imposition of a tax on the
related issuing entity or, if applicable, cause the related issuing entity
to
fail to qualify as a REMIC, at any time that the related Notes or Certificates,
as applicable, are outstanding.
The
Trustee
The
trustee under each Agreement will be named in the 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. To the extent consistent with its fiduciary
obligations as trustee, the trustee may delegate its duties to one or more
agents as provided in the Agreement.
Duties
of the Trustee
The
trustee will make no representations as to the validity or sufficiency of any
Agreement, the Notes or Certificates, as applicable, 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 Notes or Certificates, as applicable, 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 related
Agreement, as applicable. However, upon receipt of the various certificates,
reports or other instruments required to be furnished to it, the trustee is
required to examine those documents and to determine whether they conform to
the
requirements of the Agreement.
If
an
Event of Default shall occur, the trustee shall, at the direction of 51% of
the
holders of the Certificates, by notice in writing to the master servicer and
to
the Depositor, with a copy to each Rating Agency, terminate all of the rights
and obligations of the master servicer in its capacity as Master Servicer under
the related pooling and servicing agreement, to the extent permitted by law,
and
in and to the mortgage loans and the proceeds thereof. On or after the receipt
by the master servicer of such written notice, all authority and power of the
master servicer with respect to the Certificates (other than as a holder of
any
Certificate) or the mortgage loans or otherwise including, without limitation,
the compensation payable to the master servicer under the related pooling and
servicing agreement, shall pass to and be vested in the trustee, and, without
limitation, the trustee shall be authorized and empowered, as attorney-in-fact
or otherwise, to execute and deliver, on behalf of and at the expense of the
master servicer, any and all documents and other instruments and to do or
accomplish all other acts or things necessary or appropriate to effect the
purposes of such notice of termination, whether to complete the transfer and
endorsement or assignment of the mortgage loans and related documents, or
otherwise.
To
the extent that the costs and expenses of the trustee related to the termination
of the master servicer, appointment of a successor master servicer or the
transfer and assumption of the master servicing by the trustee (including,
without limitation, (i) all legal costs and expenses
70
and
all due diligence costs and expenses associated
with an evaluation of the potential termination of the master servicer as a
result of an event of default and (ii) all costs and expenses associated with
the complete transfer of the master servicing, including all servicing files
and
all servicing data and the completion, correction or manipulation of such
servicing data as may be required by the successor master servicer to correct
any errors or insufficiencies in the servicing data or otherwise to enable
the
successor master servicer to master service the mortgage loans in accordance
with the related pooling and servicing agreement) are not fully and timely
reimbursed by the terminated master servicer, the trustee shall be entitled
to
reimbursement of such costs and expenses from the Distribution
Account.
Certain
Matters Regarding the Trustee
The
trustee and any director, officer, employee or agent of the trustee will be
entitled to indemnification out of the Collection Account for any loss,
liability or expense (including costs and expenses of litigation, and of
investigation, counsel fees, damages, judgments and amounts paid in settlement)
incurred in connection with the trustee’s
(1) enforcing
its rights and remedies and protecting the interests of the securityholders
during the continuance of an Event of Default,
(2) defending
or prosecuting any legal action in respect of the related Agreement or series
of
Notes or Certificates, as applicable,
(3) being
the mortgagee of record for the mortgage loans in an issuing entity and the
owner of record for any Mortgaged Property acquired in respect thereof for
the
benefit of securityholders, or
(4) acting
or refraining from acting in good faith at the direction of the holders of
the
related series of Notes or Certificates, as applicable, entitled to not less
than 25% (or any other percentage as is specified in the related Agreement
for
any particular matter) of the voting rights for that series;
provided,
however, that this indemnification will not extend to any loss, liability or
expense that constitutes a specific liability of the trustee pursuant to the
related Agreement, or to any loss, liability or expense incurred by reason
of
willful misfeasance, bad faith or negligence on the part of the trustee in
the
performance of its obligations and duties under the Agreement, or by reason
of
its reckless disregard of those obligations or duties, or as may arise from
a
breach of any representation, warranty or covenant of the trustee made in the
Agreement.
Resignation
and Removal of the Trustee
The
trustee may resign at any time, in which event the depositor will be obligated
to appoint a successor trustee. The depositor may also remove the trustee if
the
trustee ceases to be eligible to continue under the pooling and servicing
agreement or if the trustee becomes insolvent. Upon becoming aware of the
circumstances, the depositor will be obligated to appoint a successor trustee.
The trustee may also be removed at any time by the holders of securities
evidencing not less a majority of the aggregate undivided interests (or, if
applicable, voting rights) in the related issuing entity. Any resignation or
removal of the trustee and appointment of a successor trustee will not become
effective until acceptance of the appointment by the successor trustee. If
the
trustee resigns or is removed by the depositor, the expenses associated with
the
change of trustees will be paid by the former trustee and reimbursed from the
Distribution Account. If the trustee is removed by holders of securities, such
holders shall be responsible for paying any
71
compensation
payable to a successor trustee, in
excess of the amount paid to the predecessor 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 any
provision of the indenture relating to that series that materially differs
from
the description of that provision contained in this prospectus. The summaries
do
not purport to be complete and are subject to, and are qualified by reference
to, all of the provisions of the indenture for a series of Notes. A form of
an
indenture has been filed as an exhibit to the Registration Statement of which
this prospectus is a part. The depositor will provide a copy of the indenture
(without exhibits) relating to any series of Notes without charge upon written
request of a securityholder of that series addressed to ACE Securities Corp.,
6525 Morrison Boulevard, Suite 318, Charlotte, North Carolina28211, Attention:
Evelyn Echevarria.
Events
of Default
Events
of
default under the indenture for each series of Notes will generally
include:
·
a
default for thirty days (or any other number of days specified in
the
prospectus supplement) or more in the payment of any principal of
or
interest on a Note of that series, to the extent specified in the
prospectus supplement;
·
failure
to perform any other covenant of the depositor or the issuing entity
in
the indenture that continues for a period of sixty days (or any other
number of days specified in the prospectus supplement or the indenture)
after notice of the failure is given in accordance with the procedures
described in the prospectus
supplement;
·
any
representation or warranty made by the depositor or the issuing entity
in
the indenture or in any certificate or other writing delivered pursuant
to
the indenture or in connection with the indenture with respect to
or
affecting that series having been incorrect in a material respect
as of
the time made, and that breach is not cured within sixty days (or
any
other number of days specified in the prospectus supplement) after
notice
of the breach is given in accordance with the procedures described
in the
prospectus supplement;
·
specified
events of bankruptcy, insolvency, receivership or liquidation of
the
issuing entity; or
·
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, subject to and in accordance with the terms of the
indenture, either the indenture trustee or the holders of a majority of the
then
total outstanding amount of the Notes of that series may declare the principal
amount (or, if the Notes of that series are Accrual Securities, that portion
of
the principal amount as may be specified in the terms of that series, as
provided in the indenture) of all the Notes of that series to be due and payable
immediately. That declaration may, under some circumstances, be rescinded and
annulled by the securityholders of a majority in total outstanding amount of
the
Notes of that series.
72
If,
following an event of default with respect to any series of Notes, the Notes
of
that series have been declared to be due and payable, the indenture trustee
may,
in its discretion, notwithstanding that acceleration, elect to maintain
possession of the collateral securing the Notes of that series and to continue
to apply distributions on that collateral as if there had been no declaration
of
acceleration if that collateral continues to provide sufficient funds for the
payment of principal of and interest on the Notes of that series as they would
have become due if there had not been that 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 that series for thirty
days
or more, unless
(1)
the holders of
100% (or any other percentage specified in the indenture) of the then total
outstanding amount of the Notes of that series consent to that
sale;
(2)
the proceeds
of that sale or liquidation are sufficient to pay in full the principal of
and
accrued interest, due and unpaid, on the outstanding Notes of that series at
the
date of that sale; or
(3)
the indenture
trustee determines that that collateral would not be sufficient on an ongoing
basis to make all payments on the Notes as those payments would have become
due
if the Notes had not been declared due and payable, and the indenture trustee
obtains the consent of the holders of 66 2/3% (or any other percentage specified
in the indenture) of the then total outstanding amount of the Notes of that
series.
If
so
specified in the prospectus supplement, only holders of particular classes
of
Notes will have the right to declare the Notes of that series to be immediately
due and payable in the event of a payment default, as described above, and
to
exercise the remedies described above.
If
the
indenture trustee liquidates the collateral in connection with an event of
default involving a default for thirty days (or any other number of days
specified in the indenture) 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 liquidation for unpaid fees and
expenses. As a result, upon the occurrence of that 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 that event of default.
To
the
extent provided in the prospectus supplement, in the event the principal of
the
Notes of a series is declared due and payable, as described above, the holders
of any Notes issued at a discount from par may be entitled to receive no more
than an amount equal to the unpaid principal amount of the Notes less the amount
of the discount that is unamortized.
Subject
to the provisions of the indenture relating to the duties of the indenture
trustee, in case an event of default occurs and continues for a series of Notes,
the indenture trustee will 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 that series, unless those holders offer to the indenture
trustee security or indemnity satisfactory to it against the costs, expenses
and
liabilities that might be incurred by it in complying with that request or
direction. Subject to those provisions for indemnification and some limitations
contained in the indenture, the holders of a majority of the then total
outstanding amount of the Notes of that series will 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 that series, and the holders
of a
majority of the then total outstanding amount of the Notes of that series may,
in some cases, waive any default with respect to the Notes, except a default
in
the
73
payment
of principal or interest or a default in
respect of a covenant or provision of the indenture that cannot be modified
without the waiver or consent of all the holders of the outstanding Notes of
that series affected.
Discharge
of Indenture
The
indenture will be discharged, subject to the provisions of the indenture, for
a
series of Notes (except for continuing rights specified in the indenture) upon
the delivery to the indenture trustee for cancellation of all the Notes of
that
series or, with some limitations, upon deposit with the indenture trustee of
funds sufficient for the payment in full of all of the Notes of that
series.
With
some
limitations, the indenture will provide that, if specified for the Notes of
any
series, the related issuing entity will be discharged from any and all
obligations in respect of the Notes of that series (except for obligations
specified in the indenture including obligations relating to temporary Notes
and
exchange of Notes, to register the transfer of or exchange Notes of that series,
to replace stolen, lost or mutilated Notes of that 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 of the Notes 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 that series on the maturity date for
those Notes and any installment of interest on those Notes in accordance with
the terms of the indenture and the Notes of that series. In the event of any
defeasance and discharge of Notes of that series, holders of Notes of that
series would be able to look only to that money and/or those 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, as provided in the indenture,
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 indebtedness owing by that Trust
to
the applicable indenture trustee in its individual capacity, the property and
funds physically held by the indenture trustee in its capacity as indenture
trustee and any action taken by it that materially affects the Notes and that
has not been previously reported.
The
Indenture Trustee
The
indenture trustee for a series of Notes will be specified in the prospectus
supplement. The indenture trustee for any series may resign at any time in
accordance with the terms of the indenture, in which event the depositor or
the
appropriate party designated in the indenture will be obligated to appoint
a
successor trustee for that series. The depositor or the appropriate party
designated in the indenture may also remove any indenture trustee if that
indenture trustee ceases to be eligible to continue as the indenture trustee
under the related indenture, if that indenture trustee becomes insolvent or
for
any other grounds specified in the indenture. In those circumstances the
depositor or the appropriate party designated in the indenture 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 that 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. To the extent consistent with
its fiduciary obligations as indenture trustee, the
74
indenture
trustee may delegate its duties to one or
more agents as provided in the indenture and the Agreement.
Description
of Credit Support
General
For
any
series of Notes or Certificates, as applicable, credit support may be provided
for one or more classes of the series or the related Assets. Credit
support only may be in the form of one or more of the following
features:
•
letters
of credit;
•
Pool
Insurance Policies;
•
special
hazard insurance policies;
•
Bankruptcy
Bonds;
•
guarantees;
or
•
the
establishment of one or more reserve funds;
Alternatively,
the prospectus supplement relating to a series of securities will specify if
credit support may be provided by subordination of one or more classes of
securities or by overcollateralization, in combination with or in lieu of any
one or more of the instruments set forth above.
Any
form
of credit support may be structured so as to be drawn upon by more than one
series to the extent described in the prospectus supplement.
The
coverage provided by any credit support will be described in the prospectus
supplement. Generally, that coverage will not provide protection against all
risks of loss and will not guarantee repayment of the entire Security Balance
of
the Notes or Certificates, as applicable, and interest on the Security Balance.
If losses or shortfalls occur that exceed the amount covered by credit support
or that are not covered by credit support, securityholders will bear their
allocable share of deficiencies. Moreover, if a form of credit support covers
more than one series of Notes or Certificates, as applicable (each, a “Covered
Trust”), securityholders evidencing interests in any of those Covered Trusts
will be subject to the risk that the credit support will be exhausted by the
claims of other Covered Trusts before that Covered Trust receiving any of its
intended share of that coverage.
If
credit
support is provided for one or more classes of Notes or Certificates, as
applicable, of a series, or the related Assets, the prospectus supplement will
include a description of
(a) the
nature and amount of coverage under that credit support,
(b) any
conditions to payment under the prospectus supplement not otherwise described
in
this prospectus,
75
(c) the
conditions (if any) under which the amount of coverage under that credit support
may be reduced and under which that credit support may be terminated or replaced
and
(d) the
material provisions relating to that credit support.
Additionally,
the prospectus supplement will set forth information with respect to the obligor
under any financial guaranty insurance policy, letter of credit, guarantee
or
similar instrument of credit support, including
(1) a
brief description of its principal business activities,
(2) its
principal place of business, place of incorporation and the jurisdiction under
which it is chartered or licensed to do business,
(3) if
applicable, the identity of regulatory agencies that exercise primary
jurisdiction over the conduct of its business and
(4) its
total assets, and its stockholders’ or policyholders’ surplus, if applicable, as
of the date specified in the prospectus supplement.
Subordinate
Securities
One
or
more classes of Notes or Certificates, as applicable, of a series may be
Subordinate Notes or Subordinate Certificates, as applicable, if specified
in
the prospectus supplement. The rights of the holders of Subordinate Notes or
Subordinate Certificates, as applicable, to receive distributions of principal
and interest from the Collection Account on any Distribution Date will be
subordinated to those rights of the holders of Senior Notes or Senior
Certificates, as applicable. The subordination of a class may apply only in
the
event of (or may be limited to) particular types of losses or shortfalls. The
prospectus supplement will set forth information concerning the amount of
subordination of a class or classes of Subordinate Notes or Subordinate
Certificates, as applicable, in a series, the circumstances in which that
subordination will be applicable and the manner, if any, in which the amount
of
subordination will be effected.
Cross-Support
Provisions
If
the
Assets for a series are divided into separate groups, each supporting a separate
class or classes of Notes or Certificates, as applicable, of a series, credit
support may be provided by cross-support provisions requiring that distributions
be made on Senior Notes or Senior Certificates, as applicable, evidencing
interests in one group of mortgage loans before distributions on Subordinate
Notes or Subordinate Certificates, as applicable, evidencing interests in a
different group of mortgage loans within the issuing entity. The prospectus
supplement for a series that includes a cross-support provision will describe
the manner and conditions for applying those provisions.
76
Limited
Guarantee
If
specified in the prospectus supplement for a series of Notes or Certificates,
as
applicable, credit enhancement may be provided in the form of a limited
guarantee issued by a guarantor named in the prospectus supplement. Any
guarantee specified in the prospectus supplement, if any, will be exempt from
registration under the Securities Act.
Financial
Guaranty Insurance Policy or Surety Bond
Credit
enhancement may be provided in the form of a financial guaranty insurance policy
or a surety bond issued by an insurer named in the policy or surety bond, if
specified in the prospectus supplement.
Letter
of Credit
Alternative
credit support for a series of Notes or Certificates, as applicable, may be
provided by the issuance of a letter of credit by the bank or financial
institution specified in the prospectus supplement. The coverage, amount and
frequency of any reduction in coverage provided by a letter of credit issued
for
a series of Notes or Certificates, as applicable, will be set forth in the
prospectus supplement relating to that series.
Pool
Insurance Policies
If
specified in the prospectus supplement relating to a series of Notes or
Certificates, as applicable, a pool insurance policy for the mortgage loans
in
the related issuing entity will be obtained. The pool insurance policy will
cover any loss (subject to the limitations described in the prospectus
supplement) by reason of default to the extent a related mortgage loan is not
covered by any primary mortgage insurance policy. The amount and principal
terms
of any pool insurance coverage will be set forth in the prospectus
supplement.
Special
Hazard Insurance Policies
A
special
hazard insurance policy may also be obtained for the related issuing entity,
if
specified in the prospectus supplement, in the amount set forth in the
prospectus supplement. The special hazard insurance policy will, subject to
the
limitations described in the prospectus supplement, protect against loss by
reason of damage to Mortgaged Properties caused by hazards not insured against
under the standard form of hazard insurance policy for the respective states,
in
which the Mortgaged Properties are located. The amount and principal terms
of
any special hazard insurance coverage will be set forth in the prospectus
supplement.
Borrower
Bankruptcy Bond
Losses
resulting from a bankruptcy proceeding relating to a borrower affecting the
mortgage loans in an issuing entity for a series of Notes or Certificates,
as
applicable, will, if specified in the prospectus supplement, be covered under
a
borrower bankruptcy bond (or any other instrument that will not result in a
downgrading of the rating of the Notes or Certificates, as applicable, of a
series by the rating agency or agencies that rate that series). Any borrower
bankruptcy bond or any other instrument will provide for coverage in an amount
meeting the criteria of the rating agency or agencies rating the Notes or
Certificates, as applicable, of the related series, which amount will be set
forth in the prospectus supplement. The amount and principal terms of any
borrower bankruptcy coverage will be set forth in the prospectus
supplement.
77
Reserve
Funds
If
so
provided in the prospectus supplement for a series of Notes or Certificates,
as
applicable, deficiencies in amounts otherwise payable on those Notes or
Certificates, as applicable, or specific classes of Notes or Certificates,
as
applicable, will be covered by one or more reserve funds in which cash, a letter
of credit, Permitted Investments, a demand note or a combination of these will
be deposited, in the amounts so specified in the prospectus supplement. The
reserve funds for a series may also be funded over time by depositing a
specified amount of the distributions received on the related Assets as
specified in the prospectus supplement.
Amounts
on deposit in any reserve fund for a series, together with the reinvestment
income on these amounts, if any, will be applied for the purposes, in the
manner, and to the extent specified in the prospectus supplement. A reserve
fund
may be provided to increase the likelihood of timely distributions of principal
of and interest on the Notes or Certificates, as applicable. If specified in
the
prospectus supplement, reserve funds may be established to provide limited
protection against only some types of losses and shortfalls. Following each
Distribution Date amounts in a reserve fund in excess of any amount required
to
be maintained in the reserve fund 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 Notes or Certificates, as
applicable.
Money
deposited in any reserve funds will be invested in Permitted Investments, to
the
extent specified in the prospectus supplement. To the extent specified in the
prospectus supplement, any reinvestment income or other gain from those
investments will be credited to the related reserve fund for that series, and
any loss resulting from those investments will be charged to the reserve fund.
However, that income may be payable to any related servicer or another service
provider or other entity. To the extent specified in the prospectus supplement,
the reserve fund, if any, for a series will not be a part of the issuing
entity.
Additional
information concerning any reserve fund will be set forth in the prospectus
supplement, including the initial balance of the reserve fund, the balance
required to be maintained in the reserve fund, the manner in which the required
balance will decrease over time, the manner of funding the reserve fund, 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.
Overcollateralization
If
specified in the prospectus supplement, subordination provisions of an issuing
entity may be used to accelerate to a limited extent the amortization of one
or
more classes of Notes or Certificates, as applicable, relative to the
amortization of the related Assets. The accelerated amortization is achieved
by
the application of excess interest to the payment of principal of one or more
classes of Notes or Certificates, as applicable. This acceleration feature
creates, for the Assets or groups of Assets, overcollateralization, which is
the
excess of the total principal balance of the related Assets, or a group of
related Assets, over the principal balance of the related class or classes
of
Notes or Certificates, as applicable. This acceleration may continue for the
life of the related Security, or may be limited. In the case of limited
acceleration, once the required level of overcollateralization is reached,
and
subject to the provisions specified in the prospectus supplement, the limited
acceleration feature may cease, unless necessary to maintain the required level
of overcollateralization.
78
Primary
Mortgage Insurance Policies
The
servicer will maintain or cause to be maintained with respect to each mortgage
loan, a primary mortgage insurance policy in accordance with the underwriting
standards described in the related prospectus supplement. Although the terms
and
conditions of primary mortgage insurance policies differ, each primary mortgage
insurance policy will generally cover losses up to an amount equal to the excess
of the unpaid principal amount of a defaulted mortgage loan, plus accrued and
unpaid interest thereon and approved expenses, over a specified percentage
of
the value of the related mortgaged property.
As
conditions to the filing or payment of a claim under a primary mortgage
insurance policy, the insured will typically be required, in the event of
default by the borrower, to:
·
advance
or discharge (a) hazard insurance premiums and (b) as necessary and
approved in advance by the insurer, real estate taxes, property protection
and preservation expenses and foreclosure and related
costs,
·
in
the event of any physical loss or damage to the mortgaged property,
have
the mortgaged property restored to at least its condition at the
effective
date of the primary mortgage insurance policy, ordinary wear and
tear
excepted, and
·
tender
to the insurer good and merchantable title to, and possession of,
the
mortgaged property.
Derivatives
The
trust
fund may include one or more derivative instruments, as described in this
section. All derivative instruments included in any trust fund will be used
only
in a manner that reduces or alters risk resulting from the mortgage loans or
other assets in the pool, and only in a manner such that the return on the
offered securities will be based primarily on the performance of the mortgage
loans or other assets in the pool. Derivative instruments may include only
1)
interest rate swaps (or caps, floors and collars) and yield supplement
agreements as described below, 2) currency swaps and 3) market value swaps
that
are referenced to the value of one or more of the mortgage loans or other assets
included in the trust fund or to a class of offered securities.
An
interest rate swap is an agreement between two parties to exchange a stream
of
interest payments on an agreed hypothetical or “notional” principal amount. No
principal amount is exchanged between the counterparties to an interest rate
swap. In a typical swap, one party agrees to pay a fixed rate on a notional
principal amount, while the counterparty pays a floating rate based on one
or
more reference interest rates including the London Interbank Offered Rate,
or
LIBOR, a specified bank’s prime rate or U.S. Treasury Bill rates. Interest rate
swaps also permit counterparties to exchange a floating rate obligation based
upon one reference interest rate, such as LIBOR, for a floating rate obligation
based upon another referenced interest rate, such as U.S. Treasury Bill rates.
An interest rate cap, collar or floor is an agreement where the counterparty
agrees to make payments representing interest on a notional principal amount
when a specified reference interest rate is above a strike rate, outside of
a
range of strike rates, or below a strike rate as specified in the agreement,
generally in exchange for a fixed amount paid to the counterparty at the time
the agreement is entered into. A yield supplement agreement is a type of cap
agreement, and is substantially similar to a cap agreement as described
above.
The
trustee on behalf of a trust fund may enter into interest rate swaps, caps,
floors and collars, or yield supplement agreements, to minimize the risk to
securityholders from adverse changes in interest rates or to provide
supplemental credit support. Cap agreements and yield
79
supplement
agreements may be entered into to
supplement the interest rate or other rates available to make interest payments
on one or more classes of the securities of any series.
A
market
value swap might be used in a structure where the pooled assets are hybrid
ARMs,
or mortgage loans that provide for a fixed rate period and then convert by
their
terms to adjustable rate loans. Such a structure might provide that at a
specified date near the end of the fixed rate period, the investors must tender
their securities to the trustee who will then transfer the securities to other
investors in a mandatory auction procedure. The market value swap would ensure
that the original investors would receive at least par at the time of tender,
by
covering any shortfall between par and the then current market value of their
securities.
Any
derivative contracts will be documented based upon the standard forms provided
by the International Swaps and Derivatives Association, or ISDA. These forms
generally consist of an ISDA master agreement, a schedule to the master
agreement, and a confirmation, although in some cases the schedule and
confirmation will be combined in a single document and the standard ISDA master
agreement will be incorporated therein by reference. Standard ISDA definitions
also will be incorporated by reference. Each confirmation will provide for
payments to be made by the derivative counterparty to the trust, and in some
cases by the trust to the derivative counterparty, generally based upon
specified notional amounts and upon differences between specified interest
rates
or values. For example, the confirmation for an interest rate cap agreement
will
contain a schedule of fixed interest rates, generally referred to as strike
rates, and a schedule of notional amounts, for each distribution date during
the
term of the interest rate cap agreement. The confirmation also will specify
a
reference rate, generally a floating or adjustable interest rate, and will
provide that payments will be made by the derivative counterparty to the trust
on each distribution date, based on the notional amount for that distribution
date and the excess, if any, of the specified reference rate over the strike
rate for that distribution date.
In
the
event of the withdrawal of the credit rating of a derivative counterparty or
the
downgrade of such credit rating below levels specified in the derivative
contract (where the derivative contract is relevant to the ratings of the
offered securities, such levels generally are set by the rating agencies rating
the offered securities), the derivative counterparty may be required to post
collateral for the performance of its obligations under the derivative contract,
or to take certain other measures intended to assure performance of those
obligations. Posting of collateral will be documented using the ISDA Credit
Support Annex.
There
can
be no assurance that the trustee will be able to enter into derivatives at
any
specific time or at prices or on other terms that are advantageous. In addition,
although the terms of the derivatives may provide for termination under various
circumstances, there can be no assurance that the trustee will be able to
terminate a derivative when it would be economically advantageous to the trust
fund to do so.
Certain
Legal Aspects of Mortgage Loans
The
following discussion contains summaries, which are general in nature, of 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. In this regard, the
following discussion does not fully reflect federal regulations for FHA loans
and VA loans. See “Description of The Issuing Entities—FHA Loans and VA Loans,”“Description of the Agreements—Material Terms of the Pooling and Servicing
Agreements and Underlying Servicing Agreements—FHA Insurance and VA Guarantees”
and “Description of the Issuing Entities—Assets.”
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General
All
of
the mortgage loans are 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 on 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 in this prospectus
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 that 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 borrower (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 borrower), 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, “borrower” 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 borrower 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 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 borrower 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 borrower. At origination of a mortgage
loan involving a land trust, the borrower 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, some federal laws
(including the Servicemembers’ Civil Relief Act) and, in some cases, in deed of
trust transactions, the directions of the beneficiary.
The
mortgages that encumber multifamily properties may contain an assignment of
rents and leases, pursuant to which the borrower assigns to the lender the
borrower’s right, title and interest as landlord under each lease and the income
derived therefrom, while retaining a revocable license to collect the rents
for
so long as there is no default. If the borrower defaults, the license terminates
and the lender is entitled to collect the rents. Local law may require that
the
lender take possession of the property and/or obtain a court-appointed receiver
before becoming entitled to collect the rents.
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, that
instrument may
81
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 that lease. An instrument covering an interest in real
property other than the fee estate requires special provisions in the instrument
creating that interest or in the mortgage, deed of trust, security deed or
deed
to secure debt, to protect the mortgagee against termination of that 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
prospectus supplement will make representations and warranties in the Agreement
or representations and warranties will be assigned to the trustee for any
mortgage loans secured by an interest in a leasehold estate. Those
representation and warranties, if applicable, will be set forth in the
prospectus supplement.
Cooperative
Loans
If
specified in the prospectus supplement, the mortgage loans may also consist
of
cooperative apartment loans (“Cooperative Loans”) secured by security interests
in shares issued by a cooperative housing corporation (a “Cooperative”) and in
the related proprietary leases or occupancy agreements granting exclusive rights
to occupy specific dwelling units in the cooperatives’ buildings. The security
agreement will create a lien upon, or grant a title interest in, the property
that it covers, the priority of which will depend on the terms of the particular
security agreement as well as the order of recordation of the agreement in
the
appropriate recording office. That lien or title interest is not prior to the
lien for real estate taxes and assessments and other charges imposed under
governmental police powers.
Each
Cooperative owns in fee or has a leasehold interest in all the real property
and
owns in fee or leases the building and all separate dwelling units in the
building. The Cooperative is directly responsible for property management and,
in most cases, payment of real estate taxes, other governmental impositions
and
hazard and liability insurance. If there is a blanket mortgage or mortgages
on
the cooperative apartment building or underlying land, as is generally the
case,
or an underlying lease of the land, as is the case in some instances, the
Cooperative, as property borrower, or lessee, as the case may be, is also
responsible for meeting these mortgage or rental obligations. A blanket mortgage
is ordinarily incurred by the cooperative in connection with either the
construction or purchase of the Cooperative’s apartment building or obtaining of
capital by the Cooperative. The interest of the occupant under proprietary
leases or occupancy agreements as to which that Cooperative is the landlord
are
generally subordinate to the interest of the holder of a blanket mortgage and
to
the interest of the holder of a land lease.
If
the
Cooperative is unable to meet the payment obligations (1) arising under a
blanket mortgage, the mortgagee holding a blanket mortgage could foreclose
on
that mortgage and terminate all subordinate proprietary leases and occupancy
agreements or (2) arising under its land lease, the holder of the landlord’s
interest under the land lease could terminate it and all subordinate proprietary
leases and occupancy agreements. Also, a blanket mortgage on a cooperative
may
provide financing in the form of a mortgage that does not fully amortize, with
a
significant portion of principal being due in one final payment at maturity.
The
inability of the Cooperative to refinance a mortgage and its consequent
inability to make that final payment could lead to foreclosure by the mortgagee.
Similarly, a land lease has an expiration date and the inability of the
Cooperative to extend its term or, in the alternative, to purchase the land
could lead to termination of the Cooperative’s interest in the property and
termination of all proprietary leases and occupancy agreement. In either event,
a foreclosure by the holder of a blanket mortgage or the termination of the
underlying lease could eliminate or significantly diminish the value of any
collateral held by the lender that financed the purchase by an individual tenant
stockholder of cooperative shares or, in the case of the mortgage loans, the
collateral securing the Cooperative Loans.
82
The
Cooperative is owned by tenant-stockholders who, through ownership of stock
or
shares in the corporation, receive proprietary lease or occupancy agreements
that confer exclusive rights to occupy specific units. Generally, a
tenant-stockholder of a Cooperative must make a monthly payment to the
Cooperative representing that tenant-stockholder’s pro rata share of the
Cooperative’s payments for its blanket mortgage, real property taxes,
maintenance expenses and other capital or ordinary expenses. An ownership
interest in a Cooperative and accompanying occupancy rights are financed through
a Cooperative Loan evidenced by a promissory note and secured by an assignment
of and a security interest in the occupancy agreement or proprietary lease
and a
security interest in the related Cooperative shares. The lender generally takes
possession of the share certificate and a counterpart of the proprietary lease
or occupancy agreement and a financing statement covering the proprietary lease
or occupancy agreement and the cooperative shares is filed in the appropriate
state and local offices to perfect the lender’s interest in its collateral.
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. See “—Foreclosure—Cooperative
Loans” below.
Land
Sale Contracts
Under
an
installment land sale contract for the sale of real estate (a “land sale
contract”) 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 on 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 that situation does not have to foreclose 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 those 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 particular state are simpler and less time consuming and costly
than are the procedures for foreclosing and obtaining clear title to a mortgaged
property.
83
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 for 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 some 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. Those 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 borrower from the
legal effect of mortgage defaults, to the extent that the effect is perceived
as
harsh or unfair. Relying on those 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
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 and have required
that lenders reinstate loans or recast payment schedules to accommodate
borrowers 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 borrower failed to maintain the
mortgaged property adequately or the borrower 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
borrower 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 borrower.
84
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 borrower 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, before the sale, the trustee under a deed of trust must record a notice
of default and notice of sale and send a copy to the borrower 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
borrower 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 borrower 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 that property at the time of
sale,
due to, among other things, redemption rights that 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 that may be recovered by a lender.
Thereafter, subject to the borrower’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 those 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 on 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, if 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, for those mortgage loans, if any, that are junior
85
mortgage
loans, if the lender purchases the property
the lender’s title will be subject to all senior mortgages, prior liens and
specific 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 borrower is in default. Any additional
proceeds are generally payable to the borrower. 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 those holders.
Rights
of Redemption
The
purposes of a foreclosure action are to enable the mortgagee to realize upon
its
security and to bar the borrower, and all persons who have an interest in the
property that 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
that 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 begun, the redeeming
party must pay some of the costs of that 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 that exists before
completion of the foreclosure, is not waivable by the borrower, must be
exercised before 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 borrower 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 borrower pays only a portion of the sums due. The
effect of a statutory right of redemption is to diminish the ability of the
lender to sell the foreclosed property. The 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 years from the close of the calendar year
of its acquisition. For a series of Notes or Certificates, as applicable, for
which an election is made to qualify the issuing entity or a part of the issuing
entity as a REMIC, the Agreement will permit foreclosed property to be held
for
more than such three year period if the Internal Revenue Service grants an
extension of time within which to sell the property or independent counsel
renders an opinion to the effect that holding the property for that 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 bylaws, as well as the
proprietary lease or occupancy agreement, and may be
86
canceled
by the Cooperative for failure by the
tenant-stockholder to pay rent or other obligations or charges owed by that
tenant-stockholder, including mechanics’ liens against the cooperative apartment
building incurred by that tenant-stockholder. The proprietary lease or occupancy
agreement generally permit the Cooperative to terminate the lease or agreement
in the event a borrower fails to make payments or defaults in the performance
of
covenants required under the proprietary lease or occupancy agreement.
Typically, the lender and the Cooperative enter into a recognition agreement
that 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, if the tenant-stockholder has
defaulted under the proprietary lease or occupancy agreement, the Cooperative
will take no action to terminate that 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 that 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 on the Cooperative
Loan.
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 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 that 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 that apply to 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, that
are subordinate to first or other senior mortgages or deeds of trust held by
other lenders. The rights of the issuing entity 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,
87
including
the prior rights of the senior mortgagee or
beneficiary to receive and apply hazard insurance and condemnation proceeds
and,
upon default of the borrower, 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” above.
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 borrower 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 these sums, these sums will generally have priority
over all sums due under the junior mortgage.
Anti-Deficiency
Legislation and Other Limitations on Lenders
Statutes
in some states limit the right of a beneficiary under a deed of trust or a
mortgagee under a mortgage 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 to the difference
between the net amount realized upon the public sale of the real property and
the amount due to the lender.
Some
states require the lender to exhaust the security afforded under a mortgage
by
foreclosure in an attempt to satisfy the full debt before bringing a personal
action against the borrower. In some other states, the lender has the option
of
bringing a personal action against the borrower on the debt without first
exhausting that security; however, in some of these states, the lender,
following judgment on the personal action, may be deemed to have elected a
remedy and may be precluded from exercising remedies with respect to the
security. In some cases, a lender will be precluded from exercising any
additional rights under the note or mortgage if it has taken any prior
enforcement action. Consequently, the practical effect of the election
requirement, in those states permitting that election, is that lenders will
usually proceed against the security first rather than 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
lender 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 federal bankruptcy laws and state
laws
affording relief to debtors, may interfere with or affect the ability of a
secured mortgage lender to realize upon its security. For example, numerous
statutory provisions under the United States Bankruptcy Code, 11 U.S.C. Sections
101 et seq. (the “Bankruptcy Code”), may interfere with or affect the ability of
the secured mortgage lender to obtain payment of a mortgage loan, to realize
upon collateral and/or enforce a deficiency judgment. Under federal bankruptcy
law, virtually all actions (including foreclosure actions and deficiency
judgment proceedings) are automatically stayed upon the filing of a bankruptcy
petition, and often no interest or principal payments are made during the course
of the bankruptcy proceeding. In a case under the Bankruptcy Code, the secured
party is precluded from foreclosing without authorization from the bankruptcy
court. In addition, a court with federal bankruptcy jurisdiction may permit
a
debtor through his or her Chapter 11 or Chapter 13 plan to cure a monetary
default in respect of a mortgage loan by paying arrearages within a reasonable
time period and reinstating the original mortgage loan payment schedule even
88
though
the lender accelerated the mortgage loan and
final judgment of foreclosure had been entered in state court (provided no
foreclosure sale had yet occurred) before the filing of the debtor’s petition.
Some courts with federal bankruptcy jurisdiction have approved plans, based
on
the particular facts of the case, that affected the curing of a mortgage loan
default by paying arrearages over a number of years.
If
a
mortgage loan is secured by property not consisting solely of the debtor’s
principal residence, the Bankruptcy Code also permits that mortgage loan to
be
modified. These modifications may include reducing the amount of each monthly
payment, changing the rate of interest, altering the repayment schedule, and
reducing the lender’s security interest to the value of the property, thus
leaving the lender in the position of a general unsecured creditor for the
difference between the value of the property and the outstanding balance of
the
mortgage loan. Some courts have permitted these modifications when the mortgage
loan is secured both by the debtor’s principal residence and by personal
property.
Some
tax
liens arising under the Code may in some circumstances provide priority over
the
lien of a mortgage or deed of trust. In addition, substantive requirements
are
imposed upon mortgage lenders in connection with the origination and the
servicing of 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 law. In some cases this
liability may affect assignees of the mortgage loans.
Generally,
Article 9 of the UCC governs foreclosure on Cooperative shares and the related
proprietary lease or occupancy agreement. Some courts have interpreted Section
9-504 of the UCC to prohibit a deficiency award unless the creditor establishes
that the sale of the collateral (which, in the case of a Cooperative Loan,
would
be the shares of the Cooperative and the related proprietary lease or occupancy
agreement) was conducted in a commercially reasonable manner.
Federal
Bankruptcy Laws Relating to Mortgage Loans Secured by Multifamily
Property
Section
365(a) of the Bankruptcy Code generally provides that a trustee or a
debtor-in-possession in a bankruptcy or reorganization case under the Bankruptcy
Code has the power to assume or to reject an executory contract or an unexpired
lease of the debtor, in each case subject to the approval of the bankruptcy
court administering the case. If the trustee or debtor-in- possession rejects
an
executory contract or an unexpired lease, rejection generally constitutes a
breach of the executory contract or unexpired lease immediately before the
date
of the filing of the petition. As a consequence, if the mortgagor is the other
party or parties to the executory contract or unexpired lease, such as a lessor
under a lease, the mortgagor would have only an unsecured claim against the
debtor for damages resulting from the breach, which could adversely affect
the
security for the related mortgage loan. Moreover, under Section 502(b)(6) of
the
Bankruptcy Code, the claim of a lessor for damages from the termination of
a
lease of real property will be limited to the sum of (1) the rent reserved
by
the lease, without acceleration, for the greater of one year or 15 percent,
not
to exceed three years, of the remaining term of the lease, following the earlier
of the date of the filing of the petition and the date on which the lender
repossessed, or the lessee surrendered, the leased property, and (2) any unpaid
rent due under the lease, without acceleration, on the earlier of these
dates.
Under
Section 365(h) of the Bankruptcy Code, if a trustee for a lessor, or a lessor
as
a debtor-in-possession, rejects an unexpired lease of real property, the lessee
may treat the lease as terminated by rejection or, in the alternative, may
remain in possession of the leasehold for the balance of the term and for any
renewal or extension of the term that is enforceable by the lessee under
applicable nonbankruptcy law. The Bankruptcy Code provides that if a lessee
elects to
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remain
in possession after rejection of a lease, the
lessee may offset against rents reserved under the lease for the balance of
the
term after the date of rejection of the lease, and any renewal or extension
thereof, any damages occurring after that date caused by the nonperformance
of
any obligation of the lessor under the lease after that date.
Under
Section 365(f) of the Bankruptcy Code, if a trustee assumes an executory
contract or an unexpired lease of the debtor, the trustee or
debtor-in-possession generally may assign the executory contract or unexpired
lease, notwithstanding any provision therein or in applicable law that
prohibits, restricts or conditions the assignment, provided that the trustee
or
debtor-in-possession provides adequate assurance of future performance by the
assignee. In addition, no party to an executory contract or an unexpired lease
may terminate or modify any rights or obligations under an executory contract
or
an unexpired lease at any time after the commencement of a case under the
Bankruptcy Code solely because of a provision in the executory contract or
unexpired lease or in applicable law conditioned upon the assignment of the
executory contract or unexpired lease. Thus, an undetermined third party may
assume the obligations of the lessee or a mortgagor under a lease in the event
of commencement of a proceeding under the Bankruptcy Code with respect to the
lessee or a mortgagor, as applicable.
Under
Sections 363(b) and (f) of the Bankruptcy Code, a trustee for a lessor, or
a lessor as debtor-in-possession, may, despite the provisions of the related
mortgage loan to the contrary, sell the Mortgaged Property free and clear of
all
liens, which liens would then attach to the proceeds of the sale.
Environmental
Considerations
A
lender
may be subject to unforeseen environmental risks when taking a security interest
in real or personal property. Property subject to a security interest may be
subject to federal, state, and local laws and regulations relating to
environmental protection. These 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; and/or management of electrical
or
other equipment containing polychlorinated biphenyls (“PCBs”). Failure to comply
with these laws and regulations may result in significant penalties, including
civil and criminal fines. Under the laws of some 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 that property are subordinated to the environmentally-related lien
and,
in some states, even prior recorded liens are subordinated to these liens
(“Superliens”). In the latter states, the security interest of the trustee in a
property that is subject to a Superlien could be adversely
affected.
Under
the
federal Comprehensive Environmental Response, Compensation and Liability Act,
as
amended (“CERCLA”), and under state law in some states, a secured party that
takes a deed in lieu of foreclosure, purchases a mortgaged property at a
foreclosure sale, operates a mortgaged property or undertakes particular types
of activities that may constitute management of the mortgaged property may
become liable in some circumstances for the cleanup costs of remedial action
if
hazardous wastes or hazardous substances have been released or disposed of
on
the property. These 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
90
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 total assets of the property owner.
Although
some provisions of the Asset Conservation Act (as defined in this prospectus)
apply to trusts and fiduciaries, the law is somewhat 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 issuing
entity. 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 that 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 that 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 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 that 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 some 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 these 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 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, however, 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 under both CERCLA and RCRA. The Asset Conservation
91
Act
more explicitly defined the kinds of
“participation in management” that would trigger liability under CERCLA and
specified activities that would not constitute “participation in management” or
otherwise result in a forfeiture of the secured-creditor exemption before
foreclosure or during a workout period. The Asset Conservation Act also
clarified the extent of protection against liability under CERCLA in the event
of foreclosure and authorized specific regulatory clarifications of the scope
of
the secured-creditor exemption for purposes of RCRA, similar to the statutory
protections under CERCLA. 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 issuing
entity and occasion a loss to the issuing entity and to securityholders in
some
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 that may impose liability on
“owners or operators” but do not incorporate the secured-creditor
exemption.
Traditionally,
residential mortgage lenders have not taken steps to evaluate whether hazardous
wastes or hazardous substances are present with respect to any mortgaged
property before the origination of the mortgage loan or before 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 the Mortgaged Property; the absence, presence
or
effect of hazardous wastes or hazardous substances on, near or emanating from
the Mortgaged Property; the impact on securityholders of any environmental
condition or presence of any substance on or near the 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 representation, warranty or assumption of liability relative
to any Mortgaged Property.
Due-on-Sale
Clauses
The
mortgage loans may contain due-on-sale clauses. These clauses generally provide
that the lender may accelerate the maturity of the loan if the borrower 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, for some loans the Garn-St. Germain Depository Institutions
Act
of 1982 (the “Garn-St. Germain Act”) 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
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 those 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
92
property
may have occurred. These include
intra-family transfers, some transfers by operation of law, leases of fewer
than
three years and the creation of a junior encumbrance. Regulations promulgated
under the Garn-St. Germain Act also prohibit the imposition of a prepayment
penalty upon the acceleration of a loan 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 and Late Fees; Debt-Acceleration Clauses
Some
state laws restrict the imposition of prepayment charges and late fees even
when
the loans expressly provide for the collection of those charges. Although the
Alternative Mortgage Transaction Parity Act of 1982 (the “Parity Act”), permits
the collection of prepayment charges and late fees in connection with some
types
of eligible loans preempting any contrary state law prohibitions, some states
may not recognize the preemptive authority of the Parity Act or have formally
opted out of the Parity Act. As a result, it is possible that prepayment charges
and late fees may not be collected even on loans that provide for the payment
of
those charges unless otherwise specified in the accompanying prospectus
supplement. The related servicer or another entity identified in the
accompanying prospectus supplement will be entitled to all prepayment charges
and late payment charges received on the loans and those amounts will not be
available for payment on the certificates. The Office of Thrift Supervision
(“OTS”), the agency that administers the Parity Act for unregulated housing
creditors, withdrew its favorable Parity Act regulations and Chief Counsel
Opinions that previously authorized lenders to charge prepayment charges and
late fees in certain circumstances notwithstanding contrary state law, effective
with respect to loans originated on or after July 1, 2003. However, the OTS’s
ruling does not retroactively affect loans originated before July 1,2003.
Some
of
the Commercial, Multifamily and Mixed-Use Mortgage Loans included in a trust
will include a “debt-acceleration “ clause, which permits the lender to
accelerate the full debt upon a monetary or nonmonetary default of the borrower.
The courts of all states will enforce clauses providing for acceleration in
the
event of a material payment default after giving effect to any appropriate
notices. The courts of any state, however, may refuse to permit foreclosure
of a
mortgage or deed of trust when an acceleration of the indebtedness would be
inequitable or unjust or the circumstances would render the acceleration
unconscionable. Furthermore, in some states, the borrower may avoid foreclosure
and reinstate an accelerated loan by paying only the defaulted amounts and
the
costs and attorneys’ fees incurred by the lender in collecting such defaulted
payments.
Subordinate
Financing
Where
a
borrower encumbers mortgaged property with one or more junior liens, the senior
lender is subjected to additional risks, such as:
·
The
borrower may have difficulty repaying multiple loans. In addition,
if the
junior loan permits recourse to the borrower (as junior loans often
do)
and the senior loan does not, a borrower may be more likely to repay
sums
due on the junior loan than those on the senior
loan.
·
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 borrower 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
93
lose its priority to the extent any existing junior
lender is harmed or the borrower is additionally
burdened.
·
If
the borrower 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 will
not apply to some types of residential first mortgage loans originated by
lenders after March 31, 1980. A similar federal statute was in effect for
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. Some 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 before origination of those mortgage
loans, any limitation under that state’s usury law would not apply to those
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 that state action will be eligible for inclusion
in
an issuing entity unless (1) the mortgage loan provides for the interest rate,
discount points and charges as are permitted in that state or (2) the mortgage
loan provides that its terms will be construed in accordance with the laws
of
another state under which the interest rate, discount points and charges would
not be usurious and the borrower’s counsel has rendered an opinion that the
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 borrower
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, thus permitting the
borrower 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. Those 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”).
94
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, before October 15, 1985, a law or constitutional provision
expressly rejecting the applicability of those provisions. Some states have
taken that action.
Servicemembers’
Civil Relief Act
Under
the
terms of the Servicemembers’ Civil Relief Act and similar state and local laws
(the “Relief Act”), a borrower who enters military service after the origination
of the borrower’s mortgage loan (including a borrower who was in reserve status
and is called to active duty after origination of the mortgage loan) may not
be
charged interest (including fees and charges) above an annual rate of 6% during
the period of the borrower’s active duty status, unless a court orders otherwise
upon application of the lender. The Relief Act applies to borrowers who are
members of the Army, Navy, Air Force, Marines, National Guard, Reserves, Coast
Guard and officers of the U.S. Public Health Service assigned to duty with
the
military. Because the Relief Act applies to borrowers who enter military service
(including reservists who are called to active duty) after origination of the
related mortgage loan, no information can be provided as to the number of loans
that may be affected by the Relief Act.
Application
of the Relief Act would adversely affect, for an indeterminate period of time,
the ability of the servicer to collect full amounts of interest on some of
the
mortgage loans. Any shortfalls in interest collections resulting from the
application of the Relief Act would result in a reduction of the amounts
distributable to the holders of the related series of Notes or Certificates,
as
applicable, and would not be covered by advances. These shortfalls will be
covered by the credit support provided in connection with the Notes or
Certificates, as applicable, only to the extent provided in the prospectus
supplement. In addition, the Relief Act imposes limitations that would impair
the ability of the servicer to foreclose on an affected mortgage loan during
the
borrower’s period of active duty status, and, under some circumstances, during
an additional three month period thereafter. Thus, if an affected mortgage
loan
goes into default, there may be delays and losses occasioned
thereby.
Forfeitures
in Drug and RICO Proceedings
Federal
law provides that property owned by persons convicted of drug-related crimes
or
of criminal violations of the Racketeer Influenced and Corrupt Organizations
(“RICO”) statute can be seized by the government if the property was used in, or
purchased with the proceeds of, those crimes. Under procedures contained in
the
Comprehensive Crime Control Act of 1984 (the “Crime Control Act”), the
government may seize the property even before conviction. The government must
publish notice of the forfeiture proceeding and may give notice to all parties
“known to have an alleged interest in the property,” including the holders of
mortgage loans.
A
lender
may avoid forfeiture of its interest in the property if it establishes that:
(1)
its mortgage was executed and recorded before commission of the crime upon
which
the forfeiture is based, or (2) the lender was, at the time of execution of
the
mortgage, “reasonably without cause
95
to
believe” that the property was used in, or
purchased with the proceeds of, illegal drug or RICO activities.
Commercial,
Multifamily and Mixed Use Loans
The
market value of any Commercial, Multifamily or Mixed-Use Mortgaged Property
obtained in foreclosure or by deed in lieu of foreclosure will be based
substantially on the operating income obtained from renting the commercial
or
dwelling units, the sale price, the value of any alternative uses, or such
other
factors as are considered by the originator. Because a default on a Commercial,
Multifamily or Mixed-Use Mortgage Loan is likely to have occurred because
operating income, net of expenses, is insufficient to make debt service payments
on such mortgage loan, it can be anticipated that the market value of such
property will be less than was anticipated when such mortgage loan was
originated. To the extent that the equity in the property does not absorb the
loss in market value and such loss is not covered by other credit enhancement,
a
loss may be experienced. With respect to any Multifamily Mortgaged Property
consisting of an apartment building owned by a cooperative, the cooperative’s
ability to meet debt service obligations on the mortgage loan, as well as all
other operating expenses, will be dependent in large part on the receipt of
maintenance payments from the tenant-stockholders. Unanticipated expenditures
may in some cases have to be paid by special assessments of the
tenant-stockholders. The cooperative’s ability to pay the principal balance of
the mortgage loan at maturity may depend on its ability to refinance the
mortgage loan. The depositor, the seller and the master servicer will have
no
obligation to provide refinancing for any such mortgage.
In
most
states, hotel and motel room rates are considered accounts receivable under
the
UCC. Room rates are generally pledged by the borrower as additional security
for
the loan when a mortgage loan is secured by a hotel or motel. In general, the
lender must file financing statements in order to perfect its security interest
in the room rates and must file continuation statements, generally every five
years, to maintain that perfection. Mortgage loans secured by hotels or motels
may be included in the trust even if the security interest in the room rates
was
not perfected or the requisite UCC filings were allowed to lapse. A lender
will
generally be required to commence a foreclosure action or otherwise take
possession of the property in order to enforce its rights to collect the room
rates following a default, even if the lender’s security interest in room rates
is perfected under applicable nonbankruptcy law.
In
the
bankruptcy setting, the lender will be stayed from enforcing its rights to
collect hotel and motel room rates. However, the room rates will constitute
cash
collateral and cannot be used by the bankrupt borrower without a hearing or
the
lender’s consent, or unless the lender’s interest in the room rates is given
adequate protection.
For
purposes of the foregoing, the adequate protection may include a cash payment
for otherwise encumbered funds or a replacement lien on unencumbered property,
in either case equal in value to the amount of room rates that the bankrupt
borrower proposes to use.
Leases
and Rents
Some
of
the Commercial, Multifamily and Mixed-Use Mortgage Loans are secured by an
assignment of leases (each , a “lease“) and rents of one or more lessees (each,
a “lessee“), either through a separate document of assignment or as incorporated
in the mortgage. Under such assignments, the borrower under the mortgage loan
typically assigns its right, title and interest as landlord under each lease
and
the income derived therefrom to the lender, while retaining a license to collect
the rents for so long as there is no default under the mortgage loan
documentation. The manner of perfecting the lender’s interest in rents may
depend on whether the borrower’s assignment was absolute or one granted as
security for the loan. Failure to properly perfect the lender’s interest in
rents may result in the loss of a substantial pool of funds
96
that
otherwise could serve as a source of repayment
for the loan. In the event the borrower defaults, the license terminates and
the
lender may be entitled to collect rents. Some state laws may require that to
perfect its interest in rents, the lender must take possession of the property
and/or obtain judicial appointment of a receiver before becoming entitled to
collect the rents. Lenders that actually take possession of the property,
however, may incur potentially substantial risks attendant to being a mortgagee
in possession. Such risks include liability for environmental clean-up costs
and
other risks inherent to property ownership. In addition, if bankruptcy or
similar proceedings are commenced by or in respect of the borrower, the lender’s
ability to collect the rents may be adversely affected. In the event of borrower
default, the amount of rent the lender is able to collect from the tenants
can
significantly affect the value of the lender’s security interest.
Americans
with Disabilities Act
Under
Title III of the Americans with Disabilities Act of 1990 and rules promulgated
thereunder (collectively, the “ADA“), owners of public accommodations (such as
hotels, restaurants, shopping centers, hospitals, schools and social service
center establishments) must remove architectural and communication barriers
that
are structural in nature from existing places of public accommodation to the
extent “readily achievable.” In addition, under the ADA, alterations to a place
of public accommodation or a commercial facility are to be made so that, to
the
maximum extent feasible, such altered portions are readily accessible to and
useable by disabled individuals. The “readily achievable” standard takes into
account, among other factors, the financial resources of the affected site,
owner, landlord or other applicable person. In addition to imposing a possible
financial burden on the borrower in its capacity as owner or landlord, the
ADA
may also impose such requirements on a foreclosing lender who succeeds to the
interest of the borrower as owner or landlord. Furthermore, because the “readily
achievable” standard may vary depending on the financial condition of the owner
or landlord, a foreclosing secured party who is financially more capable than
the borrower of complying with the requirements of the ADA may be subject to
more stringent requirements than those to which the borrower is
subject.
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 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 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 borrower to repay the loan evidenced thereby, and
(b) the
grant of a security interest in the manufactured home to secure repayment of
the
loan. 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 agreement, the servicer
will
transfer physical possession of the contracts to the trustee. In
97
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 depositor to the trustee
only if provided in the prospectus supplement. Therefore, if, through
negligence, fraud or otherwise, a subsequent purchaser were able to take
physical possession of the contracts without notice of the assignment, the
trustee’s interest in contracts could be defeated.
Security
Interests in the Manufactured Homes
The
manufactured homes securing the contracts may be located in all 50 states,
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 that 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 that notation or delivery, or files the security interest under the
wrong
law, 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 some
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.
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
that is prior to the security interest originally retained by the asset seller
and transferred to the depositor. For a series of securities and if so described
in the 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 for 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 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,
that assignment is an effective conveyance of the security interest without
amendment of any lien noted on the related certificate of title and the new
secured party succeeds to servicer’s rights as the secured party. However, in
some states, in the absence of an amendment to the 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
98
of
title, or the filing of a UCC-3 statement, the
assignment of the security interest in the manufactured home may not be held
effective or the security interest in the manufactured home may not be held
effective or the security interests may not be perfected and in the absence
of
that 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 any other originator of the contracts, or a trustee in
bankruptcy of the asset seller, or any 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 or 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, that 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.
If
the
owner of a manufactured home moves it to a state other than the state in which
the manufactured home initially is registered, under the laws of most states
the
perfected security interest in the manufactured home would continue for four
months after the relocation and thereafter only if and after the owner
re-registers the manufactured home in that state. If the owner were to relocate
a manufactured home to another state and not re-register the manufactured home
in that state, and if steps are not taken to re-perfect the trustee’s security
interest in that 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
the
manufactured home or, in the case of manufactured homes registered in states
that 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 that 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 re-perfection upon receipt of notice of
re-registration or information from the borrower as to relocation.
Similarly,
when a borrower 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 Agreement, the servicer is obligated
to
take those 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 agreement that it has
no
knowledge of any of these liens for any manufactured home securing payment
on
any contract. However, these liens could arise at any time during the term
of a
contract. No notice will be given to the trustee or securityholders if a lien
arises.
99
Enforcement
of Security Interests in the Manufactured Homes
The
servicer on behalf of the trustee, to the extent required by the related
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 those 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” 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 that state, before beginning 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 that sale. The law in most states also
requires that the debtor be given notice of any sale before resale of the unit
so that the debtor may redeem at or before that resale. In the event of
repossession and resale of a manufactured home, the trustee would be entitled
to
be paid out of the sale proceeds before the 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 the debtor’s loan. However, some states impose
prohibitions or limitations on deficiency judgments, and in many cases the
defaulting borrower would have no assets with which to pay a
judgment.
Other
statutory provisions, including federal and state bankruptcy and insolvency
laws
and general 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 a borrower on a Contract as described for a borrower
on a mortgage loan under “Certain Legal Aspects of Mortgage Loans-Civil
Act.”
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 that
is
the seller of goods which gave rise to the transaction, and some related lenders
and assignees, to transfer the contract free of notice of claims by the debtor
thereunder. The effect of this rule is to subject the assignee of the contract
to all claims and defenses that the debtor could assert against the seller
of
goods. Liability under this rule is limited to amounts paid under a contract;
however, the borrower 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 the
borrower. 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
100
the
servicer upon any 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 some cases, the transfer may be made by a delinquent borrower
to
avoid a repossession proceeding for 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 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 some
manufactured homes.
Applicability
of Usury Laws
Title
V
of the Depository Institutions Deregulation and Monetary Control Act of 1980,
as
amended (Title V), provides that, subject to the following conditions, state
usury limitations will not apply to any loan that 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
before instituting any action leading to repossession of or foreclosure on
the
related unit.
Title
V
authorized any state to re-impose limitations on interest rates and finance
charges by adopting before April 1, 1983, a law or constitutional provision
that
expressly rejects application of the federal law. Fifteen states adopted a
similar law before 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.
Material
Federal Income Tax Considerations
General
The
following discussion represents the opinions of McKee Nelson llp
and
Thacher Proffitt & Wood llp
as to
the material federal income tax consequences of the purchase, ownership and
disposition of the Notes or Certificates, as applicable, offered under this
prospectus. These opinions assume compliance with all provisions of the
Agreements pursuant to which the Notes or Certificates, as applicable, are
issued. This discussion is directed solely to securityholders that hold the
Notes or Certificates, as applicable, 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, investors that do not buy in the original offering and
foreign investors) may be subject to special rules. Further, the authorities
on
which this discussion, and the opinions referred to below, are based are subject
to change or differing interpretations, which could apply
retroactively.
In
addition to the federal income tax consequences described in this prospectus,
potential investors are encouraged to consider the state, local and other tax
consequences, if any, of the purchase, ownership and disposition of the Notes
or
Certificates, as applicable. See “State and Other Tax Considerations.” The
depositor recommends that securityholders consult their own tax advisors
concerning the federal, state, local or other tax consequences to them of the
purchase, ownership and disposition of the Notes or Certificates, as applicable,
offered under this prospectus.
101
The
following discussion addresses securities of four general types:
·
securities
(“REMIC Securities”) representing interests in an issuing entity, or a
portion of an issuing entity, that the trustee will elect to have
treated
as a real estate mortgage investment conduit (“REMIC”) under Sections 860A
through 860G (the “REMIC Provisions”) of the
Code;
·
securities
(“Grantor Trust Securities”) representing interests in a trust fund (a
“Grantor Trust Fund”) as to which no election will be
made;
·
securities
(“Partnership Certificates”) representing equity interests in a trust fund
(a “Partnership Trust Fund”) which is treated as a partnership for federal
income tax purposes; and
·
securities
(“Debt Securities”) representing indebtedness of a Partnership Trust Fund
or a trust fund which is disregarded as a separate entity from the
owner
of its equity for federal income tax
purposes.
The
prospectus supplement for each series of Notes or Certificates, as applicable,
will indicate which of the foregoing treatments will apply to that series and,
if a REMIC election (or elections) will be made for the related issuing entity,
will identify all “regular interests” and “residual interests” in the REMIC. For
purposes of this tax discussion,
1. references
to a “securityholder” or a “holder” are to the beneficial owner of a
Security,
2. references
to “REMIC Pool” are to an entity or portion thereof as to which a REMIC election
will be made and
3. to
the
extent specified in the prospectus supplement, references to “mortgage loans”
include Contracts.
The
following discussion is based in part upon the rules governing original issue
discount that are set forth in Sections 1271 through 1275 of the Code and in
the
Treasury regulations promulgated thereunder (the “OID Regulations”), and in part
upon the REMIC Provisions and the Treasury regulations promulgated thereunder
(the “REMIC Regulations”). In addition, the OID Regulations do not adequately
address some issues relevant to, and in some instances provide that they are
not
applicable to, prepayable securities such as the Notes or Certificates, as
applicable.
Taxable
Mortgage Pools
Corporate
income tax can be imposed on the net income of some 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
(1) substantially
all of the assets of the entity consist of debt obligations and more than 50%
of
those obligations (determined by adjusted tax basis) consist of “real estate
mortgages,”
(2) that
entity is the borrower under debt obligations with two or more maturities,
and
102
(3) under
the terms of the debt obligations on which the entity is the borrower, payments
on those 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.
REMICs
Classification
of REMICs
For
each
series of REMIC Securities, McKee Nelson llp
or
Thacher Proffitt & Wood llp
(as
applicable, “Federal Tax Counsel”) will deliver an opinion that, assuming
compliance with all provisions of the related pooling and servicing agreement,
the related issuing entity (or each applicable portion of the issuing entity)
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 the 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, 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 total adjusted
basis of the nonqualified assets is less than 1% of the total 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 of “disqualified organizations” and must furnish applicable tax
information to transferors or agents that violate this requirement. The pooling
and servicing agreement for 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” below.
A
qualified mortgage is any obligation that is principally secured by an interest
in real property and that is transferred to the REMIC Pool on the Startup Day,
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 is attributable to
an
advance made to the mortgagor pursuant to the original terms of the obligation
and is purchased by the REMIC pursuant to a fixed price contract in effect
on
the Startup Day. Qualified mortgages include whole mortgage loans and, certain
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
a tiered REMIC. 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:
103
(1)
in exchange
for any qualified mortgage within a three-month period from the Startup Day;
or
(2)
in exchange
for a “defective obligation” within a two-year period from the Startup
Day.
A
“defective obligation” includes:
(1)
a mortgage in
default or as to which default is reasonably foreseeable;
(2)
a mortgage as
to which a customary representation or warranty made at the time of transfer
to
the REMIC Pool has been breached;
(3)
a mortgage
that was fraudulently procured by the borrower; and
(4)
a mortgage
that was not in fact principally secured by real property (but only if the
sponsor had a reasonable belief the mortgage loan was principally secured by
real estate at the time the mortgage was acquired by the REMIC and the mortgage
is disposed of within 90 days of discovery of this defect).
A
mortgage loan that is “defective” as described in clause (4) above that is not
sold or, if within two years of the Startup Day, sold or exchanged, within
90
days of discovery, ceases to be a qualified mortgage after that 90-day
period.
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 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 other contingencies. The reserve fund will be disqualified if
more than 30% of the gross income from the assets in that 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” to the extent no longer reasonably required.
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 for more than three taxable years after the taxable year of
acquisition unless an extension of up to three additional years is granted
by
the Secretary of the Treasury.
In
addition to the foregoing requirements, the various interests in a REMIC Pool
also must meet specific requirements. All of the interests in a REMIC Pool
must
be either of the following: (1) one or more classes of regular interests or
(2)
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. That specified portion may consist of a fixed number of
basis
points, a
104
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 for that 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, except as disclosed in a related prospectus supplement,
in the opinion of Federal Tax Counsel, the Regular Securities of a series will
constitute one or more classes of regular interests, and the Residual Securities
for that series will constitute a single class of residual interests for each
REMIC Pool.
If
an
entity electing to be treated as a REMIC fails to comply with one or more of
the
ongoing requirements of the Code for that status during any taxable year, the
Code provides that the entity will not be treated as a REMIC for that year
and
thereafter. In that event, that 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, none of these regulations have been
issued. Any relief provided, moreover, may be accompanied by sanctions, such
as
the imposition of a corporate tax on all or a portion of the issuing entity’s
income for the period in which the requirements for that status are not
satisfied. The pooling and servicing agreement for each REMIC Pool will include
provisions designed to maintain the issuing entity’s status as a REMIC under the
REMIC Provisions. It is not anticipated that the status of any issuing entity
as
a REMIC will be terminated.
Characterization
of Investments in REMIC Securities
The
REMIC
Securities will be treated as “real estate assets” within the meaning of Section
856(c)(4)(A) of the Code and assets described in Section 7701(a)(19)(C) of
the
Code in the same proportion that the assets of the REMIC Pool underlying these
Notes or Certificates, as applicable, 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.
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 the Notes or Certificates,
as applicable, are treated as “real estate assets” within the meaning of Section
856(c)(4)(A) 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 in the REMIC.
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 those assets (to the extent not invested in assets
described in the foregoing sections) otherwise would receive the same treatment
as the
105
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
some
series of REMIC Securities, two or more separate elections may be made to treat
designated portions of the related issuing entity as REMICs (“Tiered REMICs”)
for federal income tax purposes. Upon the issuance of any of these series of
REMIC Securities, Federal Tax Counsel will deliver its opinion that, assuming
compliance with all provisions of the related pooling and servicing agreement,
the Tiered REMICs will each qualify as a REMIC and the respective interests
issued by each Tiered REMIC will be considered to evidence ownership of regular
interests or residual interests 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)(4)(A) of the Code and “loans
secured by an interest in real property” under Section 7701(a)(19)(C) of the
Code, and whether the income on those Notes or Certificates, as applicable,
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
(1)
General
Except
as
otherwise indicated herein, the Regular Securities will be treated for federal
income tax purposes as debt instruments that are issued by the REMIC and not
as
beneficial interests in the REMIC or the REMIC’s assets. Interest, original
issue discount, and market discount (other than de minimis original issue
discount market discount the holder does not elect to include currently) on
a
Regular Security will be treated as ordinary income to a holder of the Regular
Security (the “Regular Securityholder”), and principal payments (other than
payments treated as payments of accrued market discount not previously included
in income) 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 that Regular Securityholder.
Payments
of interest on Regular Securities may be based on a fixed rate, a variable
rate
as permitted by the REMIC Regulations, or may consist of a specified portion
of
the interest payments on qualified mortgages where such portion does not vary
during the period the Regular Security is outstanding. The definition of a
variable rate for purposes of the REMIC Regulations is based on the definition
of a qualified floating rate for purposes of the rules governing original issue
discount set forth in the OID Regulations, with certain modifications and
permissible variations. See “—Variable Rate Regular Securities” below for a
discussion of the definition of a qualified floating rate for purposes of the
OID Regulations. A qualified floating rate, as defined above for purposes of
the
REMIC Regulations (a “REMIC qualified floating rate”), qualifies as a variable
rate for purposes of the REMIC Regulations if such REMIC qualified floating
rate
is set at a “current rate” as defined in the OID Regulations. In addition, a
rate equal to the highest, lowest or an average of two or more REMIC qualified
floating rates qualifies as a variable rate for REMIC purposes. A Regular
Security may also have a variable rate based on a weighted average of the
interest rates on some or all of the qualified mortgages held by the REMIC
where
each qualified mortgage taken into account has a fixed rate or a variable rate
that is permissible under the REMIC Regulations. Further, a Regular Security
may
have a rate that is the product of a REMIC qualified floating rate or a weighted
average rate and a fixed multiplier, is a constant number of basis points more
or less
106
than
a REMIC qualified floating rate or a weighted
average rate, or is the product, plus or minus a constant number of basis
points, of a REMIC qualified floating rate or a weighted average rate and a
fixed multiplier. An otherwise permissible variable rate for a Regular Security,
described above, will not lose its character as such because it is subject
to a
floor or a cap, including a “funds available cap” as that term is defined in the
REMIC Regulations. Lastly, a Regular Security will be considered as having
a
permissible variable rate if it has a fixed or otherwise permissible variable
rate during one or more payment or accrual periods and different fixed or
otherwise permissible variable rates during other payment or accrual
periods.
(2)
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 that income. The following discussion is based
in
part on the OID Regulations and in part on the provisions of the Tax Reform
Act
of 1986 (the “1986 Act”). Regular Securityholders should be aware, however, that
the OID Regulations do not adequately address some of the issues relevant to,
and in some instances provide that they are not applicable to, securities,
such
as the Regular Securities. To the extent that those issues are not addressed
in
the regulations, the Seller intends to apply the methodology described in the
Conference Committee Report to the 1986 Act. No assurance can be provided that
the Internal Revenue Service 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 Internal Revenue Service
to
apply or depart from the OID Regulations where necessary or appropriate to
ensure a reasonable tax result because of the applicable statutory provisions.
A
tax result will not be considered unreasonable under the anti-abuse rule in
the
absence of an expected 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 in the OID Regulations and the appropriate method for reporting
interest and original issue discount for the Regular Securities.
In
limited circumstances multiple Regular Securities can be aggregated and treated
as a single debt instrument for purposes of applying the original issue discount
rules. Otherwise each Regular Security will be treated as a single installment
obligation for purposes of determining the original issue discount includible
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 that 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 before the issue date of the Regular Security, unless the Regular
Securityholder elects on its federal income tax return to exclude that 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 those 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 the interest payments are unconditionally
payable at intervals of one year or less during the entire term of the Regular
Security. Interest is unconditionally
107
payable
only if reasonable legal remedies exist to
compel timely payment or the terms of the debt instrument otherwise make the
likelihood of late payment (beyond a grace period) or non-payment sufficiently
remote. Because there is no penalty or default remedy in the case of nonpayment
of interest for 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 prospectus
supplement, although there is no guidance directly addressing the issue, because
the underlying mortgage loans provide for remedies in the event of default
it is
anticipated that the trustee will treat interest for the Regular Securities
as
qualified stated interest. Distributions of interest on an Accrual Security,
or
on other Regular Securities for which deferred interest will accrue, will not
constitute qualified stated interest, in which case the stated redemption price
at maturity of those Regular Securities includes all distributions of interest
as well as principal on the Regular Securities. Likewise, although there is
no
guidance directly addressing the issue, 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 the 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 those
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 for a series of Regular Securities will be set forth
in
the prospectus supplement. Holders generally must report de minimis original
issue discount pro rata as principal payments are received, and that income
will
generally 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” below.
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. The original issue discount accruing in a full accrual period would
be the excess, if any, of:
108
(1)
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
(2)
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:
(1)
the yield to
maturity of the Regular Security at the issue date; and
(2)
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
total amount of original issue discount for 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 those 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. For 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 for a series of Regular Securities can result in both a change
in
the priority of principal payments for some Classes of Regular Securities and
either an increase or decrease in the daily portions of original issue discount
for those Regular Securities.
(3) 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 the
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, a purchaser may elect to treat all that acquisition premium
under
the constant yield method, as described below under the heading “—Election to
Treat All Interest Under the Constant Yield Method” below.
(4) 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 qualified variable rate if,
generally, (1) the issue
109
price
does not exceed the original principal balance
by more than a specified amount, (2) it does not provide for any principal
payments that are contingent, within the meaning of the OID Regulations, except
as provided in (1), and (3) 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) 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 than 0.65 but not more than 1.35, increased or decreased by a fixed
rate. That rate may also be 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 the information
is
not (1) within the control of the issuer or a related party or (2) unique to
the
circumstances of the issuer or a related party. However, an objective rate
does
not include a rate if it is reasonably expected that the average value of such
rate during the first half of the Regular Security’s term will be either
significantly less than or significantly greater than the average value of
the
rate during the final half of the Regular Security’s term. 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 qualified floating
rate; 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 qualified variable rate under the
foregoing rules, for example, a Class that bears different rates at different
times during the period it is outstanding that it is considered significantly
“front-loaded” or “back-loaded” within the meaning of the OID Regulations. It is
possible that 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
for
Regular Securities apply the same principles as the OID Regulations, those
regulations may lead to different timing of income inclusion than would be
the
case under the OID Regulations. Furthermore, application of those principles
could lead to the characterization of gain on the sale of contingent interest
Regular Securities as ordinary income. Investors are encouraged to consult
their
tax advisors regarding the appropriate treatment of any Regular Security that
does not pay interest at a fixed rate or qualified variable rate as described
in
this paragraph.
The
amount of original issue discount for a Regular Security bearing a qualified
variable rate of interest will accrue in the manner described above under
“—Original Issue Discount,” with the yield to maturity and future payments on
that 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, if the Class bears interest at a qualified floating
rate
or qualified inverse floating rate, or based on a fixed rate which reflects
the
reasonably expected yield for the relevant Class, if the Class bears interest
at
an objective rate (other than a qualified inverse floating rate). However,
110
the
qualified stated interest allocable to an accrual
period will be increased (or decreased) if the interest actually paid during
the
accrual period exceed (or is less than) the interest assumed to be paid under
the rate just described. Unless required otherwise by applicable final
regulations, although there is no guidance directly addressing the issue, it
is
anticipated that the trustee will treat interest, other than variable interest
on an interest-only or super-premium Class, as qualified stated interest at
the
qualified variable rate.
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 (1) is exceeded by the remaining outstanding
principal payments and interest payments other than qualified stated interest
payments due on a Regular Security, or (2) in the case of a Regular Security
having original issue discount, is exceeded by the adjusted issue price of
that
Regular Security at the time of purchase. The purchaser generally will be
required to recognize ordinary income to the extent of accrued market discount
on that Regular Security as distributions includible in the stated redemption
price at maturity of the Regular Security are received, in an amount not
exceeding that distribution. The 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
these regulations are issued, the market discount would accrue either (1) on
the
basis of a constant interest rate, or (2) in the ratio of stated interest
allocable to the relevant period to the sum of the interest for that period
plus
the remaining interest as of the end of that 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 that period plus the remaining original issue discount
as
of the end of that period. The 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. The 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 on the Regular Security. The deferred portion of
the
interest expense in any taxable year generally will not exceed the accrued
market discount on the Regular Security for that year. Any 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 the
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
that election may be deemed to be made. A person who purchases a Regular
Security at a price lower than the remaining amounts includible 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.
Market
discount for a Regular Security will be considered to be zero if the market
discount is less than 0.25% of the remaining stated redemption price at maturity
of the Regular Security (or, in the case of a Regular Security having original
issue discount, the adjusted issue price of that Regular Security) multiplied
by
the weighted average maturity of the Regular Security (presumably determined
as
described above in the third paragraph under “—Original Issue Discount” above)
111
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.
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 particular Class of Regular Securities. Prospective investors
in
Regular Securities are encouraged to consult their own tax advisors regarding
the application of the market discount rules to the Regular Securities and
the
elections to include market discount in income currently and to accrue market
discount on the basis of the constant yield method.
(6) 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 that Regular Security as a “capital asset” within the
meaning of Code Section 1221, the Regular Securityholder may elect under Code
Section 171 to amortize the premium under a constant yield method that reflects
compounding based on the interval between payments on the Regular Security.
The
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 Internal
Revenue Service. 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 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 deductible item. 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.
(7) 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 this election, (1)
“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 (2) 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 this
election on an instrument by instrument basis or for a class or group of debt
instruments. However, if the holder makes this election for a debt instrument
with amortizable bond premium, the holder is deemed to have made elections
to
amortize bond premium currently as it accrues under the constant yield method
for all premium bonds held by the holder in the same taxable year or thereafter.
Alternatively, if the holder makes this election for a debt instrument with
market discount, the holder is deemed to have made elections to report market
discount income currently as it accrues under the constant yield method for
all
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
112
the
Internal Revenue Service. Investors are
encouraged to consult their own tax advisors regarding the advisability of
making this election.
(8) Treatment
of Losses
Regular
Securityholders will be required to report income for 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 the losses are uncollectible.
Accordingly, the holder of a Regular Security, particularly a Subordinate
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 uncollectible, the Internal Revenue Service 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.
To
the
extent the rules of Code Section 166 regarding bad debts are applicable, 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 that loss with respect to
principal sustained during the taxable year on account of any 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 Regular Securities becoming wholly worthless. Although the
matter is not free from doubt, non-corporate Regular Securityholders should
be
allowed a bad debt deduction at the time the principal balance of the Regular
Securities is reduced to reflect losses resulting from any liquidated mortgage
loans. The Internal Revenue Service, however, could take the position that
non-corporate holders will be allowed a bad debt deduction to reflect those
losses only after all the mortgage loans remaining in the issuing entity have
been liquidated or the applicable Class of Regular Securities has been otherwise
retired. The Internal Revenue Service could also assert that losses on the
Regular Securities are deductible based on some other method that may defer
those 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 that may be deductible only against future
positive original issue discount or otherwise upon termination of the
Class.
Regular
Securityholders are encouraged to consult their own tax advisors regarding
the
appropriate timing, amount and character of any loss sustained for their 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 Internal Revenue Service 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 may be
applicable to banks and thrift institutions. These taxpayers are advised to
consult their tax advisors regarding the treatment of losses on Regular
Securities.
(9) 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
113
issue
discount or market discount previously included
in the seller’s gross income for 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 regarding 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). That gain will be treated as ordinary
income
(1)
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 in effect at the time the taxpayer
entered into the transaction minus any amount previously treated as ordinary
income for any prior disposition of property that was held as part of that
transaction;
(2)
in the case of
a non-corporate taxpayer, to the extent that the 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
(3)
to the extent
that the gain does not exceed the excess, if any, of (a) the amount that would
have been includible in the gross income of the holder if its yield on that
Regular Security were 110% of the applicable federal rate as of the date of
purchase, over (b) the amount of income actually includible in the gross income
of the holder for that Regular Security (the “110% yield rule”).
In
addition, gain or loss recognized from the sale of a Regular Security by some
banks or thrift institutions will be treated as ordinary income or loss pursuant
to Code Section 582(c). Long-term capital gains of noncorporate taxpayers
generally are subject to a lower maximum tax rate than ordinary income of those
taxpayers for property held for more than one year, with further rate reductions
for property held for more than five years. Currently, the maximum tax rate
for
corporations is the same for both ordinary income and capital
gains.
Taxation
of Owners of Residual Securities
(1) Taxation
of REMIC Income
Generally,
the “daily portions” of REMIC taxable income or net loss will be includible 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 that quarter and
by
allocating that daily portion among the Residual Holders in proportion to their
respective holdings of Residual Securities in the REMIC Pool on that 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
(1)
the
limitations on deductibility of investment interest expense and expenses for
the
production of income do not apply;
(2)
all bad loans
will be deductible as business bad debts; and
114
(3)
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 or as a result of a Certificateholder,
particularly an interest only Regular Security, not recovering its adjusted
issue price. 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 Notes or Certificates, as applicable, of any class of the related series
outstanding.
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 for 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.
If
an interest in the mortgage loans is acquired by the REMIC Pool at a discount,
and one or more of these mortgage loans is prepaid, the prepayment may be used
in whole or in part to make distributions in reduction of principal on the
Regular Securities, and the discount on the mortgage loans that is includible
in
income may exceed the original issue discount deductions allowed with respect
to
the 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
those Classes are not issued with substantial discount or are issued at a
premium. If taxable income attributable to that 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 that 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 for any particular
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 that mismatching or unrelated deductions against which
to offset that income, subject to the discussion of “excess inclusions” below
under “—Limitations on Offset or Exemption of REMIC Income.” The timing of
mismatching of income and deductions described in this paragraph, if present
for
a series of Notes or Certificates, as applicable, may have a significant adverse
effect upon a Residual Holder’s after-tax rate of return.
A
portion
of the income of a Residual Holder may be treated unfavorably in three
contexts:
(1)
it may not be
offset by current or net operating loss deductions;
(2)
it will be
considered unrelated business taxable income to tax-exempt entities;
and
(3)
it is
ineligible for any statutory or treaty reduction in the 30% withholding tax
otherwise available to a foreign Residual Holder.
115
See
“—Limitations on Offset or Exemption of REMIC Income” below. In addition, a
Residual Holder’s taxable income during some periods may exceed the income
reflected by those Residual Holders for those periods in accordance with
generally accepted accounting principles. Investors are encouraged to consult
their own accountants concerning the accounting treatment of their investment
in
Residual Securities.
(2)
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 that Residual Security. The 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
the loss was disallowed and may be used by the Residual Holder only to offset
any income generated by the same REMIC Pool, but is not available to a
subsequent Residual Holder.
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, if, in any year, cash distributions to a Residual Holder
exceed its share of the REMIC’s taxable income, the excess will constitute a
return of capital to the extent of the holder’s basis in its Residual Security.
A return of capital is not treated as income for federal income tax purposes,
but will reduce the tax basis of the Residual Holder (but not below zero).
If a
Residual Security’s basis is reduced to zero, any cash distributions with
respect to that Residual Security in any taxable year in excess of its share
of
the REMIC’s income would be taxable to the holder as gain on the sale or
exchange of its interest in the REMIC.
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 the residual interest
as zero rather than the negative amount for purposes of determining the REMIC
Pool’s basis in its assets. The preamble to the REMIC Regulations states that
the Internal Revenue Service may provide future guidance on the proper tax
treatment of payments made by a transferor of the residual interest to induce
the transferee to acquire the interest, and Residual Holders are encouraged
to
consult their own tax advisors in this regard.
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 the basis until termination of the REMIC Pool
unless future Treasury regulations provide for periodic adjustments to the
REMIC
income otherwise reportable by the 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.
(3) 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
116
respect
to the mortgage loans and expenses for 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 “—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 those mortgage loans is
exceeded by their unpaid principal balances. The REMIC Pool’s basis in those
mortgage loans is generally the fair market value of the mortgage loans
immediately after the transfer of the mortgage loans to the REMIC Pool. The
REMIC Regulations provide that the basis is equal to the total of the issue
prices of all regular and residual interests in the REMIC Pool. The market
discount must be recognized currently as an item of ordinary income as it
accrues, rather than being included in income upon the sale of mortgage loans
or
as principal on the mortgage loans is paid. 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 of the mortgage loans, the REMIC Pool will be
considered to have acquired those mortgage loans at a premium equal to the
amount of that excess. As stated above, the REMIC Pool’s basis in mortgage loans
is generally the fair market value of the mortgage loans and is based on the
total of the issue prices of the regular and residual interests in the REMIC
Pool immediately after the transfer of the mortgage loans 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 borrowers on the mortgage loans are
expected to be individuals, Code Section 171 will not be available for premium
on mortgage loans originated on or before September 27, 1985. Premium for those
mortgage loans may be deductible in accordance with a reasonable method
regularly employed by the holder of those mortgage loans. The allocation of
that
premium pro rata among principal payments should be considered a reasonable
method; however, the Internal Revenue Service may argue that the premium should
be allocated in a different manner, such as allocating the premium entirely
to
the final payment of principal.
(4) Limitations
on Offset or Exemption of REMIC Income
A
portion
(or all) of the REMIC taxable income includible 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 that quarterly period of (1) 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 (2) the adjusted issue price of the Residual Security at the
beginning of the 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 those daily accruals of REMIC income
described in this paragraph for all prior quarters, decreased by any
distributions made with respect to the Residual Security before the beginning
of
that quarterly period.
117
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 the 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 the
Residual Holder for purposes of Code Section 511. In addition, REMIC taxable
income is subject to 30% withholding tax for 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 persons who are not U.S. Persons.
Provisions
governing the relationship between excess inclusions and the alternative minimum
tax provide that (i) 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, (ii) a Residual Holder’s
alternative minimum taxable income for a taxable year cannot be less than the
excess inclusions for the year, and (iii) the amount of any alternative minimum
tax net operating loss deduction must be computed without regard to any excess
inclusions.
The
Internal Revenue Service has authority to promulgate regulations providing
that
if the aggregate value of the Residual Securities is not considered to be
“significant,” then the entire share of REMIC taxable income of a Residual
Holder may be treated as excess inclusions subject to the foregoing limitations.
This authority has not been exercised to date.
(5) 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 (1) the present value of the total anticipated
excess inclusions for that Residual Security for periods after the transfer
and
(2) 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. That 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. That tax generally would be imposed on the transferor of the
Residual Security, except that where the transfer is through an agent (including
a broker, nominee, or other middleman) for a Disqualified Organization, the
tax
would instead be imposed on the agent. However, a transferor of a Residual
Security would in no event be liable for the tax for 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 the affidavit is false. Under
the
REMIC Regulations, an affidavit will be sufficient if the transferee furnishes
(A) a social security number, and states under penalties of perjury that the
social security number is that of the transferee, or (B) a statement under
penalties of perjury that it is not a disqualified organization.
118
“Disqualified
Organization” means the United States, any state (including the District of
Columbia) or political subdivision thereof, any foreign government, any
international organization, any agency or instrumentality of any of the
foregoing (provided, that the term does not include an instrumentality if all
of
its activities are subject to tax and, except for the Federal Home Loan Mortgage
Corporation, a majority of its board of directors in not selected by any
governmental entity), any cooperative organization furnishing electric energy
or
providing telephone service to 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 521) that is exempt from taxation under the Code
unless the organization is subject to the tax on unrelated business income
imposed by Code Section 511.
In
addition, if a “Pass-Through Entity” (as defined below) has excess inclusion
income for a Residual Security during a taxable year and a Disqualified
Organization is the record holder of an equity interest in that entity, then
a
tax is imposed on the entity equal to the product of (1) the amount of excess
inclusions that are allocable to the interest in the Pass-Through Entity during
the period that interest is held by the Disqualified Organization, and (2)
the
highest marginal federal corporate income tax rate. That 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 the tax if (1) it has received
an affidavit from the record holder stating, under penalties of perjury, that
it
is not a Disqualified Organization, or providing the holder’s taxpayer
identification number and stating, under penalties of perjury, that the social
security number is that of the record owner, and (2) during the period that
person is the record holder of the Residual Security, the Pass-Through Entity
does not have actual knowledge that the affidavit is false.
“Pass-Through
Entity” means any regulated investment company, real estate investment trust,
common trust fund, partnership, trust or estate and any organization treated
as
a cooperative under Code Section 1381. 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 that interest, be treated as a
Pass-Through Entity.
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(e) of
the
Code. The exception to this tax, otherwise available to a Pass-Through Entity
that is furnished particular affidavits by record holders of interests in the
entity and that does not know those affidavits are false, is not available
to an
electing large partnership.
The
pooling and servicing agreement for a series will provide that no legal or
beneficial interest in a Residual Security may be transferred or registered
unless (1) the proposed transferee furnished to the transferor and the trustee
an affidavit providing its taxpayer identification number and stating that
the
transferee is the beneficial owner of the Residual Security and is not a
Disqualified Organization and is not purchasing the Residual Security on behalf
of a Disqualified Organization (i.e., as a broker, nominee or middleman) and
(2)
the transferor provides a statement in writing to the trustee that it has no
actual knowledge that the 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 for a series will
bear a legend referring to those restrictions on transfer, and each Residual
Holder will be deemed to have agreed, as a condition of ownership of the
Residual Security, 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 Internal Revenue Service and
to
the requesting party within 60 days of the request, and the Seller or the
trustee may charge a fee for computing and providing that
information.
119
Noneconomic
Residual Interests.
The REMIC Regulations disregard transfers of Residual Securities under
certain circumstances, 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 to 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, (1) 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 corporate income tax rate in effect for the year
in
which the transfer occurs, and (2) 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 (1) 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, (2) 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 (3) either the formula
test or the asset test (each as described below) is satisfied.
The
formula test is satisfied if the present value of the anticipated tax
liabilities associated with holding the Residual Security does not exceed the
sum of the present values of (1) any consideration given to the transferee
to
the acquire the Residual Security, (2) the expected future distributions on
the
Residual Security, and (3) the anticipated tax savings associated with holding
the Residual Security as the REMIC generates losses. For purposes of this
calculation, the present values generally are calculated using a discount rate
equal to the applicable federal rate, and the transferee is assumed to pay
tax
at the highest corporate rate of tax.
The
asset
test is satisfied if
1.
at
the time of the transfer of the Residual Security, and at the close
of
each of the transferee’s two fiscal years preceding the year of transfer,
the transferee’s gross assets for financial reporting purposes exceed $100
million and its net assets for financial reporting purposes exceed
$10
million,
2.
the
transferee is a taxable domestic C corporation, other than a RIC,
REIT,
REMIC or a cooperative corporation to which subchapter T of Chapter
1 of
subtitle A of the Code applies (an “Eligible Corporation”), that makes a
written agreement that any subsequent transfer of the Residual Security
will be to another Eligible Corporation in a transaction that satisfies
the safe harbor described above, and the transferor does not know,
or have
reason to know, that the transferee will not honor such agreement,
and
3.
the
facts and circumstances known to the transferor on or before the
date of
transfer do not reasonably indicate that the taxes associated with
the
Residual Security will not be paid.
120
For
purposes of requirement (1), the gross and net assets of a transferee do not
include any obligations of a person related to the transferee or any other
asset
if a principal purpose for holding or acquiring the asset is to permit the
transferee to satisfy the asset test. Further, the formula test will not be
treated as satisfied in the case of any transfer or assignment of the Residual
Security to a foreign branch of an Eligible Corporation or any other arrangement
by which the Residual Security is at any time subject to net tax by a foreign
country or possession of the United States.
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 applies to a transferee
who
is not a “U.S. Person” (as defined below), unless the transferee’s 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, the transferor reasonably expects that (1) the future
distributions on the Residual Security will equal at least 30% of the
anticipated excess inclusions after the transfer, and (2) such amounts will
be
distributed at or after the time at which the excess inclusions accrue and
before the end of the calendar taxable year following the calendar year of
accrual. A safe harbor in the REMIC Regulations provides that the
reasonable expectation requirement will be satisfied if the above test would
be
met at all assumed prepayment rates for the mortgage loans from 50 percent
to
200 percent of the Prepayment Assumption. 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 Certificates 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 the transfer may be made. The term “U.S. Person” means a citizen or
resident of the United States, a corporation or partnership (or other entity
properly treated as a partnership or as a corporation for federal income tax
purposes) created or organized in or under the laws of the United States or
of
any state (including, for this purpose, the District of Columbia), 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 the trust and one or more U.S.
Persons have the authority to control all substantial decisions of the trust
(or, to the extent provided in applicable Treasury regulations, trusts in
existence on August 20, 1996, which are eligible to elect and do elect to be
treated as U.S. Persons). In addition, a REMIC Residual Interest held by an
entity treated as a partnership for federal tax purposes may be treated as
held
by its equity owners.
(6) 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 the Residual Holder in the Residual Security at
the time of the sale or exchange.
Further,
as described above under “—Taxation of Owners of Residual Securities—Basis and
Losses”, if a Residual Security’s basis is reduced to zero, any cash
distributions with respect to that Residual Security in any taxable year in
excess of its share of the REMIC’s income for that year would be taxable to the
holder as gain on the sale or exchange of its interest in the REMIC. If a
Residual Holder has an adjusted basis in its Residual Security when its interest
in the REMIC Pool terminates, then it will recognize a loss at that time in
an
amount equal to the remaining adjusted basis.
121
Any
gain
on the sale of a Residual Security will be treated as ordinary income (1) 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 for any prior disposition of property that was held as a part of that
transaction or (2) in the case of a non-corporate taxpayer, to the extent that
the 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 some banks
or
thrift institutions will be treated as ordinary income or loss pursuant to
Code
Section 582(c).
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 the 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.
(7) Mark
to Market Regulations
Treasury
regulations provide that a Residual Security acquired on or after January 4,1995 is not treated as a security and thus may not be marked to market pursuant
to Section 475 of the Code.
(8) Inducement
Fees
Regulations
have been adopted regarding the federal income tax treatment of “inducement
fees” received by transferees of non-economic REMIC residual interests. The
regulations (i) provide tax accounting rules for the treatment of such fees
as
income over an appropriate period and (ii) specify that inducement fees
constitute income from sources within the United States. Prospective purchasers
of the Residual Certificates are encouraged to consult their tax advisors
regarding the effect of these regulations and the tax consequences of receiving
any inducement fee.
Taxes
That May Be Imposed on the REMIC Pool
(1)
Prohibited
Transactions
Income
from transactions by the REMIC Pool, called prohibited transactions, will not
be
part of the calculation of income or loss includible 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:
(1) the
disposition of a qualified mortgages other than for:
(a) substitution
for a defective (including a defaulted) obligation within two years of the
Startup Day (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
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(d)
a qualified
(complete) liquidation;
(2)
the receipt of
income from assets that are not qualified mortgages or investments that the
REMIC Pool is permitted to hold;
(3)
the receipt of
compensation for services; or
(4)
the receipt of
gain from disposition of cash flow investments other than pursuant to a
qualified liquidation.
Notwithstanding
(1) and (4) above, it is not a prohibited transaction to sell a qualified
mortgage or cash flow investment held by a REMIC Pool to prevent a default
on
Regular Securities as a result of a default on qualified mortgages or to
facilitate a clean-up call of a class of REMIC regular interest to save
administrative costs when no more than a small percentage of the Notes or
Certificates, as applicable, is outstanding. The REMIC Regulations indicate
that
the modification of a mortgage loan generally will not be treated as a
disposition for this purpose 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 borrower pursuant to the terms of a convertible adjustable rate mortgage
loan.
(2)
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
(1) during
the three months following the Startup
Day,
(2)
made to a
qualified reserve fund by a Residual Holder,
(3)
in the nature
of a guarantee,
(4)
made to
facilitate a qualified liquidation or clean-up call, and
(5)
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 that do not qualify for an exception from the 100% penalty
tax.
(3) 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
foreclosure or by deed in lieu of foreclosure would be treated as “foreclosure
property” until the close of the third calendar year after the year in which the
REMIC Pool acquired that property, unless an extension of up to three additional
years is granted. 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 income that would be 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.
123
(4) 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 that adoption is deemed to occur, and
sells all of its assets (other than cash) within a 90-day period beginning
on
that 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.
(5) 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 the 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 Internal
Revenue Service 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, for 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 the Residual Holder,
the
Residual Holder or any 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 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 those proceedings in appropriate
circumstances.
(6) Limitations
on Deduction of Certain Expenses
An
investor who is an individual, estate, or trust will be subject to limitation
with respect to some itemized deductions described in Code Section 67, to the
extent that those itemized deductions, in total, do not exceed 2% of the
investor’s adjusted gross income. In the case of a partnership that has 100 or
more partners and elects to be treated as an “electing large partnership,” 70%
of that partnership’s miscellaneous itemized deductions will be disallowed,
although the remaining deductions will generally be allowed at the partnership
level and will not be subject to the 2% floor that would otherwise be applicable
to individual partners. 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 or (1) 3% of the excess of adjusted gross income in
excess of a specified threshold amount (which is adjusted annually for
inflation), or (2) 80% of the amount of itemized deductions otherwise allowable
for that year. The reduction under Code Section 68 is itself reduced by
one-third for taxable years beginning in 2006 and 2007, two-thirds for taxable
years beginning in 2008 and 2009, and fully reduced for taxable years beginning
in 2010 with no reduction thereafter. In the case of a REMIC Pool, those
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 for a regular interest it holds
in
another REMIC. Those investors who hold REMIC Securities either directly or
indirectly through pass-through entities may have their pro rata share of those
expenses allocated to them as additional gross income, but may be subject to
that limitation on deductions. In addition, those expenses are not deductible
at
all for purposes of computing the alternative minimum tax, and may cause those
investors to be subject to significant additional tax
124
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. For 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 those 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. The prospectus supplement will indicate if all those expenses
will not be allocable to the Residual Securities.
Taxation
of Certain Foreign Investors
(1)
Regular
Securities
Interest,
including original issue discount, distributable to Regular Securityholders
who
are non-resident aliens, foreign corporations, or other Non-U.S. Persons (as
defined below), generally will be considered “portfolio interest” and,
therefore, generally will not be subject to 30% United States withholding tax,
provided that (1) the interest is not effectively connected with the conduct
of
a trade or business in the United States of the securityholder, (2) the 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) and (3) that Non-U.S. Person complies to the extent necessary
with
certain certification requirements, which generally relate to the identity
of
the beneficial owner and the status of the beneficial owner as a person that
is
a Non-U.S. person. Each Regular Securityholder is encouraged to consult its
tax
advisors regarding the tax documentation and certifications that must be
provided to secure the exemption from United States withholding
taxes.
Any
capital gain realized on the sale, redemption, retirement or other taxable
disposition of a Regular Security by a Non-U.S. Person generally will be exempt
from United States federal income and withholding tax, provided that (i) such
gain is not effectively connected with the conduct of a trade or business in
the
United States by the Non-U.S. Person and (ii) in the case of an individual
Non-U.S. Person, the Non-U.S. Person is not present in the United States for
183
days or more in the taxable year.
If
the
interest on the Regular Security is effectively connected with the conduct
of a
trade or business within the United States by that Non-U.S. Person, the Non-U.S.
Person, although exempt from the withholding tax previously discussed if the
holder provides an appropriate statement establishing that such income is so
effectively connected, will be subject to United States federal income tax
at
regular rates. Investors who are Non-U.S. Persons are encouraged to consult
their own tax advisors regarding the specific tax consequences to them of owning
a Regular Security. The term “Non-U.S. Person” means any person who is not a
U.S. Person.
(2)
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 (1) the
mortgage loans were issued after July 18, 1984, and (2) the issuing entity
or
segregated pool of assets in the issuing entity (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,
125
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”
above. 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 those Non-U.S. Persons, although exempt from the withholding tax
previously discussed if the holder provides an appropriate statement
establishing that such income is so effectively connected, the amounts paid
to
those Non-U.S. Persons will be subject to United States federal income tax
at
regular rates. See “—Tax-Related Restrictions on Transfer of Residual
Securities—Foreign Investors” above concerning the disregard of transfers having
“tax avoidance potential.” Investors who are Non-U.S. Persons are
encouraged to consult their own tax advisors regarding the specific tax
consequences to them of owning Residual Securities.
(3) Backup
Withholding
Distributions
made on the REMIC Securities, and proceeds from the sale of the REMIC Securities
to or through certain brokers, may be subject to a “backup” withholding tax
under Code Section 3406 on “reportable payments” (including interest
distributions, original issue discount, and, under some circumstances, principal
distributions) if the Holder fails to comply with certain identification
procedures, unless the Holder is otherwise an exempt recipient under applicable
provisions of the Code, and, if necessary, demonstrates such status. Any amounts
to be withheld from distribution on the REMIC Securities would be refunded
by
the Internal Revenue Service or allowed as a credit against the Regular Holder’s
federal income tax liability.
Grantor
Trust Funds
Characterization.
For
each series of Grantor Trust Securities, Federal Tax Counsel will deliver its
opinion that the Grantor Trust Fund will not be classified as an association
taxable as a corporation and that the Grantor Trust Fund will be classified
as a
grantor trust under subpart E, Part I of subchapter J of chapter 1 of subtitle
A
of the Code. In this case, beneficial owners of Grantor Trust Securities
(referred to in this Prospectus as “Grantor Trust Securityholders”) will be
treated for federal income tax purposes as owners of a portion of the Grantor
Trust Fund’s assets as described below.
Taxation
of Grantor Trust Securityholders.
Subject
to the discussion below under “Stripped Certificates” and “Subordinated
Certificates,” each Grantor Trust Securityholder will be treated as the owner of
a pro rata undivided interest in the assets of the Grantor Trust Fund.
Accordingly, and subject to the discussion below of the recharacterization
of
the servicing fee, each Grantor Trust Securityholder must include in income
its
pro rata share of the interest and other income from the assets of the Grantor
Trust Fund, including any interest, original issue discount, market discount,
prepayment fees, assumption fees, and late payment charges with respect to
the
assets, and, subject to limitations discussed below, may deduct its pro rata
share of the fees and other deductible expenses paid by the Grantor Trust Fund,
at the same time and to the same extent as these items would be included or
deducted by the Grantor Trust Securityholder if the Grantor Trust Securityholder
held directly a pro rata interest in the assets of the Grantor Trust Fund and
received and paid directly the amounts received and paid by the Grantor Trust
Fund. Any amounts received by a Grantor Trust Securityholder in lieu of amounts
due with respect to any asset of the Grantor Trust Fund because of a default
or
delinquency in payment will be treated for federal income tax purposes as having
the same character as the payments they replace.
Each
Grantor Trust Securityholder will be entitled to
deduct its pro rata share of servicing fees, prepayment fees, assumption fees,
any loss recognized upon an assumption and late
126
payment
charges retained by the servicer, provided that these amounts are reasonable
compensation for services rendered to the Grantor Trust Fund. Grantor Trust
Securityholders that are individuals, estates or trusts will be entitled to
deduct their share of expenses only to the extent these expenses plus all other
miscellaneous itemized deductions exceed two percent of the Grantor Trust
Securityholder’s adjusted gross income, and will be allowed no deduction for
these expenses in determining their liabilities for alternative minimum tax.
In
addition, Section 68 of the Code, provides that the amount of itemized
deductions otherwise allowable for the taxable year for an individual whose
adjusted gross income exceeds a prescribed threshold amount will be reduced
by
the lesser of (1) 3% of the excess of adjusted gross income over the specified
threshold amount (adjusted annually for inflation) or (2) 80% of the amount
of
itemized deductions otherwise allowable for the applicable taxable year. The
reduction under Code Section 68 is itself reduced by one-third for taxable
years
beginning in 2006 and 2007, two-thirds for taxable years beginning in 2008
and
2009, and fully reduced for taxable years beginning in 2010 with no reduction
thereafter. In the case of a partnership that has 100 or more partners and
elects to be treated as an “electing large partnership,” 70% of the
partnership’s miscellaneous itemized deductions will be disallowed, although the
remaining deductions will generally be allowed at the partnership level and
will
not be subject to the 2% floor that would otherwise be applicable to individual
partners.
The
servicing compensation to be received by the servicer may be questioned by
the
IRS as exceeding a reasonable fee for the services being performed in exchange
for the servicing compensation, and a portion of the servicing compensation
could be recharacterized as an ownership interest retained by the servicer
or
other party in a portion of the interest payments to be made with respect to
the
Grantor Trust Fund’s assets. In this event, a certificate might be treated as a
Stripped Certificate subject to the stripped bond rules of Section 1286 of
the
Code, and either the original issue discount or the market discount rules.
See
the discussion below under “—Stripped Certificates”. Except as discussed below
under “Stripped Certificates” or “—Subordinated Certificates,” this discussion
assumes that the servicing fees paid to the servicer do not exceed reasonable
servicing compensation.
A
purchaser of a Grantor Trust Security will be treated as purchasing an interest
in each asset in the Grantor Trust Fund at a price determined by allocating
the
purchase price paid for the certificate among all asset of the Grantor Trust
Fund in proportion to their fair market values at the time of the purchase
of
the certificate. To the extent that the portion of the purchase price of a
Grantor Trust Security allocated to an asset of the Grantor Trust Fund is less
than or greater than the stated redemption price at maturity of the asset,
the
interest in the asset will have been acquired at a discount or premium. See
“—Market Discount” and “—Premium,” below.
The
treatment of any discount on an asset of the Grantor Trust Fund will depend
on
whether the discount represents original issue discount or market discount.
Except as indicated otherwise in the applicable Prospectus Supplement, it is
not
expected that any asset of the Grantor Trust Fund (other than a Stripped Agency
Security or other instrument evidencing ownership of specific interest and/or
principal of a particular bond) will have original issue discount (except as
discussed below under “Stripped Certificates” or “Subordinated Certificates”).
For the rules governing original issue discount, see “REMICs—Taxation of Owners
of Regular Securities—Original Issue Discount” above.
The
information provided to Grantor Trust Securityholders will not include
information necessary to compute the amount of discount or premium, if any,
at
which an interest in each asset of the Grantor Trust Fund is
acquired.
Market
Discount.
A
Grantor Trust Securityholder that acquires an undivided interest in the Grantor
Trust Fund’s assets may be subject to the market discount rules of Sections 1276
through 1278 to the extent an undivided interest in an asset of the Grantor
Trust Fund is considered to have been purchased at a “market discount”. For a
discussion of the market discount rules under the
127
Code,
see “REMICs—Taxation of Owners of Regular
Securities—Market Discount” above. As discussed above, to the extent an asset of
the Grantor Trust Fund is a Stripped Agency Security or other instrument
evidencing ownership of specific interest and/or principal of a particular
bond,
it will be subject to the rules relating to original issue discount (in lieu
of
the rules relating to market discount). See “REMICs—Taxation of Owners of
Regular Securities—Original Issue Discount” above.
Premium.
To the
extent a Grantor Trust Securityholder is considered to have purchased an
undivided interest in an asset of the Grantor Trust Fund for an amount that
is
greater than the stated redemption price at maturity of the interest, the
Grantor Trust Securityholder will be considered to have purchased the interest
in the asset with “amortizable bond premium” equal in amount to the excess. For
a discussion of the rules applicable to amortizable bond premium, see
“REMICs—Taxation of Owners of Regular Securities—Amortizable Premium”
above.
Status
of the Grantor Trust Securities.
Except
for that portion of a Grantor Trust Fund consisting of unsecured home
improvement loans and except as qualified below, a Grantor Trust 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” within the meaning of Code Section
7701(a)(19)(C)(v), to the extent assets of the Trust consist of mortgage
loans and other assets of the type described in that section of the
Code.
·
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 those assets will be considered “interest on
obligations secured by mortgages on real property” to that extent within
the meaning of Code Section
856(c)(3)(B).
·
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).
It
is not
clear whether Grantor Trust Certificates that are Stripped Certificates (as
described below under “Stripped Certificates”) should be treated as qualifying
under the Code provisions cited in the first two bullet points above to the
same
extent as Grantor Trust Certificates that are not Stripped Certificate. Grantor
Trust Securityholders are encouraged to consult their own tax advisors
concerning the characterization of the securityholder’s investment for federal
income tax purposes.
Stripped
Certificates.
Some
classes of certificates may be subject to the stripped bond rules of Section
1286 of the Code and for purposes of this discussion will be referred to as
“Stripped Certificates.” In general, a Stripped Certificate will be subject to
the stripped bond rules where there has been a separation of ownership of the
right to receive some or all of the principal payments on a mortgage loan held
by the Grantor Trust Fund from ownership of the right to receive some or all
of
the related interest payments. Generally, where a separation has occurred,
under
the stripped bond rules of Section 1286 of the Code, the holder of a right
to
receive a principal or interest payment on the bond is required to accrue into
income, on a constant yield basis under rules governing original issue discount
(see “REMICs—Taxation of Owners of Regular Securities—Original Issue Discount”),
the difference between the holder’s initial purchase price for
128
the
right to receive principal or interest, and the
principal or interest payment to be received with respect to that right.
However, a holder of a Stripped Certificate will account for any discount on
the
Stripped Certificate (other than an interest treated as a “stripped coupon”) as
market discount rather than original issue discount if either (i) the amount
of
original issue discount with respect to the Stripped Certificate was treated
as
zero under the original issue discount de minimis rule when the Stripped
Certificate was stripped or (ii) no more than 100 basis points (including any
amount of servicing in excess of reasonable servicing) is stripped from the
mortgage assets.
Certificates
will constitute Stripped Certificates and will be subject to these rules under
various circumstances, including the following:
·
if
any servicing compensation is deemed to exceed a reasonable
amount;
·
if
the company or any other party retains a retained yield with respect
to
the assets held by the Grantor Trust
Fund;
·
if
two or more classes of certificates are issued representing the right
to
non-pro rata percentages of the interest or principal payments on
the
Grantor Trust Fund’s assets; or
·
if
certificates are issued which represent the right to interest-only
payments or principal-only
payments.
The
tax
treatment of the Stripped Certificates with respect to the application of the
original issue discount provisions of the Code is currently unclear. However,
the trustee intends to treat each Stripped Certificate as a single debt
instrument issued on the day it is purchased for purposes of calculating any
original issue discount. Holders may be obligated to perform such calculation
based on the day they acquire their Trust Certificates rather than based on
when
the Grantor Trust Fund acquires the Stripped Certificates. Original issue
discount with respect to a Stripped Certificate must be included in ordinary
gross income for federal income tax purposes as it accrues in accordance with
the constant yield method that takes into account the compounding of interest
and this accrual of income may be in advance of the receipt of any cash
attributable to that income. See “REMICs—Taxation of Owners of Regular
Securities—Original Issue Discount” above. For purposes of applying the original
issue discount provisions of the Code, the issue price of a Stripped Certificate
will be the purchase price paid by each holder of the Stripped Certificate
and
the stated redemption price at maturity may include the aggregate amount of
all
payments to be made with respect to the Stripped Certificate whether or not
denominated as interest. The amount of original issue discount with respect
to a
Stripped Certificate may be treated as zero under the original issue discount
de
minimis rules described above.
The
precise tax treatment of Stripped Coupon Certificates is substantially
uncertain. The Code could read literally to require that OID computations be
made for each payment from each mortgage loan. However, based on IRS guidance,
it appears that all payments from a mortgage loan underlying a Stripped Coupon
Certificate should be treated as a single installment obligation subject to
the
OID rules of the Code, in which case, all payments from the mortgage loan would
be included in the mortgage loan’s stated redemption price at maturity for
purposes of calculating income on the Stripped Coupon Certificate under the
OID
rules of the Code.
Based
on
current authority it is unclear under what circumstances, if any, the prepayment
of mortgage loans will give rise to a loss to the holder of a Stripped Bond
Certificate purchased at a premium or a Stripped Coupon Certificate. The Code
provides that a prepayment assumption must be used to accrue income on any
pool
of debt instruments the yield on which can be affected by prepayments. There
is
no guidance as to whether a Stripped Coupon Certificate or a Stripped
129
Bond
Certificate would represent an interest in a
pool of debt instruments for purposes of this Code provision. In addition,
the
manner in which to take prepayments into account is uncertain. It is possible
that no loss may be available as a result of any particular prepayment, except
perhaps to the extent that even if no further prepayments were received a
Certificateholder would be unable to recover its basis. In addition, amounts
received in redemption for debt instruments issued by natural persons purchased
or issued after June 8, 1997 are treated as received in exchange therefor (that
is treated the same as obligations issued by corporations). This change could
affect the character of any loss.
Holders
of Stripped Bond Certificates and Stripped Coupon Certificates are encouraged
to
consult with their own tax advisors regarding the proper treatment of these
certificates for federal income tax purposes.
Subordinated
Certificates.
In the
event the Grantor Trust Fund issues two classes of Grantor Trust Securities
that
are identical except that one class is a subordinate class, with a relatively
high certificate pass-through rate, and the other is a senior class, with a
relatively low certificate pass-through rate (referred to in this Prospectus
as
the “Subordinate Certificates” and “Senior Certificates”, respectively), the
Grantor Trust Securityholders in the aggregate will be deemed to have acquired
the following assets: (1) the principal portion of each mortgage loan plus
a
portion of the interest due on each mortgage loan (the “Grantor Trust Fund
Stripped Bond”), and (2) a portion of the interest due on each mortgage loan
equal to the difference between the Interest Rate on the Subordinate
Certificates and the Interest Rate on the Senior Certificates, if any, which
difference is then multiplied by the Subordinate Class Percentage (the “Grantor
Trust Fund Stripped Coupon”). The “Subordinate Class Percentage” equals the
initial aggregate principal amount of the Subordinate Certificates divided
by
the sum of the initial aggregate principal amount of the Subordinate
Certificates and the Senior Certificates. The “Senior Class Percentage” equals
the initial aggregate principal amount of the Senior Certificates divided by
the
sum of the initial aggregate principal amount of the Subordinate Certificates
and the Senior Certificates.
The
Senior Certificateholders in the aggregate will own the Senior Class Percentage
of the Grantor Trust Fund Stripped Bond and accordingly each Senior
Certificateholder will be treated as owning its pro rata share of such asset.
The Senior Certificateholders will not own any portion of the Grantor Trust
Fund
Stripped Coupon. The Subordinate Certificateholders in the aggregate own both
the Subordinate Class Percentage of the Grantor Trust Fund Stripped Bond plus
100% of the Grantor Trust Fund Stripped Coupon, if any, and accordingly each
Subordinate Certificateholder will be treated as owning its pro rata share
in
both assets. The Grantor Trust Fund Stripped Bond will be treated as a “stripped
bond” and the Grantor Trust Fund Stripped Coupon will be treated as “stripped
coupons” within the meaning of Section 1286 of the Code.
Although
not entirely clear, the interest income on the Subordinate Certificates and
the
portion of the servicing fee allocable to such certificates that does not
constitute excess servicing will be treated by the Grantor Trust Fund as
qualified stated interest, assuming the interest with respect to the mortgage
loans held by the Grantor Trust Fund would otherwise qualify as qualified stated
interest. Accordingly, except to the extent modified below, the income of the
Subordinate Certificates will be reported in the same manner as described
generally above for holders of Senior Certificates.
If
the
Subordinate Certificateholders receive distribution of less than their share
of
the Grantor Trust Fund’s receipts of principal or interest (the “Shortfall
Amount”) because of the subordination of the Subordinate Certificates, holders
of Subordinate Certificates would probably be treated for federal income tax
purposes as if they had
·
received
as distributions their full share of
receipts;
130
·
paid
over to the Senior Certificateholders an amount equal to the Shortfall
Amount; and
·
retained
the right to reimbursement of the relevant amounts to the extent
these
amounts are otherwise available as a result of collections on the
mortgage
loans or amounts available from a reserve account or other form of
credit
enhancement, if any.
Under
this analysis,
·
Subordinate
Certificateholders would be required to accrue as current income
any
interest income, original issue discount, or (to the extent paid
on assets
of the Grantor Trust Fund) accrued market discount of the Grantor
Trust
Fund that was a component of the Shortfall Amount, even though that
amount
was in fact paid to the Senior
Certificateholders;
·
a
loss would only be allowed to the Subordinate Certificateholders
when
their right to receive reimbursement of the Shortfall Amount became
worthless (i.e., when it becomes clear that amount will not be available
from any source to reimburse the loss);
and
·
reimbursement
of the Shortfall Amount prior to a claim of worthlessness would not
be
taxable income to Subordinate Certificateholders because the amount
was
previously included in income.
Those
results should not significantly affect the inclusion of income for Subordinate
Certificateholders on the accrual method of accounting, but could accelerate
inclusion of income to Subordinate Certificateholders on the cash method of
accounting by, in effect, placing them on the accrual method. Moreover, the
character and timing of loss deductions are unclear. Subordinate
Certificateholders are strongly encouraged to consult their own tax advisors
regarding the appropriate timing, amount and character of any losses sustained
with respect to the Subordinate Certificates including any loss resulting from
the failure to recover previously accrued interest or discount
income.
Election
to Treat All Interest as Original Issue Discount.
The
Treasury Regulations relating to original issue discount permit a Grantor Trust
Securityholder to elect to accrue all interest, discount, including de minimis
market or original issue discount, reduced by any premium, in income as
interest, based on a constant yield method. If an election were to be made
with
respect to an interest in a mortgage loan with market discount, the Grantor
Trust Securityholder would be deemed to have made an election to include in
income currently market discount with respect to all other debt instruments
having market discount that the Grantor Trust Securityholder acquires during
the
year of the election or afterward. See “—Market Discount” above. Similarly, a
Grantor Trust Securityholder that makes this election for an interest in a
mortgage loan that is acquired at a premium will be deemed to have made an
election to amortize bond premium with respect to all debt instruments having
amortizable bond premium that the Grantor Trust Securityholder owns at the
beginning of the first taxable year to which the election applies or acquires
afterward. See “—Premium” above. The election to accrue interest, discount and
premium on a constant yield method with respect to a Grantor Trust Security
is
irrevocable.
Prepayments.
The
Taxpayer Relief Act of 1997 (the “1997 Act”) contains a provision requiring
original issue discount on any pool of debt instruments the yield on which
may
be affected by reason of prepayments be calculated taking into account the
Prepayment Assumption
131
and
requiring the discount to be taken into income on
the basis of a constant yield to assumed maturity taking account of actual
prepayments.
Sale
or Exchange of a Grantor Trust Security.
Sale or
exchange of a Grantor Trust Security prior to its maturity will result in gain
or loss equal to the difference, if any, between the amount realized, exclusive
of amounts attributable to accrued and unpaid interest (which will be treated
as
ordinary income allocable to the related asset of the Grantor Trust Fund),
and
the owner’s adjusted basis in the Grantor Trust Security. The adjusted basis
generally will equal the seller’s cost for the Grantor Trust Security, increased
by the original issue discount and any market discount included in the seller’s
gross income with respect to the Grantor Trust Security, and reduced, but not
below zero, by any premium amortized by the seller and by principal payments
on
the Grantor Trust Security previously received by the seller. The gain or loss
will, except as discussed below, be capital gain or loss to an owner for which
the assets of the Grantor Trust Fund represented by a Grantor Trust
Security are “capital assets” within the meaning of Section 1221. A capital gain
or loss will be long-term or short-term depending on whether or not the Grantor
Trust Security has been owned for the long-term capital gain holding period,
currently more than one year.
Notwithstanding
the foregoing, any gain realized on the sale or exchange of a Grantor Trust
Security will be ordinary income to the extent of the seller’s interest in
accrued market discount on Grantor Trust Fund assets not previously taken into
income. See “—Market Discount,” above. Further, Grantor Trust Securities will be
“evidences of indebtedness” within the meaning of Section 582(c)(1) to the
extent the assets of the grantor trust would be so treated. Accordingly, gain
or
loss recognized from the sale of a Grantor Trust Security by a bank or thrift
institution to which such section applied will be treated as ordinary gain
or
loss to the extent selling the assets of the grantor trust directly would be
so
treated.
Foreign
Investors in Grantor Trust Securities.
A
holder of a Grantor Trust Security who is not a “U.S. person” (as defined above
at “REMICs—Tax Related Restrictions on Transfer of Residual Securities—Foreign
Investors”) and is not subject to federal income tax as a result of any direct
or indirect connection to the United States other than its ownership of a
Grantor Trust Security generally will not be subject to United States income
or
withholding tax in respect of payments of interest or original issue discount
on
its Grantor Trust Security to the extent attributable to debt obligations held
by the Grantor Trust Fund that were originated after July 18, 1984, provided
that the Grantor Trust Securityholder complies to the extent necessary with
certain certification requirements which generally relate to the identity of
the
beneficial owner and the status of the beneficial owner as a person that is
not
a U.S. person. Interest or original issue discount on a Grantor Trust Security
attributable to debt obligations held by the Grantor Trust Fund that were
originated prior to July 19, 1984 will be subject to a 30% withholding tax
(unless such tax is reduced or eliminated by an applicable tax treaty). All
holders of Grantor Trust Securities are encouraged to consult their tax advisors
regarding the tax documentation and certifications that must be provided to
secure any applicable exemptions from United States withholding
taxes.
Any
capital gain realized on the sale or other taxable disposition of a Grantor
Trust Security by a Non-U.S. Person (as defined above at “REMICs—Taxation of
Certain Foreign Investors—Regular Securities”) generally will be exempt from
United States federal income and withholding tax, provided that (i) such gain
is
not effectively connected with the conduct of a trade or business in the United
States by the Non-U.S. Person and (ii) in the case of an individual Non-U.S.
Person, the Non-U.S. Person is not present in the United States for 183 days
or
more in the taxable year.
If
the
interest, gain or income with respect to a Grantor Trust Security held by a
Non-U.S. Person is effectively connected with the conduct of a trade or business
in the United States by the Non-U.S. Person (although exempt from the
withholding tax previously discussed if the holder provides an appropriate
statement establishing that such income is so effectively connected), the
132
holder
generally will be subject to United States
federal income tax on the interest, gain or income at regular federal income
tax
rates. In this regard, real estate acquired by a Grantor Trust as a result
of
foreclosure or in lieu of foreclosure could cause a foreign holder to have
“effectively connected income” or a U.S. tax filing obligation even in the
absence of such income. In addition, if the Non-U.S. Person is a foreign
corporation, it may be subject to a branch profits tax equal to 30% of its
“effectively connected earnings and profits,” within the meaning of the Code,
for the taxable year, as adjusted for certain items, unless it qualifies for
a
lower rate under an applicable tax treaty (as modified by the branch profits
tax
rules).
Backup
Withholding.
Distributions made on the Grantor Trust Securities and proceeds from the sale
of
the Grantor Trust Securities will be subject to a “backup” withholding tax if,
in general, the Grantor Trust Securityholder fails to comply with particular
identification procedures, unless the holder is an exempt recipient under
applicable provisions of the Code and, if necessary, demonstrates such status.
Any amounts so withheld would be refunded by the IRS or allowable as a credit
against the Grantor Trust Securityholder’s federal income tax.
Partnership
Trust Funds
and Disregarded Entities
Classification
of Issuing
Entities
For
each
series of Partnership Certificates or Debt Securities, Federal Tax Counsel
will
deliver its opinion that the issuing entity 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 parties to the related Agreement and related documents will comply with
the
terms of those documents.
Taxation
of Debt Securityholders
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, for each series
of
Debt Securities, Federal Tax Counsel 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 Internal Revenue Service successfully
asserted that the Debt Securities were not debt for federal income tax purposes,
the Debt Securities might be treated as equity interests in a Partnership Trust
Fund. If so treated, the Partnership Trust Fund might be treated as a publicly
traded partnership that would be taxable as a corporation unless it met
particular qualifying income tests, and the resulting taxable corporation would
not be able to reduce its taxable income by deductions for interest expense
on
Debt Securities recharacterized as equity. Treatment of the Debt Securities
as
equity interests in a partnership could have adverse tax consequences to some
holders, even if the Partnership Trust Fund were not treated as a publicly
traded partnership taxable as a corporation. For example, income allocable
to
foreign holders might be subject to United States tax and United States tax
return filing and withholding requirements, income allocable to tax-exempt
holders might constitute “unrelated business taxable income” (if some, but not
all, of the Debt Securities were recharacterized as equity in a partnership),
individual holders might be subject to limitations on their ability to deduct
their share of the Partnership Trust Fund’s expenses, and income from the
Partnership Trust Fund’s assets would be taxable to owners of Debt Securities
without regard to whether cash distributions are made to such owners and without
regard to the owners’ method of tax accounting.
133
Except
for the treatment of the allocation of Realized Losses, Debt Securities
generally will be subject to the same rules of taxation as Regular Securities
issued by a REMIC, as described above, except that (1) income reportable on
Debt
Securities is not required to be reported under the accrual method unless the
holder otherwise uses the accrual method and (2) the special 110% yield 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.”
Allocations
of Realized Losses.
The
manner in which losses are claimed on the Notes as a result of defaults by
the
underlying obligors is complex and differs depending on the characterization
of
the person considered the issuer of the Notes for federal tax purposes. Whether
the Notes are governed by the loss rules for bad debts under Code Section 166
or
for worthless securities under Code Section 165 depends on whether the Notes
are
considered issued by a corporation. If there is a single corporate holder of
the
Certificates constituting all of the equity interests in the issuing Partnership
Trust Fund, then the issuing entity will be a disregarded entity as separate
from its equity owner and if such equity owner is a corporation, the Notes
will
be considered issued by a corporation subject to the loss rules of Code Section
165 (which affects both timing and character of loss for corporate taxpayers,
and character and possibly timing for other taxpayers). If the Notes are
considered issued by a grantor trust, then the notes may be treated as issued
in
proportion to the nature of the Certificateholders (e.g., if some
Certificateholders are natural persons or partnerships and some are
corporations, losses on the Notes would be governed in part by Code Section
166
and in part by Code Section 165). If the Notes are considered issued by a
partnership then they would be governed by the rules under Code Section 166
the
same as a REMIC. Investors are encouraged to consult their tax advisors as
to
the character and timing of any loss that can be claimed with respect to a
Note.
Further,
for federal income tax purposes, (i) 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” within the
meaning of Section 7701(a)(19)(C)(v) of the Code; (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); (iii) Debt
Securities held by a real estate investment trust will not constitute “real
estate assets” or “Government securities” within the meaning of Section
856(c)(4)(A) of the Code; (iv) Debt Securities held by a regulated investment
company will not constitute “Government securities” within the meaning of
Section 851(b)(3)(A)(i) of the Code; and (v) Debt Securities will not constitute
“qualified mortgages” with in the meaning of Section 860G(a)(3) of the Code for
REMICs.
Taxation
of Owners of Partnership Certificates
(1) Treatment
as a Partnership Trust Fund
The
correct characterization of an issuing entity that has issued debt and is not
otherwise taxed as a corporation is uncertain. If the issuing entity has only
a
single class of equity and the Trustee does not have the authority to accept
any
additional assets after the initial acquisition of receivables (except within
a
certain prescribed pre-funding period not exceeding three months) and has very
limited powers of investment (for example does not hold any reserve fund that
could ultimately flow to the Certificateholders if not needed to pay the
Noteholders) the issuing entity could qualify as a grantor trust with an
interest expense. As a consequence, each Certificateholder would be treated
as
owning a pro rata share of the issuing entity’s assets, earning income thereon
and incurring the expenses of the issuing entity (including the interest expense
on the Notes). See “Grantor Trusts.” If an issuing entity that issues
Notes intends to take the position that
134
Certificateholders
hold interests in a grantor trust
it will be disclosed in the related prospectus supplement. In addition, it
is
possible that an issuing entity that issued Notes could qualify as a partnership
eligible to make an election under Section 761 to not be taxed under the main
partnership provisions of the Code (although certain ancillary provisions,
including the rules relating to audits of partnerships, would continue to
apply). Such an election would cause Certificateholders to be treated as
essentially the same as holding an interest in a grantor trust. However, the
IRS
has recently taken a narrow interpretation of the type of entities that qualify
for this election, which may not include an issuing entity. If an issuing entity
that is treated as a partnership has made an election under Section 761 to
be
excluded from the main partnership provisions of the Code this will be disclosed
in the related prospectus supplement along with a description of the
consequences of making such an election. If there is only one Certificateholder
in an issuing entity that represents all of the equity of the issuing entity
for
federal income tax purposes, the separate existence of the issuing entity is
disregarded, and the Certificateholder is treated as the owner of all of the
assets of the issuing entity and as the issuer of the Notes of the issuing
entity for federal income tax purposes. For all other Issuing entities that
issue Notes, the Partnership Trust Fund will agree, and the related owners
of
Partnership Certificates (“Partnership Certificate Owners”) will agree by their
purchase of Partnership Certificates, if there is more than one Partnership
Certificate Owner, 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 Partnership Certificate Owners, including, to the extent relevant,
the
depositor in its capacity as recipient of distributions from any reserve fund,
and the Debt Securities, if any, being debt of the partnership, and if there
is
one Partnership Certificate Owner, to treat the Partnership Certificate Owner
as
the owner of the assets of the Partnership Trust Fund and to treat the
Partnership Trust Fund as a disregarded entity. However, the proper
characterization of the arrangement involving the Partnership Trust Fund, the
Partnership Certificates, the Debt Securities and the depositor is not certain
because there is no authority on transactions closely comparable to that
contemplated in this prospectus.
A
variety
of alternative characterizations are possible. For example, because the
Partnership Certificates have certain features characteristic of debt, the
Partnership Certificates might be considered debt of the Partnership Trust
Fund.
Generally, provided such Partnership Certificates are issued at or close to
face
value, any such characterization would not result in materially adverse tax
consequences to holders of Partnership Certificates as compared to the
consequences from treatment of the Partnership Certificates as equity in a
partnership, described below. The following discussion assumes that the
Partnership Certificates represent equity interests in a partnership. The
following discussion also assumes that all payments on the Partnership
Certificates are denominated in U.S. dollars, none of the Partnership
Certificates have Interest Rates which would qualify as contingent interest
under the Treasury regulations relating to original issue discount, and that
a
series of securities includes a single class of Partnership Certificates. If
these conditions are not satisfied with respect to any given series of
Partnership Certificates, additional tax considerations with respect to such
Partnership Certificates will be disclosed in the applicable prospectus
supplement.
(2) Partnership
Taxation
As
a
partnership, the Partnership Trust Fund will not be subject to federal income
tax. Rather, each Partnership Certificate Owner will be required to take into
account separately the Partnership Certificate Owner’s allocable share of
income, gains, losses, deductions and credits of the Partnership Trust Fund,
whether or not there is a corresponding cash distribution. The Trust will
generally be required to use an accrual method of accounting and a tax year
based on the tax year of its Certificateholders. Thus, cash basis holders will
in effect be required to report income from the Partnership Certificates on
the
accrual basis and Partnership Certificate Owners may become liable for taxes
on
Partnership Trust Fund income even if they have not received cash
135
from
the Partnership Trust Fund to pay the taxes. The
Partnership Trust Fund’s income will consist primarily of interest and finance
charges earned on the related mortgage loans, including appropriate adjustments
for market discount, original issue discount and bond premium, and any gain
upon
collection or disposition of the 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 mortgage loans.
The
tax
items of a partnership are allocable to the partners in accordance with the
Code, Treasury regulations and the partnership agreement (i.e., the Agreement
and related documents). To the extent that there is more than one class of
equity (or potentially more than one class of equity) the related prospectus
supplement will describe the manner in which income from the assets of the
issuing entity will be allocated.
Assuming
Debt Securities are also issued, all or substantially all of the taxable income
allocated to a Partnership Certificate Owner that is a pension, profit sharing
or employee benefit plan or other tax-exempt entity, including an individual
retirement account, will constitute “unrelated business taxable income”
generally taxable to the holder under the Code.
An
individual taxpayer’s share of expenses of the Partnership Trust Fund, including
fees to the servicer, but not interest expense, would be miscellaneous itemized
deductions and thus deductible only to the extent such expenses plus all other
miscellaneous itemized deductions exceeds two percent of the individual’s
adjusted gross income. An individual taxpayer will be allowed no deduction
for
his share of expenses of the Partnership Trust Fund, other than interest, in
determining his liability for alternative minimum tax. In addition, Section
68
of the Code provides that the amount of itemized deductions otherwise allowable
for the taxable year for an individual whose adjusted gross income exceeds
a
prescribed threshold amount will be reduced by the lesser of (1) 3% of the
excess of adjusted gross income over the specified threshold amount (adjusted
annually for inflation) or (2) 80% of the amount of itemized deductions
otherwise allowable for the applicable taxable year. Accordingly, deductions
might be disallowed to the individual in whole or in part and might result
in
the Partnership Certificate Owner being taxed on an amount of income that
exceeds the amount of cash actually distributed to the holder over the life
of
the Partnership Trust Fund. The reduction under Code Section 68 is itself
reduced by one-third for taxable years beginning in 2006 and 2007, two-thirds
for taxable years beginning in 2008 and 2009, and fully reduced for taxable
years beginning in 2010 with no reduction thereafter. In the case of a
partnership that has 100 or more partners and elects to be treated as an
“electing large partnership,” 70% of that partnership’s miscellaneous itemized
deductions will be disallowed, although the remaining deductions will generally
be allowed at the partnership level and will not be subject to the 2% floor
that
would otherwise be applicable to individual partners.
The
Partnership Trust Fund intends to make all tax calculations relating to income
and allocations to Partnership Certificate Owners on an aggregate basis to
the
extent relevant. If the IRS were to require that the calculations be made
separately for each mortgage loan, the calculations may result in some timing
and character differences under some circumstances.
(3) Discount
and Premium
The
purchase price paid by the Partnership Trust Fund for the related 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 market discount, as the case may be. See “REMICs—Taxation of
Owners of Regular Securities—Acquisition Premium” and “— Market Discount” above.
As indicated above, the Partnership Trust Fund will make this calculation on
an
aggregate basis, but it is possible that the IRS might require that it be
136
recomputed
on a mortgage loan-by-mortgage loan basis.
Further, with respect to any asset of the Partnership Trust Fund that is a
Stripped Agency Security or other instrument evidencing ownership of specific
interest and/or principal of a particular bond, it will be subject to the rules
relating to original issue discount with respect to such security or instrument
(in lieu of the rules relating to market discount). See “REMICs—Taxation of
Owners of Regular Securities—Original Issue Discount” above.
If
the
Partnership Trust Fund acquires the mortgage loans at a market discount or
premium, the Partnership Trust Fund will elect to include any market discount
in
income currently as it accrues over the life of the mortgage loans or to offset
any premium against interest income on the mortgage loans. As indicated above,
a
portion of the market discount income or premium deduction may be allocated
to
Partnership Certificate Owners.
(4) 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 a termination occurs under Section 708 of the Code, the Partnership
Trust Fund will be considered to contribute its assets to a new Partnership
Trust Fund, which would be treated as a new partnership, in exchange for
Partnership Certificates in the new Partnership Trust Fund. The original
Partnership Trust Fund will then be deemed to distribute the Partnership
Certificates in the new Partnership Trust Fund to each of the owners of
Partnership Certificates in the original Partnership Trust Fund in liquidation
of the original Partnership Trust Fund. The Partnership Trust Fund will not
comply with particular technical requirements that might apply when a
constructive termination occurs. As a result, the Partnership Trust Fund may
be
subject to some 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 with these requirements due to lack of
data.
(5) Disposition
of Partnership Certificates
Generally,
capital gain or loss will be recognized on a sale of Partnership Certificates
in
an amount equal to the difference between the amount realized and the seller’s
tax basis in the Partnership Certificates sold. Any gain or loss would be
long-term capital gain or loss if the Partnership Certificate Owner’s holding
period exceeded one year. A Partnership Certificate Owner’s tax basis in a
Partnership Certificate will generally equal its cost, increased by its share
of
Partnership Trust Fund income allocable to the Partnership Certificate Owner
and
decreased by any distributions received or losses allocated with respect to
the
Partnership Certificate. In addition, both the tax basis in the Partnership
Certificates and the amount realized on a sale of a Partnership Certificate
would include the Partnership Certificate Owner’s share, determined under
Treasury Regulations, of the Debt Securities and other liabilities of the
Partnership Trust Fund. A Partnership Certificate Owner acquiring Partnership
Certificates at different prices will generally be required to maintain a single
aggregate adjusted tax basis in the Partnership Certificates and, upon a sale
or
other disposition of some of the Partnership Certificates, allocate a portion
of
the aggregate tax basis to the Partnership Certificates sold, rather than
maintaining a separate tax basis in each Partnership Certificate for purposes
of
computing gain or loss on a sale of that Partnership Certificate. A portion
holding rule is applied, however, if a Certificateholder has held some of its
interest in the Partnership Trust Fund for one year or less and some of its
interest for more than one year and a “by lot” identification is not
permitted.
If
a
Partnership Certificate Owner 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 Certificates that exceeds
the
aggregate cash distributions with respect to the
137
Partnership
Certificates, the excess will generally
give rise to a capital loss upon the retirement of the Partnership
Certificates.
(6) Allocations
Between Transferors and Transferees
In
general, the Partnership Trust Fund’s taxable income and losses will be
determined each Due Period and the tax items for a particular Due Period will
be
apportioned among the Partnership Certificate Owners in proportion to the
principal amount of Partnership Certificates owned by them as of the close
of
the last day of that Due Period. As a result, a Partnership Certificate Owner
purchasing Partnership Certificates may be allocated tax items, which will
affect the purchaser’s tax liability and tax basis, attributable to periods
before the actual transaction.
The
use
of a Due Period convention may not be permitted by existing Treasury
regulations. If a Due Period convention is not allowed, or only applies to
transfers of less than all of the partner’s interest, taxable income or losses
of the Partnership Trust Fund might be reallocated among the Partnership
Certificate Owners. The Partnership Trust Fund’s method of allocation between
transferors and transferees may be revised to conform to a method permitted
by
future laws, regulations or other IRS guidance.
(7) Section
731 Distributions
In
the
case of any distribution to a Partnership Certificate Owner, no gain will be
recognized to that Partnership Certificate Owner to the extent that the amount
of any money distributed for that Partnership Certificate exceeds the adjusted
basis of that Partnership Certificate Owner’s interest in the Partnership
Certificate. To the extent that the amount of money distributed exceeds that
Partnership Certificate Owner’s adjusted basis, gain will be currently
recognized. In the case of any distribution to a Partnership Certificate Owner,
no loss will be recognized except upon a distribution in liquidation of a
Partnership Certificate Owner’s interest. Any gain or loss recognized by a
Partnership Certificate Owner generally will be capital gain or
loss.
(8) Section
754 Election
In
the
event that a Partnership Certificate Owner sells its Partnership Certificates
at
a profit (or loss), the purchasing Partnership Certificate Owner will have
a
higher (or lower) basis in the Partnership Certificates than the selling
Partnership Certificate Owner had. The tax basis of the Partnership Trust Fund’s
assets will not be adjusted to reflect that higher (or lower) basis unless
there
is a “substantial basis reduction” within the meaning of Section 734 of the
Code or unless the trust were to file an election under Section 754 of the
Code.
Because the trust will most likely qualify as a “securitization partnership”
within the meaning of Section 743(f) of the Code, there will not be a
substantial basis reduction with respect to the sale of the certificates. With
respect to the 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 current does not intend to make an
election under Section 754 of the Code. As a result, Partnership Certificate
Owners might be allocated a greater or lesser amount of Partnership Trust Fund
income than would be appropriate based on their own purchase price for
Partnership Certificates.
(9) Administrative
Matters
The
trustee is required to keep or cause to be kept complete and accurate books
of
the Partnership Trust Fund. Except as disclosed in the related prospectus
supplement, 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 Partnership Certificate Owner’s allocable share of items of
Partnership Trust Fund income and expense to Partnership Certificate Owners and
the IRS
138
on
Schedule K-1. The Partnership Trust Fund will
provide the Schedule K-1 information to nominees that fail to provide the
Partnership Trust Fund with the information statement described below and the
nominees will be required to forward this information to the beneficial owners
of the Partnership Certificates. Generally, holders must timely 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 the
inconsistencies.
Under
Section 6031 of the Code, any person that holds Partnership Certificates as
a
nominee at any time during a calendar year is required to furnish the
Partnership Trust Fund with a statement containing specific information on
the
nominee, the beneficial owners and the Partnership Certificates so held. The
information includes (1) the name, address and taxpayer identification number
of
the nominee and (2) as to each beneficial owner
·
the
name, address and identification number of such
person,
·
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
·
particular
information on Partnership Certificates that were held, bought or
sold on
behalf of the person throughout the
year.
In
addition, brokers and financial institutions that hold Partnership Certificates
through a nominee are required to furnish directly to the Partnership Trust
Fund
information as to themselves and their ownership of Partnership Certificates.
A
clearing agency registered under Section 17A of the Exchange Act is not required
to furnish any information statement to the Partnership Trust Fund. The
information referred to above for any calendar year must be furnished to the
Partnership Trust Fund on or before the following January 31. Nominees, brokers
and financial institutions that fail to provide the Partnership Trust Fund
with
the information described above may be subject to penalties.
Unless
another designation is made, the depositor will be designated as the tax matters
partner for each Partnership Trust Fund in the pooling and servicing agreement
and, as the tax matters partner, will be responsible for representing the
Partnership Certificate Owners in some specific disputes 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 before the later of three years after the
date
on which the partnership information return is filed or the last day for filing
the return for the applicable year, determined without regard to extensions.
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 Partnership Certificate Owners, and, under some circumstances,
a
Partnership Certificate Owner 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 Partnership Certificate Owner’s returns and
adjustments of items not related to the income and losses of the Partnership
Trust Fund.
A
special
audit system exists for qualifying large partnerships that have elected to
apply
a simplified flow-through reporting system under Sections 771 through 777 of
the
Code. Unless otherwise specified in the applicable prospectus supplement, a
Partnership Trust Fund will not elect to apply the simplified flow-through
reporting system.
139
(10) Taxation
of Certain Foreign Partnership Certificate Owners
As
used
below, the term “Non-United States Owner” means a Partnership Certificate Owner
that is not a U.S. Person, as defined under “REMICs—Taxation of Owners of
Residual Securities—Tax Related Restrictions on Transfer of Residual
Securities—Foreign Investors,” above.
It
is not
clear whether the Partnership Trust Fund would be considered to be engaged
in a
trade or business in the United States for purposes of federal withholding
taxes
with respect to Non-United States Owners because there is no clear authority
dealing with that issue under facts substantially similar to those described
in
this Prospectus. Although it is not expected that the Partnership Trust Fund
would be engaged in a trade or business in the United States for these purposes,
the Partnership Trust Fund will withhold as if it were so engaged in order
to
protect the Partnership Trust Fund from possible adverse consequences of a
failure to withhold. The Partnership Trust Fund expects to withhold on the
portion of its taxable income that is allocable to Non-United States Owners
pursuant to Section 1446 of the Code, as if the income were effectively
connected to a U.S. trade or business, at a rate of 35% for Non-United States
Owners that are taxable as corporations and 35% for all other Non-United States
Owners.
Subsequent
adoption of Treasury regulations or the issuance of other administrative
pronouncements may require the Partnership Trust Fund to change its withholding
procedures.
Each
Non-United States Owner might be required to file a U.S. individual or corporate
income tax return on its share of the income of the Partnership Trust Fund
including, in the case of a corporation, a return in respect of the branch
profits tax. Assuming the Partnership Trust Fund is not engaged in a U.S. trade
or business, a Non-United States Owner would be entitled to a refund with
respect to all or a portion of taxes withheld by the Partnership Trust Fund
if,
in particular, the Owner’s allocable share of interest from the Partnership
Trust Fund constituted “portfolio interest” under the Code.
The
interest, however, may not constitute “portfolio interest” if, among other
reasons, the underlying obligation is not in registered form or if the interest
is determined without regard to the income of the Partnership Trust Fund, in
the
later case, the interest being properly characterized as a guaranteed payment
under Section 707(c) of the Code. If this were the case, Non-United States
Owners would be subject to a United States federal income and withholding tax
at
a rate of 30 percent on the Partnership Trust Fund’s gross income, without any
deductions or other allowances for costs and expenses incurred in producing
the
income, unless reduced or eliminated pursuant to an applicable treaty. In this
case, a Non-United States Owner would only be entitled to a refund for that
portion of the taxes, if any, in excess of the taxes that should have been
withheld with respect to the interest.
(11) Backup
Withholding
Distributions
made on the Partnership Certificates and proceeds from the sale of the
Partnership Certificates will be subject to a “backup” withholding tax if, in
general, the Partnership Certificate Owner fails to comply with particular
identification procedures, unless the holder is an exempt recipient under
applicable provisions of the Code and, if necessary, demonstrates such status.
Any amounts so withheld would be refunded by the IRS or allowable as a credit
against the Non-United States Owner’s federal income tax.
(12) Reportable
Transactions
Pursuant
to recently enacted legislation, a penalty in the amount of $10,000 in the
case
of a natural person and $50,000 in any other case in imposed on any taxpayer
that fails to timely file an information return with the IRS with respect to
a
“reportable transaction” (as defined in Section
140
6011
of the Code). The rules defining “reportable
transactions” are complex, and include, but are not limited to, transactions
that result in certain losses that exceed threshold amounts. Prospective
investors are advised to consult their own tax advisers regarding any possible
disclosure obligations in light of their particular circumstances.
Consequences
for Particular Investors
The
federal tax discussions above may not be applicable depending on a
securityholder’s particular tax situation. The depositor recommends that
prospective purchasers consult their tax advisors for the tax consequences
to
them of the purchase, ownership and disposition of REMIC Securities, Grantor
Trust Securities, Partnership Certificates 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.
Penalty
Avoidance
The
summary of tax considerations contained herein was written to support the
promotion and marketing of the securities, and was not intended or written
to be
used, and cannot be used, by a taxpayer for the purpose of avoiding United
States federal income tax penalties that may be imposed. Each taxpayer is
encouraged to seek advice based on the taxpayer's particular circumstances
from
an independent tax advisor.
State
and Other Tax Considerations
In
addition to the federal income tax consequences described in “Material Federal
Income Tax Considerations,” potential investors should consider the state and
local tax consequences of the acquisition, ownership, and disposition of the
Notes or Certificates, as applicable, offered under this prospectus. State
and
local 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 are encouraged
to consult their own tax advisors with respect to the various state and other
tax consequences of investments in the Notes and Certificates, as applicable,
offered under this prospectus and the prospectus supplement. In particular,
individuals should consider the deductability of the expenses (including
interest expense) of a partnership.
ERISA
Considerations
General
A
fiduciary of a pension, profit-sharing, retirement or other employee benefit
plan subject to Title I of ERISA should consider the fiduciary standards under
the Employee Retirement Income Security Act of 1974, as amended (“ERISA”) in the
context of the plan’s particular circumstances before authorizing an investment
of a portion of such plan’s assets in the Securities. Accordingly, pursuant to
Section 404 of ERISA, such fiduciary should consider among other factors (i)
whether the investment is for the exclusive benefit of plan participants and
their beneficiaries; (ii) whether the investment satisfies the applicable
diversification requirements; (iii) whether the investment is in accordance
with
the documents and instruments governing the plan; and (iv) whether the
investment is prudent, considering the nature of the investment. Fiduciaries
of
plans also should consider ERISA’s prohibition on improper delegation of control
over, or responsibility for, plan assets.
In
addition, employee benefit plans or other
retirement arrangements subject to ERISA, as well as individual retirement
accounts, certain types of Keogh plans not subject to ERISA but
141
subject
to Section 4975 of the Code, or any entity (including insurance company separate
or general accounts) whose underlying assets include plan assets by reason
of
such plans, arrangements or accounts investing in the entity (each, a “Plan”)
are prohibited from engaging in a broad range of transactions involving Plan
assets and persons having certain specified relationships to a Plan (“parties in
interest” and “disqualified persons”). Such transactions are treated as
“prohibited transactions” under Sections 406 of ERISA and excise taxes and/or
other penalties are imposed upon such persons under ERISA and/or Section 4975
of
the Code unless an exemption applies. The depositor, underwriter, each master
servicer or other servicer, any insurer, the trustee, the indenture trustee
and
certain of their affiliates might be considered “parties in interest” or
“disqualified persons” with respect to a Plan. If so, the acquisition, holding
or disposition of Securities by or on behalf of such Plan could be considered
to
give rise to a “prohibited transaction” within the meaning of ERISA and the Code
unless a statutory, regulatory or administrative exception or exemption is
available.
ERISA
Considerations Relating to Certificates
Plan
Assets
In
29
C.F.R §2510.3-101 (the “Plan Asset Regulations”), the U.S. Department of Labor
(“DOL”) has defined what constitutes “plan assets” for purposes of ERISA and
Section 4975 of the Code. The Plan Asset Regulations provide that if a Plan
makes an investment in an “equity interest” in an entity, an undivided portion
of the assets of the entity will be considered the assets of such Plan unless
certain exceptions set forth in such Regulations apply. The Certificates will
be
deemed an equity interest for purposes of the Plan Asset Regulations, and the
depositor can give no assurance that the Certificates will qualify for any
of
the exceptions under the Plan Asset Regulations. As a result, (i) a Plan may
be
deemed to have acquired an interest in the Assets of the issuing entity and
not
merely an interest in the Certificates, (ii) the fiduciary investment standards
of ERISA could apply to such Assets and (iii) transactions occurring in the
course of managing, operating and servicing the issuing entity and its Assets
might constitute prohibited transactions, unless a statutory, regulatory or
administrative exemption applies.
Prohibited
Transaction Class Exemption 83-1
The
DOL
has issued an administrative exemption, Prohibited Transaction Class Exemption
83-1 (“PTCE 83-1”), which under certain conditions exempts from the application
of the prohibited transaction rules of ERISA and the excise tax provisions
of
Section 4975 of the Code transactions involving a Plan in connection with the
operation of a “mortgage pool” and the purchase, sale and holding of
Certificates which are “mortgage pool pass-through certificates.” A
“mortgage pool” is defined as a fixed investment pool consisting solely of
interest-bearing obligations secured by first or second mortgages or deeds
of
trust on single-family residential property, property acquired in foreclosure
and undistributed cash. A “mortgage pool pass-through certificate” is defined as
a Certificate which represents a beneficial undivided interest in a mortgage
pool which entitles the holder to pass through payments of principal and
interest from the mortgage loans. PTCE 83-1 requires that: (i) the
depositor and the trustee maintain a system of insurance or other protection
for
the mortgage loans, the property securing such mortgage loans and for
indemnifying holders of Certificates against reductions in pass-through payments
due to defaults in loan payments or property damage in an amount at least equal
to the greater of (x) 1% of the aggregate principal balance of the mortgage
loans or (y) 1% of the principal balance of the largest covered pooled mortgage
loans; (ii) the trustee may not be an affiliate of the depositor; and (iii)
the
payments made to, and retained by, the depositor in connection with the issuing
entity, together with all funds inuring to its benefit for administering the
issuing entity, represent no more than “adequate consideration” for selling the
mortgage loans, plus reasonable compensation for services provided to the
issuing entity. In addition, PTCE 83-1 exempts the initial sale of Certificates
to a Plan with respect to which the depositor, the insurer, the master servicer
or other servicer or the trustee is a
142
party
in interest if the Plan does not pay more than
fair market value for such Certificates and the rights and interests evidenced
by such Certificates are not subordinated to the rights and interests evidenced
by other Certificates of the same pool.
PTCE
83-1
also exempts from the prohibited transaction rules any transactions in
connection with the servicing and operation of the mortgage pool, provided
that
any payments made to the master servicer in connection with the servicing of
the
issuing entity are made in accordance with a binding agreement, copies of which
must be made available to prospective Plan investors. In the case of any Plan
with respect to which the depositor, the master servicer, the insurer or the
trustee is a fiduciary, PTCE 83-1 will only apply if, in addition to the other
requirements: (i) the initial sale, exchange or transfer of Certificates is
expressly approved by an independent fiduciary who has authority to manage
and
control those Plan assets being invested in Certificates; (ii) the Plan pays
no
more for the Certificates than would be paid in an arm’s-length transaction;
(iii) no investment management, advisory or underwriting fee, sales commission
or similar compensation is paid to the depositor with regard to the sale,
exchange or transfer of Certificates to the Plan; (iv) the total value of the
Certificates purchased by such Plan does not exceed 25% of the amount issued
and
(v) at least 50% of the aggregate amount of Certificates is acquired by persons
independent of the depositor, the trustee, the master servicer and the insurer.
Before purchasing Certificates, a fiduciary of a Plan should confirm that the
issuing entity is a “mortgage pool,” that the Certificates constitute “mortgage
pool pass-through certificates” and that the conditions set forth in
PTCE 83-1 would be satisfied. In addition to making its own determination
as to the availability of the exemptive relief provided in PTCE 83-1, the Plan
fiduciary should consider the availability of any other prohibited transaction
exemptions. The Plan fiduciary should also consider its general fiduciary
obligations under ERISA in determining whether to purchase any Certificates
on
behalf of a Plan pursuant to PTCE 83-1.
Underwriter
Exemption
The
DOL
has granted to Deutsche Bank Securities Inc. an individual exemption, Prohibited
Transaction Exemption 94-84, and to Deutsche Morgan Grenfell/C.J. Lawrence
Inc.,
similar approval (FAN 97-03E), which were both amended by Prohibited Transaction
Exemption 97-34 (“PTE 97-34”), Prohibited Transaction Exemption 2000-58 (“PTE
2000-58”) and Prohibited Transaction Exemption 2002-41 (“PTE 2002-41”)
(collectively, the “Exemption”) which is applicable to Certificates which meet
its requirements whenever the underwriter or its affiliate is the sole
underwriter, manager or co-manager of an underwriting syndicate or is the
selling or placement agent. The Exemption generally exempts certain transactions
from the application of certain of the prohibited transaction provisions of
ERISA and the Code provided that the conditions set forth in the Exemption
are
satisfied. These transactions include the servicing, managing and operation
of
investment trusts holding fixed (generally non-revolving pools) of enumerated
categories of assets which include: single and multi-family residential
mortgage loans, home equity loans or receivables (including cooperative housing
loans), manufactured housing loans, guaranteed governmental mortgage pool
certificates and previously issued securities eligible under the Exemption
and
the purchase, sale and holding of Certificates which represent beneficial
ownership interests in the assets of such trusts.
General
Conditions of Exemption
The
Exemption sets forth general conditions which must be satisfied for a
transaction involving the purchase, sale and holding of the Certificates to
be
eligible for exemptive relief thereunder. First, the acquisition of Certificates
by Plans 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
Assets held by the issuing entity must be fully secured (other than one-to-four
family residential mortgage loans and home equity loans or receivables backing
certain types of Certificates, as described below). (Mortgage loans, loans,
obligations and receivables will be
143
collectively
referred to herein as “loans.”). Third,
unless the Certificates are backed by fully-secured loans, they may not be
subordinated. Fourth, except as described below, the Certificates at the time
of
acquisition by the Plan must generally be rated in one of the four highest
generic rating categories by Standard & Poor’s Ratings Services, a division
of The McGraw-Hill Companies, Inc., Moody’s Investors Services, Inc. or Fitch,
Inc. (each, a “Rating Agency”). Fifth, the trustee and the indenture trustee
generally cannot be affiliates of any member of the “Restricted Group” other
than any underwriter as defined in the Exemption. The “Restricted Group”
consists of any (i) underwriter as defined in the Exemption, (ii) the depositor,
(iii) the master servicer, (iv) each servicer, (v) the insurer, (vi) the
counterparty of any “interest rate swap” (as described below) held as an Asset
of the issuing entity and (vii) any obligor with respect to loans constituting
more than 5% of the aggregate unamortized principal balance of the loans held
in
the issuing entity as of the date of initial issuance of the Certificates.
Sixth, the sum of all payments made to, and retained by, such underwriters
must
represent not more than reasonable compensation for underwriting the
Certificates; the sum of all payments made to, and retained by, the depositor
pursuant to the assignment of the loans to the related issuing entity must
represent not more than the fair market value of such loans; and the sum of
all
payments made to, and retained by, the master servicer and any servicer must
represent not more than reasonable compensation for such person’s services under
the Agreement and reimbursement of such person’s reasonable expenses in
connection therewith. Seventh, (i) the investment pool must consist only of
assets of the type enumerated in the Exemption and which have been included
in
other investment pools; (ii) Certificates evidencing interests in such other
investment pools must have been rated in one of the four highest generic rating
categories by one of the Rating Agencies for at least one year prior to a 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 a Plan’s acquisition of Certificates. Finally,
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.
If Securities are being sold under the Exemptions, the depositor assumes that
only Plans which are accredited investors under the federal securities laws
will
be permitted to purchase the Certificates.
Residential
(one- to-four family) and home equity loans, may be less than fully secured,
provided that the rights and interests evidenced by Certificates issued in
such
transactions are: (a) not subordinated to the rights and interests
evidenced by Securities of the same issuing entity; (b) such Certificates
acquired by the Plan have received a rating from a Rating Agency at the time
of
such acquisition that is in one of the two highest generic rating categories;
and (c) any loan included in the corpus or Assets of the issuing entity is
secured by collateral whose fair market value on the closing date of the
Designated Transactions is at least equal to 80% of the sum of: (i) the
outstanding principal balance due under the loan which is held by the issuing
entity and (ii) the outstanding principal balance(s) of any other loan(s) of
higher priority (whether or not held by the issuing entity) which are secured
by
the same collateral.
Types
of Issuing
Entities
The
Exemption permits the issuer to be an owner-trust, a REMIC or a grantor trust.
Owner-trusts are subject to certain restrictions in their governing documents
to
ensure that their Assets may not be reached by the creditors of the depositor
in
the event of bankruptcy or other insolvency and must provide certain legal
opinions.
Coverage
for Certificates Not Exemption Eligible
In
the
event that Certificates do not meet the requirements of the Exemption solely
because they are Subordinate Certificates or fail to meet a minimum rating
requirement under the Exemption, certain Plans may be eligible to purchase
Certificates pursuant to Section III of Prohibited Transaction Class
Exemption 95-60 (“PTCE 95-60”) which permits insurance company
144
general
accounts as defined in PTCE 95-60 to purchase
such Certificates if they otherwise meet all of the other requirements of the
Exemption.
Permitted
Assets
The
Amendment permits an interest-rate swap agreement and a yield supplement
agreement to be Assets of an issuing entity which issues Certificates acquired
by Plans in an initial offering or in the secondary market. An interest-rate
swap (or if purchased by or on behalf of the issuing entity) an interest-rate
cap contract (collectively, a “Swap” or “Swap Agreement”) is a permitted issuing
entity Asset if it: (a) is an “eligible Swap;” (b) is with an “eligible
counterparty;” (c) is purchased by a “qualified plan investor;” (d) meets
certain additional specific conditions which depend on whether the Swap is
a
“ratings dependent Swap” or a “non-ratings dependent Swap” and (e) permits the
issuing entity to make termination payments to the Swap counterparty (other
than
currently scheduled payments) solely from excess spread or amounts otherwise
payable to the servicer or depositor.
An
“eligible Swap” is one which: (a) is denominated in U.S. dollars; (b)
pursuant to which the issuing entity pays or receives, on or immediately prior
to the respective payment or distribution date for the class of Certificates
to
which the Swap relates, a fixed rate of interest or a floating rate of interest
based on a publicly available index (e.g.,
LIBOR
or the U.S. Federal Reserve’s Cost of Funds Index (COFI)), with the issuing
entity receiving such payments on at least a quarterly basis and obligated
to
make separate payments no more frequently than the counterparty, with all
simultaneous payments being netted (“Allowable Interest Rate”); (c) has a
notional amount that does not exceed either: (i) the principal balance of
the class of Certificates to which the Swap relates, or (ii) the portion of
the
principal balance of such class represented by obligations (“Allowable Notional
Amount”); (d) is not leveraged (i.e.,
payments are based on the applicable notional amount, the day count fractions,
the fixed or floating rates permitted above, and the difference between the
products thereof, calculated on a one-to-one ratio and not on a multiplier
of
such difference) (“Leveraged”); (e) has a final termination date that is either
the earlier of the date on which the issuer terminates or the related class
of
Certificates are fully repaid and (f) does not incorporate any provision which
could cause a unilateral alteration in the interest rate requirements described
above or the prohibition against leveraging.
An
“eligible counterparty” means a bank or other financial institution which has a
rating at the date of issuance of the Certificates, which is in one of the
three
highest long-term credit rating categories or one of the two highest short-term
credit rating categories, utilized by at least one of the Rating Agencies rating
the Certificates; provided that, if a counterparty is relying on its short-term
rating to establish eligibility hereunder, such counterparty must either have
a
long-term rating in one of the three highest long-term rating categories or
not
have a long-term rating from the applicable Rating Agency.
A
“qualified plan investor” is a Plan or Plans where the decision to buy such
class of Certificates is made on behalf of the Plan by an independent fiduciary
qualified to understand the Swap transaction and the effect the Swap would
have
on the rating of the Certificates and such fiduciary is either (a) a “qualified
professional asset manager” (“QPAM”) under Prohibited Transaction Class
Exemption 84-14 (“PTCE 84-14”) (see below), (b) an “in-house asset manager”
under Prohibited Transaction Class Exemption 96-23 (“PTCE 96-23”) (see below) or
(c) has total assets (both Plan and non-Plan) under management of at least
$100
million at the time the Certificates are acquired by the Plan.
In
“ratings dependent Swaps” (where the rating of a class of Certificates is
dependent on the terms and conditions of the Swap), the Swap Agreement must
provide that if the credit rating of the counterparty is withdrawn or reduced
by
any Rating Agency below a level specified by the Rating Agency, the servicer
must, within the period specified under the Pooling and Servicing
145
Agreement:
(a)
obtain a replacement Swap
Agreement with an eligible counterparty which is acceptable to the Rating Agency
and the terms of which are substantially the same as the current Swap Agreement
(at which time the earlier Swap Agreement must terminate); or (b) cause the
Swap
counterparty to establish any collateralization or other arrangement
satisfactory to the Rating Agency such that the then current rating by the
Rating Agency of the particular class of Certificates will not be withdrawn
or
reduced (and the terms of the Swap Agreement must specifically obligate the
counterparty to perform these duties for any class of Certificates with a term
of more than one year). In the event that the servicer fails to meet these
obligations, Plan certificateholders must be notified in the immediately
following periodic report which is provided to certificateholders but in no
event later than the end of the second month beginning after the date of such
failure. Sixty days after the receipt of such report, the exemptive relief
provided under the Exemption will prospectively cease to be applicable to any
class of Certificates held by a Plan which involves such ratings dependent
Swap.
“Non-ratings
dependent Swaps” (those where the rating of the Certificates does not depend on
the terms and conditions of the Swap) are subject to the following conditions.
If the credit rating of the counterparty is withdrawn or reduced below the
lowest level permitted above, the servicer will, within a specified period
after
such rating withdrawal or reduction: (a) obtain a replacement Swap Agreement
with an eligible counterparty, the terms of which are substantially the same
as
the current Swap Agreement (at which time the earlier Swap Agreement must
terminate); (b) cause the counterparty to post collateral with the issuing
entity in an amount equal to all payments owed by the counterparty if the Swap
transaction were terminated; or (c) terminate the Swap Agreement in accordance
with its terms.
An
“eligible yield supplement agreement” is any yield supplement agreement or
similar arrangement (or if purchased by or on behalf of the issuing entity)
an
interest rate cap contract to supplement the interest rates otherwise payable
on
obligations held by the issuing entity (“EYS Agreement”). If the EYS Agreement
has a notional principal amount and/or is written on an International Swaps
and
Derivatives Association, Inc. (ISDA) form, the EYS Agreement may only be held
as
an Asset of the issuing entity if it meets the following conditions: (a)
it is denominated in U.S. dollars; (b) it pays an Allowable Interest Rate;
(c)
it is not Leveraged; (d) it does not allow any of these three preceding
requirements to be unilaterally altered without the consent of the trustee;
(e)
it is entered into between the issuing entity and an eligible counterparty
and
(f) it has an Allowable Notional Amount.
Pre-Funding
Accounts
If
Certificates issued in transactions using pre-funding accounts whereby a portion
of the loans backing the Certificates are transferred to the issuing entity
within a specified period following the closing date (“DOL Pre-Funding Period”)
(see below) instead of requiring that all such loans be either identified or
transferred on or before the closing date. Exemptive relief is available
provided that the following conditions are met. First, the ratio of the amount
allocated to the Pre-Funding Account to the total principal amount of the
Certificates being offered (“Pre-Funding Limit”) must not exceed twenty-five
percent (25%). Second, all loans transferred after the closing date (referred
to
here as “additional loans”) must meet the same terms and conditions for
eligibility as the original loans used to create the issuing entity, which
terms
and conditions have been approved by the Rating Agency. Third, the transfer
of
such additional loans to the issuing entity during the DOL Pre-Funding Period
must not result in the Certificates receiving a lower credit rating from the
Rating Agency upon termination of the DOL Pre-Funding Period than the rating
that was obtained at the time of the initial issuance of the Certificates by
the
issuing entity. Fourth, solely as a result of the use of pre-funding, the
weighted average annual percentage interest rate (the “average interest rate”)
for all of the loans in the issuing entity at the end of the DOL Pre-Funding
Period must not be more than 100 basis points lower than the average interest
rate for the loans which were transferred to the issuing entity on the closing
date. Fifth, either: (i)
146
the
characteristics of the additional loans must be
monitored by an insurer or other credit support provider which is independent
of
the depositor; or (ii) an independent accountant retained by the depositor
must
provide the depositor with a letter (with copies provided to the Rating Agency,
the underwriter and the trustee) stating whether or not the characteristics
of
the additional loans conform to the characteristics described in the Prospectus,
Prospectus Supplement, Private Placement Memorandum (“Offering Documents”)
and/or the Agreement. In preparing such letter, the independent accountant
must
use the same type of procedures as were applicable to the loans which were
transferred as of the closing date. Sixth, the DOL Pre-Funding Period must
end
no later than three months or 90 days after the closing date or earlier, in
certain circumstances, if the amount on deposit in the Pre-Funding Account
is
reduced below the minimum level specified in the Agreement or an event of
default occurs under the Agreement. Seventh, amounts transferred to any
Pre-Funding Account and/or Capitalized Interest Account used in connection
with
the pre-funding may be invested only in investments which are permitted by
the
Rating Agency and (i) are direct obligations of, or obligations fully guaranteed
as to timely payment of principal and interest by, the United States or any
agency or instrumentality thereof (provided that such obligations are backed
by
the full faith and credit of the United States); or (ii) have been rated (or
the
obligor has been rated) in one of the three highest generic rating categories
by
the Rating Agency (“Acceptable Investments”). Eighth, certain disclosure
requirements must be met.
Revolving
Pool Features
The
Exemption only covers Certificates backed by “fixed” pools of loans which
require that all the loans must be transferred to the issuing entity or
identified at closing (or transferred within the DOL Pre-Funding Period, if
pre-funding meeting the conditions described above is used). Accordingly,
Certificates issued by issuing entities which feature revolving pools of Assets
will not be eligible for a purchase by Plans. However, Securities which are
Notes backed by revolving pools of Assets may be eligible for purchase by Plans
pursuant to certain other prohibited transaction exemptions. See discussion
below in “ERISA Considerations Relating to Notes.”
Limitations
on Scope of the Exemption
If
the
general conditions of the Exemption are satisfied, the Exemption may provide
an
exemption from the restrictions imposed by ERISA and the Code in connection
with
the initial acquisition, transfer or holding, and the acquisition or disposition
in the secondary market, of the Certificates by Plans. However, no exemption
is
provided from the restrictions of ERISA for the acquisition or holding of a
Certificates on behalf of an “Excluded Plan” by any person who is a fiduciary
with respect to the assets of such Excluded Plan. For those purposes, an
Excluded Plan is a Plan sponsored by any member of the Restricted Group.
Exemptive relief may also be provided for the acquisition, holding and
disposition of Certificates by Plans if the fiduciary or its affiliate is the
obligor with respect to 5% or less of the fair market value of the Loans in
the
issuing entity provided that: (i) the Plan is not an Excluded Plan, (ii)
each Plan’s investment in each class of Certificates does not exceed 25% of the
outstanding Certificates in the class, (iii) after the Plan’s acquisition of the
Certificates, no more than 25% of the assets over which the fiduciary has
investment authority are invested in Certificates of a trust containing assets
which are sold or serviced by the same entity and (iv) in the case of initial
issuance (but not secondary market transactions), at least 50% of each class
of
Certificates and at least 50% of the aggregate interests in the issuing entity
are acquired by persons independent of the Restricted Group.
ERISA
Considerations Relating to Notes
Under
the
Plan Asset Regulations, the Assets of the issuing entity would be treated as
“plan assets” of a Plan for the purposes of ERISA and the Code only if the Plan
acquires an “equity interest” in the issuing entity and none of the exceptions
contained in the Plan Asset Regulations is applicable. An equity interest is
defined under the Plan Asset Regulations as an interest other
147
than
an instrument which is treated as indebtedness
under applicable local law and which has no substantial equity features.
Assuming that the Notes are treated as indebtedness without substantial equity
features for purposes of the Plan Asset Regulations, then such Notes will be
eligible for purchase by Plans. However, without regard to whether the Notes
are
treated as an “equity interest” for such purposes, the acquisition or holding of
Notes by or on behalf of a Plan could be considered to give rise to a prohibited
transaction if the issuing entity or any of its affiliates is or becomes a
party
in interest or disqualified person with respect to such Plan, or in the event
that a Note is purchased in the secondary market and such purchase constitutes
a
sale or exchange between a Plan and a party in interest or disqualified person
with respect to such Plan. There can be no assurance that the issuing entity
or
any of its affiliates will not be or become a party in interest or a
disqualified person with respect to a Plan that acquires Notes.
The
Amendment to the Exemption permits issuing entities which are grantor trusts,
owner-trusts or REMICs to issue Notes, as well as Certificates, provided a
legal
opinion is received to the effect that the noteholders have a perfected security
interest in the issuing entity’s Assets. The exemptive relief provided under the
Exemption for any prohibited transactions which could be caused as a result
of
the operation, management or servicing of the issuing entity and its Assets
would not be necessary with respect to Notes with no substantial equity features
which are issued as obligations of the issuing entity. However, with respect
to
the acquisition, holding or transfer of Notes between a Plan and a party in
interest, the Exemption would provide prohibited transaction exemptive relief,
provided that the same conditions of the Exemption described above relating
to
Certificates are met with respect to the Notes. The same limitations of such
exemptive relief relating to acquisitions of Certificates by fiduciaries with
respect to Excluded Plans would also be applicable to the Notes as described
herein in “Limitations on Scope of the Exemption.”
In
the
event that the Exemption is not applicable to the Notes, one or more other
prohibited transactions exemptions may be available to Plans purchasing or
transferring the Notes depending in part upon the type of Plan fiduciary making
the decision to acquire the Notes and the circumstances under which such
decision is made. These exemptions include, but are not limited to, Prohibited
Transaction Class Exemption 90-1 (regarding investments by insurance company
pooled separate accounts), Prohibited Transaction Class Exemption 91-38
(regarding investments by bank collective investments funds), PTCE 84-14
(regarding transactions effected by “qualified professional asset managers”),
PTCE 95-60 (regarding investments by insurance company general accounts) and
PTCE 96-23 (regarding transactions effected by “in-house asset managers”)
(collectively, the “Investor-Based Exemptions”). However, even if the conditions
specified in these Investor-Based Exemptions are met, the scope of the relief
provided under such Exemptions might or might not cover all acts which might
be
construed as prohibited transactions.
EACH
PROSPECTUS SUPPLEMENT WILL CONTAIN INFORMATION CONCERNING CONSIDERATIONS
RELATING TO ERISA AND THE CODE THAT ARE APPLICABLE TO THE RELATED SECURITIES.
BEFORE PURCHASING SECURITIES IN RELIANCE ON PTCE 83-1, THE EXEMPTION, THE
INVESTOR-BASED EXEMPTIONS OR ANY OTHER EXEMPTION, A FIDUCIARY OF A PLAN SHOULD
ITSELF CONFIRM THAT REQUIREMENTS SET FORTH IN SUCH EXEMPTION WOULD BE
SATISFIED.
ANY
PLAN
INVESTOR WHO PROPOSES TO USE “PLAN ASSETS” OF ANY PLAN TO PURCHASE SECURITIES OF
ANY SERIES OR CLASS IS ENCOURAGED TO CONSULT WITH ITS COUNSEL WITH RESPECT
TO
THE POTENTIAL CONSEQUENCES UNDER ERISA AND SECTION 4975 OF THE CODE OF THE
ACQUISITION AND OWNERSHIP OF SUCH SECURITIES.
Governmental
plans and church plans as defined in ERISA are not subject to ERISA or Code
Section 4975, although they may elect to be qualified under Section 401(a)
of
the Code and exempt from taxation under Section 501(a) of the Code and would
then be subject to the prohibited transaction rules set forth in Section 503
of
the Code. In addition, governmental plans
148
may
be subject to federal, state and local laws which
are to a material extent similar to the provisions of ERISA or a Code Section
4975 (“Similar Law”). A fiduciary of a governmental plan should make its own
determination as to the propriety of an investment in Securities under
applicable fiduciary or other investment standards and the need for the
availability of any exemptive relief under any Similar Law.
Legal
Investment
The
prospectus supplement will specify which classes of the Notes or Certificates,
as applicable, if any, will constitute “mortgage related securities” for
purposes of the Secondary Mortgage Market Enhancement Act of 1984, as amended
(“SMMEA”). Generally, only classes of Offered Notes or Offered Certificates, as
applicable, that (1) are rated in one of the two highest rating categories
by
one or more rating agencies and (2) are part of a series representing interests
in, or secured by, an issuing entity’ trust fund consisting of loans secured by
first liens on real property and originated by particular types of originators
specified in SMMEA, will be “mortgage related securities” for purposes of
SMMEA.
Those
classes of Offered Notes or Offered Certificates, as applicable, qualifying
as
“mortgage related securities” will constitute legal investments for persons,
trusts, corporations, partnerships, associations, business trusts and business
entities (including, but not limited to, state chartered savings banks,
commercial banks, savings and loan associations and insurance companies, as
well
as trustees and state government employee retirement systems) 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 of the United States constitute legal
investments for those entities. Pursuant to SMMEA, a number of states enacted
legislation, on or before the October 3, 1991 cut-off for those enactments,
limiting to varying extents the ability of some entities (in particular,
insurance companies) to invest in mortgage related securities secured by liens
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.
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 these securities, and national
banks may purchase these securities for their own account without regard to
the
limitations generally applicable to investment securities set forth in 12 U.S.C.
§24 (Seventh), subject in each case to regulations that the applicable federal
regulatory authority may prescribe. In this connection, the Office of the
Comptroller of the Currency (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 general standards concerning “safety and soundness” and
retention of credit information in 12 C.F.R. §1.5), some “Type IV securities,”
defined in 12 C.F.R. §1.2(l) to include some “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” under some limited circumstances, other than stripped
mortgage related securities, residual interests in mortgage related securities,
and commercial mortgage related securities, unless the credit union has obtained
written approval from the NCUA to participate in the “investment pilot program”
described in 12 C.F.R. §703.140. Thrift institutions that are subject to the
jurisdiction of the Office of Thrift Supervision (the “OTS”) should consider the
OTS’ Thrift Bulletin 13a (December 1, 1998), “Management of Interest Rate
149
Risk,
Investment Securities, and Derivatives
Activities,” before investing in any of the Offered Notes or Offered
Certificates, as applicable.
All
depository institutions considering an investment in the Certificates should
review the “Supervisory Policy Statement on Investment Securities and End-User
Derivatives Activities” (the “1998 Policy Statement”) of the Federal Financial
Institutions Examination Council (“FFIEC”), 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. The 1998 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.
If
specified in the prospectus supplement, other classes of Offered Notes or
Offered Certificates, as applicable, offered pursuant to this prospectus will
not constitute “mortgage related securities” under SMMEA. The appropriate
characterization of those classes under various legal investment restrictions,
and thus the ability of investors subject to these restrictions to purchase
these Offered Notes or Offered Certificates, as applicable, may be subject
to
significant interpretive uncertainties.
Institutions
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 Offered Notes or Offered
Certificates, as applicable, as some classes or subclasses may be deemed
unsuitable investments, or may otherwise be restricted, under those rules,
policies or guidelines (in some instances irrespective of SMMEA).
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 that may restrict or prohibit
investment in securities that are not “interest bearing” or “income paying,” and
with regard to any Offered Notes or Offered Certificates, as applicable, issued
in book-entry form, provisions that may restrict or prohibit investments in
securities that are issued in book-entry form.
Except
as
to the status of some classes of Offered Notes or Offered Certificates, as
applicable, as “mortgage related securities,” no representation is made as to
the proper characterization of the Offered Notes or Offered Certificates, as
applicable, for legal investment, financial institution regulatory, or other
purposes, or as to the ability of particular investors to purchase any Offered
Notes or Offered Certificates, as applicable, 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 Notes or Offered Certificates, as applicable)
may
adversely affect the liquidity of the Offered Notes or Offered Certificates,
as
applicable.
Accordingly,
all investors whose investment activities are subject to legal investment laws
and regulations, regulatory capital requirements or review by regulatory
authorities are encouraged to consult with their own legal advisors in
determining whether and to what extent the Offered Notes or Offered
Certificates, as applicable, of any class constitute legal investments for
them
or are subject to investment, capital or other restrictions, and, if applicable,
whether SMMEA has been overridden in any jurisdiction relevant to that
investor.
150
Methods
of Distribution
The
Notes
or Certificates, as applicable, offered by this prospectus and by the
supplements to this prospectus will be offered in series. The distribution
of
the Notes or Certificates, as applicable, 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 specified in the prospectus supplement,
the
Notes or Certificates, as applicable, will be distributed in a firm commitment
underwriting, subject to the terms and conditions of the underwriting agreement,
by Deutsche Bank Securities Inc. (“DBS”) acting as underwriter with other
underwriters, if any, named in the underwriting agreement. In that event, the
prospectus supplement may also specify that the underwriters will not be
obligated to pay for any Notes or Certificates, as applicable, agreed to be
purchased by purchasers pursuant to purchase agreements acceptable to the
depositor. In connection with the sale of the Notes or Certificates, as
applicable, underwriters may receive compensation from the depositor or from
purchasers of the Notes or Certificates, as applicable, in the form of
discounts, concessions or commissions. The prospectus supplement will describe
any compensation paid by the depositor.
As
to any
offering of securities, in additions to the method of distribution as described
in the prospectus supplement and this base prospectus, the distribution of
any
class of the offered securities may be effected through one or more
resecuritization transactions, in accordance with Rule 190(b).
Alternatively,
the prospectus supplement may specify that the Notes or Certificates, as
applicable, will be distributed by DBS acting as agent or in some cases as
principal with respect to Notes or Certificates, as applicable, that it has
previously purchased or agreed to purchase. If DBS acts as agent in the sale
of
Notes or Certificates, as applicable, DBS will receive a selling commission
for
each series of Notes or Certificates, as applicable, depending on market
conditions, expressed as a percentage of the total principal balance of the
related mortgage loans as of the Cut-off Date. The exact percentage for each
series of Notes or Certificates, as applicable, will be disclosed in the
prospectus supplement. To the extent that DBS elects to purchase Notes or
Certificates, as applicable, as principal, DBS may realize losses or profits
based upon the difference between its purchase price and the sales price. The
prospectus supplement for any series offered other than through underwriters
will contain information regarding the nature of that offering and any
agreements to be entered into between the depositor and purchasers of Notes
or
Certificates, as applicable, of that series.
The
depositor will indemnify DBS and any underwriters against particular civil
liabilities, including liabilities under the Securities Act of 1933, or will
contribute to payments DBS and any underwriters may be required to make in
respect of these civil liabilities.
In
the
ordinary course of business, DBS 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
those mortgage loans or interests in those mortgage loans, including the Notes
or Certificates, as applicable. DBS performs management services for the
depositor.
The
depositor anticipates that the Notes or Certificates, as applicable, will be
sold primarily to institutional investors. Purchasers of Notes or Certificates,
as applicable, including dealers, may, depending on the facts and circumstances
of those purchases, be deemed to be “underwriters” within the meaning of the
Securities Act of 1933 in connection with reoffers and sales by them of Notes
or
Certificates, as applicable Securityholders are encouraged to consult with
their
legal advisors in this regard before any reoffer or sale of Notes or
Certificates, as applicable.
151
As
to
each series of Notes or Certificates, as applicable, only those classes rated
in
one of the four highest rating categories by any rating agency will be offered
by this prospectus. Any lower rated or 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.
Additional
Information
The
Depositor has filed with the Commission a registration statement on Form S-3
under the Securities Act of 1933, as amended, with respect to the Notes or
Certificates, as applicable (the “Registration Statement”). This prospectus,
which forms a part of the Registration Statement, omits some of the information
contained in the Registration Statement pursuant to the rules and regulations
of
the Commission. The Registration Statement and the exhibits to the Registration
Statement can be inspected and copied at the public reference facilities
maintained by the Commission at 100 F Street NE, Washington, D.C. 20549, and
at
Regional Offices in the following locations:
·
Chicago
Regional Office, 175 West Jackson Boulevard, Suite 900, Chicago,
Illinois60604; and
·
New
York Regional Office, 3 World Financial Center, Room 4300, New York,
NewYork10281.
Copies
of
these materials can also be obtained from the Public Reference Section of the
Commission, 100 F Street NE, Washington, D.C. 20549, at prescribed
rates.
The
Commission also maintains a site on the world wide web at “http://www.sec.gov”
at which users can view and download copies of reports, proxy and information
statements and other information filed electronically through the Electronic
Data Gathering, Analysis and Retrieval (“EDGAR”) system. The Depositor has filed
the Registration Statement, including all exhibits to the Registration
Statement, through the EDGAR system and therefore these materials should be
available by logging onto the Commission’s web site. The Commission maintains
computer terminals providing access to the EDGAR system at each of the offices
referred to above.
Copies
of
the most recent Fannie Mae prospectus for Fannie Mae certificates and Fannie
Mae’s annual report and quarterly financial statements as well as other
financial information are available from the Director of Investor Relations
of
Fannie Mae, 3900 Wisconsin Avenue, N.W., Washington, D.C.20016 (202-752-7115).
The Depositor did not participate in the preparation of Fannie Mae’s prospectus
or its annual or quarterly reports or other financial information and,
accordingly, makes no representation as to the accuracy or completeness of
the
information in those documents.
Copies
of
the most recent Offering Circular for Freddie Mac certificates as well as
Freddie Mac’s most recent Information Statement and Information Statement
supplement and any quarterly report made available by Freddie Mac may be
obtained by writing or calling the Investor Inquiry Department of Freddie Mac
at
8200 Jones Branch Drive, McLean, Virginia22102 (outside Washington, D.C.
metropolitan area, telephone 800-336-3672; within Washington, D.C. metropolitan
area, telephone 703-759-8160). The Depositor did not participate in the
preparation of Freddie Mac’s Offering Circular, Information Statement or any
supplement to the Information Statement or any quarterly report of the
Information Statement and, accordingly, makes no representation as to the
accuracy or completeness of the information in those documents.
As
to
each issuing entity that is no longer required to file reports under the
Exchange Act, periodic distribution reports will be posted on the depositor’s
website referenced above as soon as
152
practicable.
Annual reports of assessment of
compliance with the AB Servicing Criteria, attestation reports, and statements
of compliance will be provided to registered holders of the related securities
upon request free of charge. See “Description of the Agreements - Material Terms
of the Pooling and Servicing Agreement and Underlying Servicing Agreements
—
Evidence as to Compliance” and “Description of the Securities — Reports to
Securityholders.”
Incorporation
of Certain Documents by Reference
All
documents subsequently filed by or on behalf of the issuing entity referred
to
in the prospectus supplement with the Commission pursuant to Section 13(a),
13(c), 14 or 15(d) of the Exchange Act, after the date of this prospectus and
prior to the termination of any offering of the Notes or Certificates, as
applicable, issued by that issuing entity will be deemed to be incorporated
by
reference in this prospectus and to be a part of this prospectus from the date
of the filing of those documents. Any statement contained in a document
incorporated or deemed to be incorporated by reference in this prospectus will
be deemed to be modified or superseded for all purposes of this prospectus
to
the extent that a statement contained in this prospectus (or in the prospectus
supplement) or in any other subsequently filed document that also is or is
deemed to be incorporated by reference modifies or replaces that statement.
Any
statement so modified or superseded will not be deemed, except as so modified
or
superseded, to constitute a part of this prospectus. All documents subsequently
filed by the depositor pursuant to Sections 13(a) or 15(d) of the Exchange
Act
in respect of any offering prior to the termination of the offering of the
offered securities shall also be deemed incorporated by reference into this
prospectus and the related prospectus supplement.
The
Trustee on behalf of any issuing entity will provide without charge to each
person to whom this prospectus is delivered, upon request, a copy of any or
all
of the documents referred to above that have been or may be incorporated by
reference in this prospectus (not including exhibits to the information that
is
incorporated by reference unless the exhibits are specifically incorporated
by
reference into the information that this prospectus incorporates). Requests
for
information should be directed to the corporate trust office of the Trustee
specified in the prospectus supplement.
Legal
Matters
Certain
legal matters, including the federal income tax consequences to securityholders
of an investment in the Notes or Certificates, as applicable, of a series,
will
be passed upon for the depositor by McKee Nelson llp,
Washington, D.C., Sidley Austin Brown & Wood LLP, New York, NY and Thacher
Proffitt & Wood llp,
New
York, NY.
Financial
Information
A
new
issuing entity will be formed for each series of Notes or Certificates, as
applicable, and no issuing entity will engage in any business activities or
have
any assets or obligations before the issuance of the related series of Notes
or
Certificates, as applicable. Accordingly, financial statements for an issuing
entity will generally not be included in this prospectus or in the prospectus
supplement.
Rating
As
a
condition to the issuance of any class of Offered Notes or Offered Certificates,
as applicable, they must not be rated lower than investment grade; that is,
they
must be rated in one of the four highest rating categories, by a rating
agency.
153
Ratings
on mortgage pass-through certificates and mortgage-backed notes 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 the Notes or Certificates, as applicable, the nature
of
the underlying assets and the credit quality of the guarantor, if any. Ratings
on mortgage pass-through certificates, mortgage-backed notes and other asset
backed securities do not represent any assessment of the likelihood of principal
prepayments by borrowers or of the degree by which prepayments might differ
from
those originally anticipated. As a result, securityholders might suffer a lower
than anticipated yield, and, in addition, holders of stripped interest
certificates 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. Each security rating should be evaluated independently of any
other security rating.
You
should rely only on the information contained or incorporated by reference
in
this prospectus supplement and the accompanying prospectus. We have not
authorized anyone to provide you with different
information.
We
are
not offering the certificates offered by this prospectus supplement in any
state
where the offer is not permitted.
Dealers
will be required to deliver a prospectus supplement and prospectus when acting
as underwriters of the certificates and with respect to their unsold allotments
or subscriptions. In addition, all dealers selling the Offered Certificates,
whether or not participating in this offering, may be required to deliver a
prospectus supplement and prospectus until 90 days after the date of this
prospectus supplement.
