0000882377-01-500351.txt : 20011031
0000882377-01-500351.hdr.sgml : 20011031
ACCESSION NUMBER: 0000882377-01-500351
CONFORMED SUBMISSION TYPE: 424B5
PUBLIC DOCUMENT COUNT: 1
FILED AS OF DATE: 20011029
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: IMH ASSETS CORP
CENTRAL INDEX KEY: 0001017447
STANDARD INDUSTRIAL CLASSIFICATION: ASSET-BACKED SECURITIES [6189]
IRS NUMBER: 330705301
STATE OF INCORPORATION: DE
FISCAL YEAR END: 1231
FILING VALUES:
FORM TYPE: 424B5
SEC ACT: 1933 Act
SEC FILE NUMBER: 333-06637
FILM NUMBER: 1769313
BUSINESS ADDRESS:
STREET 1: 1401 DOVE STREET
STREET 2: SUITE 200
CITY: NEWPORT BEACH
STATE: CA
ZIP: 92660
BUSINESS PHONE: 9494753600
MAIL ADDRESS:
STREET 1: 20371 IRVINE AVENUE
CITY: SANTA ANA HEIGHTS
STATE: CA
ZIP: 92707
424B5
1
d10003037.txt
IMH ASSETS CORP
Prospectus Supplement
dated October 25, 2001 (to Prospectus dated October 25, 2001)
$397,000,000
[insert Impac logo]
IMPAC FUNDING CORPORATION
MASTER SERVICER
IMH ASSETS CORP.
COMPANY
IMPAC CMB TRUST SERIES 2001-3
COLLATERALIZED ASSET-BACKED BONDS, SERIES 2001-3
YOU SHOULD CONSIDER CAREFULLY THE RISK FACTORS BEGINNING ON PAGE 8 IN THIS
PROSPECTUS SUPPLEMENT.
THE TRUST
The trust will consist primarily of a pool of one- to four-family primarily
adjustable-rate first lien and fixed-rate second lien residential mortgage
loans. The trust will issue five classes of bonds, all of which are offered
under this prospectus supplement.
CREDIT ENHANCEMENT
The bonds will have credit enhancement in the form of
o excess interest and overcollateralization; and
o subordination of other classes of bonds.
In addition, sixteen derivative contracts will be included in the trust to cover
basis risk shortfalls on some of the classes of bonds.
The price to investors will vary from time to time and will be determined at the
time of sale. The proceeds to the company from the offering will be
approximately 99.75% of the aggregate principal balance of the bonds less
expenses estimated to be approximately $580,000. 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 BONDS OR DETERMINED THAT
THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS IS ACCURATE 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.
COUNTRYWIDE SECURITIES CORPORATION JPMORGAN
UNDERWRITERS
S-1
IMPORTANT NOTICE ABOUT INFORMATION PRESENTED IN THIS PROSPECTUS SUPPLEMENT AND
THE ACCOMPANYING PROSPECTUS
YOU SHOULD RELY 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 Bonds in two separate documents that
provide progressively more detail:
o the accompanying prospectus, which provides general information, some
of which may not apply to your series of bonds; and
o this prospectus supplement, which describes the specific terms of your
series of Bonds.
The Company's principal offices are located at 1401 Dove Street, Newport Beach,
CA 92660 and its phone number is (949) 475-3600.
TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT
PAGE
Summary of Prospectus Supplement..............................................................................................S-3
Risk Factors..................................................................................................................S-8
The Mortgage Pool............................................................................................................S-16
Yield on the Bonds...........................................................................................................S-47
The Issuer...................................................................................................................S-54
The Indenture Trustee........................................................................................................S-55
Description of the Bonds.....................................................................................................S-55
Description of the Servicing Agreement.......................................................................................S-72
The Indenture................................................................................................................S-73
Federal Income Tax Consequences..............................................................................................S-75
Method of Distribution.......................................................................................................S-75
Secondary Market.............................................................................................................S-76
Legal Opinions...............................................................................................................S-76
Ratings......................................................................................................................S-76
Legal Investment.............................................................................................................S-77
ERISA Considerations.........................................................................................................S-77
Glossary.....................................................................................................................S-79
Annex I-- Global Clearance, Settlement
and Tax Documentation Procedures............................................................................................I-1
S-2
SUMMARY OF PROSPECTUS SUPPLEMENT
THE FOLLOWING SUMMARY IS A VERY GENERAL OVERVIEW OF THE BONDS AND DOES NOT
CONTAIN ALL OF THE INFORMATION THAT YOU SHOULD CONSIDER IN MAKING YOUR
INVESTMENT DECISION. TO UNDERSTAND ALL OF THE TERMS OF THE BONDS, YOU SHOULD
READ CAREFULLY THIS ENTIRE DOCUMENT AND THE ACCOMPANYING PROSPECTUS.
Issuer.............................. Impac CMB Trust Series 2001-3.
Title of Series..................... Collateralized Asset-Backed Bonds, Series 2001-3.
Cut-off Date........................ October 1, 2001.
Closing date........................ October 30, 2001.
Company IMH Assets Corp., an affiliate of the Master Servicer and Seller.
Master Servicer..................... Impac Funding Corporation.
Seller.............................. Impac Mortgage Holdings, Inc., an affiliate of the Company and the Master
Servicer.
Subservicer......................... With respect to the fixed-rate mortgage loans, Wendover Funding Inc. With
respect to adjustable-rate mortgage loans, initially Wendover Funding, Inc.,
which subservicing will be transferred to Countrywide Home Loans, Inc. or an
affiliate thereof on or about January 1, 2002, with respect to the initial
adjustable-rate mortgage loans, or no later than three months after the date of
transfer to the trust, with respect to the subsequent adjustable-rate mortgage
loans.
Indenture Trustee................... Bankers Trust Company of California, N.A.
Owner Trustee....................... Wilmington Trust Company.
Payment Date........................ The 25th of each month or, if the 25th is not a business day, on the next business
day, beginning in November 2001.
Bonds............................... The classes of bonds and their bond interest rates and bond principal balances
or notional balances are set forth in the table below.
S-3
BONDS
BOND INTEREST INITIAL BOND INITIAL RATING
CLASS RATE PRINCIPAL BALANCE (FITCH/MOODY'S/S&P)(1) DESIGNATION
----- ---- ----------------- ---------------------- -----------
CLASS A BONDS:
A-1 Adjustable Rate(2) $ 260,000,000 AAA/Aaa/AAA Senior/Adjustable Rate
A-2 Adjustable Rate(3) $ 64,000,000 AAA/Aaa/-- Senior/Adjustable Rate
Total Class A Bonds: $ 324,000,000
CLASS M BONDS:
M-1 Adjustable Rate(4) $ 32,000,000 AA/Aa2/-- Mezzanine/Adjustable Rate
M-2 Adjustable Rate(5) $ 21,000,000 A/A2/-- Mezzanine/Adjustable Rate
Total Class M Bonds: $ 53,000,000
CLASS B BONDS:
B Adjustable Rate(6) $ 20,000,000 BBB/Baa2/BBB Subordinate/Adjustable Rate
Total Bonds: $ 397,000,000
(1) SEE "RATINGS" IN THIS PROSPECTUS SUPPLEMENT. S&P is only rating
the Class A-1 Bonds and Class B Bonds.
(2) The lesser of (1) one-month LIBOR plus 0.37% per annum (or 0.740%
per annum beginning on the first payment date after the step-up
date) and (2) 13.25% per annum, subject to a payment cap equal to
the available funds rate described in this prospectus supplement.
(3) The lesser of (1) one-month LIBOR plus 0.52% per annum (or 1.040%
per annum beginning on the first payment date after the step-up
date) and (2) 13.25% per annum, subject to a payment cap equal to
the available funds rate described in this prospectus supplement.
(4) The lesser of (1) one-month LIBOR plus 0.95% per annum (or 1.425%
per annum beginning on the first payment date after the step-up
date) and (2) 13.25% per annum, subject to a payment cap equal to
the available funds rate described in this prospectus supplement.
(5) The lesser of (1) one-month LIBOR plus 1.45% per annum (or 2.175%
per annum beginning on the first payment date after the step-up
date) and (2) 13.25% per annum, subject to a payment cap equal to
the available funds rate described in this prospectus supplement.
(6) The lesser of (1) one-month LIBOR plus 2.00% per annum (or 3.000%
per annum beginning on the first payment date after the step-up
date) and (2) 13.25% per annum, subject to a payment cap equal to
the available funds rate described in this prospectus supplement.
S-4
THE TRUST
The company will establish Impac CMB Trust Series 2001-3, a Delaware business
trust, pursuant to a trust agreement among the company, the owner trustee and
the certificate registrar. The trust will issue the bonds pursuant to an
indenture between the issuer and the indenture trustee. On the closing date, the
company will deposit into the trust the pool of mortgage loans and the pre-
funding amount described below.
In addition, the company will assign to the trust sixteen derivative contracts,
which may cover basis risk shortfalls on the bonds.
Distributions of interest and/or principal on the bonds will be made from
payments received from the assets of the trust as described in this prospectus
supplement.
The beneficial ownership interest in the trust will be represented by the
certificates, which are not offered by this prospectus supplement.
SEE "DESCRIPTION OF THE BONDS" IN THIS PROSPECTUS SUPPLEMENT.
THE MORTGAGE LOANS
On the closing date, the trust will initially contain approximately 1,551
conventional, one- to four-family, mortgage loans secured by residential
mortgaged properties. Approximately 98.87% of the initial mortgage loans have
adjustable rates and are secured by first liens on the related mortgaged
property. Approximately 1.13% of the initial mortgage loans have fixed rates and
are secured by second liens on the related mortgaged property. The initial
mortgage loans have an aggregate principal balance of approximately $353,081,124
as of the cut-off date.
The initial mortgage loans have original terms to maturity of not greater than
30 years and the following characteristics as of the cut-off date:
Range of mortgage rates 3.625% to 17.000%
(approximate):
Weighted average mortgage 7.165%
rate (approximate):
Weighted average remaining 357 months
term to stated maturity
(approximate):
Range of principal balances $9,972 to $769,096
(approximate):
Average principal balance: $227,647
Range of loan-to-value ratios 15.51% to 100.00%
and combined loan-to-value
ratios (approximate):
Weighted average loan-to-value 84.25%
ratio and combined loan-to-
value ratios (approximate):
The interest rate on the initial adjustable-rate mortgage loans will adjust on
each adjustment date to equal the sum of the related index and the related gross
margin on such initial mortgage loan, subject to a maximum and minimum interest
rate, as described in this prospectus supplement.
FOR ADDITIONAL INFORMATION REGARDING THE MORTGAGE LOANS, SEE "THE MORTGAGE POOL"
IN THIS PROSPECTUS SUPPLEMENT.
PRE-FUNDING ACCOUNT
On or before December 31, 2001, the company may sell and the indenture trustee
will be obligated to purchase, on behalf of the trust, subsequent mortgage loans
to be included in the mortgage pool.
On the closing date, the company will pay to the indenture trustee an amount
equal to approximately $46,918,876, which will be held by the indenture trustee
in the pre-funding account. The amount on deposit in the pre-funding account
will be reduced by the amount thereof used to purchase subsequent mortgage loans
during the period from the closing date up to and including December 31, 2001.
Any amounts remaining in the pre-funding account after December 31, 2001 will be
distributed on the next payment date to the holders of the bonds.
S-5
THE BONDS
PRIORITY OF DISTRIBUTIONS. In general, on any payment date, funds available for
distribution from payments and other amounts received on the mortgage loans,
after the payment of certain fees, will be distributed in the following order:
INTEREST DISTRIBUTIONS
first, to pay current interest and any previously unpaid interest on the Class
A-1 Bonds;
second, to pay current interest and any previously unpaid interest on the Class
A-2 Bonds; and
third, to pay current interest on the Class M-1 Bonds, the Class M-2 Bonds, and
the Class B Bonds, in that order of priority.
Net amounts from the derivative contracts and excess interest will be available
to pay basis risk shortfalls on the bonds.
PRINCIPAL DISTRIBUTIONS
to pay principal on the bonds on a pro rata basis as described in this
prospectus supplement, including the payment of amounts to create and maintain
overcollateralization.
SEE "DESCRIPTION OF THE BONDS" IN THIS PROSPECTUS SUPPLEMENT FOR ADDITIONAL
INFORMATION.
CREDIT ENHANCEMENT
The credit enhancement provided for the benefit of the holders of the bonds
consists of excess spread, overcollateralization, and the subordination provided
to the more senior classes of bonds by the more subordinate classes of bonds as
described under "Description of the Bonds--Allocation of Losses; Subordination"
in this prospectus supplement.
THE DERIVATIVE CONTRACTS
The trust will include sixteen derivative contracts, which will be assigned to
the trust on the closing date. Payments under the derivative contracts will be
made pursuant to the formulas described in this prospectus supplement. Net
amounts paid under the derivative contracts will be available to cover basis
risk shortfalls on the bonds. Any amounts received from the derivative contracts
not used to cover basis risk shortfalls as described in this prospectus
supplement shall be paid to the holder of the certificates.
SEE "DESCRIPTION OF THE BONDS -- THE DERIVATIVE CONTRACTS" IN THIS PROSPECTUS
SUPPLEMENT.
OPTIONAL REDEMPTION
At its option, the holder of the certificates, or, if there is no single holder,
the majority holder of the certificates, may purchase all of the bonds on or
after the earlier of (i) the payment date on which the aggregate stated
principal balance of the mortgage loans has been reduced to less than or equal
to 20% of the sum of the aggregate stated principal balance of the initial
mortgage loans as of the cut-off date and the aggregate amount on deposit in the
pre-funding account on the closing date and (ii) the payment date occurring in
November 2011.
SEE "DESCRIPTION OF THE BONDS -- OPTIONAL REDEMPTION" IN THIS PROSPECTUS
SUPPLEMENT.
FEDERAL INCOME TAX CONSEQUENCES
For federal income tax purposes, the bonds will be treated as indebtedness and
not as an equity interest in the issuer.
SEE "FEDERAL INCOME TAX CONSEQUENCES" IN THIS PROSPECTUS SUPPLEMENT.
RATINGS
When issued, the bonds will receive the ratings set forth on page S-4 of this
prospectus supplement. The ratings on the bonds address the likelihood that
holders of the bonds will receive all distributions on the underlying mortgage
loans to which they are entitled. However, the ratings do not address the
S-6
possibility that bondholders might suffer a lower than anticipated yield.
A security rating is not a recommendation to buy, sell or hold a security and is
subject to change or withdrawal at any time by the assigning rating agency. The
ratings also do not address the rate of principal prepayments on the mortgage
loans.
In particular, the rate of prepayments, if different than originally
anticipated, could adversely affect the yield realized by holders of the bonds.
SEE "RATINGS" IN THIS PROSPECTUS SUPPLEMENT.
LEGAL INVESTMENT
The bonds will not constitute "mortgage related securities" for purposes of
SMMEA.
SEE "LEGAL INVESTMENT" IN THIS PROSPECTUS SUPPLEMENT AND IN THE PROSPECTUS.
ERISA CONSIDERATIONS
The bonds may be eligible for purchase by persons investing assets of employee
benefit plans or individual retirement accounts, subject to important
considerations. Plans should consult with their legal advisors before investing
in the bonds.
SEE "ERISA CONSIDERATIONS" IN THIS PROSPECTUS SUPPLEMENT.
S-7
RISK FACTORS
You should carefully consider, among other things, the following
factors in connection with the purchase of the bonds:
THE BONDS MAY HAVE LIMITED LIQUIDITY, SO YOU MAY BE UNABLE TO SELL YOUR
SECURITIES OR MAY BE FORCED TO SELL THEM AT A DISCOUNT FROM THEIR FAIR MARKET
VALUE
There can be no assurance that a secondary market for the bonds will
develop or, if one does develop, that it will provide holders of the bonds with
liquidity of investment or that it will continue for the life of the bonds. As a
result, any resale prices that may be available for any bond in any market that
may develop may be at a discount from the initial offering price or the fair
market value thereof. The bonds will not be listed on any securities exchange.
THE CREDIT ENHANCEMENT IS LIMITED, AND THE POTENTIAL INADEQUACY OF THE CREDIT
ENHANCEMENT MAY CAUSE LOSSES OR SHORTFALLS TO BE INCURRED ON THE BONDS
The credit enhancement features described in the summary of this
prospectus supplement are intended to enhance the likelihood that holders of the
Class A-1 Bonds, and to a more limited extent, the holders of the Class A-2
Bonds, Class M Bonds and Class B Bonds, will receive regular payments of
interest and principal. However, we cannot assure you that the applicable credit
enhancement will adequately cover any shortfalls in cash available to pay your
bonds as a result of delinquencies or defaults on the mortgage loans. On the
closing date, the amount of overcollateralization is equal to approximately
0.75% of the aggregate stated principal balance of the mortgage loans as of the
cut-off date and the amount initially on deposit in the pre-funding account.
If delinquencies or defaults occur on the mortgage loans, neither the
master servicer nor any other entity will advance scheduled monthly payments of
interest and principal on delinquent or defaulted mortgage loans if, in the good
faith judgment of the master servicer, these advances would not be ultimately
recovered from the proceeds of the mortgage loan.
If substantial losses occur as a result of defaults and delinquent
payments on the mortgage loans, you may suffer losses.
The ratings of the bonds by the rating agencies may be lowered
following the initial issuance thereof as a result of losses on the mortgage
loans in excess of the levels contemplated by the rating agencies at the time of
their initial rating analysis. None of the company, the master servicer, the
indenture trustee, the owner trustee or any of their respective affiliates will
have any obligation to replace or supplement any credit enhancement, or to take
any other action to maintain the ratings of the bonds. SEE "DESCRIPTION OF
CREDIT ENHANCEMENT" IN THE PROSPECTUS.
INTEREST GENERATED BY THE MORTGAGE LOANS MAY BE INSUFFICIENT TO CREATE OR
MAINTAIN OVERCOLLATERALIZATION
The amount of interest generated by the mortgage loans (net of fees and
expenses) may be higher than the amount of interest required to be paid to the
bonds. Any such excess interest will be used first to absorb losses that occur
on the mortgage loans, and then to create and maintain overcollateralization. We
cannot assure you, however, that enough excess interest will be available to
cover losses or to create or maintain the required level of
overcollateralization. The factors described below will affect the amount of
excess interest that the mortgage loans will generate:
S-8
o Every time a mortgage loan is prepaid in full, excess interest
may be reduced because the mortgage loan will no longer be
outstanding and generating interest or, in the case of a
partial prepayment, will be generating less interest.
o Every time a mortgage loan is liquidated, excess interest may
be reduced because such mortgage loans will no longer be
outstanding and generating interest.
o If the rates of delinquencies, defaults or losses on the
mortgage loans turn out to be higher than expected, excess
interest will be reduced by the amount necessary to compensate
for any shortfalls in cash available on such date to make
required distributions on the bonds.
o If prepayments, defaults and liquidations occur more rapidly
on the mortgage loans with relatively higher interest rates
than on the mortgage loans with relatively lower interest
rates, the amount of excess interest generated by the mortgage
loans will be less than would otherwise be the case.
In addition, during the funding period, amounts on deposit in the
pre-funding account will earn a limited amount of interest. The interest earned
will be significantly less than interest generated by the mortgage loans in the
trust, and the shortfall will not be covered by any account of the trust or by a
third-party.
NET PAYMENTS BY THE ISSUER TO THE DERIVATIVE COUNTERPARTIES UNDER THE DERIVATIVE
CONTRACTS MAY REDUCE EXCESS INTEREST AND THE BOND INTEREST RATE FOR THE BONDS
The amount of excess interest available for payments to the bondholders
will be reduced by net payments to the counterparties under the derivative
contracts in the event of a reduction of One-Month LIBOR as set forth in the
related derivative contract. In addition, the available funds rate and therefore
the bond interest rate on the bonds may be reduced by the requirement of the
issuer to pay net payments to the counterparties under the derivative contracts.
THE DIFFERENCE BETWEEN THE INTEREST RATES ON THE BONDS AND THE MORTGAGE LOANS
MAY RESULT IN BASIS RISK SHORTFALL WITH RESPECT TO THESE BONDS
The bond interest rate with respect to the bonds changes each month and
is based upon the value of an index (One-Month LIBOR) plus a margin, limited by
a maximum bond interest rate and an available funds rate. However, the mortgage
rate of each adjustable-rate mortgage loan is based generally upon a different
index (Six-Month LIBOR) and the related gross margin, and generally adjusts
semi-annually, commencing, in many cases, after an initial fixed-rate period. In
addition, the mortgage rate of each fixed rate mortgage loan is fixed. One-Month
LIBOR and Six-Month LIBOR may respond differently to economic and market
factors, and there is not necessarily any correlation between them. Moreover,
the adjustable-rate mortgage loans are subject to periodic rate caps, maximum
mortgage rates and minimum mortgage rates. Thus, it is possible, for example,
that One-Month LIBOR may rise during periods in which Six-Month LIBOR is stable
or falling or that, even if both One-Month LIBOR and Six-Month LIBOR rise during
the same period, One-Month LIBOR may rise much more rapidly than Six-Month
LIBOR. See "Description of the Bonds--Interest Payments on the Bonds."
The derivative contracts will be assigned to the trust and will provide
some protection against any resulting basis risk shortfall on the bonds. Net
amounts paid under the derivative contracts will be available to cover basis
risk shortfalls on these bonds. However, payments under the derivative contracts
are based on the parameters described in this prospectus supplement; different
parameters may result in the derivative contracts providing insufficient funds
to cover such basis risk shortfalls on these bonds. In addition, payments under
the derivative contracts are limited to a specified rate in effect from time to
time.
S-9
To the extent that net amounts payable under the derivative contracts
are insufficient to cover basis risk shortfalls on the bonds, excess interest
may be used. However, there can be no assurance that there will be excess cash
flow or that excess cash flow will be sufficient to cover these shortfalls,
particularly because in a situation where the bond interest rate is limited to
the available funds rate, there will be little or no excess interest.
STATUTORY AND JUDICIAL LIMITATIONS ON FORECLOSURE PROCEDURES MAY DELAY RECOVERY
WITH RESPECT TO THE MORTGAGED PROPERTIES AND, IN SOME INSTANCES, LIMIT THE
AMOUNT THAT MAY BE RECOVERED BY THE FORECLOSING LENDER, RESULTING IN LOSSES ON
THE MORTGAGE LOANS THAT MIGHT CAUSE LOSSES OR SHORTFALLS TO BE INCURRED ON THE
BONDS
Foreclosure procedures vary from state to state. Two primary methods of
foreclosing a mortgage instrument are judicial foreclosure, involving court
proceedings, and non-judicial foreclosure pursuant to a power of sale granted in
the mortgage instrument. A foreclosure action is subject to most of the delays
and expenses of other lawsuits if defenses are raised or counterclaims are
asserted. Delays may also result from difficulties in locating necessary
defendants. Non-judicial foreclosures may be subject to delays resulting from
state laws mandating the recording of notice of default and notice of sale and,
in some states, notice to any party having an interest of record in the real
property, including junior lienholders. Some states have adopted
"anti-deficiency" statutes that limit the ability of a lender to collect the
full amount owed on a loan if the property sells at foreclosure for less than
the full amount owed. In addition, United States courts have traditionally
imposed general equitable principles to limit the remedies available to lenders
in foreclosure actions that are perceived by the court as harsh or unfair. The
effect of these statutes and judicial principles may be to delay and/or reduce
distributions with respect to the bonds. SEE "LEGAL ASPECTS OF MORTGAGE LOANS --
FORECLOSURE ON MORTGAGES AND SOME CONTRACTS" IN THE PROSPECTUS.
THE VALUE OF THE MORTGAGE LOANS MAY BE AFFECTED BY, AMONG OTHER THINGS, A
DECLINE IN REAL ESTATE VALUES AND CHANGES IN THE BORROWERS' FINANCIAL CONDITION,
WHICH MAY CAUSE LOSSES OR SHORTFALLS TO BE INCURRED ON THE BONDS
No assurance can be given that values of the mortgaged properties have
remained or will remain at their levels as of the dates of origination of the
related mortgage loans. If the residential real estate market should experience
an overall decline in property values so that the outstanding balances of the
mortgage loans, and any secondary financing on the mortgaged properties, become
equal to or greater than the value of the mortgaged properties, the actual rates
of delinquencies, foreclosures and losses could be higher than those now
generally experienced in the mortgage lending industry. In particular, mortgage
loans with high loan-to- value ratios will be affected by any decline in real
estate values. Any decrease in the value of the mortgage loans may result in the
allocation of losses to the bonds to the extent not covered by credit
enhancement.
THE MORTGAGE LOANS WERE UNDERWRITTEN TO NON-CONFORMING UNDERWRITING STANDARDS,
WHICH MAY RESULT IN LOSSES OR SHORTFALLS ON THE BONDS
The mortgage loans were underwritten generally in accordance with
underwriting standards which are primarily intended to provide for single family
"non-conforming" mortgage loans. A "non-conforming" mortgage loan means a
mortgage loan which is ineligible for purchase by Fannie Mae or Freddie Mac due
to either credit characteristics of the related mortgagor or documentation
standards in connection with the underwriting of the related mortgage loan that
do not meet the Fannie Mae or Freddie Mac underwriting guidelines for "A" credit
mortgagors. These credit characteristics include mortgagors whose
creditworthiness and repayment ability do not satisfy such Fannie Mae or Freddie
Mac underwriting guidelines and mortgagors who may have a record of credit
write-offs, outstanding judgments, prior bankruptcies and other credit items
that do not satisfy such Fannie Mae or Freddie Mac underwriting guidelines.
These documentation standards may include mortgagors who provide limited or no
documentation in connection with the underwriting of the related mortgage loan.
Accordingly, mortgage loans underwritten under the seller's non-conforming
credit
S-10
underwriting standards are likely to experience rates of delinquency,
foreclosure and loss that are higher, and may be substantially higher, than
mortgage loans originated in accordance with the Fannie Mae or Freddie Mac
underwriting guidelines. Any resulting losses, to the extent not covered by
credit enhancement, may affect the yield to maturity of the bonds.
THE MORTGAGE LOANS ARE CONCENTRATED IN THE STATE OF CALIFORNIA, WHICH MAY RESULT
IN LOSSES WITH RESPECT TO THESE MORTGAGE LOANS
Investors should note that some geographic regions of the United States
from time to time will experience weaker regional economic conditions and
housing markets, and, consequently, will experience higher rates of loss and
delinquency than will be experienced on mortgage loans generally. For example, a
region's economic condition and housing market may be directly, or indirectly,
adversely affected by natural disasters or civil disturbances such as
earthquakes, hurricanes, floods, eruptions or riots, or by disruptions such as
ongoing power outages. The economic impact of any of these types of events may
also be felt in areas beyond the region immediately affected by the disaster or
disturbance. Approximately 70.78% of the mortgage loans (by aggregate
outstanding principal balance as of the cut-off date) are in the state of
California. The concentration of the mortgage loans in the state of California
may present risk considerations in addition to those generally present for
similar mortgage-backed securities without this concentration. Any risks
associated with mortgage loan concentration may affect the yield to maturity of
the bonds to the extent losses caused by these risks which are not covered by
credit enhancement are allocated to the bonds.
SOME OF THE MORTGAGE LOANS PROVIDE FOR BALLOON PAYMENTS AT MATURITY, WHICH MAY
RESULT IN A GREATER RISK OF LOSS WITH RESPECT TO THESE MORTGAGE LOANS
Approximately 0.90% of the mortgage loans (by aggregate outstanding
principal balance as of the cut- off date) are balloon loans. These mortgage
loans will require a substantial payment of principal, or "balloon payment," at
their stated maturity in addition to their scheduled monthly payment. Mortgage
loans of this type involve a greater degree of risk than self-amortizing loans
because the ability of a mortgagor to make a balloon payment typically will
depend upon its ability either to fully refinance the loan or to sell the
related mortgaged property at a price sufficient to permit the mortgagor to make
the balloon payment. The ability of a mortgagor to accomplish either of these
goals will be affected by a number of factors, including the value of the
related mortgaged property, the level of available mortgage rates at the time of
sale or refinancing, the mortgagor's equity in the related mortgaged property,
prevailing general economic conditions, the availability of credit for loans
secured by comparable real properties. Any risks associated with the balloon
loans may affect the yield to maturity of the bonds to the extent losses or
delays in payment caused by these risks which are not covered by credit
enhancement are allocated to, or result in a slower rate of principal payments
on, the bonds.
THE RATE AND TIMING OF PREPAYMENTS WILL AFFECT YOUR YIELD
Borrowers may prepay their mortgage loans in whole or in part at any
time. We cannot predict the rate at which borrowers will repay their mortgage
loans. A prepayment of a mortgage loan generally will result in a prepayment on
the bonds:
o If you purchase your bonds at a discount and principal is repaid
slower than you anticipate, then your yield may be lower than you anticipate.
o If you purchase your bonds at a premium and principal is repaid
faster than you anticipate, then your yield may be lower than you anticipate.
o The rate of prepayments on the mortgage loans will be sensitive to
prevailing interest rates. Generally, if interest rates decline, mortgage loan
prepayments may increase due to the availability of other
S-11
mortgage loans at lower interest rates. Conversely, if prevailing interest rates
rise significantly, the prepayments on mortgage loans may decrease.
o Approximately 58.28% of the mortgage loans (by aggregate principal
balance as of the cut-off date) require the mortgagor to pay a charge in certain
instances if the mortgagor prepays the mortgage loan during a stated period,
which may be from one year to five years after the mortgage loan was originated.
A prepayment charge may or may not discourage a mortgagor from prepaying the
mortgage loan during the applicable period.
o The seller may be required to purchase mortgage loans from the trust
in the event certain breaches of representations and warranties occur and have
not been cured. In addition, the master servicer has the option to purchase
mortgage loans that become 90 days or more delinquent. These purchases will have
the same effect on the holders of the bonds as a prepayment of the mortgage
loans.
o The overcollateralization provisions are intended to result in an
accelerated rate of principal distributions to holders of the classes of bonds
then entitled to distributions of principal whenever overcollateralization is at
a level below the required level. An earlier return of principal to the holders
of the bonds as a result of the overcollateralization provisions will influence
the yield on the bonds in a manner similar to the manner in which principal
prepayments on the mortgage loans will influence the yield on the bonds.
SEE "YIELD ON THE BONDS" IN THIS PROSPECTUS SUPPLEMENT FOR A
DESCRIPTION OF FACTORS THAT MAY INFLUENCE THE RATE AND TIMING OF PREPAYMENTS ON
THE MORTGAGE LOANS AND THE WEIGHTED AVERAGE LIVES OF THE BONDS.
THE MORTGAGE LOANS MAY HAVE ENVIRONMENTAL RISKS, WHICH MAY RESULT IN INCREASED
LOSSES WITH RESPECT TO THESE MORTGAGE LOANS
To the extent the master servicer for a mortgage loan acquires title to
any related mortgaged property contaminated with or affected by hazardous wastes
or hazardous substances, these mortgage loans may incur losses. SEE "SERVICING
OF MORTGAGE LOANS -- REALIZATION UPON OR SALE OF DEFAULTED MORTGAGE LOANS" AND
"LEGAL ASPECTS OF MORTGAGE LOANS -- ENVIRONMENTAL LEGISLATION" IN THE
PROSPECTUS. To the extent these environmental risks result in losses on the
mortgage loans, the yield to maturity of the bonds, to the extent not covered by
credit enhancement, may be affected.
SOME ADDITIONAL RISKS ARE ASSOCIATED WITH THE CLASS A-2 BONDS, CLASS M BONDS AND
CLASS B BONDS
The weighted average lives of, and the yields to maturity on, the Class
A-2 Bonds, Class M-1 Bonds, the Class M-2 Bonds and the Class B Bonds 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 such bonds, the actual yield to maturity of such bonds may be
lower than the yield anticipated by such holder 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 overcollateralization following distributions of principal
on the related payment date, will reduce the bond principal balance of the class
of Class A-2 Bonds, Class M Bonds or Class B Bonds then outstanding with the
lowest payment priority. As a result of such reductions, less interest will
accrue on such class of Class A-2 Bonds, Class M Bonds or Class B Bonds than
would otherwise be the case. Once a realized loss is allocated to a Class A-2
Bond, Class M Bond or Class B Bond, no amounts will be distributable with
respect to such written down
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amount. However, the amount of any realized losses allocated to the Class A-2
Bonds, Class M Bonds or Class B Bonds may be paid to the holders thereof
according to the priorities set forth under "Description of the Bonds --
Overcollateralization Provisions" in this prospectus supplement.
The yield to maturity on the Class A-2 Bonds, Class M Bonds and Class B
Bonds will be extremely sensitive to losses due to defaults on the mortgage
loans (and the timing thereof), to the extent such losses are not covered by
excess interest, overcollateralization or a class of Class M Bonds or Class B
Bonds with a lower payment priority. Furthermore, as described in this
prospectus supplement, the timing of receipt of principal and interest by the
Class A-2 Bonds, Class M Bonds and Class B Bonds may be adversely affected by
losses even if such classes of bonds do not ultimately bear such loss.
PREPAYMENT INTEREST SHORTFALLS AND RELIEF ACT SHORTFALLS WILL AFFECT YOUR YIELD
When a principal prepayment in full is made on a mortgage loan, the
mortgagor is charged interest only up to the date of the principal 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 any days in the month in which the prepayment is made. In
addition, the application of the Relief Act to any mortgage loan will adversely
affect, for an indeterminate period of time, the ability of the master servicer
to collect full amounts of interest on the mortgage loan. This may result in a
shortfall in interest collections available for distribution to bondholders on
the next payment date. The master servicer is required to cover a portion of the
shortfall in interest collections that are attributable to prepayments in full,
but only up to the lesser of (a) one- twelfth of 0.125% of the aggregate stated
principal balance of the mortgage loans immediately preceding such payment date
and (b) the amount of the master servicer's aggregate master servicing fee and
any subservicing fee for the related due period. Prepayment interest shortfalls
resulting from prepayments in part will not be covered by the master servicer,
any subservicer or otherwise. In addition, certain shortfalls in interest
collections arising from the application of the Relief Act will not be covered
by the master servicer or any subservicer.
On any payment date, any shortfalls resulting from the application of
the Relief Act and any prepayment interest shortfalls to the extent not covered
by compensating interest paid by the master servicer will be allocated to the
bonds on a pro rata basis based on the respective amounts of interest accrued on
such bonds for such payment date. The holders of the bonds will be entitled to
reimbursement for any such interest shortfalls with interest thereon solely in
accordance with the payment provisions in this prospectus supplement. If these
shortfalls are allocated to the bonds and are not reimbursed on any payment
date, the amount of interest paid to those bonds will be reduced, adversely
affecting the yield on your investment.
VIOLATION OF VARIOUS FEDERAL AND STATE LAWS MAY RESULT IN LOSSES ON THE MORTGAGE
LOANS
Applicable state laws generally regulate interest rates and other
charges, require specific disclosure, and require licensing of the seller. 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.
The initial mortgage loans also are, and the subsequent mortgage loans
also will be, subject to federal laws, including:
o the Federal Truth-in-Lending Act and Regulation Z promulgated
thereunder, which require specific disclosures to the borrowers regarding the
terms of the mortgage loans;
o 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
S-13
assistance or the exercise of any right under the Consumer Credit Protection
Act, in the extension of credit; and
o the Fair Credit Reporting Act, which regulates the use and reporting
of information related to the borrower's credit experience.
Depending on the provisions of the applicable law and the specific
facts and circumstances involved, violations of these federal or state laws,
policies and principles may limit the ability of the trust to collect all or
part of the principal of or interest on the mortgage loans, may entitle the
borrower to a refund of amounts previously paid and, in addition, could subject
the trust to damages and administrative enforcement.
The seller will represent that as of the closing date, with respect to
the initial mortgage loans, and as of the subsequent transfer date, with respect
to the subsequent mortgage loans, to the best of seller's knowledge, each
initial mortgage loan and subsequent mortgage loan, respectively, at the time it
was made complied in all material respects with applicable state and federal
laws, including, without limitation, usury, equal credit opportunity,
truth-in-lending and disclosure laws; and each mortgage loan is being serviced
in all material respects in accordance with applicable state and federal laws,
including, without limitation, usury, equal credit opportunity and disclosure
laws. In the event of a breach of this representation, it will be obligated to
cure the breach or repurchase or replace the affected mortgage loan in the
manner described in the prospectus.
THERE MAY BE VARIATIONS IN SUBSEQUENT MORTGAGE LOANS FROM THE INITIAL MORTGAGE
LOANS
Each subsequent mortgage loan generally will satisfy the eligibility
criteria described in this prospectus supplement at the time of its sale to the
trust. The characteristics of the subsequent mortgage loans, however, may vary
from the specific characteristics reflected in the statistical information
relating to the initial mortgage loans presented in this prospectus supplement,
although the extent of such variance is not expected to be material.
MANDATORY PREPAYMENT
To the extent that the amount on deposit in the pre-funding account has
not been fully applied to the purchase of subsequent mortgage loans on or before
December 31, 2001, the holders of the bonds then entitled to principal
distributions will receive on the payment date immediately following December
31, 2001 the amounts in the pre-funding account after giving effect to any
purchase of subsequent mortgage loans. Although no assurance can be given, the
company intends that the principal amount of subsequent mortgage loans sold to
the indenture trustee will require the application of substantially all amounts
on deposit in the pre- funding account and that there will be no material
principal payment to the holders of the bonds on such payment date.
THE RATINGS ON THE BONDS ARE NOT A RECOMMENDATION TO BUY, SELL OR HOLD THE BONDS
AND ARE SUBJECT TO WITHDRAWAL AT ANY TIME, WHICH MAY RESULT IN LOSSES ON THE
BONDS
It is a condition to the issuance of the bonds that each class of bonds
be rated no lower than the ratings described on page S-4 of this prospectus
supplement. A security rating is not a recommendation to buy, sell or hold
securities and may be subject to revision or withdrawal at any time. No person
is obligated to maintain the rating on any bond, and, accordingly, there can be
no assurance that the ratings assigned to any bond on the date on which the
bonds are initially issued will not be lowered or withdrawn by a rating agency
at any time thereafter. In the event any rating is revised or withdrawn, the
liquidity or the market value of the bonds may be adversely affected. SEE
"RATINGS" IN THIS PROSPECTUS SUPPLEMENT AND IN THE PROSPECTUS.
S-14
A TRANSFER OF SUBSERVICING MAY RESULT IN INCREASED LOSSES AND DELINQUENCIES ON
THE ADJUSTABLE- RATE MORTGAGE LOANS
The mortgage loans will initially be subserviced by Wendover Funding,
Inc. as described in this prospectus supplement under "Description of the
Servicing Agreement -- The Subservicers." However, the master servicer has
entered into a contract to transfer the subservicing of the initial
adjustable-rate mortgage loans to Countrywide Home Loans, Inc. or an affiliate
thereof on or about January 1, 2002, with respect to the initial adjustable-rate
mortgage loans, or no later than three months after the date of transfer to the
trust, with respect to the subsequent adjustable-rate mortgage loans. Investors
should note, however, that when the servicing of mortgage loans is transferred,
there is generally a rise in delinquencies associated with such transfer. Such
increase in delinquencies may result in losses, which, to the extent they are
not absorbed by credit enhancement, will cause losses or shortfalls to be
incurred by the holders of the bonds. In addition, any higher default rate
resulting from such transfer may result in an acceleration of prepayments on the
adjustable- rate mortgage loans.
THE RECORDING OF MORTGAGES IN THE NAME OF MERS MAY AFFECT THE YIELD ON THE
BONDS.
The mortgages or assignments of mortgage for some of the mortgage loans
have been or may be recorded in the name of Mortgage Electronic Registration
Systems, Inc., or MERS, solely as nominee for the seller and its successors and
assigns. Subsequent assignments of those mortgages are registered electronically
through the MERS(R) System. However, if MERS discontinues the MERS(R) System and
it becomes necessary to record an assignment of the mortgage to the trustee,
then any related expenses shall be paid by the trust and will reduce the amount
available to pay principal of and interest on the Class A-2 Bonds, Class M Bonds
and Class B Bonds.
The recording of mortgages in the name of MERS is a new practice in the
mortgage lending industry. Public recording officers and others may have
limited, if any, experience with lenders seeking to foreclose mortgages,
assignments of which are registered with MERS. Accordingly, delays and
additional costs in commencing, prosecuting and completing foreclosure
proceedings and conducting foreclosure sales of the mortgaged properties could
result. Those delays and additional costs could in turn delay the distribution
of liquidation proceeds to certificateholders and increase the amount of losses
on the mortgage loans.
FOR ADDITIONAL INFORMATION REGARDING MERS AND THE MERS(R) SYSTEM, SEE "THE
MORTGAGE POOL--MORTGAGE LOAN CHARACTERISTICS" AND "YIELD ON THE BONDS--YIELD
SENSITIVITY OF THE CLASS A-2 BONDS, CLASS M BONDS AND CLASS B BONDS" IN THIS
PROSPECTUS SUPPLEMENT.
S-15
THE MORTGAGE POOL
GENERAL
References to percentages of the initial mortgage loans unless
otherwise noted are calculated based on the aggregate principal balance of the
initial mortgage loans as of the Cut-off Date.
The mortgage pool will initially consist of approximately 1,551
conventional, one- to four-family, adjustable-rate and fixed-rate,
fully-amortizing and balloon payment mortgage loans secured by first and second
liens on mortgaged properties and having an aggregate principal balance as of
the Cut-off Date of approximately $353,081,124, after application of scheduled
payments due on or before the Cut-off Date whether or not received.
Approximately 98.87% of the initial mortgage loans have adjustable rates and are
secured by first liens on the related mortgaged property. Approximately 1.13% of
the initial mortgage loans have fixed rates and are secured by second liens on
the related mortgaged property. The initial mortgage loans have, and the
subsequent mortgage loans will have, original terms to maturity of not greater
than 30 years.
The company will convey the initial mortgage loans to the trust on the
Closing Date pursuant to the Trust Agreement and subsequent mortgage loans to
the trust during the Funding Period with amounts on deposit in the Pre-Funding
Account pursuant to Subsequent Transfer Instruments. The Seller will make
certain representations and warranties with respect to the initial mortgage
loans in the Mortgage Loan Sale and Contribution Agreement and with respect to
the subsequent mortgage loans in the Subsequent Mortgage Loan Sale and
Contribution Agreement. These representations and warranties will be assigned to
the Indenture Trustee for the benefit of the bondholders. As more particularly
described in the prospectus, the Seller will have certain repurchase or
substitution obligations in connection with a breach of any such representation
or warranty, as well as in connection with an omission or defect in respect of
certain constituent documents required to be delivered with respect to the
mortgage loans, if such breach, omission or defect cannot be cured and it
materially and adversely affects the interests of the bondholders. SEE "THE
MORTGAGE POOLS -- REPRESENTATIONS BY SELLERS" IN THE PROSPECTUS.
The mortgage loans will have been originated or acquired by the Seller
in accordance with the underwriting criteria described in this prospectus
supplement. SEE " --UNDERWRITING STANDARDS" BELOW.
All of the mortgage loans will initially be subserviced by Wendover
Funding, Inc. The subservicing with respect to the adjustable-rate mortgage
loans will be transferred to Countrywide Home Loans, Inc., or an affiliate
thereof, on or about January 1, 2002 or later as described in this prospectus
supplement under "Description of the Servicing Agreement -- The Subservicers."
All of the mortgage loans have scheduled monthly payments due on the
first of the month. Each mortgage loan will contain a customary "due-on-sale"
clause.
MORTGAGE RATE ADJUSTMENT
The mortgage rate on each adjustable-rate mortgage loan will generally
adjust semi-annually commencing after an initial period after origination of
generally six months, two years, three years or five years, in each case on each
applicable adjustment date to a rate equal to the sum, generally rounded to the
nearest one-eighth of one percentage point (12.5 basis points), of (i) the
related Index plus (ii) the gross margin. In addition, the mortgage rate on each
adjustable-rate mortgage loan is subject on its first adjustment date following
its origination to an initial rate cap and on each adjustment date thereafter to
a periodic rate cap. All of the adjustable-rate mortgage loans are also subject
to maximum and minimum lifetime mortgage rates. The adjustable-rate mortgage
loans were generally originated with an initial mortgage rate below the sum of
the Index at origination and the gross margin. Due to the application of the
initial rate caps, periodic rate caps, maximum mortgage rates and minimum
mortgage rates, the
S-16
mortgage rate on any adjustable-rate mortgage loan, as adjusted on any related
adjustment date, may not equal the sum of the index and the gross margin.
The mortgage rate on the adjustable-rate initial mortgage loans will
adjust based on an index equal to Six-Month LIBOR. In the event that Six-Month
LIBOR is no longer available, an index that is based on comparable information
will be selected by the Master Servicer, to the extent that it is permissible
under the terms of the related mortgage and mortgage note.
Substantially all of the adjustable-rate initial mortgage loans will
not have reached their first adjustment date as of the Closing Date. The initial
mortgage rate is generally lower than the rate that would have been produced if
the applicable gross margin had been added to the index in effect at
origination. Adjustable-rate initial mortgage loans that have not reached their
first adjustment date are subject to the initial rate cap on their first
adjustment date, and periodic rate caps thereafter.
SIX-MONTH LIBOR
The index applicable to the determination of the mortgage rate on the
adjustable-rate mortgage loans will be the average of the interbank offered
rates for six-month United States dollar deposits in the London market as
published by Fannie Mae or the Wall Street Journal and, in most cases, as most
recently available as of the first business day of the month preceding such
adjustment date, or Six-Month LIBOR.
The table below sets forth historical average rates of Six-Month LIBOR
for the months indicated as made available from Fannie Mae. The rates are
determined from information that is available as of 11:00 A.M. (London time) on
the second to last business day of each month. Such average rates may fluctuate
significantly from month to month as well as over longer periods and may not
increase or decrease in a constant pattern from period to period. There can be
no assurance that levels of Six-Month LIBOR published by Fannie Mae, or
published on a different Reference Date would have been at the same levels as
those set forth below. The following does not purport to be representative of
future levels of Six-Month LIBOR (as published by Fannie Mae). No assurance can
be given as to the level of Six-Month LIBOR on any adjustment date or during the
life of any adjustable-rate mortgage loan based on Six-Month LIBOR.
SIX-MONTH LIBOR
MONTH 1994 1995 1996 1997 1998 1999 2000 2001
----- ------ ------ ------ ------ ------ ------ ---- ----
January.................... 3.39% 6.69% 5.34% 5.71% 5.75% 5.04% 6.23% 5.36%
February................... 4.00 6.44 5.29 5.68 5.78 5.17 6.32 4.96
March...................... 4.25 6.44 5.52 5.96 5.80 5.08 6.53 4.71
April...................... 4.63 6.31 5.42 6.08 5.87 5.08 6.61 4.23
May........................ 5.00 6.06 5.64 6.01 5.81 5.19 7.06 3.91
June....................... 5.25 5.88 5.84 5.94 5.87 5.62 7.01 3.83
July....................... 5.33 5.88 5.92 5.83 5.82 5.65 6.88 3.70
August..................... 5.33 5.94 5.74 5.86 5.69 5.90 6.83 3.48
September.................. 5.69 5.99 5.75 5.85 5.36 5.96 6.76 2.53
October.................... 6.00 5.95 5.58 5.81 5.13 6.13 6.72
November................... 6.44 5.74 5.55 6.04 5.28 6.04 6.68
December................... 7.00 5.56 5.62 6.01 5.17 6.13 6.20
S-17
PREPAYMENT CHARGES
Approximately 58.28% of the initial mortgage loans provide for payment
by the mortgagor of a prepayment charge in limited circumstances on prepayments.
Generally, these initial mortgage loans provide for payment of a prepayment
charge on some partial or full prepayments made within one year, five years or
other period as provided in the related mortgage note from the date of
origination of the mortgage loan. No initial mortgage loan provides for payment
of a prepayment charge on partial or full prepayments made more than five years
from the date of origination of the initial mortgage loan. The amount of the
prepayment charge is as provided in the related mortgage note, and the
prepayment charge will generally apply if, in any twelve-month period during the
first year, five years or other period as provided in the related mortgage note
from the date of origination of the initial mortgage loan, the mortgagor prepays
an aggregate amount exceeding 20% of the original principal balance of the
initial mortgage loan. The amount of the prepayment charge will generally be
equal to 6 months' advance interest calculated on the basis of the mortgage rate
in effect at the time of the prepayment on the amount prepaid in excess of 20%
of the original principal balance of the initial mortgage loan. The prepayment
charges may, in certain circumstances, be waived by the Master Servicer or the
related subservicer. Some of these prepayment charges may not be enforceable in
cases where the mortgagor sells the related mortgaged property. There can be no
assurance that the prepayment charges will have any effect on the prepayment
performance of the initial mortgage loans. The Master Servicer or the related
subservicer will be entitled to all prepayment charges received on the mortgage
loans, and these amounts will not be available for distribution on the Bonds.
PRIMARY MORTGAGE INSURANCE AND THE RADIAN LENDER-PAID PMI POLICY
Substantially all of the adjustable-rate initial mortgage loans (by
aggregate outstanding principal balance as of the Cut-off Date) with a
loan-to-value ratio at origination in excess of 80.00% will be insured by one of
the following: (1) a Primary Insurance Policy issued by a private mortgage
insurer (other than a Radian Lender-Paid PMI Policy) or (2) a Radian Lender-
Paid PMI Policy. Approximately 39.71% and 15.92% of the initial mortgage loans
are covered by a Primary Insurance Policy and the Radian Lender- Paid PMI
Policy, respectively. None of the fixed-rate initial mortgage loans are so
insured.
Each Primary Insurance Policy will insure against default under each
insured mortgage note as follows: (A) for which the outstanding principal
balance at origination of such mortgage loan is greater than or equal to 80.01%
and up to and including 90.00% of the lesser of the Appraised Value and the
sales price, such mortgage loan is covered by a Primary Insurance Policy in an
amount equal to at least 20.00% of the Allowable Claim and (B) for which the
outstanding principal balance at origination of such mortgage loan exceeded
90.00% of the lesser of the Appraised Value and the sales price, such mortgage
loan is covered by a Primary Insurance Policy in an amount equal to at least
22.00% of the Allowable Claim.
Each Radian Lender-Paid PMI Policy will insure against default under
each insured mortgage note as follows: (A) for which the outstanding principal
balance at origination of such mortgage loan is greater than or equal to 80.01%
and up to and including 89.99% of the lesser of the Appraised Value and the
sales price, such mortgage loan is covered in an amount equal to at least 22.00%
of the Allowable Claim, (B) for which the outstanding principal balance at
origination of such mortgage loan is at least 90.00% and up to and including
95.00% of the lesser of the Appraised Value and the sales price, such mortgage
loan is covered in an amount equal to at least 22.00% of the Allowable Claim and
(C) for which the outstanding principal balance at origination of such mortgage
loan is at least 95.01% and up to and including 97.00% of the lesser of the
Appraised Value and the sales price, such mortgage loan is covered in an amount
equal to at least 35.00% of the Allowable Claim.
S-18
With respect to the Radian Lender-Paid PMI Policies, the premium will
be payable by the Master Servicer out of interest collections on the mortgage
loans at a rate equal to the related Radian PMI Rate. The Radian PMI Rates range
from 0.50% per annum to 1.34% per annum of the Stated Principal Balance of the
related Radian PMI Insured Loan and the Radian PMI Rates have a weighted average
of approximately 0.82% per annum.
Each mortgage loan is required to be covered by a standard hazard
insurance policy.
SEE "PRIMARY MORTGAGE INSURANCE, HAZARD INSURANCE; CLAIMS THEREUNDER --
HAZARD INSURANCE POLICIES" IN THE PROSPECTUS.
MORTGAGE LOAN CHARACTERISTICS
The average principal balance of the initial mortgage loans at
origination was approximately $227,806. No initial mortgage loan had a principal
balance at origination of greater than approximately $770,000 or less than
approximately $10,000. The average principal balance of the initial mortgage
loans as of the Cut-off Date was approximately $227,647. No initial mortgage
loan had a principal balance as of the Cut-off Date of greater than
approximately $769,096 or less than approximately $9,972.
As of the Cut-off Date, the initial mortgage loans had mortgage rates
ranging from approximately 3.625% per annum to approximately 17.000% per annum
and the weighted average mortgage rate was approximately 7.165% per annum. The
weighted average remaining term to stated maturity of the initial mortgage loans
will be approximately 357 months as of the Cut-off Date. None of the initial
mortgage loans will have a first Due Date prior to January 1, 2001 or after
December 1, 2001, or will have a remaining term to maturity of less than 170
months or greater than 360 months as of the Cut-off Date. The latest maturity
date of any initial mortgage loan is November 1, 2031.
The loan-to-value ratio of a mortgage loan secured by a first lien is
equal to the ratio, expressed as a percentage, of the principal amount of the
loan at origination, to the lesser of the appraised value of the related
mortgaged property at the time of origination and the sales price. The combined
loan-to-value ratio of a mortgage loan secured by a second lien is equal to the
ratio, expressed as a percentage, of the principal amount of the loan at
origination, plus the outstanding principal balance of the related senior lien,
to the appraised value of the related mortgaged property at the time of
origination. The weighted average of the loan-to-value ratios and combined
loan-to-value ratios, as applicable, at origination of the initial mortgage
loans was approximately 84.25%. No loan-to-value ratio or combined loan-to-value
ratio, as applicable, at origination was greater than approximately 100.00% or
less than approximately 15.51%.
The original mortgages for some of the mortgage loans have been, or in
the future may be, at the sole discretion of the master servicer, recorded in
the name of Mortgage Electronic Registration Systems, Inc., or MERS, solely as
nominee for the seller and its successors and assigns, and subsequent
assignments of those mortgages have been, or in the future may be, at the sole
discretion of the master servicer, registered electronically through the MERS(R)
System. In some other cases, the original mortgage was recorded in the name of
the originator of the mortgage loan, record ownership was later assigned to
MERS, solely as nominee for the owner of the mortgage loan, and subsequent
assignments of the mortgage were, or in the future may be, at the sole
discretion of the master servicer, registered electronically through the MERS(R)
System. For each of these mortgage loans, MERS serves as mortgagee of record on
the mortgage solely as a nominee in an administrative capacity on behalf of the
trustee, and does not have any interest in the mortgage loan. As of the cut-off
date, approximately 20.29% of the aggregate principal balance of the mortgage
loans were recorded in the name of MERS. For additional information regarding
the recording of mortgages in the name of MERS see "Yield on the Bonds--Yield
Sensitivity of the Class A-2 Bonds, Class M Bonds and Class B Bonds" in this
prospectus supplement.
S-19
61 initial mortgage loans, representing approximately 0.90% of the
mortgage pool (by aggregate outstanding principal balance as of the Cut-off
Date), are balloon loans. The amount of the balloon payment on each of these
initial mortgage loans is substantially in excess of the amount of the scheduled
monthly payment on such initial mortgage loan for the period prior to the Due
Date of the balloon payment. These initial mortgage loans have a weighted
average remaining term to maturity of approximately 179 months.
None of the initial mortgage loans are buydown mortgage loans.
None of the initial mortgage loans were 30 days or more delinquent as
of the Cut-off Date.
None of the initial mortgage loans are subject to the Home Ownership
and Equity Protection Act of 1994 or any comparable state law.
Set forth below is a description of certain additional characteristics
of the initial mortgage loans as of the Cut-off Date, except as otherwise
indicated. All percentages of the initial mortgage loans are approximate
percentages by aggregate principal balance as of the Cut-off Date, except as
otherwise indicated. Dollar amounts and percentages may not add up to totals due
to rounding.
S-20
PRINCIPAL BALANCES AT ORIGINATION
PERCENTAGE OF
ORIGINAL NUMBER OF CUT-OFF DATE
INITIAL MORTGAGE LOAN INITIAL MORTGAGE AGGREGATE UNPAID AGGREGATE
PRINCIPAL BALANCES ($) LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
---------------------- ----- ----------------- -----------------
0.01 - 50,000.00...................... $ 1,854,526 $ 1,854,526 0.53%
50,000.01 - 100,000.00...................... 144 11,157,405 3.16
100,000.01 - 150,000.00...................... 235 29,810,145 8.44
150,000.01 - 200,000.00...................... 283 49,680,100 14.07
200,000.01 - 250,000.00...................... 256 57,538,192 16.30
250,000.01 - 300,000.00...................... 200 54,997,348 15.58
300,000.01 - 350,000.00...................... 152 49,221,641 13.94
350,000.01 - 400,000.00...................... 109 41,223,238 11.68
400,000.01 - 450,000.00...................... 46 19,540,347 5.53
450,000.01 - 500,000.00...................... 43 20,653,459 5.85
500,000.01 - 550,000.00...................... 14 7,258,750 2.06
550,000.01 - 600,000.00...................... 6 3,443,266 0.98
600,000.01 - 650,000.00...................... 7 4,484,341 1.27
650,000.01 - 700,000.00...................... 1 700,000 0.20
700,000.01 - 750,000.00...................... 1 749,271 0.21
750,000.01 - 800,000.00...................... 1 769,096 0.22
------------ ------------ ------
Total................................... $353,081,124 $353,081,124 100.00%
The average principal balance of the initial mortgage loans at
origination was approximately $227,806.
S-21
PRINCIPAL BALANCES AS OF THE CUT-OFF DATE
PERCENTAGE OF
NUMBER OF CUT-OFF DATE
CURRENT INITIAL MORTGAGE LOAN INITIAL MORTGAGE AGGREGATE UNPAID AGGREGATE
PRINCIPAL BALANCES ($) LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
---------------------- ----- ----------------- -----------------
0.01 - 50,000.00...................... 53 $ 1,854,526 0.53%
50,000.01 - 100,000.00...................... 145 11,257,300 3.19
100,000.01 - 150,000.00...................... 234 29,710,249 8.41
150,000.01 - 200,000.00...................... 283 49,680,100 14.07
200,000.01 - 250,000.00...................... 256 57,538,192 16.30
250,000.01 - 300,000.00...................... 200 54,997,348 15.58
300,000.01 - 350,000.00...................... 154 49,921,200 14.14
350,000.01 - 400,000.00...................... 107 40,523,679 11.48
400,000.01 - 450,000.00...................... 46 19,540,347 5.53
450,000.01 - 500,000.00...................... 44 21,153,229 5.99
500,000.01 - 550,000.00...................... 13 6,758,980 1.91
550,000.01 - 600,000.00...................... 6 3,443,266 0.98
600,000.01 - 650,000.00...................... 7 4,484,341 1.27
650,000.01 - 700,000.00...................... 1 700,000 0.20
700,000.01 - 750,000.00...................... 1 749,271 0.21
750,000.01 - 800,000.00...................... 1 769,096 0.22
----- ----------- ------
Total................................... 1,551 $353,081,124 100.00%
===== =========== ======
As of the Cut-off Date, the average current principal balance
of the initial mortgage loans will be approximately $227,647.
S-22
MORTGAGE RATES
PERCENTAGE OF
NUMBER OF CUT-OFF DATE
INITIAL MORTGAGE AGGREGATE UNPAID AGGREGATE
MORTGAGE RATES(%) LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
-------------- ----- ----------------- -----------------
3.500 - 3.999...................... 4 $ 792,818 0.22%
4.000 - 4.499...................... 11 3,016,589 0.85
4.500 - 4.999...................... 26 6,880,518 1.95
5.000 - 5.499...................... 42 12,271,399 3.48
5.500 - 5.999...................... 95 27,184,690 7.70
6.000 - 6.499...................... 138 37,936,025 10.74
6.500 - 6.999...................... 255 64,267,557 18.20
7.000 - 7.499...................... 265 63,067,247 17.86
7.500 - 7.999...................... 280 65,037,255 18.42
8.000 - 8.499...................... 127 27,149,453 7.69
8.500 - 8.999...................... 121 23,975,389 6.79
9.000 - 9.499...................... 47 7,944,594 2.25
9.500 - 9.999...................... 46 5,811,522 1.65
10.000 - 10.499...................... 21 2,707,082 0.77
10.500 - 10.999...................... 26 2,284,020 0.65
11.000 - 11.499...................... 18 1,023,329 0.29
11.500 - 11.999...................... 7 601,640 0.17
12.000 - 12.499...................... 2 138,391 0.04
12.500 - 12.999...................... 7 261,345 0.07
13.000 - 13.499...................... 7 344,712 0.10
13.500 - 13.999...................... 3 142,913 0.04
14.000 - 14.499...................... 1 12,979 0.00
14.500 - 14.999...................... 1 199,685 0.06
17.000 - 17.499...................... 1 29,974 0.01
----- ------------ ------
Total............................ 1,551 $353,081,124 100.00%
===== ============ ======
The weighted average mortgage rate of the initial mortgage loans was
approximately 7.165% per annum.
S-23
NEXT ADJUSTMENT DATE
NUMBER OF PERCENTAGE OF
INITIAL MORTGAGE AGGREGATE UNPAID CUT-OFF DATE
NEXT ADJUSTMENT DATE LOANS PRINCIPAL BALANCE BALANCE
-------------------- ----- ----------------- -------
Fixed Rate Loans (N/A).............. 81 $ 3,999,764 1.13%
November 1, 2001.................... 2 595,674 0.17
January 1, 2002..................... 1 189,605 0.05
February 1, 2002.................... 19 4,194,429 1.19
March 1, 2002....................... 212 56,651,367 16.04
April 1, 2002....................... 182 47,107,034 13.34
May 1, 2002......................... 26 6,825,890 1.93
February 1, 2003.................... 1 142,290 0.04
March 1, 2003....................... 3 675,314 0.19
April 1, 2003....................... 4 942,883 0.27
May 1, 2003......................... 5 672,885 0.19
June 1, 2003........................ 3 445,803 0.13
July 1, 2003........................ 13 1,717,670 0.49
August 1, 2003...................... 108 26,942,301 7.63
September 1, 2003................... 403 92,903,149 26.31
October 1, 2003..................... 326 73,615,745 20.85
November 1, 2003.................... 61 14,149,090 4.01
February 1, 2004.................... 3 426,006 0.12
March 1, 2004....................... 1 397,985 0.11
May 1, 2004......................... 1 209,659 0.06
June 1, 2004........................ 1 224,467 0.06
July 1, 2004........................ 2 164,832 0.05
August 1, 2004...................... 14 2,849,327 0.81
September 1, 2004................... 49 10,802,337 3.06
October 1, 2004..................... 23 5,244,467 1.49
November 1, 2004.................... 5 704,400 0.20
August 1, 2006...................... 1 161,753 0.05
November 1, 2006.................... 1 125,000 0.04
----- ------------ ------
Total.......................... 1,551 $353,081,124 100.00%
===== ============ ======
As of the Cut-off Date, the weighted average remaining months to the
next adjustment date of the initial adjustable-rate mortgage loans will be
approximately 18 months.
S-24
GROSS MARGIN
NUMBER OF PERCENTAGE OF
INITIAL MORTGAGE AGGREGATE UNPAID CUT-OFF DATE
GROSS MARGINS (%) LOANS PRINCIPAL BALANCE BALANCE
----------------- ----- ----------------- -------
Fixed Rate Loans (N/A) 81 $ 3,999,764 1.13%
2.000 - 2.249 ........... 20 4,952,184 1.40
2.250 - 2.499 ........... 26 6,862,437 1.94
2.500 - 2.749 ........... 131 34,421,806 9.75
2.750 - 2.999 ........... 482 116,617,608 33.03
3.000 - 3.249 ........... 348 84,231,697 23.86
3.250 - 3.499 ........... 220 52,764,047 14.94
3.500 - 3.749............ 93 19,931,222 5.64
3.750 - 3.999............ 40 7,701,841 2.18
4.000 - 4.249 ........... 32 7,605,743 2.15
4.250 - 4.499 ........... 20 3,747,391 1.06
4.500 - 4.749 ........... 8 1,742,353 0.49
4.750 - 4.999 ........... 17 3,377,434 0.96
5.000 - 5.249 ........... 12 1,566,408 0.44
5.250 - 5.499 ........... 6 1,379,101 0.39
5.500 - 5.749 ........... 8 1,162,246 0.33
5.750 - 5.999 ........... 2 444,748 0.13
6.000 - 6.249 ........... 3 437,396 0.12
6.250 - 6.499 ........... 2 135,698 0.04
----- ----------- ------
Total................. 1,551 $353,081,124 100.00%
===== =========== ======
As of the Cut-off Date, the weighted average Gross Margin of the initial
adjustable-rate mortgage loans that are initial mortgage loans will be
approximately 3.035% per annum.
S-25
MAXIMUM MORTGAGE RATE
NUMBER OF PERCENTAGE OF
INITIAL MORTGAGE AGGREGATE UNPAID CUT-OFF DATE
MAXIMUM MORTGAGE RATE (%) LOANS PRINCIPAL BALANCE BALANCE
---------------------- ----- ----------------- -------
Fixed Rate Loans (N/A) .... 81 $3,999,764 1.13%
11.000 - 11.499 ........... 1 179,794 0.05
11.500 - 11.999............ 3 896,059 0.25
12.000 - 12.499............ 4 1,016,666 0.29
12.500 - 12.999............ 559 149,091,969 42.23
13.000 - 13.499............ 267 63,607,384 18.01
13.500 - 13.999............ 277 64,269,304 18.20
14.000 - 14.499............ 125 26,705,401 7.56
14.500 - 14.999............ 115 23,606,900 6.69
15.000 - 15.499............ 41 7,454,352 2.11
15.500 - 15.999............ 36 6,096,178 1.73
16.000 - 16.499............ 18 2,894,776 0.82
16.500 - 16.999............ 15 1,582,891 0.45
17.000 - 17.499............ 4 550,686 0.16
17.500 - 17.999............ 3 778,857 0.22
18.500 - 18.999............ 2 350,143 0.10
----- ------------ ------
Total................... 1,551 $353,081,124 100.00%
===== =========== ======
As of the Cut-off Date, the weighted average Maximum Mortgage Rate of the
initial adjustable- rate mortgage loans that are initial mortgage loans will be
approximately 13.335% per annum.
S-26
INITIAL FIXED-RATE PERIOD
NUMBER OF PERCENTAGE OF
INITIAL MORTGAGE AGGREGATE UNPAID CUT-OFF DATE
INITIAL PERIOD LOANS PRINCIPAL BALANCE BALANCE
-------------- ----- ----------------- -------
Fixed Rate Loans (N/A) 81 $ 3,999,764 1.13%
Six Months............... 442 115,563,999 32.73
Two Years................ 927 212,207,129 60.10
Three Years.............. 99 21,023,479 5.95
Five Years............... 2 286,753 0.08
----- ------------ -------
Total................. 1,551 $353,081,124 100.00%
===== =========== ======
INITIAL RATE CAP
NUMBER OF PERCENTAGE OF
INITIAL MORTGAGE AGGREGATE UNPAID CUT-OFF DATE
INITIAL RATE CAP (%) LOANS PRINCIPAL BALANCE BALANCE
----------------- ----- ----------------- --------
Fixed Rate Loans (N/A) 81 $3,999,764 1.13%
0.50...................... 1 177,118 0.05
1.00...................... 434 113,473,764 32.14
1.50 ..................... 8 2,077,528 0.59
3.00 ..................... 1,027 233,352,950 66.09
----- ------------ ------
Total................ 1,551 $353,081,124 100.00%
===== =========== ======
PERIODIC RATE CAP
NUMBER OF PERCENTAGE OF
INITIAL MORTGAGE AGGREGATE UNPAID CUT-OFF DATE
PERIODIC RATE CAP (%) LOANS PRINCIPAL BALANCE BALANCE
------------------ ----- ----------------- --------
Fixed Rate Loans (N/A) 81 $3,999,764 1.13%
0.50....................... 1 177,118 0.05
1.00....................... 1,434 342,106,809 96.89
1.50 ...................... 35 6,797,432 1.93
-----
Total................. 1,551 $353,081,124 100.00%
===== =========== ======
S-27
ORIGINAL LOAN-TO-VALUE RATIOS (1)
PERCENTAGE OF
CUT-OFF DATE
NUMBER OF AGGREGATE UNPAID AGGREGATE
ORIGINAL LOAN-TO-VALUE RATIOS (%)(1) INITIAL MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
------------------------------------ ---------------------- ----------------- -----------------
15.01 - 20.00....................... 2 $588,400 0.17%
20.01 - 25.00....................... 1 50,000 0.01
30.01 - 35.00....................... 1 60,000 0.02
35.01 - 40.00....................... 6 1,686,671 0.48
40.01 - 45.00....................... 6 1,044,580 0.30
45.01 - 50.00....................... 7 2,262,619 0.64
50.01 - 55.00....................... 9 2,622,085 0.74
55.01 - 60.00....................... 15 2,251,991 0.64
60.01 - 65.00....................... 21 5,662,283 1.60
65.01 - 70.00....................... 91 25,387,640 7.19
70.01 - 75.00....................... 85 20,184,180 5.72
75.01 - 80.00....................... 371 90,747,522 25.70
80.01 - 85.00....................... 54 13,654,105 3.87
85.01 - 90.00....................... 430 100,328,535 28.42
90.01 - 95.00....................... 358 78,838,117 22.33
95.01 -100.00....................... 94 7,712,397 2.18
----- ----------- ------
Total........................... 1,551 $353,081,124 100.00%
===== =========== ======
The minimum and maximum loan-to-value ratios of the initial mortgage loans
at origination were approximately 15.51% and 100.00%, respectively, and the
weighted average of the loan-to-value ratios of the initial mortgage loans at
origination was approximately 84.25%.
------------------------
(1) With respect to the fixed-rate initial mortgage loans, the combined
loan-to-value ratio.
S-28
OCCUPANCY TYPES
NUMBER OF PERCENTAGE OF
INITIAL AGGREGATE UNPAID CUT-OFF DATE
OCCUPANCY TYPE MORTGAGE LOANS PRINCIPAL BALANCE BALANCE
-------------- -------------- ----------------- -------------
Second Home............. 16 $4,123,368 1.17%
Non-Owner Occupied...... 130 23,924,154 6.78
Owner Occupied.......... 1,405 325,033,603 92.06
----- ----------- ------
Total............... 1,551 $353,081,124 100.00%
===== =========== ======
Occupancy type is based on the representation of the borrower at the time
of origination.
MORTGAGE LOAN PROGRAM AND DOCUMENTATION TYPE
PERCENTAGE OF
NUMBER OF CUT-OFF DATE
INITIAL MORTGAGE AGGREGATE UNPAID AGGREGATE
LOAN PROGRAM AND DOCUMENTATION TYPE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
----------------------------------- ----- ----------------- -----------------
Progressive Series Program (Full
Documentation)........................... 212 $33,311,478 9.43%
Progressive Series Program (Alternative
Documentation)........................... 3 499,586 0.14
Progressive Series Program (Limited
(Stated) Documentation).................. 68 16,504,462 4.67
Progressive Series Program (No
Income/No Asset Documentation)........... 28 9,732,315 2.76
Progressive Express(TM)Program (Verified
Assets).................................. 510 132,007,121 37.39
Progressive Express(TM)Program (Non
Verified Assets)......................... 651 144,391,106 40.89
Progressive Express(TM)No Doc Program
(No Documentation)....................... 79 16,635,056 4.71
----- ------------ ------
Total................................ 1,551 $353,081,124 100.00%
===== =========== ======
SEE "--UNDERWRITING STANDARDS" BELOW FOR A DETAILED DESCRIPTION OF THE
SELLER'S LOAN PROGRAMS AND DOCUMENTATION REQUIREMENTS.
S-29
RISK CATEGORIES
PERCENTAGE OF
NUMBER OF CUT-OFF DATE
INITIAL MORTGAGE AGGREGATE UNPAID AGGREGATE
CREDIT GRADE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
------------ ----- ----------------- -----------------
A+(1)........................... 122 $ 23,621,578 6.69%
A(1)............................ 168 32,911,481 9.32
A-(1)........................... 15 2,597,644 0.74
B(1)............................ 4 588,712 0.17
C(1)............................ 2 328,425 0.09
Progressive Express(TM)I(2)..... 545 130,402,372 36.93
Progressive Express(TM)II(2).... 561 132,821,185 37.62
Progressive Express(TM)III(2)... 80 18,166,378 5.15
Progressive Express(TM)IV(2).... 32 7,210,097 2.04
Progressive Express(TM)V(2)..... 12 2,595,466 0.74
Progressive Express(TM)VI(2).... 10 1,837,785 0.52
----- ----------- ------
Total..................... 1,551 $353,081,124 100.00%
===== =========== ======
-----------------
(1) All of these initial mortgage loans were reviewed and placed into risk
categories based on the credit standards of the Progressive Series Program.
Credit grades of A+, A, A-, B and C correspond to Progressive Series I+, I and
II, III and III+, IV, and V, respectively. All of the mortgage loans originated
pursuant to the Express Priority Refi(TM) Program have been placed in
Progressive Express(TM) Programs II and III. SEE " -- UNDERWRITING STANDARDS."
(2) These initial mortgage loans were originated under the Seller's Progressive
Express(TM) Program. The underwriting for these initial mortgage loans is
generally based on the borrower's "FICO" score and therefore these initial
mortgage loans do not correspond to the alphabetical risk categories listed
above.
SEE "--UNDERWRITING STANDARDS" BELOW FOR A DESCRIPTION OF THE SELLER'S RISK
CATEGORIES.
S-30
PROPERTY TYPES
PERCENTAGE OF
NUMBER OF CUT-OFF DATE
INITIAL MORTGAGE AGGREGATE UNPAID AGGREGATE
PROPERTY TYPE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
------------- ----- ----------------- -----------------
Single-Family............. 1,055 $240,659,729 68.16%
Condominium............... 162 28,554,809 8.09
Two- to Four-Family....... 48 10,020,966 2.84
De Minimis PUD............ 217 60,073,009 17.01
Planned Unit Development.. 63 12,674,051 3.59
Hi-Rise Condo............. 6 1,098,560 0.31
----- ----------- ------
Total.................. 1,551 $353,081,124 100.00%
===== =========== ======
GEOGRAPHIC DISTRIBUTION OF MORTGAGED PROPERTIES
PERCENTAGE OF
NUMBER OF CUT-OFF DATE
INITIAL MORTGAGE AGGREGATE UNPAID AGGREGATE
STATE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
----- ----- ----------------- -----------------
California............................. 999 $249,920,161 70.78%
Other (less than 3% in any one state).. 552 103,160,963 29.22
----- ----------- ------
Total............................... 1,551 $353,081,124 100.00%
===== =========== ======
No more than approximately 0.62% of the initial mortgage loans (by
aggregate outstanding principal balance as of the Cut-off Date) will be secured
by mortgaged properties located in any one zip code.
S-31
LOAN PURPOSES
PERCENTAGE OF
NUMBER OF CUT-OFF DATE
INITIAL MORTGAGE AGGREGATE UNPAID AGGREGATE
LOAN PURPOSE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
------------ ----- ----------------- -----------------
Purchase.................. 1,120 $248,120,318 70.27%
Cash-Out Refinance........ 325 78,933,594 22.36
Rate and Term Refinance... 106 26,027,212 7.37
-----
Total.................. 1,551 $353,081,124 100.00%
===== =========== ======
In general, in the case of an initial mortgage loan made for "rate and
term" refinance purposes, substantially all of the proceeds are used to pay in
full the principal balance of a previous mortgage loan of the mortgagor with
respect to a mortgaged property and to pay origination and closing costs
associated with such refinancing. Initial mortgage loans made for "cash-out"
refinance purposes may involve the use of the proceeds to pay in full the
principal balance of a previous mortgage loan and related costs except that a
portion of the proceeds are generally retained by the mortgagor for uses
unrelated to the mortgaged property. The amount of these proceeds retained by
the mortgagor may be substantial.
CONVEYANCE OF SUBSEQUENT MORTGAGE LOANS AND THE PRE-FUNDING ACCOUNT
Under and to the extent provided in the Indenture, the Indenture Trustee,
on behalf of the Trust, will be obligated to purchase from the company during
the Funding Period, subject to the availability thereof, subsequent mortgage
loans secured by conventional, one- to four-family, mortgage loans secured by
residential mortgaged properties. Each subsequent mortgage loan shall have been
underwritten in accordance with the criteria set forth under "--Underwriting
Standards" herein. The subsequent mortgage loans will be transferred to the
Indenture Trustee, on behalf of the Trust, pursuant to subsequent transfer
instruments between the company and the Indenture Trustee. In connection with
the purchase of subsequent mortgage loans on such Subsequent Transfer Dates, the
Indenture Trustee, on behalf of the Trust, will be required to pay to the
company from amounts on deposit in the Pre-Funding Account, a cash purchase
price of 100% of the principal balance thereof. The amount paid from the
Pre-Funding Account on each Subsequent Transfer Date will not include accrued
interest on the related subsequent mortgage loans. Following each Subsequent
Transfer Date, the aggregate principal balance of the mortgage loans will
increase by an amount equal to the aggregate principal balance of the related
subsequent mortgage loans so purchased and the amount in the Pre-Funding Account
will decrease accordingly.
The Pre-Funding Account will be established to provide the Indenture
Trustee, on behalf of the Trust, with sufficient funds to purchase subsequent
mortgage loans. During the Funding Period, the Original Pre-Funded Amount will
be reduced by the amount used to purchase subsequent mortgage loans for the
mortgage pool in accordance with the Indenture. Any investment income on funds
in the Pre- Funding Account will be paid to the company or its designee as
provided in the Indenture.
Any conveyance of subsequent mortgage loans on a Subsequent Transfer Date
is subject to certain conditions including, but not limited to the following:
(a) each such mortgage loan must satisfy the representations and warranties
specified in the related Subsequent Transfer Instrument and the Indenture; (b)
the company will not select such mortgage loans in a manner that it believes to
be adverse to the interests of the Bondholders; (c) the company will deliver
certain opinions of counsel with respect to the validity of the conveyance of
such mortgage loans; (d) as of the related Subsequent Cut-off Date, each such
mortgage loan will satisfy the following criteria: (i) the mortgage loan may not
be 30 or more days delinquent as of the last day of the calendar month preceding
the related Subsequent Cut-off Date; (ii) no mortgage loan will have a remaining
term to maturity of less than 170 months or greater than 360 months;
S-32
(iii) if the mortgage loan has a loan-to-value ratio greater than 80.00%, it is
covered by a Primary Insurance Policy or the Radian Lender-Paid PMI Policy; (iv)
none of the mortgage loans will be buydown mortgage loans; (v) no mortgage loan
will have a first Due Date prior to January 1, 2001 or after February 1, 2002;
(vi) the latest maturity date of any mortgage loan is January 1, 2032; (vii) the
mortgage loan will have a mortgage rate ranging from approximately 3.625% per
annum to approximately 17.00% per annum; and (viii) the mortgage loan shall have
been underwritten in accordance with the criteria set forth under
"--Underwriting Standards" herein; and (e) as of the related Subsequent Cut-off
Date, each group of such mortgage loans will satisfy the following criteria,
among other things: (i) the weighted average mortgage rate of such mortgage
loans will be approximately 7.165% per annum; (ii) the weighted average credit
score of such mortgage loans will be approximately 681; and (iii) no more than
approximately 71% of such mortgage loans will be concentrated in the state of
California. Notwithstanding the foregoing, any subsequent mortgage loan may be
rejected by any one of the Rating Agencies if the inclusion of such subsequent
mortgage loan would adversely affect the ratings on any class of Bonds.
UNDERWRITING STANDARDS
GENERAL
All of the initial mortgage loans were, and all of the subsequent mortgage
loans will be, originated by the Seller, generally in accordance with the
underwriting criteria specified in the prospectus, except as described in this
prospectus supplement.
Approximately 15.88% of the initial mortgage loans were underwritten
pursuant to, or in accordance with, the standards of the Seller's Progressive
Series Program which is described below. Approximately 82.99% of the initial
mortgage loans were underwritten pursuant to, or in accordance with, the
standards of the Progressive Express(TM) Program, respectively, each of which is
described below.
DETAILS OF SPECIFIC PROGRAMS
The following provisions apply to all of the mortgage loans originated
under the Seller's Progressive Series Program and Progressive Express(TM)
Program.
ELIGIBILITY. The Seller generally performs a pre-funding audit on each
mortgage loan. This audit includes a review for compliance with the related
program parameters and accuracy of the legal documents.
QUALITY CONTROL. The Seller performs a post-closing quality control review
on a minimum of 25% of the mortgage loans originated or acquired under the
programs described below for complete re- verification of employment, income and
liquid assets used to qualify for such mortgage loan. Such review also includes
procedures intended to detect evidence of fraudulent documentation and/or
imprudent activity during the processing, funding, servicing or selling of the
mortgage loan. Verification of occupancy and applicable information is made by
regular mail.
VARIATIONS. The Seller uses the following parameters as guidelines only. On
a case-by-case basis, the Seller may determine that the prospective mortgagor
warrants an exception outside the standard
S-33
program guidelines. An exception may be allowed if the loan application reflects
certain compensating factors, including instances where the prospective
mortgagor:
o has demonstrated an ability to save and devote a greater portion of
income to basic housing needs;
o may have a potential for increased earnings and advancement because of
education or special job training, even if the prospective mortgagor
has just entered the job market;
o has demonstrated an ability to maintain a debt free position;
o may have short term income that is verifiable but could not be counted
as stable income because it does not meet the remaining term
requirements; and
o has net worth substantial enough to suggest that repayment of the loan
is within the prospective mortgagor's ability.
APPRAISALS. The Seller does not publish an approved appraiser list for the
conduit seller. Each conduit seller maintains its own list of appraisers,
provided that each appraiser must:
o be a state licensed or certified appraiser;
o meet the independent appraiser requirements for staff appraisers, or,
if appropriate, be on a list of appraisers specified by the Office of
the Comptroller of the Currency, the Board of Governors of the Federal
Reserve System, the FDIC and the Office of Thrift Supervision under
their respective real estate appraisal regulations adopted in
accordance with Title XI of the Financial Institutions Reform Recovery
and Enforcement Act of 1989, regardless of whether the seller is
subject to those regulations;
o be experienced in the appraisal of properties similar to the type
being appraised;
o be actively engaged in appraisal work; and
o subscribe to a code of ethics that is at least as strict as the code
of the American Institute of Real Estate Appraisers or the Society of
Real Estate Appraisers.
With respect to the Seller's Progressive Series Program or Progressive
Express(TM) Program (other than the Progressive Express(TM) No Doc Program), one
full appraisal is required on each loan. In addition, an automated valuation
model, or AVM, is obtained either (a) when the loan amount is between $350,000
and $500,000 or (b) when the property has multiple units and the loan-to-value
ratio is equal to or less than 80%. An enhanced desk review is required either
(a) when the loan-to-value ratio is 90.01% to 95.00% or (b) when the property
has multiple units and the loan-to-value ratio is greater than 80%. An enhanced
field review is also required when the LTV ratio is over 95% or when the loan
amount is above $500,000, the property is unique, or the property exceeds 10
acres. With respect to the Seller's Progressive Express(TM) No Doc Program, one
full appraisal is required on each loan. In addition, an enhanced desk review is
required. An enhanced field review is also required when the loan amount is
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above $500,000, the property is unique or the property exceeds 10 acres. At the
underwriter's discretion, any one of the above appraisal reviews may be required
when program parameters do not require an appraisal review.
THE PROGRESSIVE SERIES PROGRAM
GENERAL. The underwriting guidelines utilized in the Progressive Series
Program, as developed by the Seller, are intended to assess the borrower's
ability and willingness to repay the mortgage loan obligation and to assess the
adequacy of the mortgaged property as collateral for the mortgage loan. The
Progressive Series Program is designed to meet the needs of borrowers with
excellent credit, as well as those whose credit has been adversely affected. The
Progressive Series Program consists of seven mortgage loan programs. Each
program has different credit criteria, reserve requirements, qualifying ratios
and loan-to-value ratio restrictions. Series I is designed for credit history
and income requirements typical of "A" credit borrowers. In the event a borrower
does not fit the Series I criteria, the borrower's mortgage loan is placed into
either Series II, III, III+, IV, V or VI, depending on which series' mortgage
loan parameters meets the borrower's unique credit profile. Series II, III,
III+, IV, V or VI allow for less restrictive standards because of certain
compensating or offsetting factors such as a lower loan-to-value ratio, verified
liquid assets, job stability, pride of ownership and, in the case of refinance
mortgage loans, length of time owning the mortgaged property. The philosophy of
the Progressive Series Program is that no single borrower characteristic should
automatically determine whether an application for a mortgage loan should be
approved or disapproved. Lending decisions are based on a risk analysis
assessment after the review of the entire mortgage loan file. Each mortgage loan
is individually underwritten with emphasis placed on the overall quality of the
mortgage loan. The Progressive Series I, II, III, III+, IV, V and VI Program
borrowers are required to have debt service-to-income ratios within the range of
45% to 60% calculated on the basis of monthly income and depending on the
loan-to-value ratio of the mortgage loan.
Under the Progressive Series Program, the Seller underwrites one- to
four-family mortgage loans with loan-to-value ratios at origination of up to
97%, depending on, among other things, a borrower's credit history, repayment
ability and debt service-to-income ratio, as well as the type and use of the
mortgaged property. Second lien financing of the mortgaged properties may be
provided by lenders other than the Seller at origination; however, the combined
loan-to-value ratio ("CLTV") generally may not exceed 95% for mortgage loan
amounts up to $400,000 and 100% for mortgage loan amounts above $400,000. Under
the Seller's 80/20 program, which is available to Progressive Series I and II
borrowers only, the Seller may allow second lien financing at the same time as
the origination of the first lien with CLTVs of up to 100%. The Seller's 80/20
program requires a full appraisal and an AVM.
The mortgage loans in the Progressive Series Program generally bear rates
of interest that are greater than those which are originated in accordance with
Freddie Mac and Fannie Mae standards. In general, the maximum amount for
mortgage loans originated under the Progressive Series Program is $750,000;
however, the Seller may approve mortgage loans in excess of such amount on a
case-by-case basis.
All of the mortgage loans originated under the Progressive Series I, II and
III Programs are underwritten either by employees of the Seller or by contracted
mortgage insurance companies or delegated conduit sellers. Generally all of the
mortgage loans originated under the Series III+, IV, V and
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VI Programs are underwritten by employees of the Seller and designated conduit
sellers. All of the Series I Program mortgage loans and all of the Series II and
III Program mortgage loans with loan-to-value ratios at origination in excess of
80% are insured by a Radian, Republic Mortgage Insurance Corporation, General
Electric Mortgage Insurance, PMI or United Guaranty Insurance. The borrower can
elect to have primary mortgage insurance covered by their loan payment. If the
borrower makes such election, a loan-to-value ratio between 80.01% and 90.00%
requires 22% coverage, a loan-to-value ratio between 90.01% and 95.00% requires
30% coverage and a loan-to-value ratio between 95.01% and 97.00% requires 35%
coverage. If the borrower does not make such election, the related mortgage loan
will be covered by a modified primary mortgage insurance policy issued by Radian
to the Seller providing coverage in the amount of (i) 22% coverage for a
mortgage loan with a loan-to-value ratio between 80.01% and 90.00%, (ii) 30%
coverage for a mortgage loan with a loan-to-value ratio between 90.01% and
95.00% and (iii) 35% coverage for a mortgage loan with a loan-to-value ratio
between 95.01% and 97.00%. None of the Series III+ Program mortgage loans with
loan-to-value ratios at origination in excess of 80% will be insured by a
Primary Insurance Policy. All Series IV, V and VI Program mortgage loans have
loan-to-value ratios at origination which are less than or equal to 85% and do
not require a Primary Insurance Policy. The Seller receives verbal verification
from the conduit seller of employment prior to funding or acquiring each
Progressive Series Program mortgage loan.
FULL/ALTERNATIVE DOCUMENTATION AND REDUCED DOCUMENTATION PROGRESSIVE SERIES
PROGRAMS. Each prospective borrower completes a mortgage loan application which
includes information with respect to the applicant's liabilities, income, credit
history, employment history and personal information. The Seller requires a
credit report on each applicant from a credit reporting company. The report
typically contains information relating to credit history with local and
national merchants and lenders, installment debt payments and any record of
defaults, bankruptcies, repossessions or judgments.
The Progressive Series Program allows for approval of an application
pursuant to the (a) Full/Alternative Documentation Program, or (b) the Limited
Documentation Program, the "No Ratio" Program or the "No Income, No Assets"
Program (any of the foregoing, a "Reduced Documentation Program"). The
Full/Alternative Documentation Program requires the following documents: (i)
Uniform Residential Loan Application (Fannie Mae Form 1003 or Freddie Mac Form
65), (ii) Statement of Assets and Liabilities (Fannie Mae Form 1003A or Freddie
Mac Form 65A), (iii) Residential Mortgage Credit Report with records obtained
from at least two separate repositories, (iv) Verification of Employment Form
providing a complete two year employment history, (v) Verification of Deposit
Form for all liquid assets, verifying minimum cash reserves based upon the
loan-to-value ratio and borrower's income, and (vi) a Uniform Residential
Appraisal Report (Fannie Mae Form 1004 or Freddie Mac Form 70). The
Full/Alternative Documentation Program allows for the use of certain alternative
documents in lieu of the Verification of Deposit Form and Verification of
Employment Form. These include W-2 Statements, tax returns and one pay check
from the most recent full month for verification of income and the most recent
one month personal bank statement for verification of liquid assets. In
addition, self-employed borrowers must provide federal tax returns for the
previous two to three years, including K-l's, federal business tax returns for
two years, year-to-date financial statements and a signed IRS Form 4506 (Request
for Copy of Tax Returns).
Under each Reduced Documentation Program (other than the Lite Income/Stated
Assets Program), which is available to borrowers in every Progressive Series
Program, the Seller obtains from prospective borrowers either a verification of
deposits or bank statements for the most recent one-month
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period preceding the mortgage loan application. Under this program the borrower
provides income information on the mortgage loan application, and the debt
service-to-income ratio is calculated. However, income is not verified.
Permitted maximum loan-to-value ratios (including secondary financing) under the
Reduced Documentation Program generally are limited.
Under all Progressive Series Programs, the Seller or the conduit seller
verbally verifies the borrower's employment prior to closing. Credit history,
collateral quality and the amount of the down payment are important factors in
evaluating a mortgage loan submitted under one of the Reduced Documentation
Programs. In addition, in order to qualify for a Reduced Documentation Program,
a mortgage loan must conform to certain criteria regarding maximum loan amount,
property type and occupancy status. Mortgage loans having a loan-to-value ratio
at origination in excess of 80% for Series I, II and III and mortgage loans on
mortgaged property used as a second or vacation home by the prospective
borrowers are not eligible for a Reduced Documentation Program. In general, the
maximum loan amount for mortgage loans underwritten in accordance with Series I,
II and III Reduced Documentation Program is $650,000 for purchase transactions,
rate-term transactions and cash out refinance transactions. The maximum loan
amount for mortgage loans underwritten in accordance with Series III+, IV, V and
VI Reduced Documentation Program is $400,000, however, exceptions are granted on
a case-by-case basis. Secondary financing is allowed in the origination of the
Reduced Documentation Program but must meet the CLTV requirements described
above and certain other requirements for subordinate financing. In all cases,
liquid assets must support the level of income of the borrower as stated in
proportion to the type of employment of the borrower. Full Documentation is
requested by the underwriter if it is the judgment of the underwriter that the
compensating factors are insufficient for loan approval.
CREDIT HISTORY. The Progressive Series Program defines an acceptable credit
history in each of the Series I, II and III Programs. The Series I Program
defines an acceptable credit history as a borrower who has "A" credit, meaning a
minimum of four trade accounts, including a mortgage and/or rental history,
along with one non-traditional trade account to satisfy five trades, with 24
months credit history, no 30-day delinquent mortgage payments in the last 12
months, and a maximum of one 30-day delinquent payments on any revolving credit
account within the past 12 months and a maximum of one 30-day delinquent payment
on installment credit account within the past 12 months. However, if the
Loan-to- Value Ratio of the loan is 90% or less, consumer credit is disregarded.
Bankruptcies must be at least 24 months old, fully discharged and the borrower
must have re-established or re-affirmed satisfactory credit history.
Foreclosures are not allowed in the past 3 years. No judgments, suits liens,
collections or charge- offs in the past 24 months, generally older items must be
paid prior to or at closing. Tax liens are not allowed within the last 24
months.
With respect to the Series II Program, a borrower must have a minimum of
four trade accounts including a mortgage and/or rental history, along with one
non-traditional trade account to satisfy five trades, with no late mortgage
payments for the past 12 months and may have one 30-day delinquent mortgage
payment within the past 13th through 24th months. A borrower may not have more
than three 30-day delinquent payments on any revolving credit account and a
maximum of three 30-day delinquent payments within the past 12 months on any
installment credit account. However, if the Loan-to-Value Ratio of the loan is
90% or less, consumer credit is disregarded. All bankruptcies must be at least
24 months old, fully discharged and the borrower must have re-established or
re-affirmed satisfactory credit history. Foreclosures are not allowed in the
past 3 years. No judgments, suits liens, collections or charge- offs in the past
24 months, generally older items must be paid prior to or at closing. Tax liens
are not allowed within the last 24 months.
With respect to the Series III Program, a borrower must have a minimum of
four trade accounts including a mortgage and/or rental history, along with one
non-traditional trade account to satisfy five trades, with 24-months credit
history, a borrower may not have more than two 30-day delinquent mortgage
payments within the past 12 months and may have no more than three 30-day
delinquent mortgage payments within the past 13th through 24th months.
Bankruptcies must be at least 24 months old, fully discharged and the borrower
must have re-established or re-affirmed satisfactory credit history.
Foreclosures are not allowed in the past 3 years. No judgments, suits liens,
collections or charge-offs in
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the past 24 months, generally older items must be paid prior to or at closing.
Tax liens are not allowed within the last 24 months.
With respect to the Series III+ Program, a borrower must have a minimum of
two trade accounts including a mortgage and/or rental history, along with one
non-traditional trade account to satisfy three trades, with 12 months credit
history, a borrower may not have more than two 30-day delinquent mortgage
payments within the past 12 months. Any open judgments, suits, liens,
collections and charge- offs not to exceed $500 per incident generally are paid
prior to or at closing. Bankruptcies must be at least 24 months old, fully
discharged and the borrower must have re-established or re-affirmed satisfactory
credit history. Foreclosures are not allowed during the past 24 months. Tax
liens are not allowed within the last 12 months.
With respect to the Series IV Program, a borrower must have a minimum of
two trade accounts including a mortgage and/or rental history, along with one
non-traditional trade account to satisfy three trades, with 12 months credit
history, a borrower may not have more than four 30-day delinquent mortgage
payments or three 30-day delinquent mortgage payments and one 60-day delinquent
mortgage payment within the past 12 months. Any open judgments, suits, liens,
collections and charge-offs not to exceed $1,000 per incident generally are paid
prior to or at closing. Bankruptcies must be at least 18 months old, fully
discharged and the borrower must have re-established or re-affirmed satisfactory
credit history. Foreclosures are not allowed in the past 18 months. Tax liens
are not allowed within the last 12 months.
With respect to the Series V Program, a borrower must have a minimum of two
trade accounts including a mortgage and/or rental history, along with one
non-traditional trade account to satisfy three trades, with 12 months credit
history, a borrower may not have more than five 30-day delinquent mortgage
payments or two 60-day delinquent mortgage payments and one 90-day delinquent
mortgage payment within the past 12 months. Any open judgments, suits, liens,
collections and charge-offs not to exceed $4,000 per incident generally are paid
prior to or at closing. Bankruptcies must be at least 12 months old, fully
discharged and the borrower must have re-established or re-affirmed satisfactory
credit history. Foreclosures are not allowed in the past 12 months. Tax liens
are not allowed within the last 12 months.
With respect to the Series VI program, a borrower must have a minimum of
two trade accounts including a mortgage and/or rental history, along with one
non-traditional trade account to satisfy three trades, with 12 months credit
history, a borrower may not have more than one 90-day delinquent mortgage
payment within the past 12 months. Any open judgements, suits, liens,
collections and charge-offs generally are paid prior to or at closing.
Bankruptcies must be at least 6 months old. Foreclosures are not allowed in the
past 6 months. Tax liens are not allowed within the last 6 months.
THE PROGRESSIVE EXPRESSTM PROGRAMS
PROGRESSIVE EXPRESSTM PROGRAMS WITH DOCUMENTATION
GENERAL. In July 1996, the Seller developed an additional series to the
Progressive Program, the "Progressive Express(TM) Program." The concept of the
Progressive Express(TM) Program is to underwrite the loan focusing on the
borrower's Credit Score, ability and willingness to repay the mortgage loan
obligation, and assess the adequacy of the mortgage property as collateral for
the loan. The Credit Score is an electronic evaluation of past and present
credit accounts on the borrower's credit bureau report.
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This includes all reported accounts as well as public records and inquiries. The
Progressive Express(TM) Program offers six levels of mortgage loan programs. The
Progressive Express(TM) Program has a minimum Credit Score that must be met by
the borrower's primary wage earner and does not allow for exceptions to the
Credit Score requirement. The Credit Score requirement is as follows:
Progressive Express(TM) I above 680, Progressive Express(TM) II 680-620,
Progressive Express(TM) III 619-601, Progressive Express(TM) IV 600-581,
Progressive Express(TM) V 580-551, and Progressive Express(TM) VI 550-500. Each
Progressive Express(TM) program has different Credit Score requirements, credit
criteria, reserve requirements, and loan-to-value ratio restrictions.
Progressive Express(TM) I is designed for credit history and income requirements
typical of "A+" credit borrowers. In the event a borrower does not fit the
Progressive Express(TM) I criteria, the borrower's mortgage loan is placed into
either Progressive Express(TM) II, III, IV, V, or VI, depending on which series'
mortgage loan parameters meets the borrowers unique credit profile.
All of the mortgage loans originated under the Progressive Express(TM)
program are underwritten either by employees of the Seller or by contracted
mortgage insurance companies or delegated conduit sellers. Under the Progressive
Express(TM) Program, the Seller underwrites single family dwellings with
loan-to-value ratios at origination of up to 97%. In order for the property to
be eligible for the Progressive Express(TM) Program, it must be a single family
residence (1 unit only) or on Express I and II 2-units, condominium, and/or
planned unit development (PUD). Progressive Express(TM) I loans are permitted on
non-owner occupied properties subject to a maximum loan-to-value ratio of 90%.
Progressive Express(TM) II loans are permitted on non-owner occupied properties
subject to a maximum loan-to-value ratio of 80%. Progressive Express(TM)
Programs I through IV loans with loan-to-value ratios at origination in excess
of 80% are insured by Radian, RMIC or GEMICO. The borrower can elect to have
primary mortgage insurance covered by their loan payment. If the borrower makes
such election, a loan-to-value ratio between 80.01% and 89.99% requires 22%
coverage, and a loan-to-value ratio between 90.00% and 95.00% requires 30%
coverage and a loan-to-value ratio between 95.01% and 97% requires 35% coverage.
If the borrower does not make such election, the related mortgage loan will be
covered by a modified primary mortgage insurance policy issued by Radian to the
Seller providing coverage in the amount of (i) 22% for a mortgage loan with a
loan-to-value ratio between 80.01% and 89.99%, (ii) 30% for a mortgage loan with
a loan-to-value ratio between 90% and 95% and (iii) 35% for mortgage loan with a
loan-to-value ratio between 95.01% and 97%.
Each borrower completes a Residential Loan Application (Fannie Mae 1003 or
Freddie Mac Form 65). The borrower must disclose employment and assets on the
application, however, there is no verification of the information. The conduit
seller obtains a verbal verification of employment on each borrower.
The Seller uses the foregoing parameters as guidelines only. Sellers may
include certain provisions in the note that the Seller may not enforce,
particularly, when a fixed rate loan provides in the addendum to the note for a
prepayment penalty. Full documentation is requested by the underwriter if it is
the judgment of the underwriter that the compensating factors are insufficient
for loan approval under the Progressive Express(TM) Product Line.
CREDIT HISTORY. The Progressive Express(TM) Program defines an acceptable
credit history in each of the programs I through VI. Progressive Express(TM) I
defines an acceptable credit history as a borrower who has "A+" credit, meaning
a minimum of four trade accounts including a mortgage and/or rental history,
along with one non-traditional trade account to satisfy five trades, no 30-day
delinquent mortgage payments in the past 12 months, and a maximum of one 30-day
delinquent payments on any
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revolving credit accounts within the past 12 months and one 30-day delinquent
payment on any installment credit accounts within the past 12 months. However,
if the Loan-to-Value Ratio of the loan is 90% or less, consumer credit is
disregarded. All bankruptcies must be at least 24 months old, fully discharged
and the borrower must have re-established or re-affirmed satisfactory credit
history. Foreclosures are not allowed in the past 3 years. No judgments, suits
liens, collections or charge-offs in the past 24 months, generally older items
must be paid prior to or at closing. Tax liens are not allowed within the last
24 months.
With respect to Progressive Express(TM) II, a borrower must have a minimum
of four trade accounts including a mortgage and/or rental history, along with
one non-traditional trade account to satisfy five trades, and no late mortgage
payments for the past 12 months. In addition, a borrower must have a maximum of
two 30-day delinquent payments on any revolving credit accounts within the past
12 months and one 30-day delinquent payment on any installment credit accounts
within the past 12 months. However, if the loan-to-value ratio of the loan is
90% or less, revolving and installment credit is disregarded. All bankruptcies
must be at least 24 months old, fully discharged and the borrower must have
re-established or re-affirmed satisfactory credit history. Foreclosures are not
allowed in the past 3 years. No judgments, suits, tax liens, other liens,
collections or charge-offs allowed within the past 24 months, generally older
items must be paid prior to or at closing.
With respect to Progressive Express(TM) III, a borrower must have a minimum
of four trade accounts including a mortgage and/or rental history, along with
one non-traditional trade account to satisfy five trades, no late mortgage
payments for the past 12 months and may have one 30-day late mortgage payment
within the past 13 and 24 months. All bankruptcies must be at least 24 months
old, fully discharged and the borrower must have re-established or re-affirmed
satisfactory credit history. Foreclosures are not allowed in the past 3 years.
No judgments, suits, tax liens, other liens, collections or charge-offs allowed
within the past 24 months, generally older items must be paid prior to or at
closing.
With respect to Progressive Express(TM) IV, a borrower must have a minimum
of four trade accounts including a mortgage and/or rental history, along with
one non-traditional trade account to satisfy five trades, no more than two
30-day late mortgage payments for the past 12 months or three 30-day late
mortgage payments in the past 24 months. All bankruptcies must be at least 24
months old, fully discharged and the borrower must have re-established or
re-affirmed satisfactory credit history. Foreclosures are not allowed in the
past 3 years. Tax liens are not allowed within the last 24 months. No judgments,
suits, tax liens, other liens, collections or charge-offs allowed within the
past 24 months, generally older items must be paid prior to or at closing.
With respect to Progressive Express(TM) V, a borrower must have a minimum
of two trade accounts including a mortgage and/or rental history, along with one
non-traditional trade account to satisfy three trades, with 12 months credit
history, no more than two 30-day late mortgage payments in the past 12 months.
All bankruptcies must be at least 24 months old, fully discharged and the
borrower must have re-established or re-affirmed satisfactory credit history.
Foreclosures are not allowed in the past 24 months. Judgments, suits, liens,
collections or charge-offs, may not exceed $500, and must be paid prior to or at
closing. Tax liens are not allowed within the last 12 months.
With respect to Progressive Express(TM) VI, a borrower must have a
minimum of two trade accounts including a mortgage and/or rental history, along
with one non-traditional trade account to satisfy three trades, with 12 months
credit history, no more than four 30-day or three 30-day and one 60-day late
mortgage payments in the past 12 months. All bankruptcies must be at least 18
months old and
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fully discharged. Foreclosures are not allowed in the past 18 months. Judgments,
suits, liens, collections or charge-offs, may not exceed $1,000, and must be
paid prior to or at closing. Tax liens are not allowed within the last 12
months.
PROGRESSIVE EXPRESS(TM) NO DOC PROGRAM
In May, 1999, the Seller introduced a Progressive Express(TM) No Doc
Program (the "No Doc program"). The concept of the No Doc program is to
underwrite the loan focusing on the borrower's credit score, ability and
willingness to repay the mortgage loan obligation, and assess the adequacy of
the mortgage property as collateral for the loan. The No Doc program has a
minimum credit score and does not allow for exceptions to the credit score. The
credit score requirement is as follows: 681 for Progressive Express(TM) No Doc I
and 620 for Progressive Express(TM) No Doc II. Each program has a different
credit score requirement and credit criteria.
All of the mortgage loans originated under the Progressive Express(TM) No
Doc program are underwritten either by employees of the Seller or by contracted
mortgage insurance companies or delegated conduit sellers. Under the Progressive
Express(TM) No Doc program, the Seller employees or contracted mortgage
insurance companies or delegated conduit sellers underwrite single family
dwellings with loan-to-value ratios at origination up to 95% and $400,000. In
order for the property to be eligible for the Progressive Express(TM) No Doc
program, it must be a single family residence (single unit only), condominium
and/or planned unit development (PUD) or 2-units to a maximum loan-to-value
ratio of 80% . The borrower can elect to have primary mortgage insurance covered
by their loan payment. If the borrower makes such election, the loan-to-value
ratios at origination in excess of 80%, are insured by Radian. For loan-to-value
ratios of 80.01% to 89.99%, mortgage insurance coverage is 22% and for loan-
to-value ratios of 90% to 95%, mortgage insurance coverage is 30%. If the
borrower does not make such election, the related mortgage loan will be covered
by a modified primary insurance policy issued by Radian to the Seller providing
coverage in the amount of 22% for a mortgage loan with a loan-to-value ratio
between 80.01% and 89.99% and 30% for a mortgage loan with a loan-to-value ratio
of 90%to 95%.
Each borrower completes a Residential Loan Application (Fannie Mae 1003 or
Freddie Mac Form 65). The borrower does not disclose income, employment, or
assets and a Verbal Verification of Employment is not provided. Generally,
borrowers provide a daytime telephone number as well as an evening telephone
number.
CREDIT HISTORY. The Progressive Express(TM) No Doc program defines an
acceptable credit history as follows: Progressive Express(TM) No Doc I defines
an acceptable credit history as a borrower who has "A+" credit, meaning a
minimum of four trade accounts including a mortgage and/or rental history, along
with one non-traditional trade account to satisfy five trades, and no 30-day
delinquent mortgage payments in the past 12 months and a maximum of one 30-day
delinquent payments on any revolving credit accounts within the past 12 months
and one 30-day delinquent payment on any installment credit accounts within the
past 12 months. However, if the loan-to-value ratio of the loan is 90% or less,
revolving and installment credit is disregarded. All bankruptcies must be at
least 24 months old, fully discharged and the borrower must have re-established
or re-affirmed a satisfactory credit history. Foreclosures are not allowed in
the past 3 years. No judgments, suits, liens, collections or charge-offs are
allowed within the past 24 months. Tax liens are not allowed within the past 24
months.
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With respect to Progressive Express(TM) No Doc II a borrower must have a
minimum of four trade accounts including a mortgage and/or rental history, along
with one non-traditional trade account to satisfy five trades, and no late
mortgage payments for the past 12 months and a maximum of two 30-day delinquent
payments on any revolving credit accounts and one 30-day delinquent payment on
any installment credit accounts within the past 12 months. However, if the
loan-to-value ratio of the loan is 90% or less, revolving and installment credit
is disregarded. All bankruptcies must be at least 24 months old, fully
discharged and the borrower must have re-established or re-affirmed satisfactory
credit history. Foreclosures are not allowed in past 3 years. No judgments,
suits, tax liens, other liens, collections or charge-offs allowed within the
past 24 months, generally older items must be paid prior to or at closing. Tax
liens are not allowed within the past 24 months.
IN ADDITION, SEE "THE MORTGAGE POOLS--UNDERWRITING STANDARDS" IN THE
PROSPECTUS.
DELINQUENCY AND FORECLOSURE EXPERIENCE OF THE SELLER
Based solely upon information provided by the Seller, the following tables
summarize, for the respective dates indicated, the delinquency, foreclosure,
bankruptcy and REO property status with respect to all mortgage loans originated
or acquired by the Seller which were being master serviced by the Seller at the
dates indicated. The indicated periods of delinquency are based on the number of
days past due on a contractual basis. The monthly payments under all of such
mortgage loans are due on the first day of each calendar month. A mortgage loan
is considered "30 days" delinquent if a payment due on the first of the month is
not received by the second day of the following month, and so forth.
A substantial majority of mortgage loan sales by the Seller during 1999
were made on a servicing- released basis. The following information does not
include statistical information on such mortgage loans. As a result, the
aggregate principal balance of non-delinquent mortgage loans serviced by the
Seller is not as high as it would otherwise be, resulting in increased
delinquency percentages for the total portfolio of mortgage loans serviced as of
December 31, 1999.
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At December 31, 1997 At December 31, 1998 At December 31, 1999
----------------------- --------------------- ---------------------
NUMBER PRINCIPAL NUMBER PRINCIPAL NUMBER PRINCIPAL
OF LOANS AMOUNT OF LOANS AMOUNT OF LOANS AMOUNT
-------- ------ -------- ------- -------- ------
(DOLLARS IN THOUSANDS) (DOLLARS IN THOUSANDS) (DOLLARS IN THOUSANDS)
Total Loans Outstanding.... 28,494 $3,028,554 33,414 $3,713,986 26,002 $2,878,701
DELINQUENCY 2 3
Period of Delinquency:
30-59 Days.............. 1,167 $ 136,427 1,677 $ 172,723 1,103 $ 124,875
60-89 Days.............. 282 33,203 506 46,719 286 27,997
90 Days or More......... 69 6,454 799 51,454 369 21,113
----- ---------- ----- ---------- ------ ----------
Total Delinquencies...... 1,518 $ 176,084 2,982 $ 270,896 1,758 $ 173,985
===== ========== ===== ========== ====== ==========
Delinquencies as a
Percentage of Total
Loans Outstanding.......... 5.33% 5.81% 8.92% 7.29% 6.76% 6.04%
At December 31, 2000 At September 30, 2001
------------------------ -----------------------
NUMBER PRINCIPAL NUMBER PRINCIPAL
OF LOANS AMOUNT OF LOANS AMOUNT
-------- ------ -------- ------
(DOLLARS IN THOUSANDS) (DOLLARS IN THOUSANDS)
Total Loans Outstanding.... 31,971 $4,042,859 36,430 $5,118,580
DELINQUENCY 2 3
Period of Delinquency:
30-59 Days.............. 1,941 $ 242,081 1,808 $ 246,386
60-89 Days.............. 529 65,809 530 70,299
90 Days or More......... 266 25,952 780 79,724
------ ---------- ---- ----------
Total Delinquencies...... 2,736 $ 333,842 3,118 $ 396,409
====== ========== ===== ==========
Delinquencies as a
Percentage of Total
Loans Outstanding.......... 8.56% 8.26% 8.56% 7.74%
----------------------------
2 The delinquency balances, percentages and numbers set forth under this
heading exclude (a) delinquent mortgage loans that were in foreclosure at
the respective dates indicated ("Foreclosure Loans"), (b) delinquent
mortgage loans as to which the related mortgagor was in bankruptcy
proceedings at the respective dates indicated ("Bankruptcy Loans") and (c)
REO properties that have been purchased upon foreclosure of the related
mortgage loans. All Foreclosure Loans, Bankruptcy Loans and REO properties
have been segregated into the sections of the table entitled "Foreclosures
Pending," "Bankruptcies Pending" and "REO Properties," respectively, and are
not included in the "30-59 Days," "60-89 Days," "90 Days or More" and "Total
Delinquencies" sections of the table. See the section of the table entitled
"Total Delinquencies plus Foreclosures Pending and Bankruptcies Pending" for
total delinquency balances, percentages and numbers which include
Foreclosure Loans and Bankruptcy Loans, and see the section of the table
entitled "REO Properties" for delinquency balances, percentages and numbers
related to REO properties that have been purchased upon foreclosure of the
related mortgage loans.
3 A substantial majority of mortgage loan sales by the Seller during 1999
were made on a servicing-released basis. The information on this table does
not include statistical information on such mortgage loans. As a result,
the aggregate principal balance of non-delinquent mortgage loans serviced
by the Seller is not as high as it would otherwise be, resulting in
increased delinquency percentages for the total portfolio of mortgage loans
serviced as of December 31, 1999.
S-43
At December 31, 1997 At December 31, 1998 At December 31, 1999
------------------------ ---------------------- ---------------------
NUMBER PRINCIPAL NUMBER PRINCIPAL NUMBER PRINCIPAL
OF LOANS AMOUNT OF LOANS AMOUNT OF LOANS AMOUNT
-------- ------ -------- ------ -------- ------
(DOLLARS IN THOUSANDS) (DOLLARS IN THOUSANDS) (DOLLARS IN THOUSANDS)
FORECLOSURES PENDING4............ 378 $ 41,792 459 $ 54,678 334 $ 46,969
Foreclosures Pending as a
Percentage of Total Loans
Outstanding...................... 1.33% 1.38% 1.37% 1.47% 1.28% 1.63%
BANKRUPTCIES PENDING5............ 140 $ 15,517 362 $ 25,973 419 $ 33,188
Bankruptcies Pending as a
Percentage of Total Loans
Outstanding...................... 0.49% 0.51% 1.08% 0.70% 1.61% 1.15%
Total Delinquencies plus
Foreclosures Pending and
Bankruptcies Pending............. 2,036 $233,393 3,803 $351,547 2,511 $254,142
Total Delinquencies plus
Foreclosures Pending and
Bankruptcies Pending as a
Percentage of Total Loans
Outstanding...................... 7.15% 7.71% 11.38% 9.47% 9.66% 8.83%
REO PROPERTIES6.................. 80 $ 9,276 116 $ 13,958 119 $ 13,882
REO Properties as a Percentage of
Total Loans Outstanding.......... 0.28% 0.31% 0.35% 0.38% 0.46% 0.48%
At December 31, 2000 At September 30, 2001
--------------------- ---------------------
NUMBER PRINCIPAL NUMBER PRINCIPAL
OF LOANS AMOUNT OF LOANS AMOUNT
-------- ------ -------- ------
(DOLLARS IN THOUSANDS) (DOLLARS IN THOUSANDS)
FORECLOSURES PENDING4............ 396 $ 57,133 698 $102,748
Foreclosures Pending as a
Percentage of Total Loans
Outstanding...................... 1.24% 1.41% 1.92% 2.01%
BANKRUPTCIES PENDING5............ 227 $ 22,556 266 $ 24,236
Bankruptcies Pending as a
Percentage of Total Loans
Outstanding...................... 0.71% 0.56% 0.73% 0.47%
Total Delinquencies plus
Foreclosures Pending and
Bankruptcies Pending............. 3,359 $413,531 4,082 $523,392
Total Delinquencies plus
Foreclosures Pending and
Bankruptcies Pending as a
Percentage of Total Loans
Outstanding...................... 10.51% 10.23% 11.21% 10.23%
REO PROPERTIES6.................. 105 $ 13,944 185 $ 29,680
REO Properties as a Percentage of
Total Loans Outstanding.......... 0.33% 0.34% 0.51% 0.58%
------------------------
4 Mortgage loans that are in foreclosure but as to which the mortgaged
property has not been liquidated at the respective dates indicated. It is
generally the Master Servicer's policy, with respect to mortgage loans
originated by the Seller, to commence foreclosure proceedings when a
mortgage loan is 60 days or more delinquent. However, the Master Servicer
may delay the foreclosure process as a result of loss mitigation efforts.
5 Mortgage loans as to which the related mortgagor is in bankruptcy
proceedings at the respective dates indicated.
6 REO properties that have been purchased upon foreclosure of the related
mortgage loans, including mortgaged properties that were purchased by the
Seller after the respective dates indicated.
S-44
The above data on delinquency, foreclosure, bankruptcy and REO property
status as of December 31, 1999, include mortgage loans which were sold
servicing-released by the Seller, but for which the servicing had not yet been
transferred as of such date.
A substantial majority of mortgage loan sales by the Seller during 1999
were made on a servicing- released basis. The following information does not
include statistical information on such mortgage loans. As a result, the
aggregate principal balance of non-delinquent mortgage loans serviced by the
Seller is not as high as it would otherwise be, resulting in increased loss
percentages for the total portfolio of mortgage loans serviced as of December
31, 1999.
Based solely on information provided by the Seller, the following table
presents the changes in the Seller's charge-offs and recoveries for the periods
indicated.
S-45
TWELVE MONTHS TWELVE MONTHS TWELVE MONTHS TWELVE MONTHS SIX MONTHS
ENDED ENDED ENDED ENDED ENDED
DECEMBER 31, 1997 DECEMBER 31, 1998 DECEMBER 31, 1999 DECEMBER 31, 2000 SEPTEMBER 30, 2001
----------------- ----------------- ----------------- ----------------- ------------------
(DOLLARS IN (DOLLARS IN (DOLLARS IN (DOLLARS IN (DOLLARS IN
THOUSANDS) THOUSANDS) THOUSANDS) THOUSANDS) THOUSANDS)
Charge-offs:
Mortgage Loan Properties..... $ 291 $ 2,684 $ 7,026 $ 12,785 $ 3,587
REO Properties............... 4,862 -153 2,165 4,779 4,866
Recoveries:
Mortgage Loan Properties..... 62 0 713 409 746
REO Properties............... 18 0 0 0 0
Net charge-offs:............... 5,073 2,531* 8,478 17,155 7,707
Ratio of net charge-offs to
average loans outstanding during
the indicated period***........ 0.22%** 0.08%** 0.34%** 0.51%** 0.22%**
---------------
* Does not include losses of $358,354 from the sale of delinquent loans
recorded by the Seller during the twelve months ended December 31,
1998.
** The ratio of net charge-offs was based upon annualized charge-offs for
the indicated periods. The average loans outstanding was computed
using monthly balances for the indicated periods.
*** The information on this table does not include statistical information
on mortgage loans which have recently been sold on a
servicing-released basis by the Seller to third parties. In addition,
it does not include statistical information for mortgage loans for
which the servicing rights were sold by the Seller in 1999. As a
result, the aggregate principal balance of non-delinquent mortgage
loans serviced has decreased, resulting in increased loss percentages
for mortgage loans serviced as of December 31, 1998 and December 31,
1999.
S-46
The above data on charge-offs and recoveries are calculated on the basis of
the total mortgage loans originated or acquired by the Seller. However, the
total amount of mortgage loans on which the above data are based includes many
mortgage loans which were not, as of the respective dates indicated, outstanding
long enough to give rise to some of the indicated charge-offs. In the absence of
such mortgage loans, the charge-off percentages indicated above would be higher
and could be substantially higher. Because the mortgage pool will consist of a
fixed group of mortgage loans, the actual charge-off percentages with respect to
the mortgage pool may therefore be expected to be higher, and may be
substantially higher, than the percentages indicated above.
The information set forth in the preceding paragraphs concerning the Seller
has been provided by the Seller.
ADDITIONAL INFORMATION
The description in this prospectus supplement of the mortgage pool and the
mortgaged properties is based upon the mortgage pool as constituted at the close
of business on the Cut-off Date, as adjusted for the scheduled principal
payments due on or before this date. Prior to the issuance of the Bonds,
mortgage loans may be removed from the mortgage pool as a result of incomplete
documentation or otherwise if the company deems this removal necessary or
desirable, and may be prepaid at any time. In no event, however, will more than
5% (by principal balance at the Cut-off Date) of the mortgage loans deviate from
the characteristics of the mortgage loans set forth in the related prospectus
supplement.
YIELD ON THE BONDS
SHORTFALLS IN COLLECTIONS OF 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 principal 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
any days in the month in which the prepayment is made. In addition, the
application of the Relief Act to any mortgage loan will adversely affect, for an
indeterminate period of time, the ability of the Master Servicer or any
subservicer to collect full amounts of interest on the mortgage loan. SEE "LEGAL
ASPECTS OF THE MORTGAGE LOANS -- SOLDIERS' AND SAILORS' CIVIL RELIEF ACT OF
1940" IN THE PROSPECTUS. The Master Servicer is obligated to pay from its own
funds only those interest shortfalls attributable to full prepayments by the
mortgagors on the mortgage loans, but only to the extent of the lesser of (a)
one-twelfth of 0.125% of the aggregate Stated Principal Balance of the mortgage
loans immediately preceding such payment date and (b) the sum of the Master
Servicing Fee and the Subservicing Fee for the related Due Period. See
"Description of the Servicing Agreement -- Servicing and Other Compensation and
Payment of Expenses" in this prospectus supplement. Accordingly, the effect of
(1) any principal prepayments in full on the mortgage loans, to the extent that
any resulting Prepayment Interest Shortfall exceeds any Compensating Interest or
(2) any shortfalls resulting from the application of the Relief Act, will be to
reduce the aggregate amount of interest collected that is available for
distribution to holders of the Bonds. Any resulting shortfalls will be allocated
among the Bonds as provided in this prospectus supplement under "Description of
the Bonds--Interest Payments on the Bonds."
S-47
GENERAL YIELD AND PREPAYMENT CONSIDERATIONS
The yield to maturity of the Bonds will be sensitive to defaults on the
mortgage loans. If a purchaser of a bond calculates its anticipated yield based
on an assumed rate of default and amount of losses that is lower than the
default rate and amount of losses actually incurred, its actual yield to
maturity will be lower than that so calculated. In general, the earlier a loss
occurs, the greater is the effect on an investor's yield to maturity. There can
be no assurance as to the delinquency, foreclosure or loss experience with
respect to the mortgage loans.
The mortgage loans were underwritten generally in accordance with
underwriting standards which are primarily intended to provide for single family
"non-conforming" mortgage loans. A "non- conforming" mortgage loan means a
mortgage loan which is ineligible for purchase by Fannie Mae or Freddie Mac due
to either credit characteristics of the related mortgagor or documentation
standards in connection with the underwriting of the related mortgage loan that
do not meet the Fannie Mae or Freddie Mac underwriting guidelines for "A" credit
mortgagors. These credit characteristics include mortgagors whose
creditworthiness and repayment ability do not satisfy such Fannie Mae or Freddie
Mac underwriting guidelines and mortgagors who may have a record of credit
write-offs, outstanding judgments, prior bankruptcies and other credit items
that do not satisfy such Fannie Mae or Freddie Mac underwriting guidelines.
These documentation standards may include mortgagors who provide limited or no
documentation in connection with the underwriting of the related mortgage loan.
Accordingly, mortgage loans underwritten under the seller's non-conforming
credit underwriting standards are likely to experience rates of delinquency,
foreclosure and loss that are higher, and may be substantially higher, than
mortgage loans originated in accordance with the Fannie Mae or Freddie Mac
underwriting guidelines. Any resulting losses, to the extent not covered by
credit enhancement, may affect the yield to maturity of the Bonds.
The rate of principal payments, the aggregate amount of distributions and
the yields to maturity of the Bonds will be affected by the rate and timing of
payments of principal on the mortgage loans. The rate of principal payments on
the mortgage loans will in turn be affected by the amortization schedules of the
mortgage loans and by the rate of principal prepayments (including for this
purpose prepayments resulting from refinancing, liquidations of the mortgage
loans due to defaults, casualties or condemnations and repurchases by the
Seller). Certain of the mortgage loans contain prepayment charge provisions. The
rate of principal payments may or may not be less than the rate of principal
payments for mortgage loans that did not have prepayment charge provisions. The
mortgage loans are subject to the "due-on-sale" provisions described in this
prospectus supplement. SEE "THE MORTGAGE POOL" IN THIS PROSPECTUS SUPPLEMENT.
Prepayments, liquidations and purchases of the mortgage loans (including
any optional purchases) will result in distributions on the Bonds of principal
amounts which would otherwise be distributed over the remaining terms of the
mortgage loans. Since the rate of payment of principal on the mortgage loans
will depend on future events and a variety of other factors, no assurance can be
given as to such rate or the rate of principal prepayments. The extent to which
the yield to maturity of a class of Bonds may vary from the anticipated yield
will depend, in the case of the Bonds, upon the degree to which such class of
bonds is purchased at a discount or premium. Further, an investor should
consider the risk that, in the case of any Bond purchased at a discount, a
slower than anticipated rate of principal payments (including prepayments) on
the mortgage loans could result in an actual yield to such investor that is
lower than the anticipated yield and, in the case of any Bond purchased at a
premium, a faster than
S-48
anticipated rate of principal payments on the mortgage loans could result in an
actual yield to such investor that is lower than the anticipated yield.
The rate of principal payments (including prepayments) on pools of mortgage
loans may vary significantly over time and may be influenced by a variety of
economic, geographic, social and other factors, including changes in mortgagors'
housing needs, job transfers, unemployment, mortgagors' net equity in the
mortgaged properties and servicing decisions. In general, if prevailing interest
rates were to fall significantly below the mortgage rates on the mortgage loans,
such mortgage loans could be subject to higher prepayment rates than if
prevailing interest rates were to remain at or above the mortgage rates on such
mortgage loans. Conversely, if prevailing interest rates were to rise
significantly, the rate of prepayments on such mortgage loans would generally be
expected to decrease. The mortgage loans may be subject to a greater rate of
principal prepayments in a low interest rate environment. For example, if
prevailing interest rates were to fall, mortgagors may be inclined to refinance
their mortgage loans with a fixed-rate loan to "lock in" a lower interest rate
or to refinance their mortgage loans with adjustable-rate mortgage loans with
low introductory interest rates. No assurances can be given as to the rate of
prepayments on the mortgage loans in stable or changing interest rate
environments.
Approximately 58.28% of the initial mortgage loans provide for payment by
the borrower of a prepayment charge in limited circumstances on certain
prepayments. The Master Servicer or the related subservicer will be entitled to
all prepayment charges received on the mortgage loans, and these amounts will
not be available for distribution on the Bonds. There can be no assurance that
the prepayment charges will have any effect on the prepayment performance of the
mortgage loans. Investors should conduct their own analysis of the effect, if
any, that the prepayment premiums, and decisions by the Master Servicer or the
related subservicer with respect to the waiver thereof, may have on the
prepayment performance of the mortgage loans.
The Derivative Contracts will be assigned to the Trust and will provide
some protection against Basis Risk Shortfalls on the Class A Bonds, Class M
Bonds and Class B Bonds. However, the Derivative Contracts may not provide
sufficient funds to cover such Basis Risk Shortfalls on such Bonds. In addition,
payments under the Derivative Contracts are limited to a specified rate in
effect from time to time. To the extent that net amounts payable under the
Derivative Contracts are insufficient to cover Basis Risk Shortfalls on the
Bonds, some or all of the Net Monthly Excess Cashflow may be used. However,
there can be no assurance that the Net Monthly Excess Cashflow will be
sufficient to cover these shortfalls, particularly because on any payment date
where the Bond Interest Rate is limited to the Available Funds Rate, there will
be little or no excess interest. In the event of a decrease in One-Month LIBOR,
the amount of Net Monthly Excess Cashflow will be reduced by any Net Derivative
Fees paid to the Derivative Counterparties under the Derivative Contracts. In
addition, the Available Funds Rate and therefore the Bond Interest Rate on the
Bonds may be reduced by the requirement of the Issuer to pay the Net Derivative
Fee to the Derivative Counterparties under the Derivative Contracts.
YIELD SENSITIVITY OF THE CLASS A-2 BONDS, CLASS M BONDS AND CLASS B BONDS
If the amount of overcollateralization and the bond principal balances of
the Class B Bonds and the Class M Bonds have been reduced to zero, the yield to
maturity on the Class A-2 Bonds 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) will be allocated to the Class A-2 Bonds. If the
amount of overcollateralization and the bond principal balances of the Class B
Bonds and the Class M-2 Bonds
S-49
have been reduced to zero, the yield to maturity on the Class M-1 Bonds 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) will
be allocated to the Class M-1 Bonds. If the amount of overcollateralization and
the bond principal balance of the Class B Bonds have been reduced to zero, the
yield to maturity on the Class M-2 Bonds 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) will be allocated to the Class M-2
Bonds. If the amount of overcollateralization has been reduced to zero, the
yield to maturity on the Class B Bonds 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) will be allocated to the Class B
Bonds. The initial undivided interests in the trust evidenced by the Class A-2
Bonds, Class M- 1 Bonds, Class M-2 Bonds and Class B Bonds are approximately
16.00%, 8.00%, 5.25% and 5.00%, respectively. The initial amount of
overcollateralization in the trust is approximately 0.75% of the sum of the
Cut-off Date Balance and the Original Pre-Funded Amount.
The recording of mortgages in the name of MERS is a new practice in the
mortgage lending industry. While the company expects that the master servicer or
applicable subservicer will be able to commence foreclosure proceedings on the
mortgaged properties, when necessary and appropriate, public recording officers
and others, however, may have limited, if any, experience with lenders seeking
to foreclose mortgages, assignments of which are registered with MERS.
Accordingly, delays and additional costs in commencing, prosecuting and
completing foreclosure proceedings, defending litigation commenced by third
parties and conducting foreclosure sales of the mortgaged properties could
result. Those delays and additional costs could in turn delay the distribution
of liquidation proceeds to the certificateholders and increase the amount of
Realized Losses on the mortgage loans. In addition, if, as a result of MERS
discontinuing or becoming unable to continue operations in connection with the
MERS(R) System, it becomes necessary to remove any mortgage loan from
registration on the MERS(R) System and to arrange for the assignment of the
related mortgages to the trustee, then any related expenses shall be
reimbursable by the trust to the master servicer, which will reduce the amount
available to pay principal of and interest on the Class A-2 Bonds, Class M Bonds
and Class B Bonds. For additional information regarding the recording of
mortgages in the name of MERS see "The Mortgage Pool--Mortgage Loan
Characteristics" in this prospectus supplement.
Investors in the Class A-2 Bonds, Class M Bonds and Class B Bonds should
fully consider the risk that Realized Losses on the mortgage loans could result
in the failure of such investors to fully recover their investments. In
addition, once Realized Losses have been allocated to the Class A-2 Bonds, Class
M Bonds and Class B Bonds, such amounts with respect to such Bonds will no
longer accrue interest and will not be reinstated thereafter. However, Allocated
Realized Loss Amounts may be paid to the holders of the Class A-2 Bonds, Class M
Bonds and Class B Bonds from Net Monthly Excess Cashflow in the priorities set
forth under "Description of the Bonds -- Overcollateralization Provisions" in
this prospectus supplement.
WEIGHTED AVERAGE LIVES
The timing of changes in the rate of principal prepayments on the
mortgage loans may significantly affect an investor's actual yield to maturity,
even if the average rate of principal prepayments is consistent with such
investor's expectation. In general, the earlier a principal prepayment
S-50
on the mortgage loans occurs, the greater the effect of such principal
prepayment on an investor's yield to maturity. The effect on an investor's yield
of principal prepayments occurring at a rate higher (or lower) than the rate
anticipated by the investor during the period immediately following the issuance
of the Bonds may not be offset by a subsequent like decrease (or increase) in
the rate of principal prepayments.
The weighted average life of a Bond is the average amount of time that will
elapse from the Closing Date, until each dollar of principal is repaid to the
investors in such Bond. Because it is expected that there will be prepayments
and defaults on the mortgage loans, the actual weighted average lives of these
Bonds are expected to vary substantially from the weighted average remaining
terms to stated maturity of the mortgage loans as set forth in this prospectus
supplement under "The Mortgage Pool."
Prepayments of mortgage loans are commonly measured relative to a
prepayment standard or model. The model used in this prospectus supplement is a
constant prepayment rate, or CPR, of the then unpaid principal balance of such
mortgage loans. CPR is a prepayment assumption that represents a constant
assumed rate of prepayment each month relative to the then outstanding principal
balance of a pool of mortgage loans for the life of such mortgage loans. The
model does not purport to be either a historical description of the prepayment
experience of any pool of mortgage loans or a prediction of the anticipated rate
of prepayment of any mortgage loans, including the mortgage loans to be included
in the trust.
The table entitled "Percent of Initial Bond Principal Balance Outstanding
at the Following Percentages of CPR" was prepared on the basis of the
assumptions in the following paragraph and the table set forth below. There are
certain differences between the loan characteristics included in such
assumptions and the characteristics of the actual mortgage loans. Any such
discrepancy may have an effect upon the percentages of original bond principal
balances outstanding and weighted average lives of the Bonds set forth in the
table. In addition, since the actual mortgage loans in the trust will have
characteristics that differ from those assumed in preparing the table set forth
below, the distributions of principal of the Bonds may be made earlier or later
than indicated in the table.
The percentages and weighted average lives in the table entitled "Percent
of Initial Bond Principal Balance Outstanding at the Following Percentages of
CPR" were determined assuming that: (i) the mortgage pool consists of six
hypothetical mortgage loans having the following characteristics:
REMAINING
TERM TO
AGE (IN MATURITY
LOAN NUMBER PRINCIPAL BALANCE MORTGAGE RATE NET MORTGAGE RATE MONTHS) (IN MONTHS) INDEX
----------- ----------------- ------------- ----------------- ------- ----------- -----
1 $130,393,727.11 6.278240% 5.709363% 1 359 6 Mth Libor
2 241,432,038.63 7.506458 6.966287 1 359 6 Mth Libor
3 23,849,175.93 7.753169 7.281993 1 359 6 Mth Libor
4 325,294.21 6.993574 6.581074 1 359 6 Mth Libor
5 805,784.82 11.478766 10.94127 1 179 Fixed Rate
6 3,193,979.30 11.373139 10.83564 1 179 Fixed Rate
S-51
MONTHS TO
NEXT MONTHS BETWEEN SUBSEQUENT
ADJUSTMENT RATE ADJUSTMENT PERIODIC RATE MAXIMUM MINIMUM
LOAN NUMBER GROSS MARGIN DATE DATES INITIAL RATE CAP CAP MORTGAGE RATE MORTGAGE RATE
----------- ------------ ---------- --------------- ---------------- ------------- ------------- -------------
1 2.815494% 5 6 1.008267% 1.008267% 12.80308% 2.890921%
2 3.140643 23 6 2.994178 1.010562 13.57996 3.337944
3 3.166121 35 6 2.984359 1.005329 13.76457 3.361678
4 3.125000 59 6 3.000000 1.000000 12.99357 3.125000
5 N/A N/A N/A N/A N/A N/A N/A
6 N/A N/A N/A N/A N/A N/A N/A
(ii) the hypothetical mortgage loans with an Index indicated as "6 Mth LIBOR"
all have an Index of Six- Month LIBOR, which remains constant at 2.37125% per
annum; (iii) One-Month LIBOR remains constant at 2.52500% per annum; (iv)
hypothetical mortgage loan number six is a balloon loan, with a remaining
amortization term of 359 months; (v) payments on the Bonds are received, in
cash, on the 25th day of each month, commencing in November 2001; (vi) there are
no delinquencies or losses on the mortgage loans and principal payments on the
mortgage loans are timely received together with prepayments, if any, at the
respective percentages of the CPR set forth in the following table; (vii) there
are no repurchases of the mortgage loans; (viii) all of the hypothetical
mortgage loans other than hypothetical mortgage loan number six are
fully-amortizing; (ix) there is no Prepayment Interest Shortfall, Basis Risk
Shortfall or any other interest shortfall in any month; (x) the scheduled
monthly payment for the mortgage loan is calculated based on its principal
balance, mortgage rate and remaining term to maturity such that such mortgage
loan will amortize in amounts sufficient to repay the remaining principal
balance of such mortgage loan by its remaining term to maturity; (xi) with
respect to each adjustable-rate mortgage loan, the Index remains constant at the
rate set forth above and the mortgage rate on each adjustable-rate mortgage loan
is adjusted on the next adjustment date (and on subsequent adjustment dates, as
necessary) to equal the Index plus the applicable gross margin, subject to the
maximum mortgage rates, minimum mortgage rates and periodic rate caps listed
above; (xii) none of the mortgage loans provide for negative amortization;
(xiii) the monthly payment on each adjustable-rate mortgage loan is adjusted on
the due date immediately following the next related adjustment date (and on
subsequent adjustment dates, as necessary) to equal a fully amortizing payment
as described in clause (x) above; (xiv) payments on the mortgage loans earn no
reinvestment return; (xv) there are no additional ongoing expenses payable out
of the trust; (xvi) the Issuer exercises its option to redeem the Bonds on the
first payment date on which it would be permitted to do so as described in
"Description of the Bonds--Optional Redemption" in this prospectus supplement;
and (xvii) the Bonds will be purchased on October 30, 2001. Nothing contained in
the foregoing assumptions should be construed as a representation that the
mortgage loans will not experience delinquencies or losses or will otherwise
behave in accordance with any of the above structuring assumptions.
Based on the foregoing assumptions, the following table indicates the
projected weighted average lives of each class of the Bonds and set forth the
percentages of the original Bond Principal Balance of each such class of Bonds
that would be outstanding after each of the dates shown, at various constant
percentages of CPR.
S-52
PERCENT OF INITIAL CERTIFICATE PRINCIPAL BALANCE OUTSTANDING AT THE
FOLLOWING PERCENTAGES OF CPR
CLASS A-1, CLASS A-2, CLASS M-1, CLASS M-2, AND CLASS B BONDS
-------------------------------------------------------------
PAYMENT DATE 0% 18% 25% 30% 35% 42% 50%
------------ -- --- --- --- --- --- ---
Initial Percentage................ 100% 100% 100% 100% 100% 100% 100%
October 25, 2002.................. 99 81 74 69 64 57 49
October 25, 2003.................. 98 65 55 48 41 32 24
October 25, 2004.................. 96 53 40 33 26 0 0
October 25, 2005.................. 95 42 30 22 0 0 0
October 25, 2006.................. 93 34 22 0 0 0 0
October 25, 2007.................. 91 27 0 0 0 0 0
October 25, 2008.................. 89 22 0 0 0 0 0
October 25, 2009.................. 87 0 0 0 0 0 0
October 25, 2010.................. 85 0 0 0 0 0 0
October 25, 2011.................. 83 0 0 0 0 0 0
October 25, 2012 and thereafter... 0 0 0 0 0 0 0
Weighted Average Life in years*... 9.3 3.8 2.7 2.2 1.8 1.5 1.2
---------
(*) The weighted average life of a Bond is determined by (i) multiplying the
net reduction, if any, of the initial Bond Principal Balance by the number
of years from the date of issuance of the Bond to the related payment date,
(ii) adding the results, and (iii) dividing the sum by the aggregate of the
net reductions of the Bond Principal Balance described in (i) above.
S-53
There is no assurance that prepayments of the mortgage loans will conform
to any of the percentages of CPR indicated in the table above or to any other
level, or that the actual weighted average life of any class of Bonds will
conform to any of the weighted average lives set forth in the table above.
Furthermore, the information contained in the table with respect to the weighted
average life of each specified class of Bonds is not necessarily indicative of
the weighted average life that might be calculated or projected under different
or varying prepayment assumptions or other structuring assumptions.
The characteristics of the mortgage loans will differ from those assumed in
preparing the table above. In addition, it is unlikely that any mortgage loan
will prepay at any constant percentage of CPR 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.
FINAL SCHEDULED PAYMENT DATE
The final scheduled payment date on each class of Bonds will be the payment
date in October 2031, which is the 360th payment date. Due to losses and
prepayments on the mortgage loans, the final scheduled payment date on each
class of Bonds may be substantially earlier than the payment date in October
2031.
For additional considerations relating to the yield on the Bonds, see
"Yield Considerations" and "Maturity and Prepayment Considerations" in the
prospectus.
THE ISSUER
The Issuer is a business trust formed under the laws of the State of
Delaware pursuant to the Trust Agreement for the transactions described in this
Prospectus Supplement. The Trust Agreement constitutes the "governing
instrument" under the laws of the State of Delaware relating to business trusts.
After its formation, the Issuer 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 Bonds and Certificates, (iii) making
payments on the Bonds and 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 assets of the Issuer will consist of the Mortgage Loans and the
Derivative Contracts and certain related assets.
THE OWNER TRUSTEE
Wilmington Trust Company is the Owner Trustee under the Trust Agreement.
The Owner Trustee is a Delaware banking corporation and its principal offices
are located in Wilmington, Delaware. The Owner Trustee shall be entitled to
compensation for its services on each payment date in an amount equal to the
Owner Trustee's Fee.
Neither the Owner Trustee nor any director, officer or employee of the
Owner Trustee will be under any liability to the Issuer or the Bondholders under
the Trust Agreement under any circumstances,
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except for the Owner Trustee's own misconduct, gross negligence, bad faith or
grossly negligent failure to act or in the case of the inaccuracy of certain
representations made by the Owner Trustee in the Trust Agreement. All persons
into which the Owner Trustee may be merged or with which it may be consolidated
or any person resulting from such merger or consolidation shall be the successor
of the Owner Trustee under the Trust Agreement.
THE INDENTURE TRUSTEE
Bankers Trust Company of California, N.A., will be the Indenture Trustee
under the Indenture. The Indenture Trustee has designated its offices located at
123 Washington Street, New York, New York 10006 for purposes of the presentment
and surrender of the Bonds for the final distribution thereon. For all other
purposes, the Indenture Trustee's "Corporate Trust Office" is located at 1761
East St. Andrew Place, Santa Ana, California 92705, Attention: IMH Assets Corp.,
Series 2001-3, or such other address as the Indenture Trustee may designate from
time to time by notice to the Bondholders, the Company and the Master Servicer.
The Indenture Trustee shall be entitled to compensation for its services on each
payment date in an amount equal to the Indenture Trustee's Fee.
DESCRIPTION OF THE BONDS
GENERAL
The Series 2001-3 Bonds will consist of five classes of bonds, all of which
are offered hereby.
The Certificates, which are not offered hereby, will be entitled to
distributions on any payment date only after all required distributions have
been made on the Bonds. The principal balance of the Certificates as of any date
of determination will be equal to the aggregate principal balance of the
mortgage loans minus the aggregate Bond Principal Balance of all the Bonds. The
Certificates will be entitled to distributions as provided in the Agreements.
The Bonds will be issued by a trust, the assets of which initially consist
primarily of a pool of mortgage loans with an aggregate principal balance as of
the Cut-off Date, after application of scheduled payments due whether or not
received, of approximately $353,081,124, subject to a permitted variance as
described in this prospectus supplement under "The Mortgage Pool," and the
Pre-Funding Account with an initial balance of $46,918,876 that will be used to
purchase subsequent mortgage loans after the Closing Date.
Each class of the Bonds will have the approximate initial Bond Principal
Balance as set forth on page S-4 hereof and will have the Bond Interest Rate as
defined under "Glossary" in this prospectus supplement. The Bond Interest Rate
on each class of the Bonds will be limited to the Available Funds Rate. In
addition, the Bond Interest Rate on each class of the Bonds will be subject to
increase after the Step-Up Date.
The Bonds will be issued, maintained and transferred on the book-entry
records of DTC, Clearstream and Euroclear and their participants in minimum
denominations representing Bond Principal Balances of $25,000 and integral
multiples of $1 in excess thereof. The Bonds will be issued as Global
S-55
Bonds. SEE ANNEX I TO THIS PROSPECTUS SUPPLEMENT AND "DESCRIPTION OF THE BONDS
-- GLOBAL BONDS" IN THE PROSPECTUS.
No person acquiring an interest in any class of the Book-Entry Bonds will
be entitled to receive a bond representing such person's interest, except as set
forth below under "--Definitive Bonds." Unless and until definitive bonds are
issued under the limited circumstances described in this prospectus supplement,
all references to actions by bondholders with respect to the Book-Entry Bonds
shall refer to actions taken by DTC, Clearstream and Euroclear upon instructions
from its participants and all references in this prospectus supplement to
distributions, notices, reports and statements to bondholders with respect to
the Book-Entry Bonds shall refer to distributions, notices, reports and
statements to DTC or Cede & Co., as the registered holder of the Book-Entry
Bonds, for distribution to Bond Owners in accordance with DTC procedures. SEE "
-- REGISTRATION OF THE BOOK-ENTRY BONDS" AND " -- DEFINITIVE BONDS" IN THIS
PROSPECTUS SUPPLEMENT.
The definitive bonds, if ever issued, will be transferable and exchangeable
at the offices of the Indenture Trustee designated by the Indenture Trustee from
time to time for these purposes. The Indenture Trustee has initially designated
its offices located at 123 Washington Street, New York, New York 10006 for such
purpose. No service charge will be imposed for any registration of transfer or
exchange, but the Indenture Trustee may require payment of a sum sufficient to
cover any tax or other governmental charge imposed in connection therewith.
All distributions to holders of the bonds, other than the final
distribution on any class of bonds, will be made on each payment date by or on
behalf of the Indenture Trustee to the persons in whose names the bonds are
registered at the close of business on the related Record Date. Distributions
will be made by wire transfer in immediately available funds to the account of
the bondholders specified in the request. The final distribution on any class of
Bonds will be made in like manner, but only upon presentment and surrender of
the Bonds at the location specified by the Indenture Trustee in the notice to
bondholders of the final distribution.
REGISTRATION OF THE BOOK-ENTRY BONDS
DTC is a limited-purpose trust company organized under the laws of the
State of New York, a member of the Federal Reserve System, a "clearing
corporation" within the meaning of the New York Uniform Commercial Code, and a
"clearing agency" registered pursuant to the provisions of Section 17A of the
Exchange Act. DTC was created to hold securities for its participants and to
facilitate the clearance and settlement of securities transactions between
participants through electronic book entries, thereby eliminating the need for
physical movement of bonds.
Bond Owners that are not participants or indirect participants but desire
to purchase, sell or otherwise transfer ownership of, or other interests in, the
Book-Entry Bonds may do so only through participants and indirect participants
in DTC. As a result, Clearstream and Euroclear will hold positions on behalf of
their participants through their relevant depositary which in turn will hold
those positions in their accounts as DTC participants. Secondary market trading
between DTC participants will be settled using
S-56
the procedures applicable to prior mortgage loan asset-backed bonds issues in
same-day funds. Secondary market trading between Clearstream participants or
Euroclear participants will be settled using the procedures applicable to
conventional eurobonds in same-day funds. SEE "DESCRIPTION OF THE BONDS -- THE
GLOBAL BONDS" IN THE PROSPECTUS. In addition, Bond Owners will receive all
distributions of principal of and interest on the Book- Entry Bonds from the
Indenture Trustee through DTC and DTC participants. Accordingly, Bond Owners may
experience delays in their receipt of payments. Unless and until definitive
bonds are issued, it is anticipated that the only bondholders of the Book-Entry
Bonds will be Cede & Co., as nominee of DTC. Bond Owners will not be recognized
by the Indenture Trustee as bondholders, as such term is used in the Indenture
and Bond Owners will be permitted to exercise the rights of bondholders only
indirectly through DTC and its participants.
Under the Rules, DTC is required to make book-entry transfers of Book-Entry
Bonds among participants and to receive and transmit distributions of principal
of, and interest on, the Book-Entry Bonds. Participants and indirect
participants with which Bond Owners have accounts with respect to the Book-Entry
Bonds similarly are required to make book-entry transfers and receive and
transmit these payments on behalf of their respective Bond Owners. Accordingly,
although Bond Owners will not possess definitive bonds, the Rules provide a
mechanism by which Bond Owners, through their participants and indirect
participants, will receive payments and will be able to transfer their interest
in the Book-Entry Bonds.
Because DTC can only act on behalf of participants, who in turn act on
behalf of indirect participants and on behalf of certain banks, the ability of a
Bond Owner to pledge Book-Entry Bonds to persons or entities that do not
participate in the DTC system, or to otherwise act with respect to Book- Entry
Bonds, may be limited due to the absence of physical bonds for the Book-Entry
Bonds. In addition, under a book-entry format, Bond Owners may experience delays
in their receipt of payments since distribution will be made by the Indenture
Trustee to Cede & Co., as nominee for DTC.
Under the Rules, DTC will take any action permitted to be taken by
bondholders under the Indenture only at the direction of one or more
participants to whose DTC account the Book-Entry Bonds are credited. Clearstream
or Euroclear, as the case may be, will take any action permitted to be taken by
bondholders under the Indenture on behalf of a Clearstream participant or
Euroclear participant in accordance with its rules. Additionally, DTC,
Clearstream or Euroclear, under the Rules or its respective rules, as the case
may be, will take actions with respect to specified voting rights only at the
direction, and on the behalf, of participants whose holdings of Book-Entry Bonds
evidence these specified voting rights. DTC may take conflicting actions with
respect to voting rights, to the extent that participants whose holdings of
Book-Entry Bonds evidence voting rights authorize divergent action.
The Company, the Master Servicer and the Indenture Trustee will have no
liability for any aspect of the records relating to or payments made on account
of beneficial ownership interests in the Book- Entry Bonds held by Cede & Co.,
as nominee for DTC, or for maintaining, supervising or reviewing any records
relating to beneficial ownership interests.
DEFINITIVE BONDS
Definitive bonds will be issued to Bond Owners or their nominees,
respectively, rather than to DTC or its nominee, only if (1) the Company advises
the Indenture Trustee in writing that DTC is no longer willing or able to
discharge properly its responsibilities as clearing agency with respect to the
Book- Entry Bonds and the Company is unable to locate a qualified successor, (2)
the Company, at its option, elects to terminate the book- entry system through
DTC, or (3) after the occurrence of an Event of Default, Bond Owners
representing in the aggregate not less than 51% of the aggregate Bond Principal
Balance of the Book-Entry Bonds advise the Indenture Trustee and DTC through
participants, in writing, that the continuation of a book-entry system through
DTC (or a successor thereto) is no longer in the Bond Owners' best interest.
S-57
Upon the occurrence of any event described in the immediately preceding
paragraph, the Indenture Trustee is required to notify all Bond Owners, through
participants, of the availability of definitive bonds. Upon surrender by DTC of
the definitive bonds representing the Book-Entry Bonds and receipt of
instructions for re-registration, the Indenture Trustee will reissue the
Book-Entry Bonds as definitive bonds issued in the respective principal amounts
owned by individual Bond Owners, and thereafter the Indenture Trustee will
recognize the holders of definitive bonds as bondholders under the Indenture.
Definitive bonds will be issued in minimum denominations of $25,000, except that
any beneficial ownership represented by a Book-Entry Bond in an amount less than
$25,000 immediately prior to the issuance of a definitive bond shall be issued
in a minimum denomination equal to the amount of the beneficial ownership.
INTEREST PAYMENTS ON THE BONDS
On each payment date the Indenture Trustee shall withdraw from the Payment
Account that portion of the Available Funds for such payment date consisting of
the Interest Remittance Amount for such payment date, and make the following
disbursements and transfers in the order of priority described below, in each
case to the extent of the Interest Remittance Amount remaining for such payment
date:
(i) to the holders of the Class A-1 Bonds, the related Accrued Bond
Interest for such class for such payment date;
(ii) to the holders of the Class A-1 Bonds, the related Unpaid Interest
Shortfall, if any, for such class for such payment date;
(iii) to the holders of the Class A-2 Bonds, the related Accrued Bond
Interest for such class for such payment date;
(iv) to the holders of the Class A-2 Bonds, the related Unpaid Interest
Shortfall for such class for such payment date;
(v) to the holders of the Class M-1 Bonds, the related Accrued Bond
Interest for such class for such payment date;
(vi) to the holders of the Class M-2 Bonds, the related Accrued Bond
Interest for such class for such payment date; and
(vii) to the holders of the Class B Bonds, the related Accrued Bond
Interest for such class for such payment date.
On any payment date, any shortfalls resulting from the application of the
Relief Act and any Prepayment Interest Shortfalls to the extent not covered by
Compensating Interest paid by the Master Servicer will be allocated to the Bonds
on a pro rata basis based on the respective amounts of interest accrued on such
Bonds for such payment date; however, such Unpaid Interest Shortfalls shall be
paid with respect to the Class A Bonds as described above, and with respect to
the Class M Bonds and Class B Bonds as described in " -- Overcollateralization
Provisions" below. Prepayment Interest Shortfalls resulting from partial
prepayments on the mortgage loans will not be offset by the Master Servicer from
the
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Master Servicing Fee, Subservicing Fee or otherwise. No assurance can be
given that Compensating Interest available to cover Prepayment Interest
Shortfalls will be sufficient therefor.
CALCULATION OF ONE-MONTH LIBOR FOR THE BONDS
On each Interest Determination Date, the Indenture Trustee will determine
the London interbank offered rate for one-month United States dollar deposits,
or One-Month LIBOR, for the next Accrual Period for the Bonds on the basis of
the offered rates of the Reference Banks for one-month United States dollar
deposits, as such rate appears on the Telerate Screen Page 3750, as of 11:00
a.m. (London time) on such Interest Determination Date.
On each Interest Determination Date, if the rate does not appear or is not
available on Telerate Screen Page 3750, One-Month LIBOR for the related Accrual
Period for the Bonds will be established by the Indenture Trustee as follows:
(a) If on such Interest Determination Date two or more Reference Banks
provide such offered quotations, One-Month LIBOR for the related Accrual Period
shall be the arithmetic mean of such offered quotations (rounded upwards if
necessary to the nearest whole multiple of 0.0625%).
(b) If on such Interest Determination Date fewer than two Reference Banks
provide such offered quotations, One-Month LIBOR for the related 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.
The establishment of One-Month LIBOR on each Interest Determination Date by
the Indenture Trustee and the Indenture Trustee's calculation of the rate of
interest applicable to the Bonds for the related Accrual Period shall (in the
absence of manifest error) be final and binding.
PRINCIPAL PAYMENTS ON THE BONDS
On each payment date the holders of each class of Bonds shall be entitled
to receive distributions in respect of principal to the extent of the Principal
Distribution Amount on a pro rata basis, based on the Bond Principal Balances
thereof, until the Bond Principal Balances thereof have been reduced to zero.
OVERCOLLATERALIZATION PROVISIONS
The weighted average of the Net Mortgage Rates for the mortgage loans is
generally expected to be higher than the weighted average of the Bond Interest
Rates on the Bonds. As a result, interest collections on the mortgage loans are
expected to be generated in excess of the amount of interest payable to the
holders of the Bonds and the fees and expenses payable by the trust. Any such
excess interest, however, will be applied by the Trustee to cover shortfalls in
the amount of interest generated by the mortgage loans attributable to the
pre-funding feature. The Indenture requires that, on each payment date, the Net
Monthly Excess Cashflow, if any, be applied on such payment date as an
accelerated payment of principal on the class or classes of Bonds then entitled
to receive distributions in respect of principal, but only to the limited extent
hereafter described.
With respect to any payment date, any Net Monthly Excess Cashflow shall
be paid as follows:
S-59
(i) to the holders of the class or classes of Bonds then entitled to
receive distributions in respect of principal, in an amount equal to any Extra
Principal Distribution Amount, payable to such holders as part of the Principal
Distribution Amount as described under " -- Principal Payments on the Bonds"
above;
(ii) to the holders of the Class A-2 Bonds, in an amount equal to the
Allocated Realized Loss Amount for the Class A-2 Bonds;
(iii) to the holders of the Class M-1 Bonds, in an amount equal to the
Unpaid Interest Shortfall for such Bonds;
(iv) to the holders of the Class M-1 Bonds, in an amount equal to the
Allocated Realized Loss Amount for the Class M-1 Bonds;
(v) to the holders of the Class M-2 Bonds, in an amount equal to the Unpaid
Interest Shortfall for such Bonds;
(vi) to the holders of the Class M-2 Bonds, in an amount equal to the
Allocated Realized Loss Amount for the Class M-2 Bonds;
(vii) to the holders of the Class B Bonds, in an amount equal to the Unpaid
Interest Shortfall for such Bonds;
(viii) to the holders of the Class B Bonds, in an amount equal to the
Allocated Realized Loss Amount for the Class B Bonds;
(ix) to the holders of the Class A-1 Bonds, Class A-2 Bonds, Class M-1
Bonds, Class M-2 Bonds and Class B Bonds, in that order, any Basis Risk
Shortfall Carry-Forward Amount for such payment date, to the extent not covered
by the Derivative Contracts; and
(x) to the holders of the Certificates as provided in the Agreements.
DERIVATIVE CONTRACTS
On the Closing Date, either the Seller will assign to the Company, and the
Company will assign to the Issuer for the benefit of the Bonds, its rights under
the Derivative Contracts, or the Seller will cause the Issuer to enter into the
Derivative Contracts with the Derivative Counterparties. Each Derivative
Contract will contain a Strike Price and provide for the calculation of
One-Month LIBOR. There are three types of Derivative Contracts:
o eight caps, where the Derivative Counterparty will pay amounts to the
Indenture Trustee on behalf of the Issuer, based on the excess of One-Month
LIBOR over the Strike Price,
o seven floors, where the Indenture Trustee on behalf of the Issuer will
pay amounts to the Derivative Counterparty to the extent the Strike Price
exceeds One-Month LIBOR, and
o one swap agreement, where net payments will be made (a) to the Issuer,
if One-Month LIBOR exceeds the Strike Price (adjusted as provided in the swap
agreement), and (b) to the Derivative
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Counterparty, to the extent the Strike Price (adjusted as provided in the swap
agreement) exceeds One- Month LIBOR.
Payments will be made with respect to the Derivative Contracts based on a
notional balance in accordance with the schedule set forth in the related
Derivative Contract. The seven floors and seven of the caps are "paired,"
meaning that they have the same notional balance. The amount of the notional
balance on which calculations are based on any payment date with respect to the
swap agreement and the seven caps and the seven floors which are paired, will be
the lesser of (a) the balance in the related schedule and (b) a percentage of
the aggregate Bond Principal Balance of the Bonds immediately prior to the
related payment date. The percentage referenced above will be determined
separately for each swap agreement and each pair of caps and floors. This
percentage will be equal to the quotient, expressed as a percentage, of the
initial notional amount of the swap agreement or the paired cap and floor
divided by the aggregate initial notional amount of all of the swap agreement
and the paired caps and floors.
On each payment date, the Indenture Trustee will determine the total amount
payable to the Issuer and the total amount payable to the Derivative
Counterparties under the Derivative Contracts. The Indenture Trustee will
determine whether a net payment is due to the Issuer or from the Derivative
Counterparties and will collect or make such payment, as applicable. Bear
Stearns Capital Markets Inc. is the sole Derivative Counterparty entitled to
receive payment under the floors and Bear Stearns Financial Products Inc. is the
sole Derivative Counterparty entitled to receive payments under the swap
agreement. Payments due by the Issuer under the Derivative Contracts will be
made prior to payments on the Bonds.
Bear Stearns Financial Products Inc. may be required to make payments to
the Issuer and be entitled to receive payments from the Issuer under the swap
agreement and may be required to make payments to the Issuer under seven of the
caps. Bear Stearns Capital Markets Inc. may be entitled to receive payments from
the Issuer under the seven floors. Lehman Brothers Financial Products Inc. may
be required to make payments to the Issuer under one of the caps. Each
Derivative Counterparty, or the guarantor thereof (other than Bear Stearns
Capital Markets Inc., which is not making any payments to the Issuer), was, as
of the Closing Date, rated at least "AA-" (or its equivalent) by two of Standard
& Poor's, Moody's or Fitch.
The Strike Price and scheduled principal balance for the one swap agreement
are as described in the following table; provided, that the scheduled principal
balances may from time to time be less than the amount in the tables based on
the aggregate Bond Principal Balance of the Bonds immediately prior to the
related payment date as described above:
Scheduled Principal
Month of Payment Date Balance Strike Price
--------------------- --------------------- -------------
November 2001 $29,107,515.27 4.743%
December 2001 28,766,623.43 4.743
January 2002 28,372,365.40 4.743
February 2002 27,925,657.72 4.743
March 2002 27,427,719.17 4.743
April 2002 26,880,071.15 4.743
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Scheduled Principal
Month of Payment Date Balance Strike Price
--------------------- --------------------- -------------
May 2002 26,284,535.52 4.743
June 2002 25,643,229.60 4.743
July 2002 25,017,435.89 4.743
August 2002 24,406,781.43 4.743
September 2002 23,810,902.17 4.743
October 2002 23,229,442.79 4.743
November 2002 22,662,056.49 4.743
December 2002 22,108,404.74 4.743
January 2003 21,568,157.15 4.743
February 2003 21,040,991.23 4.743
March 2003 20,526,592.21 4.743
April 2003 20,024,652.87 4.743
May 2003 19,534,873.35 4.743
June 2003 19,056,960.97 4.743
After the payment date in June 2003, the swap agreement will terminate
without termination payments by either party.
The Strike Prices and scheduled principal balances of the seven paired caps
and floors will effectively pay in accordance with the six representative caps
and floors described in the following tables; provided, that the scheduled
principal balances may from time to time be less than the amount in their actual
schedules based on the aggregate Bond Principal Balances of the Bonds as
described above:
Month of Payment Scheduled Principal
Date Balance Cap Strike Price Floor Strike Price
---------------- -------------------- ---------------- ------------------
November 2001 $3,949,303.17 3.69% 3.19%
December 2001 3,917,975.08 3.72 3.22
January 2002 3,879,413.02 3.72 3.22
February 2002 3,833,661.87 3.81 3.31
March 2002 3,780,805.72 3.82 3.32
April 2002 3,720,968.50 3.92 3.42
May 2002 3,654,314.39 3.92 3.42
June 2002 3,581,047.86 3.99 3.49
July 2002 3,501,413.33 4.24 3.74
August 2002 3,415,694.51 4.24 3.74
September 2002 3,332,055.21 4.33 3.83
October 2002 3,250,445.29 4.62 4.12
November 2002 3,170,815.85 4.62 4.12
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Month of Payment Scheduled Principal
Date Balance Cap Strike Price Floor Strike Price
---------------- -------------------- ---------------- ------------------
December 2002 3,093,119.12 4.71 4.21
January 2003 3,017,308.51 5.18 4.68
February 2003 2,943,338.54 4.93 4.43
March 2003 2,871,164.80 5.00 4.50
April 2003 2,800,743.99 5.25 4.75
May 2003 2,732,033.80 5.25 4.75
June 2003 2,664,992.96 5.30 4.80
July 2003 2,599,581.21 5.48 4.98
August 2003 2,535,759.22 5.48 4.98
September 2003 2,473,488.62 5.53 5.03
October 2003 2,412,731.97 5.67 5.17
November 2003 2,353,452.72 5.66 5.16
December 2003 2,295,615.19 5.71 5.21
January 2004 2,239,184.58 6.05 5.55
February 2004 2,184,126.91 5.80 5.30
March 2004 2,130,409.01 5.83 5.33
April 2004 2,077,998.52 5.93 5.43
May 2004 2,026,863.85 5.93 5.43
June 2004 1,976,974.19 5.96 5.46
July 2004 1,928,299.43 6.03 5.53
August 2004 1,880,810.22 6.03 5.53
After the payment date in August 2004, the first representative paired cap
and floor will terminate without termination payments by either party.
Month of Payment Scheduled Principal
Date Balance Cap Strike Price Floor Strike Price
---------------- -------------------- ---------------- ------------------
November 2001 $4,966,265.57 3.7027% 3.2027%
December 2001 4,935,923.06 3.7120 3.2120
January 2002 4,896,533.53 3.5667 3.0667
February 2002 4,848,106.66 3.7391 3.2391
March 2002 4,790,699.88 3.7448 3.2448
April 2002 4,724,419.58 3.7736 3.2736
May 2002 4,649,421.95 3.7740 3.2740
June 2002 4,565,913.43 3.8298 3.3298
July 2002 4,474,150.76 4.0378 3.5378
August 2002 4,374,440.57 4.0384 3.5384
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Month of Payment Scheduled Principal
Date Balance Cap Strike Price Floor Strike Price
---------------- -------------------- ---------------- ------------------
September 2002 4,267,138.52 4.1221 3.6221
October 2002 4,162,444.09 4.3880 3.8880
November 2002 4,060,294.35 4.3882 3.8882
December 2002 3,960,627.86 4.4766 3.9766
January 2003 3,863,384.65 4.9544 4.4544
February 2003 3,768,506.20 4.7012 4.2012
March 2003 3,675,935.41 4.7688 4.2688
April 2003 3,585,616.54 5.0185 4.5185
May 2003 3,497,495.17 5.0188 4.5188
June 2003 3,411,518.23 5.0807 4.5807
July 2003 3,327,633.88 5.2786 4.7786
August 2003 3,245,791.57 5.2793 4.7793
September 2003 3,165,941.93 5.3341 4.8341
October 2003 3,088,036.80 5.4875 4.9875
November 2003 3,012,029.16 5.4864 4.9864
December 2003 2,937,873.14 5.5331 5.0331
January 2004 2,865,523.96 5.8763 5.3763
February 2004 2,794,937.91 5.6138 5.1138
March 2004 2,726,072.36 5.6494 5.1494
April 2004 2,658,885.68 5.7452 5.2452
May 2004 2,593,337.25 5.7440 5.2440
June 2004 2,529,387.43 5.7764 5.2764
July 2004 2,466,997.52 5.8538 5.3538
August 2004 2,406,129.77 5.8534 5.3534
September 2004 2,346,747.33 5.8818 5.3818
After the payment date in September 2004, the second representative paired
cap and floor will terminate without termination payments by either party.
Month of Payment Scheduled Principal
Date Balance Cap Strike Price Floor Strike Price
---------------- -------------------- ---------------- ------------------
November 2001 $22,712,141 3.69% 3.18%
December 2001 22,533,190 3.72 3.21
January 2002 22,312,618 3.72 3.21
February 2002 22,050,676 3.81 3.30
March 2002 21,747,841 3.82 3.32
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Month of Payment Scheduled Principal
Date Balance Cap Strike Price Floor Strike Price
---------------- -------------------- ---------------- ------------------
April 2002 21,404,818 3.92 3.41
May 2002 21,022,546 3.92 3.41
June 2002 20,602,194 3.99 3.48
July 2002 20,145,161 4.24 3.73
August 2002 19,653,074 4.24 3.73
September 2002 19,172,902 4.33 3.82
October 2002 18,704,358 4.62 4.11
November 2002 18,247,163 4.62 4.11
December 2002 17,801,042 4.71 4.20
January 2003 17,365,730 5.18 4.67
February 2003 16,940,967 4.93 4.42
March 2003 16,526,497 5.00 4.49
April 2003 16,122,074 5.25 4.74
May 2003 15,727,456 5.25 4.74
June 2003 15,342,406 5.30 4.79
July 2003 14,966,694 5.48 4.97
August 2003 14,600,095 5.48 4.97
After the payment date in August 2003, the third representative paired cap
and floor will terminate without termination payments by either party.
Month of Payment Scheduled Principal
Date Balance Cap Strike Price Floor Strike Price
---------------- -------------------- ---------------- ------------------
November 2001 $15,798,934.71 3.80% 3.30%
December 2001 15,674,182.32 3.84 3.34
January 2002 15,520,481.65 3.94 3.44
February 2002 15,338,009.07 3.93 3.43
March 2002 15,127,097.70 3.95 3.45
April 2002 14,888,240.24 4.06 3.56
May 2002 14,622,090.42 4.06 3.56
June 2002 14,329,463.24 4.13 3.63
July 2002 14,011,333.70 4.39 3.89
August 2002 13,668,834.18 4.39 3.89
September 2002 13,334,632.69 4.48 3.98
October 2002 13,008,529.44 4.76 4.26
November 2002 12,690,329.44 4.76 4.26
December 2002 12,379,842.34 4.85 4.35
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Month of Payment Scheduled Principal
Date Balance Cap Strike Price Floor Strike Price
---------------- -------------------- ---------------- ------------------
January 2003 12,076,882.40 5.31 4.81
February 2003 11,781,268.30 5.08 4.58
March 2003 11,492,823.08 5.14 4.64
April 2003 11,211,374.02 5.40 4.90
May 2003 10,936,752.55 5.40 4.90
June 2003 10,668,794.12 5.46 4.96
July 2003 10,407,338.16 5.65 5.15
August 2003 10,152,227.92 5.65 5.65
After the payment date in August 2003, the fourth representative paired cap
and floor will terminate without termination payments by either party.
Month of Payment Scheduled Principal
Date Balance Cap Strike Price Floor Strike Price
---------------- -------------------- ---------------- ------------------
November 2001 $112,713,840.44 2.83723% 2.08723%
December 2001 112,225,903.50 2.78760 2.03760
January 2002 111,534,393.35 2.76698 2.01698
February 2002 110,638,516.95 2.64519 1.89519
March 2002 109,538,525.57 2.67093 1.92093
April 2002 108,235,749.46 2.79072 2.04072
May 2002 106,732,624.87 2.79090 2.04090
June 2002 105,032,712.84 2.85698 2.10698
July 2002 103,140,709.12 3.10121 2.35121
August 2002 101,062,444.63 3.10155 2.35155
September 2002 98,804,876.06 3.20382 2.45382
October 2002 96,376,066.15 3.52689 2.77689
November 2002 94,006,393.48 3.52704 2.77704
December 2002 91,694,428.10 3.64412 2.89412
January 2003 89,438,774.45 4.16110 3.41110
February 2003 87,238,070.54 3.94242 3.19242
March 2003 85,090,987.16 4.03179 3.28179
April 2003 82,996,227.09 4.36090 3.61090
May 2003 80,952,524.31 4.36114 3.61114
June 2003 78,958,643.32 4.43890 3.68890
July 2003 77,013,378.30 4.68581 3.93581
August 2003 75,115,552.50 4.68635 3.93635
September 2003 73,264,017.49 4.74997 3.99997
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Month of Payment Scheduled Principal
Date Balance Cap Strike Price Floor Strike Price
---------------- -------------------- ---------------- ------------------
October 2003 71,457,652.49 4.92705 4.17705
November 2003 8,032,994.41 4.92614 4.17614
December 2003 7,835,440.63 4.98265 4.23265
January 2004 7,642,695.83 5.35709 4.60709
February 2004 7,454,643.80 5.08219 4.33219
March 2004 7,271,171.10 5.12576 4.37576
April 2004 7,092,167.04 5.24205 4.49205
May 2004 6,917,523.60 5.24102 4.49102
June 2004 6,747,135.33 5.27841 4.52841
July 2004 6,580,899.33 5.36814 4.61814
August 2004 6,418,715.18 5.36778 4.61778
September 2004 6,260,484.87 5.40853 4.65853
October 2004 6,106,112.74 5.47606 4.72606
After the payment date in October 2004, the fifth representative paired cap
and floor will terminate without termination payments by either party. The fifth
representative paired cap and floor represents two actual caps and floors.
Month of Payment Scheduled Principal
Date Balance Cap Strike Price Floor Strike Price
---------------- -------------------- ---------------- ------------------
November 2001 $5,000,000.00 2.77500% 2.02500%
December 2001 4,987,695.37 2.63580 1.88580
January 2002 4,966,460.62 2.64080 1.89080
February 2002 4,936,214.35 2.61370 1.86370
March 2002 4,896,919.47 2.58000 1.83000
April 2002 4,848,585.13 2.69100 1.94100
May 2002 4,791,268.22 2.73650 1.98650
June 2002 4,725,074.57 2.75990 2.00990
July 2002 4,650,159.88 2.98680 2.23680
August 2002 4,566,730.07 3.06930 2.31930
September 2002 4,475,041.42 3.14150 2.39150
October 2002 4,375,400.09 3.37880 2.62880
November 2002 4,268,161.33 3.48690 2.73690
December 2002 4,163,526.79 3.58560 2.83560
January 2003 4,061,433.65 3.85510 3.10510
February 2003 3,961,820.59 3.99230 3.24230
March 2003 3,864,627.77 4.10880 3.35880
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Month of Payment Scheduled Principal
Date Balance Cap Strike Price Floor Strike Price
---------------- -------------------- ---------------- ------------------
April 2003 3,769,796.77 4.21190 3.46190
May 2003 3,677,270.59 4.32310 3.57310
June 2003 3,586,993.60 4.43930 3.68930
July 2003 3,498,911.49 4.57400 3.82400
August 2003 3,412,971.26 4.68780 3.93780
September 2003 3,329,121.20 4.80190 4.05190
October 2003 3,247,310.82 4.88840 4.13840
November 2003 3,167,490.86 4.99870 4.24870
December 2003 3,089,613.23 5.10330 4.35330
January 2004 3,013,631.01 5.18820 4.43820
February 2004 2,939,498.40 5.29490 4.54490
March 2004 2,867,170.69 5.39190 4.64190
April 2004 2,796,604.27 5.33540 4.58540
May 2004 2,727,756.55 5.41710 4.66710
June 2004 2,660,586.00 5.50330 4.75330
July 2004 2,595,052.05 5.50120 4.75120
August 2004 2,531,115.13 5.58080 4.83080
September 2004 2,468,736.61 5.66040 4.91040
October 2004 2,407,878.80 5.64740 4.89740
After the payment date in October 2004, the sixth representative paired cap
and floor will terminate without termination payments by either party.
The Strike Prices and scheduled principal balances of the eighth cap will
effectively pay in accordance with the representative cap described in the
following table:
Scheduled Principal
Month of Payment Date Balance Strike Price
--------------------- -------------------- ------------
November 2001 $55,853,819 3.6375%
December 2001 55,607,668 3.6375
January 2002 55,260,679 3.6375
February 2002 54,812,485 3.6375
March 2002 54,263,234 3.6375
April 2002 53,613,608 3.6375
May 2002 52,864,840 3.6375
June 2002 52,018,717 3.6375
July 2002 51,077,589 3.6375
August 2002 50,044,365 3.6375
September 2002 48,922,515 3.6375
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Scheduled Principal
Month of Payment Date Balance Strike Price
--------------------- -------------------- ------------
October 2002 47,716,051 3.6375
November 2002 46,539,047 3.6375
December 2002 45,390,790 3.6375
January 2003 44,270,581 3.6375
February 2003 43,177,741 3.6375
March 2003 42,111,606 3.6375
April 2003 41,071,528 3.6375
May 2003 40,056,876 3.6375
June 2003 39,067,031 3.6375
July 2003 38,101,394 3.6375
August 2003 37,159,375 3.6375
September 2003 36,240,401 3.6375
October 2003 35,343,914 3.6375
After the payment date in October 2003, the representative cap will
terminate without termination payments by either party.
On each payment date, the Net Derivative Contract Payment Amount with
respect to such payment date will be allocated to the Bonds and the Certificates
in the following order of priority, in each case to the extent of amounts
remaining:
(i) to the holders of the Class A-1, Class A-2, Class M-1, Class M-2
and Class B Bonds, in that order, any Basis Risk Shortfall Carry-Forward Amount
for such payment date; and
(ii) any remaining amounts to the holders of the Certificates.
CREDIT ENHANCEMENT
The credit enhancement provided for the benefit of the holders of the Class
A-1 Bonds consists of the subordination provided by the Class A-2 Bonds, Class M
Bonds and Class B Bonds, as described below, and excess interest and
overcollateralization, as described under " -- Overcollateralization Provisions"
in this prospectus supplement. The credit enhancement provided for the benefit
of the holders of the Class A-2 Bonds consists of the subordination provided by
the Class M Bonds and Class B Bonds, as described below, and excess interest and
overcollateralization, as described under "--Overcollateralization Provisions"
in this prospectus supplement.
The rights of the holders of the Class M Bonds, Class B Bonds and the
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 Bonds.
The protection afforded to the holders of the Class A Bonds by means of the
subordination of the Class M Bonds, Class B Bonds and the Certificates will be
accomplished in part by the preferential right
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of the holders of the Class A Bonds to receive on any payment date, prior to
distributions on the Class M Bonds and Class B Bonds, distributions in respect
of interest and, prior to the Certificates, distributions in respect of interest
and principal.
In addition, the rights of the holders of Class M Bonds and Class B Bonds
with higher payment priorities to receive distributions in respect of interest
will be senior to the rights of holders of Class M Bonds and Class B Bonds with
lower payment priorities, and the rights of the holders of the Class M Bonds and
Class B Bonds to receive distributions in respect of interest and principal will
be senior to the rights of the holders of the Certificates, in each case to the
extent described in this prospectus supplement.
The subordination feature is intended to enhance the likelihood of regular
receipt by the holders of the Bonds of distributions in respect of interest and
principal and to afford such holders protection against Realized Losses.
ALLOCATION OF LOSSES; SUBORDINATION
Any Realized Losses on the mortgage loans will be allocated on any payment
date, first, to Net Monthly Excess Cashflow, second, in reduction of the
Overcollateralized Amount, third, to the Class B Bonds, fourth, to the Class M-2
Bonds, fifth, to the Class M-1 Bonds, and sixth, to the Class A-2 Bonds.
The Indenture does not permit the allocation of Realized Losses to the
Class A-1 Bonds. Investors in the Class A-1 Bonds should note that although
Realized Losses cannot be allocated to the Class A-1 Bonds, under certain loss
scenarios there will not be enough principal and interest on the mortgage loans
to pay the Class A-1 Bonds all interest and principal amounts to which they are
then entitled.
Once Realized Losses have been allocated to the Class A-2 Bonds, Class M
Bonds or Class B Bonds, such amounts with respect to such Bonds will no longer
accrue interest nor will such amounts in respect of interest be reinstated
thereafter. However, Allocated Realized Loss Amounts may be paid to the holders
of the Class A-2 Bonds, Class M Bonds and Class B Bonds from Net Monthly Excess
Cashflow, according to the priorities set forth under " -- Overcollateralization
Provisions" above.
Any allocation of a Realized Loss to a Bond will be made by reducing the
Bond Principal Balance thereof by the amount so allocated as of the payment date
in the month following the calendar month in which such Realized Loss was
incurred. Notwithstanding anything to the contrary described in this prospectus
supplement, in no event will the Bond Principal Balance of any Bond be reduced
more than once in respect of any particular amount both (i) allocable to such
Bond in respect of Realized Losses and (ii) payable as principal to the holder
of such Bond from Net Monthly Excess Cashflow.
MANDATORY PREPAYMENTS ON BONDS
The Bonds will be prepaid on the payment date immediately following the end
of the Funding Period to the extent of any amounts remaining on deposit in the
Pre-Funding Account on such payment date. Such prepayment, if any, will be pro
rata among the Bonds. Although no assurance can be given, it is anticipated by
the Company that the principal amount of subsequent mortgage loans sold to the
Trust will require the application of substantially all of the Original
Pre-Funded Amount and that there will be no material amount of principal prepaid
to the holders of the Bonds from the Pre-Funding Account. It is
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unlikely, however, that the Company will be able to deliver subsequent mortgage
loans with an aggregate principal balance identical to the Original Pre-Funded
Amount. Accordingly, a small amount of principal is likely to be prepaid on the
Bonds on the payment date immediately following the end of the Funding Period.
P&I ADVANCES
Subject to the following limitations, the Master Servicer will be obligated
to advance or cause to be advanced on or before each payment date its own funds,
advances made by a subservicer or funds in the Payment Account that are not
included in the Available Funds for such payment date, in an amount equal to the
P&I Advances for such payment date. With respect to a delinquent balloon
payment, the Master Servicer is not required to make a P&I Advance of such
delinquent balloon payment. The Master Servicer will, however, make monthly
Advances with respect to balloon loans with delinquent balloon payments, in each
case in an amount equal to the assumed monthly principal and interest payment
(net of the related Master Servicing Fees and Subservicing Fees) that would have
been due on the related Due Date based on the original principal amortization
schedule for such balloon loan.
P&I Advances are required to be made only to the extent they are deemed, in
the good faith judgment of the Master Servicer, to be recoverable from related
late collections, Insurance Proceeds or Liquidation Proceeds, including amounts
paid under the Radian Lender-Paid PMI Policy. The purpose of making P&I Advances
is to maintain a regular cash flow to the bondholders, rather than to guarantee
or insure against losses. The Master Servicer will not be required to make any
P&I Advances with respect to reductions in the amount of the monthly payments
due on the mortgage loans due to bankruptcy proceedings or the application of
the Relief Act.
All P&I Advances, except the termination advances described below, will be
reimbursable to 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 Master Servicer to be nonrecoverable
from related late collections, insurance proceeds or liquidation proceeds may be
reimbursed to the Master Servicer out of any funds in the Payment Account prior
to the distributions on the Bonds. In the event the Master Servicer fails in its
obligation to make any such advance, the Indenture Trustee, as successor Master
Servicer, will be obligated to make any such advance, to the extent required in
the Servicing Agreement.
In addition to P&I Advances, the Master Servicer will be required to
advance, on the payment date in October 2031, any remaining scheduled principal
amounts to the Bondholders. This advance will be made without regard to
recoverability, and will be reimbursable to the Master Servicer solely from
scheduled monthly payments from the related mortgage loan due after the due date
in October 2031.
THE PAYING AGENT
The Paying Agent shall initially be the Indenture Trustee. The Paying Agent
shall have the revocable power to withdraw funds from the Payment Account for
the purpose of making payments to the bondholders.
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OPTIONAL REDEMPTION
The Bonds may be redeemed in whole, but not in part, by the holder of the
Certificates, or, if there is no single holder, the majority holder of the
Certificates, on any payment date on or after the earlier of (i) the payment
date on which the aggregate Stated Principal Balance of the mortgage loans as of
the end of the prior Due Period is less than or equal to 20% of the sum of the
Cut-off Date Balance and the Original Pre-Funded Amount and (ii) the payment
date occurring in November 2011. The purchase price will be equal to 100% of the
aggregate outstanding Bond Principal Balance and accrued and unpaid interest
thereon (including any Unpaid Interest Shortfalls and Basis Risk Shortfall
Carry- Forward Amount) at the Bond Interest Rate through the date on which the
Bonds are redeemed in full together with all amounts due and owing to the
Indenture Trustee.
DESCRIPTION OF THE SERVICING AGREEMENT
THE MASTER SERVICER
Impac Funding will act as master servicer for the mortgage loans pursuant
to the Servicing Agreement. See "Impac Funding" in the prospectus. Impac Funding
has entered into subservicing arrangement with Wendover. Wendover intends to
transfer all of its subservicing for the adjustable-rate mortgage loans to
Countrywide Home Loans, Inc., or an affiliate thereof, as described in this
prospectus supplement. Notwithstanding these agreements, Impac Funding will
remain primarily liable for servicing the mortgage loans.
THE SUBSERVICERS
All of the mortgage loans will initially be subserviced by Wendover.
However, the Master Servicer has entered into a contract to transfer the
subservicing of the initial adjustable-rate mortgage loans to Countrywide Home
Loans, Inc. or an affiliate thereof on or about January 1, 2002, with respect to
the initial adjustable-rate mortgage loans, or no later than three months after
the date of transfer to the trust, with respect to the subsequent
adjustable-rate mortgage loans.
Wendover is a subservicer of residential, consumer and commercial mortgage
loans in 50 states. Wendover provides origination and servicing for Federal
Housing Administration home equity conversion mortgages, specialized asset
management and default servicing for non-performing product, and special
servicing activities for government entities. Wendover is located in Greensboro,
North Carolina. Wendover is an approved servicer in good standing with Freddie
Mac.
Countrywide Home Loans, Inc., a New York corporation and a subsidiary of
Countrywide Credit Industries, Inc., is engaged primarily in the mortgage
banking business, and originates, buys, sells and services mortgage loans.
Countrywide Home Loans, Inc. originates mortgage loans nationwide, using a
retail branch system and mortgage loan brokers and correspondents. Countrywide
Home Loan's mortgage loans are mostly first-lien, fixed- or adjustable-rate
mortgage loans secured by single-family residences. Countrywide Home Loans, Inc.
is an approved servicer for Fannie Mae and Freddie Mac in good standing. The
principal executive offices of Countrywide Home Loans, Inc. are located at 4500
Park Granada, Calabasas, California 91302.
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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 Bonds and the Certificates will be equal
to the Master Servicing Fee. The principal compensation to be paid to any
subservicer of the mortgage loans will be equal to the Subservicing Fee. As
additional servicing compensation, the Master Servicer or any subservicer is
entitled to retain all prepayment penalties and charges, any assumption fees and
any late payment charges, to the extent collected from mortgagors, together with
any interest or other income earned on funds held in the Payment Account and any
escrow accounts in respect of the mortgage loans. The Master Servicer is
obligated to offset any Prepayment Interest Shortfall in respect of the mortgage
loans on any payment date with Compensating Interest in an amount equal to the
lesser of (a) one-twelfth of 0.125% of the aggregate Stated Principal Balance of
the mortgage loans immediately preceding such payment date and (b) the sum of
its aggregate Master Servicing Fee and the Subservicing Fee for such payment
date. The Master Servicer or the related subservicer is obligated to pay
insurance premiums and ongoing expenses associated with the mortgage pool in
respect of mortgage loans serviced by it and incurred by the Master Servicer or
such subservicer in connection with its responsibilities under the Servicing
Agreement or the related subservicing agreement. However, the Master Servicer or
such subservicer is entitled to reimbursement therefor as provided in the
Servicing Agreement or the related subservicing agreement.
OPTIONAL PURCHASE OF DELINQUENT LOANS
The Master Servicer, on behalf of the Issuer, may either purchase itself or
sell to a third-party any mortgage loan that is 90 days or more delinquent from
the Issuer at a price equal to the Stated Principal Balance thereof plus one
month's interest thereon and any amounts, including advances, owed to the Master
Servicer and the related Sub-Servicer. The removal of any such mortgage loan
from the Issuer may affect the loss and delinquency tests which determine the
level of the Overcollateralization Target Amount.
THE INDENTURE
The following summary describes certain terms of the Indenture. The summary
does not purport to be complete and is subject to, and qualified in its entirety
by reference to, the provisions of the Trust Agreement and Indenture. Whenever
particular defined terms of the Indenture are referred to, such defined terms
are thereby incorporated in this prospectus supplement by reference. See "The
Agreements" in the prospectus.
RIGHTS UPON EVENT OF DEFAULT
In case an Event of Default should occur and be continuing with respect to
the Bonds, then (in every such case) the Indenture Trustee at the written
direction of bondholders representing more than 50% of the aggregate Bond
Principal Balance of the Bonds then outstanding, shall declare the principal of
the Bonds, together with accrued and unpaid interest thereon through the date of
acceleration, to be due and payable. Such declaration may under certain
circumstances be rescinded by bondholders representing more than 50% of the
aggregate Bond Principal Balance of the Bonds.
If, following an Event of Default, the Bonds have been declared to be due
and payable, the Indenture Trustee may (provided that the bondholders
representing more than 50% of the aggregate Bond
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Principal Balance of the Bonds have not directed the Indenture Trustee to sell
the assets included in the Trust) refrain from selling such assets and continue
to apply all amounts received on such assets to payments due on the Bonds in
accordance with their terms, notwithstanding the acceleration of the maturity of
such Bonds. The Indenture Trustee, however, must sell or cause to be sold the
assets included in the Trust if collections in respect of such assets are
determined to be insufficient to pay certain expenses payable under the
Indenture and to make all scheduled payments on the Bonds, in which case
payments will be made on the Bonds in the same manner as described in the next
sentence with regard to instances in which such assets are sold. In addition,
upon an Event of Default the Indenture Trustee may sell or cause to be sold the
assets included in the Trust, in which event the collections on, or the proceeds
from the sale of, such assets will be applied as provided below: (i) to amounts
owed to the Indenture Trustee which have not been previously paid; (ii) to the
bondholders, the amount of interest then due and unpaid on the Bonds (including
Unpaid Interest Shortfalls but not including any Basis Risk Shortfall Carry-
Forward Amount), first to the Class A-1 Bonds, second, to the Class A-2 Bonds,
third, to the Class M-1 Bonds, fourth, to the Class M-2 Bonds, and fifth, to the
Class B Bonds; (iii) to the Bonds, the amount of principal then due and unpaid
on the Bonds, pro rata, without preference or priority of any kind; and (iv) to
the Bonds, first to the Class A-1 Bonds, second, to the Class A-2 Bonds, third,
to the Class M-1 Bonds, fourth, to the Class M-2 Bonds and fifth, to the Class B
Bonds, the amount of any related Basis Risk Shortfall Carry-Forward Amount not
previously paid; and (v) to the Issuer.
Subject to the provisions of the Indenture relating to the duties of the
Indenture Trustee, in case an Event of Default shall occur and be continuing,
the Indenture Trustee shall be under no obligation to exercise any of the rights
and powers under the Indenture at the request or direction of any of the
bondholders, unless such bondholders shall have offered to the Indenture Trustee
security or indemnity satisfactory to it against the costs, expenses and
liabilities which might be incurred by it in compliance with such request or
direction. Subject to such provisions for indemnification and certain
limitations contained in the Indenture, bondholders representing more than 50%
of the aggregate Bond Principal Balance of the Bonds shall have the right to
direct the time, method, and place of conducting any proceeding or any remedy
available to the Indenture Trustee or exercising any trust or power conferred on
the Indenture Trustee with respect to such Bonds; and bondholders representing
more than 50% of the aggregate Bond Principal Balance of the Bonds may, in
certain cases, waive any default with respect thereto, except a default in the
payment of principal or interest or a default in respect of a covenant or
provision of the Indenture that cannot be modified without the waiver or consent
of the holder of each outstanding Bond affected thereby.
LIMITATION ON SUITS
No bondholder will have any right to institute any proceedings with respect
to the Indenture unless (1) such bondholder has previously given written notice
to the Indenture Trustee of a continuing Event of Default; (2) bondholders
representing not less than 25% of the aggregate Bond Principal Balance of the
Bonds have made written request to the Indenture Trustee to institute
proceedings in respect of such Event of Default in its own name as Indenture
Trustee; (3) such bondholders have offered to the Indenture Trustee indemnity
satisfactory to it against the costs, expenses and liabilities to be incurred in
compliance with such request; (4) for 60 days after its receipt of such notice,
request and offer of indemnity the Indenture Trustee has failed to institute any
such proceedings; and (5) no direction inconsistent with such written request
has been given to the Indenture Trustee during such 60-day period by the
bondholders representing more than 50% of the aggregate Bond Principal Balance
of the Bonds.
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THE INDENTURE TRUSTEE
The Indenture Trustee may resign at any time, or in the event there is a
conflict of interest with respect to either class of Bonds, as Indenture Trustee
with respect to one or both classes of Bonds, in which event the Issuer will be
obligated to appoint a successor Indenture Trustee for the Bonds or such class
of Bonds within the period specified in the Indenture. The Indenture Trustee
also may be removed at any time by bondholders representing more than 50% of the
aggregate Bond Principal Balance of the Bonds if the Indenture Trustee ceases to
be eligible to continue as such under the Indenture or if the Indenture Trustee
becomes incapable of acting, bankrupt, insolvent or if a receiver or public
officer takes charge of the Indenture Trustee or its property. Any resignation
or removal of the Indenture Trustee and appointment of a successor Indenture
Trustee will not become effective until acceptance of the appointment by the
successor Indenture Trustee.
FEDERAL INCOME TAX CONSEQUENCES
For federal income tax purposes, the Bonds will be characterized as
indebtedness and not as representing an ownership interest in the Trust Fund or
an equity interest in the Issuer or the Company. In addition, for federal income
tax purposes, the Issuer will not be (i) classified as an association taxable as
a corporation for federal income tax purposes, (ii) a taxable mortgage pool as
defined in Section 7701(i) of the Code, or (iii) a "publicly traded partnership"
as defined in Treasury Regulation Section 1.7704-1. The Bonds will not be
treated as having been issued with "original issue discount" (as defined in the
prospectus). The prepayment assumption that will be used in determining the rate
of amortization 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 CPR of
30%. No representation is made that the mortgage loans will prepay at that rate
or at any other rate. See "Federal Income Tax Consequences" in the prospectus.
The Bonds will not be treated as assets described in Section 7701(a)(19)(C)
of the Code or "real estate assets" under Section 856(c)(4)(A) of the Code. In
addition, interest on the Bonds will not be treated as "interest on obligations
secured by mortgages on real property" under Section 856(c)(3)(B) of the Code.
The Bonds will also not be treated as "qualified mortgages" under Section
860G(a)(3)(C) of the Code.
Prospective investors in the Bonds should see "Federal Income Tax
Consequences" and "State and Other Tax Consequences" in the prospectus for a
discussion of the application of certain federal income and state and local tax
laws to the Issuer and purchasers of the Bonds.
METHOD OF DISTRIBUTION
Subject to the terms and conditions set forth in an underwriting agreement,
dated October 24, 2001, Countrywide Securities Corporation has agreed to
purchase 65% and J.P. Morgan Securities Inc. has agreed to purchase 35% of each
class of Bonds and the Company has agreed to sell to the Underwriters the Bonds.
It is expected that delivery of the Bonds will be made only in book-entry form
through the Same Day Funds Settlement System of DTC on or about October 30,
2001, against payment therefor in immediately available funds.
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The Bonds will be purchased from the Company by the Underwriters and will
be offered by the Underwriters from time to time to the public in negotiated
transactions or otherwise at varying prices to be determined for each investor
at the time of sale. The proceeds to the Company from the sale of the Bonds are
expected to be approximately 99.75% of the aggregate initial Bond Principal
Balance of the Bonds less expenses expected to equal approximately $580,000. The
Underwriters may effect such transactions by selling the Bonds to or through
dealers, and such dealers may receive compensation in the form of underwriting
discounts, concessions or commissions from the Underwriters. In connection with
the sale of the Bonds, the Underwriters may be deemed to have received
compensation from the Company in the form of underwriting compensation. The
Underwriters and any dealers that participate with the Underwriters in the
distribution of the Bonds may be deemed to be underwriters and any profit on the
resale of the Bonds positioned by them may be deemed to be underwriting
discounts and commissions under the Securities Act of 1933, as amended.
The underwriting agreement provides that the Company, the Seller and Impac
Funding Corporation will jointly and severally indemnify the Underwriters, and
that under limited circumstances the Underwriters will indemnify the Company,
the Seller and Impac Funding Corporation against certain civil liabilities under
the Securities Act of 1933, as amended, or contribute to payments required to be
made in respect thereof.
Countrywide Securities Corporation is an affiliate of Countrywide Home
Loans, Inc.
SECONDARY MARKET
There can be no assurance that a secondary market for the Bonds will
develop or, if it does develop, that it will continue. The primary source of
information available to investors concerning the Bonds will be the monthly
statements discussed in the prospectus under "Description of the Bonds--Reports
to Bondholders," which will include information as to the outstanding principal
balance of the Bonds and the status of the applicable form of credit
enhancement. There can be no assurance that any additional information regarding
the Bonds will be available through any other source. In addition, the Company
is not aware of any source through which price information about the Bonds will
be generally available on an ongoing basis. The limited nature of information
regarding the Bonds may adversely affect the liquidity of the Bonds, even if a
secondary market for the Bonds becomes available.
LEGAL OPINIONS
Legal matters relating to the Bonds will be passed upon for the Company by
Thacher Proffitt & Wood, New York, New York and for the Underwriters by Sidley
Austin Brown & Wood LLP, New York, New York.
RATINGS
It is a condition to the issuance of the Bonds that the Class A-1 Bonds be
rated "AAA" by each of S&P and Fitch, and "Aaa" by Moody's, that the Class A-2
Bonds be rated "AAA" by Fitch and "Aaa" by Moody's, that the Class M-1 Bonds be
rated at least "AA" by Fitch and "Aa2" by Moody's, that the
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Class M-2 Bonds be rated at least "A" by Fitch and "A2" by Moody's and that the
Class B Bonds be rated at least "BBB" by each of Fitch and S&P, and "Baa2" by
Moody's.
The ratings of S&P, Fitch and Moody's assigned to collateralized
asset-backed bonds address the likelihood of the receipt by bondholders of all
distributions to which the bondholders are entitled. The rating process
addresses structural and legal aspects associated with the bonds, including the
nature of the underlying mortgage loans. The ratings assigned to collateralized
asset-backed bonds do not represent any assessment of the likelihood that
principal prepayments will be made by the mortgagors or the degree to which the
rate and timing principal prepayments will differ from that originally
anticipated. The ratings do not address the possibility that bondholders might
suffer a lower than anticipated yield due to non-credit events.
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
Bonds 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 Bonds.
The Company has not requested that any rating agency rate any class of the
Bonds other than as stated above. However, there can be no assurance as to
whether any other rating agency will rate any class of the Bonds, or, if it
does, what rating would be assigned by any other rating agency. A rating on any
class of the Bonds by another rating agency, if assigned at all, may be lower
than the ratings assigned to the Bonds as stated above.
LEGAL INVESTMENT
The Bonds will not constitute "mortgage related securities" for purposes of
SMMEA.
The Company makes no representations as to the proper characterization of
any class of Bonds for legal investment or other purposes, or as to the ability
of particular investors to purchase any class of Bonds under applicable legal
investment restrictions. These uncertainties may adversely affect the liquidity
of any class of Bonds. Accordingly, all institutions whose investment activities
are subject to legal investment laws and regulations, regulatory capital
requirements or review by regulatory authorities should consult with their legal
advisors in determining whether and to what extent any class of Bonds
constitutes a legal investment or is subject to investment, capital or other
restrictions.
SEE "LEGAL INVESTMENT MATTERS" IN THE PROSPECTUS.
ERISA CONSIDERATIONS
ERISA and Section 4975 of the Code impose certain requirements on Plans (as
defined in the prospectus) and on persons who are fiduciaries with respect to
such Plans. Any Plan fiduciary which proposes to cause a Plan to acquire any of
the Bonds would be required to determine whether such an investment is permitted
under the governing Plan instruments and is prudent and appropriate for the Plan
in view of its overall investment policy and the composition and diversification
of its portfolio. The DOL (as defined in the prospectus) has promulgated the DOL
Regulations defining the term "Plan Assets" for
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purposes of applying the general fiduciary responsibility provisions of ERISA
and the prohibited transaction provisions of ERISA and Section 4975 of the Code.
Under the DOL Regulations, generally, when a Plan acquires an "equity interest"
in another entity (such as the Trust), the underlying assets of that entity may
be considered to be Plan Assets. The DOL Regulations provide that the term
"equity interest" means any interest in an entity other than an instrument which
is treated as indebtedness under applicable local law and which has no
"substantial equity features."
The ratings of the Bonds and the traditional debt features of these Bonds
should cause these Bonds to be treated as debt with no "substantial equity
features" under the DOL Regulations. There can be no assurance given, however,
that the Bonds are or will be treated as debt and not "equity interests" under
the DOL Regulations. Moreover, the debt treatment of the Bonds for ERISA
purposes could change subsequent to their issuance; that is, they could be
treated as equity interests, if, for example, the ratings of the Bonds change.
Because of the factual nature of certain of the above-described provisions of
ERISA, the Code and the DOL Regulations, Plans or persons investing Plan Assets
should carefully consider whether such an investment might constitute or give
rise to a prohibited transaction under ERISA or the Code. Any Plan fiduciary
which proposes to cause a Plan to acquire any of the Bonds should consult with
its counsel with respect to the potential consequences under ERISA and the Code
of the Plan's acquisition and ownership of such Bonds.
In addition, ERISA and the Code prohibit certain transactions involving the
assets of a Plan and Parties in Interest (as defined in the prospectus) who have
certain specified relationships to the Plan. Accordingly, even if the Bonds are
treated as indebtedness under the DOL Regulations, prior to making an investment
in the Bonds, investing Plans should determine whether the Issuer, the Seller,
the Company, any Underwriter, the Owner Trustee, the Indenture Trustee, the
Master Servicer, any other servicer, any administrator, any provider of credit
support, including the Derivative Counterparties, any owner of the Certificates,
which could be transferred subsequent to the purchase of a Bond by a Plan, or
any of their affiliates is a Party in Interest with respect to such Plan and, if
so, whether such transaction is subject to one or more statutory, regulatory or
administrative exemptions. Additionally, an investment of the assets of a Plan
in certain securities may cause the assets of the issuer of those securities to
be deemed "Plan Assets" of such Plan, and any person with certain specified
relationships to such issuer to be deemed a Party in Interest with respect to
the investing Plan.
By acquiring a Bond, each purchaser will be deemed to represent that either
(1) it is not acquiring the Bond with the assets of a Plan; or (2) the
acquisition and holding of the Bond will not give rise to a nonexempt prohibited
transaction under Section 406 of ERISA or Section 4975 of the Code as a result
of the Issuer, the Seller, the Company, any Underwriter, the Owner Trustee, the
Indenture Trustee, the Master Servicer, any other servicer, any administrator,
any provider of credit support, including the Derivative Counterparties, any
owner of the Certificates, or any of their affiliates being a Party in Interest
with respect to such purchaser that is a Plan.
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GLOSSARY
ACCRUAL PERIOD -- With respect to each class of Bonds and each payment date, the
period from the preceding payment date (or in the case of the first payment
date, from the Closing Date) through the day preceding such payment date.
ACCRUED BOND INTEREST -- With respect to any payment date and each class of
Bonds, an amount equal to interest accrued during the related Accrual Period on
the Bond Principal Balance thereof at the then-applicable Bond Interest Rate,
less such Bonds' Unpaid Interest Shortfall for such payment date, plus any
Accrued Bond Interest remaining unpaid from any prior payment date with interest
thereon at the related Bond Interest Rate.
AGREEMENTS -- The Servicing Agreement, the Indenture, the Trust Agreement and
the Mortgage Loan Sale and Contribution Agreement.
ALLOCATED REALIZED LOSS AMOUNT -- With respect to any class of the Class A-2
Bonds, Class M Bonds and Class B Bonds and any payment date, an amount equal to
the sum of any Realized Loss allocated to that class of Bonds on that payment
date and any Allocated Realized Loss Amount for that class remaining unpaid from
the previous payment date.
ALLOWABLE CLAIM -- For any mortgage loan covered by a Primary Insurance Policy,
the current principal balance of such mortgage loan plus accrued interest and
allowable expenses at the time of the claim.
APPRAISED VALUE -- The appraised value of the related mortgaged property at the
time of origination of such mortgage loan.
AVAILABLE FUNDS -- For any payment date, an amount equal to the amount received
by the Indenture Trustee and available in the Payment Account on that payment
date. The Available Funds will generally be equal to (a) the sum of (1) the
aggregate amount of scheduled payments on the mortgage loans received or
advanced that were due during the related Due Period, (2) any unscheduled
payments and receipts, including mortgagor prepayments on such mortgage loans,
the proceeds of any repurchase of the mortgage loans by the Master Servicer or
Seller, Insurance Proceeds (including amounts paid under the Radian Lender-Paid
PMI Policy) and Liquidation Proceeds, received during the related Prepayment
Period, in each case net of amounts reimbursable therefrom to the Indenture
Trustee, the Master Servicer and any subservicer and reduced by (b) Master
Servicing Fees, the Subservicing Fees, the fees of the Indenture Trustee and the
Owner Trustee, the Net Derivative Fees, if any, and any amounts in respect of
the premiums payable to Radian under the Radian Lender-Paid PMI Policies, and
(3) at the end of the Funding Period, any excess amounts transferred from the
Pre-Funding Account.
AVAILABLE FUNDS RATE -- On any payment date, the per annum rate equal to the
weighted average of the Net Mortgage Rates on the mortgage loans, weighted on
the basis of the Stated Principal Balances thereof as of the end of the prior
Due Period, times a fraction equal to (1) the aggregate Stated Principal Balance
of the mortgage loans as of the end of the prior Due Period over (2) the
aggregate Bond Principal Balance of the Bonds immediately prior to such payment
date, times a fraction equal to (x) 30 divided by (y) the number of days in the
related Accrual Period.
BASIC PRINCIPAL DISTRIBUTION AMOUNT -- With respect to any payment date, the
excess of (i) the
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Principal Remittance Amount for such payment date over (ii) the
Overcollateralization Release Amount, if any, for such payment date.
BASIS RISK SHORTFALL -- With respect to any class of Bonds, on each payment date
where clause (iii) of the definition of "Bond Interest Rate" is less than
clauses (i) or (ii) of the definition, an amount will be equal to the excess of
(x) the aggregate Accrued Bond Interest thereon for such payment date calculated
pursuant to the lesser of clause (i) or (ii) of the definition of Bond Interest
Rate over (y) interest accrued on the mortgage loans at the Available Funds
Rate.
BASIS RISK SHORTFALL CARRY-FORWARD AMOUNT -- With respect to any class of Bonds,
the aggregate amount of Basis Risk Shortfall for that class of Bonds on such
payment date, plus any unpaid Basis Risk Shortfall from prior payment dates,
plus interest thereon to the extent previously unreimbursed by Net Monthly
Excess Cashflow or the Derivative Contracts.
BOOK-ENTRY BONDS -- Each class of the Bonds for so long as they are issued,
maintained and transferred at DTC.
BOND INTEREST RATE -- With respect to any payment date and the Bonds a floating
rate equal to the least of (i) One-Month LIBOR plus the related Bond Margin,
(ii) the Maximum Bond Interest Rate and (iii) the Available Funds Rate.
BOND MARGIN -- With respect to any payment date and the Class A-1 Bonds will
equal 0.370% per annum prior to the Step-Up Date and 0.740% per annum
thereafter. The "Bond Margin" with respect to the Class A-2 Bonds will equal
0.520% per annum prior to the Step-Up Date and 1.040% per annum thereafter. The
"Bond Margin" with respect to the Class M-1 Bonds will equal 0.950% per annum
prior to the Step-Up Date and 1.425% per annum thereafter. The "Bond Margin"
with respect to the Class M- 2 Bonds will equal 1.450% per annum prior to the
Step-Up Date and 2.175% per annum thereafter. The "Bond Margin" with respect to
the Class B Bonds will equal 2.000% per annum prior to the Step-Up Date and
3.000% per annum thereafter.
BOND PRINCIPAL BALANCE -- With respect to any Bond as of any date of
determination, the initial Bond Principal Balance thereof, reduced by the
aggregate of (a) all amounts allocable to principal previously distributed with
respect to such Bond and (b) in the case of any Class A-2, Class M or Class B
Bond, any reductions in the Bond Principal Balance thereof deemed to have
occurred in connection with allocations of Realized Losses in the manner
described in this prospectus supplement.
BONDS -- The Class A-1, Class A-2, Class M-1, Class M-2 and Class B Bonds.
CERTIFICATES -- The IMH Assets Corp., Trust Certificates, Series 2001-3, issued
pursuant to the Trust Agreement and representing the beneficial ownership
interest in the trust. The Certificates are not offered hereby.
CLASS A BONDS -- The Class A-1 Bonds and Class A-2 Bonds.
CLASS M BONDS -- The Class M-1 Bonds and Class M-2 Bonds.
CLOSING DATE -- October 30, 2001.
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CODE-- The Internal Revenue Code of 1986.
COMPANY-- IMH Assets Corp., or its successor in interest.
COMPENSATING INTEREST -- With respect to any payment date, the amount of any
Prepayment Interest Shortfalls resulting from prepayments in full during the
preceding calendar month, but only to the extent such Prepayment Interest
Shortfalls do not exceed an amount equal to the lesser of (a) one-twelfth of
0.125% of the aggregate Stated Principal Balance of the mortgage loans
immediately preceding such Payment Date and (b) the sum of the Master Servicing
Fee and Subservicing Fee for such payment date.
CPR -- A constant rate of prepayment on the mortgage loans.
CREDIT SCORE -- A measurement of the relative degree of risk a borrower
represents to a lender obtained from credit reports utilizing, among other
things, payment history, delinquencies on accounts, levels of outstanding
indebtedness, length of credit history, types of credit, and bankruptcy
experience.
CUT-OFF DATE -- October 1, 2001.
CUT-OFF DATE BALANCE -- The aggregate Stated Principal Balance of the mortgage
loans as of the Cut- off Date.
DERIVATIVE CONTRACTS -- The sixteen derivative contracts between the Seller and
the Derivative Counterparties.
DERIVATIVE COUNTERPARTIES-- Bear Stearns Financial Products Inc., Bear Stearns
Capital Markets Inc., Credit Suisse First Boston and Lehman Brothers Financial
Products Inc.
DETERMINATION DATE -- With respect to any payment date is on the 15th day of the
month in which such payment date occurs or, if such day is not a business day,
on the immediately preceding business day.
DUE DATE -- With respect to each mortgage loan, the first day of each month.
DUE PERIOD -- With respect to any payment date, the second day of the month
immediately preceding the month in which such payment date occurs through the
first day of the month in which such payment date occurs.
ERISA -- The Employee Retirement Income Security Act of 1974, as amended.
EVENT OF DEFAULT -- Any one of the following: (a) the failure by the Issuer to
pay (i) Accrued Bond Interest on any Class of Bonds or the Principal
Distribution Amount with respect to a payment date on such payment date, or (ii)
any Unpaid Interest Shortfall with respect to a payment date, but in the case of
clause (ii) only to the extent funds are available to make such payment as
described under "Description of the Bonds--Priority of Payment"; (b) a default
by the Issuer in the observance of certain negative covenants in the Indenture;
(c) a default by the Issuer in the observance of any other covenant of the
Indenture, and the continuation of any such default for a period of thirty days
after notice to the Issuer by the Indenture Trustee or by the Holders of at
least 25% of the aggregate Bond Principal Balance of the Bonds, as applicable;
(d) any representation or warranty made by the Issuer in the Indenture or in any
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Bond or other writing delivered pursuant thereto having been incorrect in a
material respect as of the time made, and the circumstance in respect of which
such representation or warranty is incorrect not having been cured within thirty
days after notice thereof is given to the Issuer by the Indenture Trustee, by
the Holders of at least 25% of the aggregate Bond Principal Balance of the
Bonds, as applicable; (e) certain events of bankruptcy, insolvency, receivership
or reorganization of the Issuer; or (f) the failure on the Final Scheduled
payment date to reduce the Bond Principal Balances of the Bonds to zero.
EXTRA PRINCIPAL DISTRIBUTION AMOUNT -- For any payment date, the lesser of (x)
the Net Monthly Excess Cashflow for such payment date and (y) the
Overcollateralization Deficiency Amount for such payment date.
FINAL DISPOSITION -- With respect to a defaulted mortgage loan, when a
determination is made by the Master Servicer that it has received all Insurance
Proceeds, Liquidation Proceeds and other payments or cash recoveries which the
Master Servicer reasonably and in good faith expects to be finally recoverable
with respect to such mortgage loan.
FITCH-- Fitch, Inc.
FUNDING PERIOD -- The period from the Closing Date until the earlier of (i) the
date on which the amount on deposit in the Pre-Funding Account is reduced to
zero or (ii) December 31, 2001.
IMPAC HOLDINGS-- Impac Mortgage Holdings, Inc., an affiliate of the Company and
the Seller.
INDENTURE -- The Indenture dated as of October 30, 2001, between the Issuer and
the Indenture Trustee.
INDENTURE TRUSTEE-- Bankers Trust Company of California, N.A.
INDENTURE TRUSTEE'S FEE -- With respect to any payment date, one month's
interest accrued at the Indenture Trustee's Fee Rate on the Stated Principal
Balance of each mortgage loan.
INDENTURE TRUSTEE'S FEE RATE -- On each mortgage loan, a rate equal to 0.005%
per annum.
INTEREST DETERMINATION DATE -- With respect to the first Accrual Period, the
second LIBOR Business Day preceding the Closing Date, and with respect to each
Accrual Period thereafter, the second LIBOR Business Day preceding the payment
date on which such Accrual Period commences.
INTEREST REMITTANCE AMOUNT -- For any payment date, that portion of the
Available Funds for such payment date that represents interest received or
advanced on the mortgage loans.
IRS-- The Internal Revenue Service.
ISSUER-- Impac CMB Trust Series 2001-3.
LIBOR BUSINESS DAY -- A day on which banks are open for dealing in foreign
currency and exchange in London and New York City.
MASTER SERVICER -- Impac Funding Corporation, in its capacity as master servicer
under the Servicing Agreement.
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MASTER SERVICING FEE -- With respect to each mortgage loan, accrued interest at
the Master Servicing Fee Rate with respect to the mortgage loan on the same
principal balance on which interest on the mortgage loan accrues for the
calendar month. The Master Servicing Fee consists of servicing compensation
payable to the Master Servicer in respect of its master servicing
responsibilities.
MASTER SERVICING FEE RATE -- On each mortgage loan, a rate equal to 0.03% per
annum.
MAXIMUM BOND INTEREST RATE -- 13.25% per annum.
MOODY'S-- Moody's Investors Service, Inc.
MORTGAGE LOAN SALE AND CONTRIBUTION AGREEMENT -- The Mortgage Loan Sale and
Contribution Agreement between the Seller and the Company, whereby the mortgage
loans are being sold to the Company.
NET DERIVATIVE CONTRACT PAYMENT AMOUNT -- With respect to any payment date, the
amount equal to the excess, if any, of (a) the aggregate amount payable on that
payment date to the Issuer from the Derivative Counterparties pursuant to the
Derivative Contracts, over (b) the aggregate amount payable on that payment date
to Bear Stearns Financial Products Inc. in respect of the swap agreement and to
Bear Stearns Capital Markets Inc. in respect of the floors, in each case as
described in "Description of the Bonds--The Derivative Contracts" in this
prospectus supplement.
NET DERIVATIVE FEE -- With respect to any payment date, the amount equal to the
excess, if any, of (a) the aggregate amount payable on that payment date to Bear
Stearns Financial Products Inc. in respect of the swap agreements and to Bear
Stearns Capital Markets Inc. in respect of the floors, over (b) the aggregate
amount payable on that payment date to the Issuer from the Derivative
Counterparties pursuant to the Derivative Contracts, in each case as described
in "Description of the Bonds--The Derivative Contracts" in this prospectus
supplement.
NET DERIVATIVE FEE RATE -- With respect to any payment date, the fraction,
expressed as a rate per annum, equal to (x) the Net Derivative Fee for that
payment date over (y) the aggregate Stated Principal Balance of the Mortgage
Loans as the beginning of the related Due Period.
NET MONTHLY EXCESS CASHFLOW -- For any payment date, the sum of (a) any
Overcollateralization Release Amount and (b) the excess of (x) the Available
Funds for such payment date over (y) the sum for such payment date of (A) the
aggregate amount of Accrued Bond Interest for the Bonds, (B) the Unpaid Interest
Shortfalls for the Class A Bonds and (C) the Principal Remittance Amount.
NET MORTGAGE RATE -- On any mortgage loan, the then applicable mortgage rate
thereon minus the sum of (1) the Master Servicing Fee Rate, (2) the Subservicing
Fee Rate, (3) the Indenture Trustee's Fee Rate, (4) the Owner Trustee's Fee Rate
(5) the Net Derivative Fee Rate and (6) the related Radian PMI Rate, if such
mortgage loan is a Radian PMI Insured Loan.
OID REGULATIONS -- Treasury regulations under Sections 1271 to 1275 of the Code
generally addressing the treatment of debt instruments issued with original
issue discount.
ORIGINAL PRE-FUNDED AMOUNT -- The amount, not in excess of $46,918,876,
deposited in the Pre- Funding Account on the Closing Date by the Indenture
Trustee.
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OVERCOLLATERALIZATION DEFICIENCY AMOUNT -- With respect to any payment date, the
amount, if any, by which the Overcollateralization Target Amount exceeds the
Overcollateralized Amount on such payment date (after giving effect to
distributions in respect of the Basic Principal Distribution Amount on such
payment date).
OVERCOLLATERALIZATION RELEASE AMOUNT -- With respect to any payment date, the
lesser of (x) the Principal Remittance Amount for such payment date and (y) the
excess, if any, of (i) the Overcollateralized Amount for such payment date
(assuming that 100% of the Principal Remittance Amount is applied as a principal
payment on such payment date) over (ii) the Overcollateralization Target Amount
for such payment date.
OVERCOLLATERALIZATION TARGET AMOUNT -- With respect to any payment date prior to
the Stepdown Date or on or after the Stepdown Date for which a Trigger Event is
in effect, 0.75% of the sum of the Cut-off Date Balance and the Original
Pre-Funded Amount. With respect to any payment date on or after the Stepdown
Date for which a Trigger Event is not in effect, the greater of (i) 1.50% of the
sum of the aggregate Stated Principal Balance of the mortgage loans as of the
end of the related Due Period and the Pre-Funded Amount and (ii) 0.50% of the
sum of Cut-off Date Balance and the Original Pre-Funded Amount.
OVERCOLLATERALIZED AMOUNT -- For any payment date, the amount, if any, by which
(i) the sum of (A) the aggregate principal balance of the mortgage loans (after
giving effect to scheduled payments of principal due during the related Due
Period, to the extent received or advanced, and unscheduled collections of
principal received during the related Prepayment Period and after reduction for
Realized Losses incurred during the related Prepayment Period) and (B) the
Pre-Funded Amount exceeds (ii) the aggregate Bond Principal Balance of the Bonds
as of such payment date (after giving effect to distributions to be made on such
payment date).
OWNER TRUSTEE-- Wilmington Trust Company.
OWNER TRUSTEE'S FEE -- With respect to any payment date, one month's interest
accrued at the Owner Trustee's Fee Rate on the Stated Principal Balance of each
mortgage loan.
OWNER TRUSTEE'S FEE RATE -- On each mortgage loan, a rate equal to 0.0017% per
annum.
P&I ADVANCE -- The aggregate of all payments of principal and interest, net of
the Master Servicing Fee and Subservicing Fee, that were due during the related
Due Period on the mortgage loans and that were delinquent on the related
Determination Date, to the extent they are deemed, in the good faith judgment of
the Master Servicer, to be recoverable from related late collections, Insurance
Proceeds or Liquidation Proceeds, including amounts paid under the Radian
Lender-Paid PMI Policy.
PLAN -- Any employee benefit plan subject to Title IV of ERISA and any plan or
other arrangement described in Section 4975(e)(1) of the Code.
PLAN ASSETS -- The assets of a Plan as determined under Department of Labor
regulation section 2510.3-101 or other applicable law.
PRE-FUNDED AMOUNT -- The amount on deposit in the Pre-Funding Account on any
date of determination.
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PRE-FUNDING ACCOUNT -- An account established by the Trustee for the benefit of
the Bondholders and funded on the Closing Date by the Company with the Original
Pre-Funded Amount.
PREPAYMENT INTEREST SHORTFALL -- For any payment date, the aggregate shortfall,
if any, in collections of interest (less the related Subservicing Fees)
resulting from Mortgagor prepayments on the mortgage loans during the related
Prepayment Period. Such shortfalls will result because interest on prepayments
in full is paid only to the date of prepayment, and because no interest is paid
on prepayments in part, as such prepayments in part are applied to reduce the
outstanding principal balance of the mortgage loans as of the Due Date in the
month of prepayment.
PREPAYMENT PERIOD -- With respect to any payment date is the calendar month
immediately preceding the month in which such payment date occurs.
PRINCIPAL DISTRIBUTION AMOUNT -- For any payment date, the Basic Principal
Distribution Amount plus the Extra Principal Distribution Amount.
PRINCIPAL REMITTANCE AMOUNT-- For any payment date, the sum of
(1) the principal portion of all scheduled monthly payments on the mortgage
loans due on the related Due Date, to the extent received or advanced;
(2) the principal portion of all proceeds of the repurchase of a mortgage
loan (or, in the case of a substitution, certain amounts representing a
principal adjustment) as required by the Servicing Agreement during the
preceding calendar month;
(3) the principal portion of all other unscheduled collections received
during the preceding calendar month, including full and partial prepayments, the
proceeds of any repurchase of the mortgage loans by the Master Servicer or
Seller, Liquidation Proceeds and Insurance Proceeds (including amounts paid
under the Radian Lender-Paid PMI Policy), in each case to the extent applied as
recoveries of principal;
(4) any amount remaining on deposit in the Pre-Funding Account at the end
of the Funding Period.
RADIAN-- Radian Guaranty, Inc.
RADIAN LENDER-PAID PMI POLICY -- A Primary Insurance Policy issued by Radian in
accordance with a May 1, 2000 letter between the Seller and Radian.
RADIAN PMI INSURED LOANS -- The mortgage loans covered by a Radian Lender-Paid
PMI Policy.
RADIAN PMI RATE -- With respect to each Radian PMI Insured Loan, the per annum
rate payable to Radian under the related Radian Lender-Paid PMI Policy.
RATING AGENCIES-- Standard & Poor's, a division of The McGraw-Hill Companies,
Inc., Moody's Investors Services, Inc., and Fitch, Inc.
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RECORD DATE -- For each payment date and any class of Bonds, the close of
business on the business day immediately preceding such payment date.
REFERENCE BANKS -- Leading banks selected by the Indenture Trustee and engaged
in transactions in Eurodollar deposits in the international Eurocurrency market
(i) with an established place of business in London, (ii) whose quotations
appear on the Telerate Screen Page 3750 on the Interest Determination Date in
question, (iii) which have been designated as such by the Indenture Trustee and
(iv) not controlling, controlled by, or under common control with, the Company
or the Seller.
RESERVE INTEREST RATE -- The rate per annum that the Indenture Trustee
determines to be either (i) the arithmetic mean (rounded upwards if necessary to
the nearest whole multiple of 0.0625%) of the one- month United States dollar
lending rates which New York City banks selected by the Indenture Trustee 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 Indenture Trustee can determine no such arithmetic mean, the lowest
one-month United States dollar lending rate which New York City banks selected
by the Indenture Trustee are quoting on such Interest Determination Date to
leading European banks.
RULES -- The rules, regulations and procedures creating and affecting DTC and
its operations.
S&P -- Standard & Poor's, a division of The McGraw-Hill Companies, Inc.
SELLER-- Impac Mortgage Holdings, Inc., in its capacity as seller under the
Mortgage Loan Sale and Contribution Agreement.
SERVICING AGREEMENT -- The Servicing Agreement, dated as of October 30, 2001,
among the Master Servicer, the Issuer and the Indenture Trustee.
STATED PRINCIPAL BALANCE -- With respect to any mortgage loan as of any date of
determination, the principal balance thereof 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 all amounts allocable to principal
that have been distributed to bondholders with respect to such mortgage loan on
or before such date, and as further reduced to the extent that any Realized Loss
thereon has been allocated to one or more classes of bonds on or before the date
of determination.
STEPDOWN DATE -- The later to occur of (x) the payment date occurring in
November 2004 and (y) the first payment date for which the aggregate Stated
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
after reduction for Realized Losses incurred during the related Prepayment
Period) is less than or equal to 50.00% of the Cut-off Date Balance.
STEP-UP DATE -- The earlier of (i) the first payment date following the first
payment date for which the aggregate Stated Principal Balance of the mortgage
loans as of the end of the related Due Period has been reduced to 20% or less of
the Cut-off Date Balance and (ii) the payment date occurring in November 2011.
S-86
STRIKE PRICE -- With respect to each Derivative Contract, the fixed rate set
forth in the related Derivative Contract used to determine payments to the
Issuer or to the Derivative Counterparty.
SUBSEQUENT CUT-OFF DATE -- The date, as designated by the Company, that is the
later of (i) the first day of the month in which the related Subsequent Transfer
Date occurs and (ii) the origination date of such Mortgage Loan, as the cut-off
date with respect to the related subsequent mortgage loans.
SUBSEQUENT TRANSFER DATE -- The dates upon which the Indenture Trustee will
purchase the subsequent mortgage loans.
SUBSEQUENT TRANSFER INSTRUMENT -- The subsequent transfer instrument between IMH
Assets Corp., as company, and Bankers Trust Company of California, N.A., as
indenture trustee, or such other instrument as agreed upon by the company and
the Indenture Trustee.
SUBSERVICERS-- Wendover Funding, Inc. and Countrywide Home Loans, Inc., or an
affiliate thereof.
SUBSERVICING FEE -- With respect to each mortgage loan, accrued interest at the
Subservicing Fee Rate with respect to the mortgage loan on the same principal
balance on which interest on the mortgage loan accrues for the calendar month.
Subservicing Fee consists of subservicing and other related compensation payable
to the subservicer or to the Master Servicer if the Master Servicer is directly
servicing the loan.
SUBSERVICING FEE RATE -- On each adjustable-rate mortgage loan, a rate equal to
0.375% per annum. On each fixed-rate mortgage loan, a rate equal to 0.50% per
annum.
TELERATE SCREEN PAGE 3750 -- The display designated as page 3750 on the Telerate
Service (or such other page as may replace page 3750 on that service for the
purpose of displaying London interbank offered rates of major banks).
TRIGGER EVENT -- A Trigger Event is in effect with respect to any payment date
if:
(1) (a) in the case of any payment date after the 36th payment date
and on and before the 60th payment date, the three month average of the
aggregate principal balance of mortgage loans that are 60 or more days
delinquent (including for this purpose any such mortgage loans in foreclosure
and mortgage loans with respect to which the related mortgaged property has been
acquired by the trust) as of the close of business on the last day of the
preceding calendar month exceeds 4.00% of the aggregate Stated Principal Balance
of the mortgage loans and (b) in the case of any payment date after the 60th
payment date, the three month average of the aggregate principal balance of
mortgage loans that are 60 or more days delinquent (including for this purpose
any such mortgage loans in foreclosure and mortgage loans with respect to which
the related mortgaged property has been acquired by the trust) as of the close
of business on the last day of the preceding calendar month exceeds 5.00% of the
aggregate Stated Principal Balance of the mortgage loans; or
(2) the three month average of the aggregate principal balances of the
mortgage loans that are 90 or more days delinquent (including for this purpose
any such mortgage loans in foreclosure and mortgage loans with respect to which
the related mortgaged property has been acquired by the trust) as of the close
of business on the last day of the preceding calendar month exceeds 35% of the
Overcollateralization Amount; and the cumulative amount of Realized Losses
incurred on the mortgage
S-87
loans from the Cut-off Date through the end of the calendar month immediately
preceding such payment date exceeds (a) in the case of any payment date after
the 36th payment date and before the 120th payment date, 25.00% of the
Overcollateralization Amount, or (b) in the case of any payment date after the
120th payment date, 50.00% of the Overcollateralization Amount; or
(3) (a) in the case of any payment date after the 36th payment date
and on or before the 48th payment date, the cumulative amount of Realized Losses
incurred on the mortgage loans from the Cut-off Date through the end of the
calendar month immediately preceding such payment date exceeds 0.50% of the
Cut-off Date Balance, (b) in the case of any payment date after the 48th payment
date and on or before the 60th payment date, the cumulative amount of Realized
Losses incurred on the mortgage loans from the Cut-off Date through the end of
the calendar month immediately preceding such payment date exceeds 1.00% of the
Cut-off Date Balance, (c) in the case of any payment date after the 60th payment
date and on or before the 72nd payment date, the cumulative amount of Realized
Losses incurred on the mortgage loans from the Cut-off Date through the end of
the calendar month immediately preceding such payment date exceeds 1.50% of the
Cut-off Date Balance and (d) in the case of any payment date after the 72nd
payment date, the cumulative amount of Realized Losses incurred on the mortgage
loans from the Cut-off Date through the end of the calendar month immediately
preceding such payment date exceeds 1.75% of the Cut-off Date Balance.
For purposes of the foregoing calculations, a mortgage loan is considered "60
days" and "90 days" delinquent if a payment due on the first day of a month has
not been received by the second day of the second following month and third
following month, respectively.
TRUST AGREEMENT -- The Amended and Restated Trust Agreement dated as of October
30, 2001, among the Owner Trustee, the Certificate Registrar and the Company.
UNDERWRITERS-- Countrywide Securities Corporation and J.P. Morgan Securities
Inc.
UNPAID INTEREST SHORTFALL -- For each class of Bonds and any payment date, such
Bonds' pro rata share, based on the amount of Accrued Bond Interest otherwise
payable on such Bond on such payment date of (a) any Prepayment Interest
Shortfalls, to the extent not covered by Compensating Interest, and (b) any
Relief Act Shortfalls, plus interest on the amount of Unpaid Interest Shortfall
on such class of Bonds, at the Bond Interest Rate for such class for the related
Accrual Period.
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ANNEX I
GLOBAL CLEARANCE, SETTLEMENT AND TAX DOCUMENTATION PROCEDURES
Except in certain limited circumstances, the globally offered Impac CMB
Trust Series 2001-3 Collateralized Asset-Backed Bonds, Class A-1, Class A-2,
Class M-1, Class M-2 and Class B (the "Global Securities") will be available
only in book-entry form. Investors in the Global Securities may hold interests
in 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. Capitalized terms used but not defined in this
Annex I have the meanings assigned to them in the prospectus supplement and the
prospectus.
Secondary market trading between investors holding interests in Global
Securities through Clearstream and Euroclear will be conducted 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 interests in 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 investors holding interests in
Global Securities through Clearstream or Euroclear and investors holding
interests in Global Securities through DTC participants 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. 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 interests in Global Securities through DTC
participants will be subject to the settlement practices applicable to similar
issues of pass-through certificates. Investors' securities custody accounts will
be credited with their holdings against payment in same-day funds on the
settlement date.
Investors electing to hold interests in 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.
I-1
SECONDARY MARKET TRADING
Since the purchaser determines the place of delivery, it is important to
establish at the time of the trade where both the purchaser's and seller's
accounts are located to ensure that settlement can be made on the desired value
date.
TRANSFERS BETWEEN DTC PARTICIPANTS. Secondary market trading between DTC
participants will be settled using the DTC procedures applicable to similar
issues of pass-through certificates in same-day funds.
TRANSFERS 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.
TRANSFERS 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 its respective depository
to receive the Global Securities against payment. Payment will include interest
accrued on the Global Securities from and including the last payment date to but
excluding the settlement date. Payment will then be made by the respective
depository to the DTC participant's account against delivery of the Global
Securities. After such 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 Global Securities credit will appear on the
next business day (European time) and the cash debit 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 through DTC on the intended value date (i.e., the trade fails),
the Clearstream or Euroclear cash debit will be valued instead as of the actual
settlement date.
Clearstream participants and Euroclear participants will need to make
available to the respective clearing system the funds necessary to process
same-day funds settlement. The most direct means of doing so is to pre-position
funds for settlement, either from cash on hand or existing lines of credit, as
they would for any settlement occurring with 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 pre-position 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, to the extent 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, the investment income on the interest in
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 cost of funds.
Since the settlement through DTC will take place during New York business
hours, DTC
I-2
participants can employ their usual procedures for sending Global Securities to
the respective 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 participant, a cross-market transaction
will settle no differently than a trade between two DTC participants.
TRANSFERS 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 the Euroclear Operator through a Clearstream
participant or Euroclear participant at least one business day prior to
settlement. Clearstream or Euroclear will instruct its respective depository, 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 payment date to but excluding the settlement date. The
payment will then be reflected in the account of the Clearstream participant or
Euroclear participant the following business 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 through DTC 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 charges
incurred over that one-day period. If settlement is not completed on the
intended value date (i.e., the trade fails), receipt of the cash proceeds in the
Clearstream participant's or Euroclear participant's account would instead be
valued as of the actual settlement date.
Finally, day traders that use Clearstream or Euroclear and purchase Global
Securities from DTC participants for delivery to Clearstream participants or
Euroclear participants should note that these trades will automatically fail on
the sale side unless affirmative action were taken. At least three techniques
should be available to eliminate this potential problem:
(a) borrowing Global Securities through Clearstream or Euroclear for
one day (until the purchase side of the day trade is reflected in the
relevant Clearstream or Euroclear accounts) in accordance with the clearing
system's customary procedures;
(b) borrowing Global Securities in the United States from a DTC
participant no later than one day prior to settlement, which would give the
Global Securities sufficient time to be reflected in the relevant
Clearstream or Euroclear accounts 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 (as defined below), unless (i) each clearing system, bank
or other financial
I-3
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 Holders of Global
Securities that are Non-U.S. Persons (as defined below) 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.
EXEMPTION FOR NON-U.S. PERSONS WITH EFFECTIVELY CONNECTED INCOME (FORM
W-8ECI). A Non-U.S. Person (as defined below), including a non-U.S. corporation
or bank with a U.S. branch, for which the interest income is effectively
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 (Exemption
from Withholding of Tax on Income Effectively Connected with the Conduct of a
Trade or Business in the United States) or a substitute form.
EXEMPTION OR REDUCED RATE FOR NON-U.S. PERSONS RESIDENT IN TREATY COUNTRIES
(FORM W- 8BEN). Non- U.S. Persons 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 Oener for United States Tax Withholding). Form W-8BEN may be filed by
a beneficial owner or its agent.
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 (Payer's Request for
Taxpayer Identification Number and Certification).
U.S. Federal Income Tax Reporting Procedure. The beneficial owner of a
Global Security or, in the case of a Form W-8BEN or a Form W-8ECI filer, his
agent, files by submitting the appropriate form to the person through whom it
holds the security (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 the form is signed.
The term "U.S. Person" means (i) a citizen or resident of the United
States, (ii) a corporation, a partnership or other entity treated as a
corporation or a partnership for United States federal income tax purposes,
organized in or under the laws of the United States or any state thereof,
including for this purpose the District of Columbia, (iii) an estate, the income
of which is includible in gross income for United States tax purposes,
regardless of its source, (iv) a trust if a court within the United States is
able to exercise primary supervision of the administration of the trust and one
or more United States fiduciaries have the authority to control all substantial
decisions of the trust; or (v) to the extent provided in Treasury regulations,
certain trusts in existence on August 20, 1996 that are treated as United States
persons prior to such date and elect to continue to be treated as United States
persons. The term "Non-U.S. Person" means any person who is not 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
IMH ASSETS CORP.
Company
COLLATERALIZED ASSET-BACKED BONDS
YOU SHOULD CONSIDER CAREFULLY THE RISK FACTORS IN THE
PROSPECTUS SUPPLEMENT.
THE OFFERED BONDS
The company proposes to establish one or more trusts to issue and sell from time
to time one or more classes of offered bonds, which shall be collateralized
asset-backed bonds.
THE TRUST FUND
Each series of bonds will be secured by a trust fund consisting primarily of a
segregated pool of mortgage loans, including:
o mortgage loans secured by first and junior liens on the
related mortgage property;
o home equity revolving lines of credit;
o mortgage loans where the borrower has little or no equity in
the related mortgaged property;
o mortgage loans secured by one-to-four-family residential
properties;
o mortgage loans secured by multifamily properties, commercial
properties and mixed residential and commercial properties,
provided that the concentration of these properties is less
than 10% of the pool; and
o manufactured housing conditional sales contracts and
installment loan agreements or interests therein;
in each case acquired by the company from one or more affiliated or unaffiliated
institutions.
CREDIT ENHANCEMENT
If so specified in the related prospectus supplement, the trust for a series of
bonds may include any one or any combination of a financial guaranty insurance
policy, mortgage pool insurance policy, letter of credit, special hazard
insurance policy or reserve fund, and currency or interest rate exchange
agreements. In addition to or in lieu of the foregoing, credit enhancement may
be provided by means of subordination of one or more classes of bonds, by
cross-support or by overcollateralization.
The offered bonds may be offered to the public through different methods as
described in "Methods of Distribution" in this prospectus.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THE BONDS OFFERED HEREBY OR DETERMINED
THAT THIS PROSPECTUS OR THE PROSPECTUS SUPPLEMENT IS TRUTHFUL OR COMPLETE. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
The date of this prospectus is October 25, 2001.
TABLE OF CONTENTS
Caption Page
------- ----
INTRODUCTION......................................................................................................3
General......................................................................................................3
THE MORTGAGE POOLS................................................................................................4
General......................................................................................................4
The Mortgage Loans...........................................................................................6
Underwriting Standards......................................................................................10
Qualifications of Originators and Sellers...................................................................12
Representations by Sellers..................................................................................12
SERVICING OF MORTGAGE LOANS......................................................................................15
General.....................................................................................................15
The Master Servicer.........................................................................................16
Collection and Other Servicing Procedures; Mortgage Loan
Modifications...........................................................................................16
Subservicers................................................................................................18
Special Servicers...........................................................................................19
Realization upon or Sale of Defaulted Mortgage Loans........................................................19
Servicing and Other Compensation and Payment of Expenses;
Retained Interest.......................................................................................21
Evidence as to Compliance...................................................................................22
DESCRIPTION OF THE BONDS.........................................................................................23
General.....................................................................................................23
Form of Bonds...............................................................................................24
Global Bonds................................................................................................25
Assignment of Trust Fund Assets.............................................................................28
Payment Account.............................................................................................31
Distributions...............................................................................................35
Distributions of Interest and Principal on the Bonds........................................................35
Pre-Funding Account.........................................................................................36
Distributions on the Bonds in Respect of Prepayment Premiums
.......................................................................................................37
Allocation of Losses and Shortfalls.........................................................................37
Advances....................................................................................................37
Reports to Bondholders......................................................................................38
DESCRIPTION OF CREDIT ENHANCEMENT................................................................................40
General.....................................................................................................40
Subordinate Bonds...........................................................................................40
Cross-support...............................................................................................41
Overcollateralization.......................................................................................41
Financial Guaranty Insurance Policy.........................................................................41
Mortgage Pool Insurance Policies............................................................................41
Letter of Credit............................................................................................43
Special Hazard Insurance Policies...........................................................................43
Reserve Funds...............................................................................................44
Cash Flow Agreements........................................................................................45
Maintenance of Credit Enhancement...........................................................................45
Reduction or Substitution of Credit Enhancement.............................................................47
OTHER FINANCIAL OBLIGATIONS RELATED TO THE
BONDS.......................................................................................................48
Swaps and Yield Supplement Agreements.......................................................................48
Purchase Obligations........................................................................................48
PRIMARY MORTGAGE INSURANCE, HAZARD INSURANCE;
...........................................................................................................49
CLAIMS THEREUNDER................................................................................................49
General.....................................................................................................49
Primary Mortgage Insurance Policies.........................................................................49
Hazard Insurance Policies...................................................................................50
FHA Insurance...............................................................................................52
VA Mortgage Guaranty........................................................................................52
THE COMPANY......................................................................................................53
IMPAC FUNDING CORPORATION........................................................................................53
IMPAC MORTGAGE HOLDINGS, INC.....................................................................................53
THE AGREEMENTS...................................................................................................54
General.....................................................................................................54
Certain Matters Regarding the Master Servicer and the
Company.................................................................................................54
Events of Default and Rights upon Event Default.............................................................55
Amendment...................................................................................................57
Termination; Retirement of Bonds............................................................................58
The Trustee.................................................................................................58
Duties of the Trustee.......................................................................................59
Some Matters Regarding the Trustee..........................................................................59
RESIGNATION AND REMOVAL OF THE TRUSTEE...........................................................................59
YIELD CONSIDERATIONS.............................................................................................59
MATURITY AND PREPAYMENT CONSIDERATIONS...........................................................................62
LEGAL ASPECTS OF MORTGAGE LOANS..................................................................................64
Mortgages...................................................................................................64
Cooperative Mortgage Loans..................................................................................64
Tax Aspects of Cooperative Ownership........................................................................66
Leases and Rents............................................................................................66
Contracts...................................................................................................66
Foreclosure on Mortgages and Some Contracts.................................................................68
Foreclosure on Shares of Cooperatives.......................................................................69
Repossession with Respect to Contracts......................................................................71
Rights of Redemption........................................................................................72
Anti-deficiency Legislation and Other Limitations on Lenders
.......................................................................................................73
Environmental Legislation...................................................................................74
Consumer Protection Laws with Respect to Contracts..........................................................76
Enforceability of Some Provisions...........................................................................76
Subordinate Financing.......................................................................................77
Installment Contracts.......................................................................................78
Applicability of Usury Laws.................................................................................78
Alternative Mortgage Instruments............................................................................79
Formaldehyde Litigation with Respect to Contracts...........................................................79
Soldiers' and Sailors' Civil Relief Act of 1940.............................................................80
Forfeitures in Drug and Rico Proceedings....................................................................80
Junior Mortgages............................................................................................81
Negative Amortization Loans.................................................................................81
FEDERAL INCOME TAX CONSEQUENCES..................................................................................82
General.....................................................................................................82
STATE AND OTHER TAX CONSEQUENCES.................................................................................90
ERISA CONSIDERATIONS.............................................................................................90
Representation from Plans Investing in Bonds with "Substantial
Equity Features" or Non-exempt Bonds....................................................................95
Tax Exempt Investors........................................................................................95
Consultation with Counsel...................................................................................95
LEGAL INVESTMENT MATTERS.........................................................................................96
USE OF PROCEEDS..................................................................................................97
METHODS OF DISTRIBUTION..........................................................................................98
LEGAL MATTERS....................................................................................................99
FINANCIAL INFORMATION............................................................................................99
RATINGS..........................................................................................................99
AVAILABLE INFORMATION............................................................................................99
REPORTS TO BONDHOLDERS..........................................................................................100
INCORPORATION OF INFORMATION BY REFERENCE.......................................................................100
2
INTRODUCTION
ALL CAPITALIZED TERMS IN THIS PROSPECTUS ARE DEFINED IN THE GLOSSARY AT
THE END.
GENERAL
The collateralized asset-backed bonds offered by this prospectus and
the prospectus supplement will be offered from time to time in series. The bonds
of each series will consist of the offered bonds of the series, together with
any other collateralized asset-backed bonds of the series.
Each series of bonds will represent indebtedness of a trust fund to be
established by the company. Each trust fund will consist primarily of a mortgage
pool of mortgage loans or interests therein, which may include mortgage
securities, acquired by the company from one or more affiliated or unaffiliated
sellers. See "The Company" and "The Mortgage Pools." The mortgage loans may
include sub-prime mortgage loans. The trust fund assets may only include, if
applicable, the mortgage loans, reinvestment income, reserve funds, cash
accounts and various forms of credit enhancement as described in this prospectus
and will be held in trust for the benefit of the related bondholders pursuant to
an indenture, in each case as more fully described in this prospectus and in the
related prospectus supplement. Information regarding the offered bonds of a
series, and the general characteristics of the mortgage loans and other trust
fund assets in the related trust fund, will be set forth in the related
prospectus supplement.
Each series of bonds will include one or more classes. Each class of
bonds of any series will represent the right, which right may be senior or
subordinate to the rights of one or more of the other classes of the bonds, to
receive a specified portion of payments of principal or interest or both on the
mortgage loans and the other trust fund assets in the related trust fund in the
manner described in this prospectus under "Description of the Bonds" and in the
related prospectus supplement. A series may include one or more classes of bonds
entitled to principal distributions, with disproportionate, nominal or no
interest distributions, or to interest distributions, with disproportionate,
nominal or no principal distributions. A series may include two or more classes
of bonds which differ as to the timing, sequential order, priority of payment,
pass-through rate or amount of distributions of principal or interest or both.
The company's only obligations with respect to a series of bonds will
be pursuant to representations and warranties made by the company, except as
provided in the related prospectus supplement. The master servicer for any
series of bonds will be named in the related prospectus supplement. The
principal obligations of the master servicer will be pursuant to its contractual
servicing obligations, which include its limited obligation to make advances in
the event of delinquencies in payments on the related mortgage loans. See
"Description of the Bonds."
If so specified in the related prospectus supplement, the trust fund
for a series of bonds may include any one or any combination of a financial
guaranty insurance policy, mortgage pool insurance policy, letter of credit,
special hazard insurance policy, reserve fund or currency or interest rate
exchange agreements. In addition to or in lieu of the foregoing, credit
enhancement may be provided by means of subordination of one or more classes of
bonds or by overcollateralization. See "Description of Credit Enhancement."
The rate of payment of principal of each class of bonds entitled to a
portion of principal payments on the mortgage loans in the related mortgage pool
and the trust fund assets will depend on the priority of payment of the class
and the rate and timing of principal payments on the mortgage loans and other
trust fund assets, including by reason of prepayments, defaults, liquidations
and repurchases of mortgage loans. A rate of principal payment slower or faster
than that anticipated may affect the yield on a class of bonds
3
in the manner described in this prospectus and in the related prospectus
supplement. See "Yield Considerations."
The offered bonds may be offered through one or more different methods,
including offerings through underwriters, as more fully described under "Methods
of Distribution" and in the related prospectus supplement.
There will be no secondary market for the offered bonds of any series
prior to the offering thereof. There can be no assurance that a secondary market
for any of the offered bonds will develop or, if it does develop, that it will
continue. The offered bonds will not be listed on any securities exchange.
THE MORTGAGE POOLS
GENERAL
Each mortgage pool will consist primarily of mortgage loans, minus any
interest retained by the company or any affiliate of the company. The mortgage
loans may consist of single family loans, multifamily loans, commercial loans,
mixed-use loans and Contracts, each as described below.
The single family loans will be evidenced by mortgage notes and secured
by mortgages that, in each case, create a first or junior lien on the related
mortgagor's fee or leasehold interest in the related mortgaged property. The
related mortgaged property for a single family loan may be owner-occupied or may
be a vacation, second or non-owner-occupied home.
If specified in the related prospectus supplement relating to a series
of bonds, the single family loans may include cooperative apartment loans
evidenced by a mortgage note secured by security interests in the related
mortgaged property including shares issued by cooperatives and in the related
proprietary leases or occupancy agreements granting exclusive rights to occupy
specific dwelling units in the related buildings.
The multifamily loans will be evidenced by mortgage notes and secured
by mortgages that create a first or junior lien on residential properties
consisting of five or more dwelling units in high-rise, mid- rise or garden
apartment structures or projects.
The commercial loans will be evidenced by mortgage notes and secured
mortgages that create a first or junior lien on commercial properties including
office building, retail building and a variety of other commercial properties as
may be described in the related prospectus supplement.
The mixed-use loans will be evidenced by mortgage loans and secured by
mortgages that create a first or junior lien on properties consisting of mixed
residential and commercial structures.
The aggregate concentration by original principal balance of
commercial, multifamily and mixed- use loans in any mortgage pool will be less
than 10% of the original principal balance of the mortgage pool.
Mortgaged properties may be located in any one of the 50 states, the
District of Columbia or the Commonwealth of Puerto Rico.
The mortgage loans will not be guaranteed or insured by the company or
any of its affiliates. However, if so specified in the related prospectus
supplement, the mortgage loans may be insured by the
4
FHA or the VA. See "Primary Mortgage Insurance, Hazard Insurance; Claims
Thereunder--FHA Insurance" and "-- VA Mortgage Guaranty" in this prospectus.
A mortgage pool may include mortgage loans that are delinquent as of
the date the related series of bonds is issued. In that case, the related
prospectus supplement will set forth, as to each mortgage loan, available
information as to the period of delinquency and any other information relevant
for a prospective purchaser to make an investment decision. No mortgage loan in
a mortgage pool shall be 90 days or more delinquent. Mortgage loans which are
more than 30 and less than 90 days delinquent included in any mortgage pool will
have delinquency data relating to them included in the related prospectus
supplement. No mortgage pool will include a concentration of mortgage loans
which is more than 30 and less than 90 days delinquent of 20% or more.
The mortgage loans may include "sub-prime" mortgage loans. "Sub-prime"
mortgage loans will be underwritten in accordance with underwriting standards
which are less stringent than guidelines for "A" quality borrowers. Mortgagors
may have a record of outstanding judgments, prior bankruptcies and other credit
items that do not satisfy the guidelines for "A" quality borrowers. They may
have had past debts written off by past lenders.
A mortgage pool may include mortgage loans that do not meet the
purchase requirements of Fannie Mae and Freddie Mac. These mortgage loans are
known as nonconforming loans. The mortgage loans may be nonconforming because
they exceed the maximum principal balance of mortgage loans purchased by Fannie
Mae and Freddie Mac, known as jumbo loans, because they are sub-prime mortgage
loans, or because of some other failure to meet the purchase criteria of Fannie
Mae and Freddie Mac. The related prospectus supplement will detail to what
extent the mortgage loans are nonconforming mortgage loans.
Each mortgage loan will be selected by the company for inclusion in a
mortgage pool from among those purchased by the company, either directly or
through its affiliates, from Unaffiliated Sellers or Affiliated Sellers. If a
mortgage pool is composed of mortgage loans acquired by the company directly
from Unaffiliated Sellers, the related prospectus supplement will specify the
extent of mortgage loans so acquired. The characteristics of the mortgage loans
are as described in the related prospectus supplement. Other mortgage loans
available for purchase by the company may have characteristics which would make
them eligible for inclusion in a mortgage pool but were not selected for
inclusion in the mortgage pool.
The mortgage loans may be delivered to the trust fund pursuant to a
Designated Seller Transaction, concurrently with the issuance of the related
series of bonds. These bonds may be sold in whole or in part to the Seller in
exchange for the related mortgage loans, or may be offered under any of the
other methods described in this prospectus under "Methods of Distribution." The
related prospectus supplement for a mortgage pool composed of mortgage loans
acquired by the company pursuant to a Designated Seller Transaction will
generally include information, provided by the related Seller, about the Seller,
the mortgage loans and the underwriting standards applicable to the mortgage
loans.
If specified in the related prospectus supplement, the trust fund for a
series of bonds may include mortgage securities, as described in this
prospectus. The mortgage securities may have been issued previously by the
company or an affiliate thereof, a financial institution or other entity engaged
generally in the business of mortgage lending or a limited purpose corporation
organized for the purpose of, among other things, acquiring and depositing
mortgage loans into trusts, and selling beneficial interests in trusts. The
mortgage securities will be generally similar to bonds offered under this
prospectus. However, any mortgage securities included in a trust fund will (1)
either have been (a) previously registered under the Securities Act, or (b)
eligible for sale under Rule 144(k) under the Exchange Act; and (2) be acquired
in bona fide secondary market transactions. If the mortgage securities are the
securities of the company or an
5
affiliate thereof, they will be registered under the Securities Act, even if
they satisfy the requirements of the preceding sentence. As to any series of
mortgage securities, the related prospectus supplement will include a
description of (1) the mortgage securities and any related credit enhancement,
and (2) the mortgage loans underlying the mortgage securities.
THE MORTGAGE LOANS
Each of the mortgage loans will be a type of mortgage loan described or
referred to below, with any variations described in the related prospectus
supplement:
o Fixed-rate, fully-amortizing mortgage loans (which may include
mortgage loans converted from adjustable-rate mortgage loans or
otherwise modified) providing for level monthly payments of
principal and interest and terms at origination or modification
of not more than approximately 15 years;
o Fixed-rate, fully-amortizing mortgage loans (which may include
mortgage loans converted from adjustable-rate mortgage loans or
otherwise modified) providing for level monthly payments of
principal and interest and terms at origination or modification
of more than 15 years, but not more than approximately 30 years;
o Fully-amortizing ARM Loans having an original or modified term to
maturity of not more than approximately 30 years with a related
mortgage rate which generally adjusts initially either three
months, six months or one, two, three, five, seven or ten years
or other intervals subsequent to the initial payment date, and
thereafter at either three- month, six-month, one-year or other
intervals (with corresponding adjustments in the amount of
monthly payments) over the term of the mortgage loan to equal the
sum of the related Note Margin and the Index. The related
prospectus supplement will set forth the relevant Index and the
highest, lowest and weighted average Note Margin with respect to
the ARM Loans in the related mortgage pool. The related
prospectus supplement will also indicate any periodic or lifetime
limitations on changes in any per annum mortgage rate at the time
of any adjustment. If specified in the related prospectus
supplement, an ARM Loan may include a provision that allows the
mortgagor to convert the adjustable mortgage rate to a fixed rate
at some point during the term of the ARM Loan generally not later
than six to ten years subsequent to the initial payment date;
o Negatively-amortizing ARM Loans having original or modified terms
to maturity of not more than approximately 30 years with mortgage
rates which generally adjust initially on the payment date
referred to in the related prospectus supplement, and on each of
specified periodic payment dates thereafter, to equal the sum of
the Note Margin and the Index. The scheduled monthly payment will
be adjusted as and when described in the related prospectus
supplement to an amount that would fully amortize the mortgage
loan over its remaining term on a level debt service basis;
provided that increases in the scheduled monthly payment may be
subject to limitations as specified in the related prospectus
supplement. Any Deferred Interest will be added to the principal
balance of the mortgage loan;
o Fixed-rate, graduated payment mortgage loans having original or
modified terms to maturity of not more than approximately 15
years with monthly payments during the first year calculated on
the basis of an assumed interest rate which is a specified
percentage below the mortgage rate on the mortgage loan. Monthly
payments on these mortgage loans increase at the beginning of the
second year by a specified percentage of the
6
monthly payment during the preceding year and each year
thereafter to the extent necessary to amortize the mortgage loan
over the remainder of its approximately 15-year term. Deferred
Interest, if any, will be added to the principal balance of these
mortgage loans;
o Fixed-rate, graduated payment mortgage loans having original or
modified terms to maturity of not more than approximately 30
years with monthly payments during the first year calculated on
the basis of an assumed interest rate which is a specified
percentage below the mortgage rate. The monthly payments on these
mortgage loans increase at the beginning of the second year by a
specified percentage of the monthly payment during the preceding
year and each year thereafter to the extent necessary to fully
amortize the mortgage loan within its approximately 25- or
30-year term. Deferred Interest, if any, will be added to the
principal balance of these mortgage loans;
o Balloon loans having payment terms similar to those described in
one of the preceding paragraphs, calculated on the basis of an
assumed amortization term, but providing for a balloon payment of
all outstanding principal and interest to be made at the end of a
specified term that is shorter than the assumed amortization
term.
o Mortgage loans that provide for a line of credit pursuant to
which amounts may be advanced to the borrower from time to time;
or
o Another type of mortgage loan described in the related prospectus
supplement.
The mortgage pool may contain mortgage loans secured by junior liens,
and the related senior liens may not be included in the mortgage pool. The
primary risk to holders of mortgage loans secured by junior liens is the
possibility that adequate funds will not be received in connection with a
foreclosure of the related senior liens to satisfy fully both the senior liens
and the mortgage loan. In the event that a holder of a senior lien forecloses on
a mortgaged property, the proceeds of the foreclosure or similar sale will be
applied first to the payment of court costs and fees in connection with the
foreclosure, second to real estate taxes, third in satisfaction of all
principal, interest, prepayment or acceleration penalties, if any, and any other
sums due and owing to the holder of the senior liens. The claims of the holders
of the senior liens will be satisfied in full out of proceeds of the liquidation
of the related mortgaged property, if the proceeds are sufficient, before the
trust fund as holder of the junior lien receives any payments in respect of the
mortgage loan. If the master servicer were to foreclose on a mortgage loan
secured by a junior lien, it would do so subject to any related senior liens. In
order for the debt related to the mortgage loan to be paid in full at the sale,
a bidder at the foreclosure sale of the mortgage loan would have to bid an
amount sufficient to pay off all sums due under the mortgage loan and the senior
liens or purchase the mortgaged property subject to the senior liens. In the
event that the proceeds from a foreclosure or similar sale of the related
mortgaged property are insufficient to satisfy all senior liens and the mortgage
loan in the aggregate, the trust fund, as the holder of the junior lien, and,
accordingly, holders of one or more classes of the bonds of the related series
bear (1) the risk of delay in distributions while a deficiency judgment against
the borrower is sought and (2) the risk of loss if the deficiency judgment is
not realized upon. Moreover, deficiency judgments may not be available in some
jurisdictions or the mortgage loan may be nonrecourse. In addition, a junior
mortgagee may not foreclose on the property securing a junior mortgage unless it
forecloses subject to the senior mortgages.
A mortgage loan may contain a prohibition on prepayment or lock-out
period or require payment of a prepayment penalty. A multifamily, commercial or
mixed-use loan may also contain a provision that entitles the lender to a share
of profits realized from the operation or disposition of the related mortgaged
property. If the holders of any class or classes of offered bonds of a series
will be entitled to all or a
7
portion of this type of equity participation, the related prospectus supplement
will describe the equity participation and the method or methods by which
distributions in respect thereof will be made to such holders.
The mortgage loans may be "equity refinance" mortgage loans, as to
which a portion of the proceeds are used to refinance an existing mortgage loan,
and the remaining proceeds may be retained by the mortgagor or used for purposes
unrelated to the mortgaged property. Alternatively, the mortgage loans may be
"rate and term refinance" mortgage loans, as to which substantially all of the
proceeds (net of related costs incurred by the mortgagor) are used to refinance
an existing mortgage loan or loans (which may include a junior lien) primarily
in order to change the interest rate or other terms thereof. The mortgage loans
may be mortgage loans which have been consolidated and/or have had various terms
changed, mortgage loans which have been converted from adjustable rate mortgage
loans to fixed rate mortgage loans, or construction loans which have been
converted to permanent mortgage loans. In addition, a mortgaged property may be
subject to secondary financing at the time of origination of the mortgage loan
or thereafter. In addition, some or all of the single family loans secured by
junior liens may be High LTV Loans.
A mortgage pool may contain convertible ARM Loans which allow the
mortgagors to convert the adjustable rates on these mortgage loans to a fixed
rate at some point during the life of these mortgage loans, generally not later
than six to ten years subsequent to the date of origination, depending upon the
length of the initial adjustment period. If specified in the related prospectus
supplement, upon any conversion, the company, the related master servicer, the
applicable Seller or a third party will purchase the converted mortgage loan as
and to the extent set forth in the related prospectus supplement. Alternatively,
if specified in the related prospectus supplement, the company or the related
master servicer (or another specified party) may agree to act as remarketing
agent with respect to the converted mortgage loans and, in this capacity, to use
its best efforts to arrange for the sale of converted mortgage loans under
specified conditions. Upon the failure of any party so obligated to purchase any
converted mortgage loan, the inability of any remarketing agent to arrange for
the sale of the converted mortgage loan and the unwillingness of the remarketing
agent to exercise any election to purchase the converted mortgage loan for its
own account, the related mortgage pool will thereafter include both fixed rate
and adjustable rate mortgage loans.
If provided for in the related prospectus supplement, the mortgage
loans may include buydown mortgage loans. Under the terms of a buydown mortgage
loan, the monthly payments made by the mortgagor during the early years of the
mortgage loan will be less than the scheduled monthly payments on the mortgage
loan. The resulting difference will made up from:
o funds contributed by the seller of the mortgaged property or
another source and placed in a custodial account,
o if funds contributed by the seller are contributed on a present
value basis, investment earnings on these funds or
o additional funds to be contributed over time by the mortgagor's
employer or another source.
See "Description of the Bonds--Payment Account."
Generally, the mortgagor under each buydown mortgage loan will be
qualified at the applicable lower monthly payment. Accordingly, the repayment of
a buydown mortgage loan is dependent on the
8
ability of the mortgagor to make larger level monthly payments after the Buydown
Funds have been depleted and, for some buydown mortgage loans, during the
Buydown Period.
The prospectus supplement for each series of bonds will contain
information, to the extent known or reasonably ascertainable, as to the loss and
delinquency experience of the Seller and/or the master servicer with respect to
mortgage loans similar to those included in the trust fund. Information
generally will be provided when the Seller and/or master servicer have a
seasoned portfolio of mortgage loans.
The prospectus supplement for each series of bonds will contain
information as to the type of mortgage loans that will be included in the
related mortgage pool. Each prospectus supplement applicable to a series of
bonds will include information, generally as of the cut-off date and to the
extent then available to the company, on an approximate basis, as to the
following:
o the aggregate principal balance of the mortgage loans,
o the type of property securing the mortgage loans,
o the original or modified terms to maturity of the mortgage loans,
o the range of principal balances of the mortgage loans at
origination or modification,
o the earliest origination or modification date and latest maturity
date of the mortgage loans,
o the loan-to-value ratios of the mortgage loans,
o the mortgage rate or range of mortgage rates borne by the
mortgage loans,
o if any of the mortgage loans are ARM Loans, the applicable Index,
the range of Note Margins and the weighted average Note Margin,
o the geographical distribution of the mortgage loans,
o the number of buydown mortgage loans, if applicable, and
o the percent of ARM Loans which are convertible to fixed-rate
mortgage loans, if applicable.
A Current Report on Form 8-K will be available upon request to holders of the
related series of bonds and will be filed, together with the related servicing
agreement, owner trust agreement and indenture, with the Commission within
fifteen days after the initial issuance of the bonds. In the event that mortgage
loans are added to or deleted from the trust fund after the date of the related
prospectus supplement, the addition or deletion will be noted in the Current
Report on Form 8-K. In no event, however, will more than 5% (by principal
balance at the cut-off date) of the mortgage loans or mortgage securities
deviate from the characteristics of the mortgage loans or mortgage securities
set forth in the related prospectus supplement.
The company will cause the mortgage loans constituting each mortgage
pool, or mortgage securities evidencing interests therein, to be assigned,
without recourse, to the trustee named in the related prospectus supplement, for
the benefit of the holders of all of the bonds of a series. Except to the extent
that servicing of any mortgage loan is to be transferred to a special servicer,
the master servicer named in the related prospectus supplement will service the
mortgage loans, directly or through subservicers,
9
pursuant to a servicing agreement, and will receive a fee for these services.
See "Servicing of Mortgage Loans," "Description of the Bonds" and "The
Agreements." With respect to those mortgage loans serviced by the master
servicer through a subservicer, the master servicer will remain liable for its
servicing obligations under the related servicing agreement as if the master
servicer alone were servicing the mortgage loans. The master servicer's
obligations with respect to the mortgage loans will consist principally of its
contractual servicing obligations under the related servicing agreement
(including its obligation to enforce the purchase and other obligations of
subservicers and Sellers, as more fully described in this prospectus under
"--Representations by Sellers" in this prospectus, "Servicing of Mortgage
Loans--Subservicers," and "Description of the Bonds--Assignment of Trust Fund
Assets," and, if and to the extent set forth in the related prospectus
supplement, its obligation to make cash advances in the event of delinquencies
in payments on or with respect to the mortgage loans as described in this
prospectus under "Description of the Bonds--Advances") or pursuant to the terms
of any mortgage securities.
UNDERWRITING STANDARDS
Mortgage loans to be included in a mortgage pool will have been
purchased by the company, either directly or indirectly from Sellers. The
mortgage loans, as well as mortgage loans underlying mortgage securities, will
have been originated in accordance with underwriting standards acceptable to the
company and generally described below. Any mortgage loan not directly
underwritten by the company or its affiliates will be reunderwritten by the
company or its affiliates, except in the case of a Designated Seller's
Transaction, in which case each mortgage loan will be underwritten by the Seller
or an affiliate thereof. The reunderwriting standards of the company or its
affiliates for these mortgage loans generally will be in accordance with the
same standards as those for mortgage loans directly underwritten, with any
variations described in the related prospectus supplement.
The underwriting standards to be used in originating the mortgage loans
are primarily intended to assess the creditworthiness of the mortgagor, the
value of the mortgaged property and the adequacy of the property as collateral
for the mortgage loan.
The primary considerations in underwriting a mortgage loan are the
mortgagor's employment stability and whether the mortgagor has sufficient
monthly income available (1) to meet the mortgagor's monthly obligations on the
proposed mortgage loan (generally determined on the basis of the monthly
payments due in the year of origination) and other expenses related to the home
(including property taxes and hazard insurance) and (2) to meet monthly housing
expenses and other financial obligations and monthly living expenses. However,
the loan-to-value ratio of the mortgage loan is another critical factor. In
addition, a mortgagor's credit history and repayment ability, as well as the
type and use of the mortgaged property, are also considerations.
High LTV Loans are underwritten with an emphasis on the
creditworthiness of the related mortgagor. High LTV Loans are underwritten with
a limited expectation of recovering any amounts from the foreclosure of the
related mortgaged property.
In the case of the multifamily loans, commercial loans or mixed-use
loans, lenders typically look to the debt service coverage ratio of a loan as an
important measure of the risk of default on that loan. Unless otherwise defined
in the related prospectus supplement, the debt service coverage ratio of a
multifamily loan or commercial loan at any given time is the ratio of (1) the
net operating income of the related mortgaged property for a twelve-month period
which is to (2) the annualized scheduled payments on the mortgage loan and on
any other loan that is secured by a lien on the mortgaged property prior to the
lien of the related mortgage. The total operating revenues derived from a
multifamily, commercial or mixed-use property, as applicable, during that
period, minus the total operating expenses incurred in
10
respect of that property during that period other than (a) non-cash items such
as depreciation and amortization, (b) capital expenditures and (c) debt service
on loans (including the related mortgage loan) secured by liens on that
property. The net operating income of a multifamily, commercial or mixed-use
property, as applicable, will fluctuate over time and may or may not be
sufficient to cover debt service on the related mortgage loan at any given time.
As the primary source of the operating revenues of a multifamily, commercial or
mixed-use property, as applicable, rental income (and maintenance payments from
tenant-stockholders of a cooperatively owned multifamily property) may be
affected by the condition of the applicable real estate market and/or area
economy. Increases in operating expenses due to the general economic climate or
economic conditions in a locality or industry segment, such as increases in
interest rates, real estate tax rates, energy costs, labor costs and other
operating expenses, and/or changes in governmental rules, regulations and fiscal
policies, may also affect the risk of default on a multifamily, commercial or
mixed-use loan. Lenders also look to the loan-to-value ratio of a multifamily,
commercial or mixed-use loan as a measure of risk of loss if a property must be
liquidated following a default.
Each prospective mortgagor will generally complete a mortgage loan
application that includes information on the applicant's liabilities, income,
credit history, employment history and personal information. One or more credit
reports on each applicant from national credit reporting companies generally
will be required. The report typically contains information relating to credit
history with local and national merchants and lenders, installment debt payments
and any record of defaults, bankruptcies, repossessions, or judgments. In the
case of a multifamily loan, commercial loan or mixed-use loan, the mortgagor
will also be required to provide certain information regarding the related
mortgaged property, including a current rent roll and operating income
statements (which may be pro forma and unaudited). In addition, the originator
will generally also consider the location of the mortgaged property, the
availability of competitive lease space and rental income of comparable
properties in the relevant market area, the overall economy and demographic
features of the geographic area and the mortgagor's prior experience in owning
and operating properties similar to the multifamily properties or commercial
properties, as the case may be.
Mortgaged properties generally will be appraised by licensed
appraisers. The appraiser will generally address neighborhood conditions, site
and zoning status and condition and valuation of improvements. In the case of
mortgaged properties secured by single family loans, the appraisal report will
generally include a reproduction cost analysis (when appropriate) based on the
current cost of constructing a similar home and a market value analysis based on
recent sales of comparable homes in the area. With respect to multifamily
properties, commercial properties and mixed-use properties, the appraisal must
specify whether an income analysis, a market analysis or a cost analysis was
used. An appraisal employing the income approach to value analyzes a property's
projected net cash flow, capitalization and other operational information in
determining the property's value. The market approach to value analyzes the
prices paid for the purchase of similar properties in the property's area, with
adjustments made for variations between those other properties and the property
being appraised. The cost approach to value requires the appraiser to make an
estimate of land value and then determine the current cost of reproducing the
improvements less any accrued depreciation. In any case, the value of the
property being financed, as indicated by the appraisal, must support, and
support in the future, the outstanding loan balance. All appraisals are required
to be on forms acceptable to Fannie Mae or Freddie Mac.
Notwithstanding the foregoing, loan-to-value ratios will not
necessarily constitute an accurate measure of the risk of liquidation loss in a
pool of mortgage loans. For example, the value of a mortgaged property as of the
date of initial issuance of the related series of bonds may be less than the
Value determined at loan origination, and will likely continue to fluctuate from
time to time based upon changes in economic conditions and the real estate
market. Mortgage loans which are subject to negative
11
amortization will have loan-to-value ratios which will increase after
origination as a result of negative amortization. Also, even when current, an
appraisal is not necessarily a reliable estimate of value for a multifamily
property or commercial property. As stated above, appraised values of
multifamily, commercial and mixed-use properties are generally based on the
market analysis, the cost analysis, the income analysis, or upon a selection
from or interpolation of the values derived from those approaches. Each of these
appraisal methods can present analytical difficulties. It is often difficult to
find truly comparable properties that have recently been sold; the replacement
cost of a property may have little to do with its current market value; and
income capitalization is inherently based on inexact projections of income and
expenses and the selection of an appropriate capitalization rate. Where more
than one of these appraisal methods are used and provide significantly different
results, an accurate determination of value and, correspondingly, a reliable
analysis of default and loss risks, is even more difficult.
If so specified in the related prospectus supplement, the underwriting
of a multifamily loan, commercial loan or mixed-use loan may also include
environmental testing. Under the laws of some states, contamination of real
property may give rise to a lien on the property to assure the costs of cleanup.
In several states, this type of lien has priority over an existing mortgage lien
on that property. In addition, under the laws of some states and under the
federal Comprehensive Environmental Response, Compensation and Liability Act of
1980, a lender may be liable, as an "owner" or "operator", for costs of
addressing releases or threatened releases of hazardous substances 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 the borrower or a prior owner. A
lender also risks such liability on foreclosure of the mortgage as described
under "Legal Aspects of Mortgage Loans--Environmental Legislation" in this
prospectus.
With respect to any FHA loan or VA loans the mortgage loan Seller will
be required to represent that it has complied with the applicable underwriting
policies of the FHA or VA, respectively. See "Primary Mortgage Insurance, Hazard
Insurance; Claims Thereunder--FHA Insurance" and "-- VA Mortgage Guaranty" in
this prospectus.
QUALIFICATIONS OF ORIGINATORS AND SELLERS
Each mortgage loan generally will be originated, directly or through
mortgage brokers and correspondents, by a savings and loan association, savings
bank, commercial bank, credit union, insurance company, or similar institution
which is supervised and examined by a federal or state authority, or by a
mortgagee approved by the Secretary of Housing and Urban Development pursuant to
sections 203 and 211 of the Housing Act.
REPRESENTATIONS BY SELLERS
Each Seller will have made representations and warranties in respect of
the mortgage loans and/or mortgage securities sold by the Seller and evidenced
by a series of bonds. In the case of mortgage loans, representations and
warranties will generally include, among other things, that as to each mortgage
loan:
o any required hazard and primary mortgage insurance policies were
effective at the origination of the mortgage loan, and each the
policy remained in effect on the date of purchase of the mortgage
loan from the Seller by or on behalf of the company;
o with respect to each mortgage loan other than a Contract or a
cooperative mortgage loan, either (A) a title insurance policy
insuring (subject only to permissible title insurance exceptions)
the lien status of the mortgage was effective at the origination
of the mortgage loan and the policy remained in effect on the
date of purchase of the mortgage
12
loan from the Seller by or on behalf of the company or (B) if the
mortgaged property securing the mortgage loan is located in an
area where these policies are generally not available, there is
in the related mortgage file an attorney's certificate of title
indicating (subject to permissible exceptions set forth therein)
the lien status of the mortgage;
o the Seller has good title to the mortgage loan and the mortgage
loan was subject to no offsets, defenses or counterclaims except
as may be provided under the Relief Act and except to the extent
that any buydown agreement exists for a buydown mortgage loan;
o there are no mechanics' liens or claims for work, labor or
material affecting the related mortgaged property which are, or
may be a lien prior to, or equal with, the lien of the related
mortgage (subject only to permissible title insurance
exceptions);
o the related mortgaged property is free from damage and in good
repair;
o there are no delinquent tax or assessment liens against the
related mortgaged property;
o the mortgage loan is not more than 90 days delinquent as to any
scheduled payment of principal and/or interest;
o if a Primary Insurance Policy is required with respect to the
mortgage loan, the mortgage loan is the subject of the policy;
and
o the mortgage loan was made in compliance with, and is enforceable
under, all applicable local, state and federal laws in all
material respects.
If the mortgage loans include cooperative mortgage loans, representations and
warranties with respect to title insurance or hazard insurance may not be given.
Generally, the cooperative itself is responsible for the maintenance of hazard
insurance for property owned by the cooperative, and the borrowers (tenant-
stockholders) of the cooperative do not maintain hazard insurance on their
individual dwelling units. In the case of mortgage securities, representations
and warranties will generally include, among other things, that as to each
mortgage security: (1) the mortgage security is validly issued and outstanding
and entitled to the benefits of the agreement pursuant to which it was issued;
and (2) the Seller has good title to the mortgage security. In the event of a
breach of a Seller's representation or warranty that materially adversely
affects the interests of the bondholders in a mortgage loan or mortgage
security, the related Seller will be obligated to cure the breach or repurchase
or, if permitted, replace the mortgage loan or mortgage security as described
below. However, there can be no assurance that a Seller will honor its
obligation to repurchase or, if permitted, replace any mortgage loan or mortgage
security as to which a breach of a representation or warranty arises.
All of the representations and warranties of a Seller in respect of a
mortgage loan or mortgage security will have been made as of the date on which
the mortgage loan or mortgage security was purchased from the Seller by or on
behalf of the company. As a result, the date as of which the representations and
warranties were made may be a date prior to the date of initial issuance of the
related series of bonds or, in the case of a Designated Seller Transaction, will
be the date of closing of the related sale by the applicable Seller. A
substantial period of time may have elapsed between the date as of which the
representations and warranties were made and the later date of initial issuance
of the related series of bonds. Accordingly, the Seller's purchase obligation
(or, if specified in the related prospectus supplement, limited replacement
option) described below will not arise if, during the period commencing on the
date of sale of a mortgage loan or mortgage security by the Seller, an event
occurs that would have given rise to a purchase obligation had the event
occurred prior to sale of the affected mortgage loan or mortgage
13
security, as the case may be. The only representations and warranties to be made
for the benefit of holders of bonds in respect of any related mortgage loan or
mortgage security relating to the period commencing on the date of sale of the
mortgage loan or mortgage security by the Seller to or on behalf of the company
will be the limited representations of the company and the master servicer
described under "Description of the Bonds--Assignment of Trust Fund Assets"
below.
The company will assign to the trustee for the benefit of the holders
of the related series of bonds all of its right, title and interest in each
purchase agreement by which it purchased a mortgage loan or mortgage security
from a Seller insofar as the purchase agreement relates to the representations
and warranties made by the Seller in respect of the mortgage loan or mortgage
security and any remedies provided for with respect to any breach of
representations and warranties with respect to the mortgage loan or mortgage
security. If a Seller cannot cure a breach of any representation or warranty
made by it in respect of a mortgage loan or mortgage security which materially
and adversely affects the interests of the bondholders therein within a
specified period after having discovered or received notice of a breach, then,
the Seller will be obligated to purchase the mortgage loan or mortgage security
at a purchase price set forth in the related agreement which purchase price
generally will be equal to the principal balance thereof as of the date of
purchase plus accrued and unpaid interest through or about the date of purchase
at the related mortgage rate or pass-through rate, as applicable (net of any
portion of this interest payable to the Seller in respect of master servicing
compensation, special servicing compensation or subservicing compensation, as
applicable, and any interest retained by the company).
As to any mortgage loan required to be purchased by a Seller as
provided above, rather than repurchase the mortgage loan, the Seller, if so
specified in the related prospectus supplement, will be entitled, at its sole
option, to remove the Deleted Mortgage Loan from the trust fund and substitute
in its place a Qualified Substitute Mortgage Loan. Any Qualified Substitute
Mortgage Loan generally will, on the date of substitution:
o have an outstanding principal balance, after deduction of the
principal portion of the monthly payment due in the month of
substitution, not in excess of the outstanding principal balance
of the Deleted Mortgage Loan (the amount of any shortfall to be
deposited in the Payment Account by the related Seller or the
master servicer in the month of substitution for distribution to
the bondholders),
o have a mortgage rate and a Net Mortgage Rate not less than (and
not more than one percentage point greater than) the mortgage
rate and Net Mortgage Rate, respectively, of the Deleted Mortgage
Loan as of the date of substitution,
o have a loan-to-value ratio at the time of substitution no higher
than that of the Deleted Mortgage Loan at the time of
substitution,
o have a remaining term to maturity not greater than (and not more
than one year less than) that of the Deleted Mortgage Loan and
o comply with all of the representations and warranties made by the
Seller as of the date of substitution.
The related mortgage loan purchase agreement may include additional requirements
relating to ARM Loans or other specific types of mortgage loans, or additional
provisions relating to meeting the foregoing requirements on an aggregate basis
where a number of substitutions occur contemporaneously. No Seller will have any
option to substitute for a mortgage security that it is obligated to repurchase
in connection with a breach of a representation and warranty.
14
The master servicer will be required under the applicable servicing
agreement to use reasonable efforts to enforce this purchase or substitution
obligation for the benefit of the trustee and the bondholders, following those
practices it would employ in its good faith business judgment and which are
normal and usual in its general mortgage servicing activities; provided,
however, that this purchase or substitution obligation will not become an
obligation of the master servicer in the event the applicable Seller fails to
honor the obligation. In instances where a Seller is unable, or disputes its
obligation, to purchase affected mortgage loans and/or mortgage securities, the
master servicer, employing the standards set forth in the preceding sentence,
may negotiate and enter into one or more settlement agreements with the related
Seller that could provide for the purchase of only a portion of the affected
mortgage loans and/or mortgage securities. Any settlement could lead to losses
on the mortgage loans and/or mortgage securities which would be borne by the
related bonds. In accordance with the above described practices, the master
servicer will not be required to enforce any purchase obligation of a Seller
arising from any misrepresentation by the Seller, if the master servicer
determines in the reasonable exercise of its business judgment that the matters
related to the misrepresentation did not directly cause or are not likely to
directly cause a loss on the related mortgage loan or mortgage security. If the
Seller fails to repurchase and no breach of any other party's representations
has occurred, the Seller's purchase obligation will not become an obligation of
the company or any other party. In the case of a Designated Seller Transaction
where the Seller fails to repurchase a mortgage loan or mortgage security and
neither the company nor any other entity has assumed the representations and
warranties, the repurchase obligation of the Seller will not become an
obligation of the company or any other party. The foregoing obligations will
constitute the sole remedies available to bondholders or the trustee for a
breach of any representation by a Seller or for any other event giving rise to
the obligations as described above.
Neither the company nor the master servicer will be obligated to
purchase a mortgage loan or mortgage security if a Seller defaults on its
obligation to do so, and no assurance can be given that the Sellers will carry
out their purchase obligations. A default by a Seller is not a default by the
company or by the master servicer. However, to the extent that a breach of the
representations and warranties of a Seller also constitutes a breach of a
representation made by the company or the master servicer, as described below
under "Description of the Bonds--Assignment of Trust Fund Assets," the company
or the master servicer may have a purchase or substitution obligation. Any
mortgage loan or mortgage security not so purchased or substituted for shall
remain in the related trust fund and any losses related thereto shall be
allocated to the related credit enhancement, to the extent available, and
otherwise to one or more classes of the related series of bonds.
If a person other than a Seller makes the representations and
warranties referred to in the first paragraph of this "--Representations by
Sellers" section, or a person other than a Seller is responsible for
repurchasing or replacing any mortgage loan or mortgage security for a breach of
those representations and warranties, the identity of that person will be
specified in the related prospectus supplement.
SERVICING OF MORTGAGE LOANS
GENERAL
The mortgage loans and mortgage securities included in each mortgage
pool will be serviced and administered pursuant to a servicing agreement. A form
of servicing agreement have been filed as an exhibit to the registration
statement of which this prospectus is a part. However, the provisions of each
servicing agreement will vary depending upon the nature of the related mortgage
pool. The following summaries describe the material servicing-related provisions
that may appear in a servicing agreement for a mortgage pool that includes
mortgage loans. The related prospectus supplement will describe any
servicing-related provision of its related servicing agreement that materially
differs from the description
15
thereof contained in this prospectus. If the related mortgage pool includes
mortgage securities, the related prospectus supplement will summarize the
material provisions of the related servicing agreement and identify the
responsibilities of the parties to that servicing agreement.
With respect to any series of bonds as to which the related mortgage
pool includes mortgage securities, the servicing and administration of the
mortgage loans underlying any mortgage securities will be pursuant to the terms
of those mortgage securities. Mortgage loans underlying mortgage securities in a
mortgage pool will be serviced and administered generally in the same manner as
mortgage loans included in a mortgage pool, however, there can be no assurance
that this will be the case, particularly if the mortgage securities are issued
by an entity other than the company or any of its affiliates. The related
prospectus supplement will describe any material differences between the
servicing described below and the servicing of the mortgage loans underlying
mortgage securities in any mortgage pool.
THE MASTER SERVICER
The master servicer, if any, for a series of bonds will be named in the
related prospectus supplement and may be Impac Funding Corporation or another
affiliate of the company. The master servicer is required to maintain a fidelity
bond and errors and omissions policy with respect to its officers and employees
and other persons acting on behalf of the master servicer in connection with its
activities under a servicing agreement.
COLLECTION AND OTHER SERVICING PROCEDURES; MORTGAGE LOAN MODIFICATIONS
The master servicer for any mortgage pool, directly or through
subservicers, will be obligated under the servicing agreement to service and
administer the mortgage loans in the mortgage pool for the benefit of the
related bondholders, in accordance with applicable law, the terms of the
servicing agreement, the mortgage loans and any instrument of credit enhancement
included in the related trust fund, and, to the extent consistent with the
foregoing, the customs and standards of prudent institutional mortgage lenders
servicing comparable mortgage loans for their own account in the jurisdictions
where the related mortgaged properties are located. Subject to the foregoing,
the master servicer will have full power and authority to do any and all things
in connection with servicing and administration that it may deem necessary and
desirable.
As part of its servicing duties, the master servicer will be required
to make reasonable efforts to collect all payments called for under the terms
and provisions of the mortgage loans that it services. The master servicer will
be obligated to follow the same collection procedures as it would follow for
comparable mortgage loans held for its own account, so long as these procedures
are consistent with the servicing standard of and the terms of the related
servicing agreement and the servicing standard generally described in the
preceding paragraph, and do not impair recovery under any instrument of credit
enhancement included in the related trust fund. Consistent with the foregoing,
the master servicer will be permitted, in its discretion, to waive any
prepayment premium, late payment charge or other charge in connection with any
mortgage loan.
Under a servicing agreement, a master servicer will be granted
discretion to extend relief to mortgagors whose payments become delinquent. In
the case of single family loans and Contracts, a master servicer may, for
example, grant a period of temporary indulgence to a mortgagor or may enter into
a liquidating plan providing for repayment of delinquent amounts within a
specified period from the date of execution of the plan. However, the master
servicer must first determine that any waiver or extension will not impair the
coverage of any related insurance policy or materially adversely affect the
security for the mortgage loan. In addition, unless otherwise specified in the
related prospectus supplement, if a material default occurs or a payment default
is reasonably foreseeable with respect to a
16
multifamily loan, commercial loan or mixed-use loan, the master servicer will be
permitted, subject to any specific limitations set forth in the related
servicing agreement and described in the related prospectus supplement, to
modify, waive or amend any term of such mortgage loan, including deferring
payments, extending the stated maturity date or otherwise adjusting the payment
schedule, provided that the modification, waiver or amendment (1) is reasonably
likely to produce a greater recovery with respect to that mortgage loan on a
present value basis than would liquidation and (2) will not adversely affect the
coverage under any applicable instrument of credit enhancement.
In the case of multifamily loans, commercial loans and mixed-use loans,
a mortgagor's failure to make required mortgage loan payments may mean that
operating income is insufficient to service the mortgage debt, or may reflect
the diversion of that income from the servicing of the mortgage debt. In
addition, a mortgagor under a multifamily, commercial or mixed-use loan that is
unable to make mortgage loan payments may also be unable to make timely payment
of taxes and otherwise to maintain and insure the related mortgaged property.
Generally, the related master servicer will be required to monitor any
multifamily loan or commercial loan that is in default, evaluate whether the
causes of the default can be corrected over a reasonable period without
significant impairment of the value of the related mortgaged property, initiate
corrective action in cooperation with the mortgagor if cure is likely, inspect
the related mortgaged property and take any other actions as are consistent with
the servicing standard described above and in the servicing agreement. A
significant period of time may elapse before the master servicer is able to
assess the success of any such corrective action or the need for additional
initiatives. The time within which the master servicer can make the initial
determination of appropriate action, evaluate the success of corrective action,
develop additional initiatives, institute foreclosure proceedings and actually
foreclose (or accept a deed to a mortgaged property in lieu of foreclosure) on
behalf of the bondholders of the related series may vary considerably depending
on the particular multifamily, commercial or mixed- use loan, the mortgaged
property, the mortgagor, the presence of an acceptable party to assume that loan
and the laws of the jurisdiction in which the mortgaged property is located. If
a mortgagor files a bankruptcy petition, the master servicer may not be
permitted to accelerate the maturity of the related multifamily, commercial or
mixed-use loan or to foreclose on the mortgaged property for a considerable
period of time. See "Legal Aspects of Mortgage Loans."
Some or all of the mortgage loans in a mortgage pool may contain a
due-on-sale clause that entitles the lender to accelerate payment of the
mortgage loan upon any sale or other transfer of the related mortgaged property
made without the lender's consent. In any case in which a mortgaged property is
being conveyed by the mortgagor, the master servicer will in general be
obligated, to the extent it has knowledge of the conveyance, to exercise its
rights to accelerate the maturity of the related mortgage loan under any
due-on-sale clause applicable thereto, but only if the exercise of these rights
is permitted by applicable law and only to the extent it would not adversely
affect or jeopardize coverage under any Primary Insurance Policy or applicable
credit enhancement arrangements. If applicable law prevents the master servicer
from enforcing a due-on-sale or due-on-encumbrance clause or if the master
servicer determines that it is reasonably likely that the related mortgagor
would institute a legal action to avoid enforcement of a due-on-sale or
due-on-encumbrance clause, the master servicer may enter into an assumption and
modification agreement with the person to whom the property has been or is about
to be conveyed, pursuant to which this person becomes liable under the mortgage
loan subject to specified conditions. The original mortgagor may be released
from liability on a single family loan if the master servicer shall have
determined in good faith that the release will not adversely affect the
collectability of the mortgage loan. The master servicer will determine whether
to exercise any right the trustee may have under any due-on-sale or
due-on-encumbrance provision in a multifamily loan, commercial loan or mixed-use
loan in a manner consistent with the servicing standard. The master servicer
generally will be entitled to retain as additional servicing compensation any
fee collected in connection with the permitted transfer of a mortgaged property.
See "Legal Aspects of Mortgage Loans--Enforceability of Some
17
Provisions." FHA loans do not contain due-on-sale or due-on-encumbrance clauses
and may be assumed by the purchaser of the mortgaged property.
Mortgagors may, from time to time, request partial releases of the
mortgaged properties, easements, consents to alteration or demolition and other
similar matters. The master servicer may approve a request if it has determined,
exercising its good faith business judgment in the same manner as it would if it
were the owner of the related mortgage loan, that approval will not adversely
affect the security for, or the timely and full collectability of, the related
mortgage loan. Any fee collected by the master servicer for processing these
requests will be retained by the master servicer as additional servicing
compensation.
In the case of mortgage loans secured by junior liens on the related
mortgaged properties, the master servicer will be required to file (or cause to
be filed) of record a request for notice of any action by a superior lienholder
under the senior lien for the protection of the related trustee's interest,
where permitted by local law and whenever applicable state law does not require
that a junior lienholder be named as a party defendant in foreclosure
proceedings in order to foreclose the junior lienholder's equity of redemption.
The master servicer also will be required to notify any superior lienholder in
writing of the existence of the mortgage loan and request notification of any
action (as described below) to be taken against the mortgagor or the mortgaged
property by the superior lienholder. If the master servicer is notified that any
superior lienholder has accelerated or intends to accelerate the obligations
secured by the related senior lien, or has declared or intends to declare a
default under the mortgage or the promissory note secured thereby, or has filed
or intends to file an election to have the related mortgaged property sold or
foreclosed, then, the master servicer will be required to take, on behalf of the
related trust fund, whatever actions are necessary to protect the interests of
the related bondholders, and/or to preserve the security of the related mortgage
loan. The master servicer will be required to advance the necessary funds to
cure the default or reinstate the superior lien, if the advance is in the best
interests of the related bondholders and the master servicer determines the
advances are recoverable out of payments on or proceeds of the related mortgage
loan.
The master servicer for any mortgage pool will also be required to
perform other customary functions of a servicer of comparable loans, including
maintaining escrow or impound accounts for payment of taxes, insurance premiums
and similar items, or otherwise monitoring the timely payment of those items;
adjusting mortgage rates on ARM Loans; maintaining Buydown Accounts; supervising
foreclosures and similar proceedings; managing REO properties; and maintaining
servicing records relating to the mortgage loans in the mortgage pool. The
master servicer will be responsible for filing and settling claims in respect of
particular mortgage loans under any applicable instrument of credit enhancement.
See "Description of Credit Enhancement."
SUBSERVICERS
A master servicer may delegate its servicing obligations in respect of
the mortgage loans serviced by it to one or more third-party subservicers, but
the master servicer will remain liable for its obligations under the related
servicing agreement. The master servicer will be solely liable for all fees owed
by it to any subservicer, regardless of whether the master servicer's
compensation pursuant to the related servicing agreement is sufficient to pay
the subservicer's fees. Each subservicer will be entitled to reimbursement for
some of the expenditures which it makes, generally to the same extent as would
the master servicer for making the same expenditures. See "--Servicing and Other
Compensation and Payment of Expenses; Retained Interest" below and "Description
of the Bonds--The Payment Account."
18
SPECIAL SERVICERS
If and to the extent specified in the related prospectus supplement, a
special servicer may be a party to the related servicing agreement or may be
appointed by the master servicer or another specified party to perform specified
duties in respect of servicing the related mortgage loans that would otherwise
be performed by the master servicer (for example, the workout and/or foreclosure
of defaulted mortgage loans). The rights and obligations of any special servicer
will be specified in the related prospectus supplement, and the master servicer
will be liable for the performance of a special servicer only if, and to the
extent, set forth in that prospectus supplement.
REALIZATION UPON OR SALE OF DEFAULTED MORTGAGE LOANS
Except as described below, the master servicer will be required, in a
manner consistent with the servicing standard, to foreclose upon or otherwise
comparably convert the ownership of properties securing any mortgage loans in
the related mortgage pool that come into and continue in default and as to which
no satisfactory arrangements can be made for collection of delinquent payments.
Generally, the foreclosure process will commence no later than 90 days after
delinquency of the related mortgage loan. The master servicer will be authorized
to institute foreclosure proceedings, exercise any power of sale contained in
the related mortgage, obtain a deed in lieu of foreclosure, or otherwise acquire
title to the related mortgaged property, by operation of law or otherwise, if
the action is consistent with the servicing standard. The master servicer's
actions in this regard must be conducted, however, in a manner that will permit
recovery under any instrument of credit enhancement included in the related
trust fund. In addition, the master servicer will not be required to expend its
own funds in connection with any foreclosure or to restore any damaged property
unless it shall determine that (1) the foreclosure and/or restoration will
increase the proceeds of liquidation of the mortgage loan to the related
bondholders after reimbursement to itself for these expenses and (2) these
expenses will be recoverable to it from related Insurance Proceeds, Liquidation
Proceeds or amounts drawn out of any fund or under any instrument constituting
credit enhancement (respecting which it shall have priority for purposes of
withdrawal from the Payment Account in accordance with the servicing agreement).
However, unless otherwise specified in the related prospectus
supplement, the master servicer may not acquire title to any multifamily
property or commercial property securing a mortgage loan or take any other
action that would cause the related trustee, for the benefit of bondholders of
the related series, or any other specified person to be considered to hold title
to, to be a "mortgagee-in-possession" of, or to be an "owner" or an "operator"
of such mortgaged property within the meaning of federal environmental laws,
unless the master servicer has previously determined, based on a report prepared
by a person who regularly conducts environmental audits (which report will be an
expense of the trust fund), that either:
(1) the mortgaged property is in compliance with applicable
environmental laws and regulations or, if not, that taking actions as
are necessary to bring the mortgaged property into compliance with
these laws is reasonably likely to produce a greater recovery on a
present value basis than not taking those actions; and
(2) there are no circumstances or conditions present at the
mortgaged property that have resulted in any contamination for which
investigation, testing, monitoring, containment, clean-up or
remediation could be required under any applicable environmental laws
and regulations or, if those circumstances or conditions are present
for which any such action could be required, taking those actions with
respect to the mortgaged property is reasonably likely to produce a
greater recovery on a present value basis than not taking those
actions. See "Legal Aspects of Mortgage Loans--Environmental
Legislation."
19
The master servicer will not be obligated to foreclose upon or
otherwise convert the ownership of any mortgaged property securing a single
family loan if it has received notice or has actual knowledge that the property
may be contaminated with or affected by hazardous wastes or hazardous
substances; however, environmental testing will not be required. The master
servicer will not be liable to the bondholders of the related series if, based
on its belief that no such contamination or effect exists, the master servicer
forecloses on a mortgaged property and takes title to the mortgaged property,
and thereafter the mortgaged property is determined to be so contaminated or
affected.
With respect to a mortgage loan in default, the master servicer may
pursue foreclosure (or similar remedies) concurrently with pursuing any remedy
for a breach of a representation and warranty. However, the master servicer is
not required to continue to pursue both remedies if it determines that one
remedy is more likely than the other to result in a greater recovery. Upon the
first to occur of final liquidation (by foreclosure or otherwise) and a
repurchase or substitution pursuant to a breach of a representation and
warranty, the mortgage loan will be removed from the related trust fund if it
has not been removed previously. The master servicer may elect to treat a
defaulted mortgage loan as having been finally liquidated if substantially all
amounts expected to be received in connection therewith have been received. Any
additional liquidation expenses relating to the mortgage loan thereafter
incurred will be reimbursable to the master servicer (or any subservicer) from
any amounts otherwise distributable to holders of bonds of the related series,
or may be offset by any subsequent recovery related to the mortgage loan.
Alternatively, for purposes of determining the amount of related Liquidation
Proceeds to be distributed to bondholders, the amount of any Realized Loss or
the amount required to be drawn under any applicable form of credit support, the
master servicer may take into account minimal amounts of additional receipts
expected to be received, as well as estimated additional liquidation expenses
expected to be incurred in connection with the defaulted mortgage loan.
With respect to a series of bonds, if so provided in the related
prospectus supplement, the applicable form of credit enhancement may provide, to
the extent of coverage, that a defaulted mortgage loan will be removed from the
trust fund prior to the final liquidation thereof. In addition, a servicing
agreement may grant to the master servicer, a special servicer, a provider of
credit enhancement and/or the holder or holders of specified classes of bonds of
the related series a right of first refusal to purchase from the trust fund, at
a predetermined purchase price, any mortgage loan as to which a specified number
of scheduled payments are delinquent. If the purchase price is insufficient to
fully fund the entitlements of bondholders to principal and interest, it will be
specified in the related prospectus supplement. Furthermore, a servicing
agreement may authorize the master servicer to sell any defaulted mortgage loan
if and when the master servicer determines, consistent with the servicing
standard, that the sale would produce a greater recovery to bondholders on a
present value basis than would liquidation of the related mortgaged property.
In the event that title to any mortgaged property is acquired by
foreclosure or by deed in lieu of foreclosure, the deed or certificate of sale
will be issued to the trustee or to its nominee on behalf of bondholders of the
related series. Notwithstanding any acquisition of title and cancellation of the
related mortgage loan, the REO Mortgage Loan will be considered for most
purposes to be an outstanding mortgage loan held in the trust fund until the
mortgaged property is sold and all recoverable Liquidation Proceeds and
Insurance Proceeds have been received with respect to the defaulted mortgage
loan. For purposes of calculations of amounts distributable to bondholders in
respect of an REO Mortgage Loan, the amortization schedule in effect at the time
of any acquisition of title (before any adjustment thereto by reason of any
bankruptcy or any similar proceeding or any moratorium or similar waiver or
grace period) will be deemed to have continued in effect (and, in the case of an
ARM Loan, the amortization schedule will be deemed to have adjusted in
accordance with any interest rate changes occurring on any adjustment date
therefor) so long as the REO Mortgage Loan is considered to remain in the trust
fund.
20
If Liquidation Proceeds collected with respect to a defaulted mortgage
loan are less than the outstanding principal balance of the defaulted mortgage
loan plus accrued interest plus the aggregate amount of reimbursable expenses
incurred by the master servicer with respect to the mortgage loan, and the
shortfall is not covered under any applicable instrument or fund constituting
credit enhancement, the trust fund will realize a loss in the amount of the
difference. The master servicer will be entitled to reimburse itself from the
Liquidation Proceeds recovered on any defaulted mortgage loan, prior to the
distribution of Liquidation Proceeds to bondholders, amounts that represent
unpaid servicing compensation in respect of the mortgage loan, unreimbursed
servicing expenses incurred with respect to the mortgage loan and any
unreimbursed advances of delinquent payments made with respect to the mortgage
loan. If so provided in the related prospectus supplement, the applicable form
of credit enhancement may provide for reinstatement subject to specified
conditions in the event that, following the final liquidation of a mortgage loan
and a draw under the credit enhancement, subsequent recoveries are received. In
addition, if a gain results from the final liquidation of a defaulted mortgage
loan or an REO Mortgage Loan which is not required by law to be remitted to the
related mortgagor, the master servicer will be entitled to retain the gain as
additional servicing compensation unless the related prospectus supplement
provides otherwise. For a description of the master servicer's (or other
specified person's) obligations to maintain and make claims under applicable
forms of credit enhancement and insurance relating to the mortgage loans, see
"Description of Credit Enhancement" and "Primary Mortgage Insurance, Hazard
Insurance; Claims Thereunder."
SERVICING AND OTHER COMPENSATION AND PAYMENT OF EXPENSES; RETAINED INTEREST
The principal servicing compensation to be paid to the master servicer
in respect of its master servicing activities for a series of bonds will be
equal to the percentage or range of percentages per annum described in the
related prospectus supplement of the outstanding principal balance of each
mortgage loan, and this compensation will be retained by it on a monthly or
other periodic basis from collections of interest on each mortgage loan in the
related trust fund at the time the collections are deposited into the applicable
Payment Account. This portion of the servicing fee will be calculated with
respect to each mortgage loan by multiplying the fee by the principal balance of
the mortgage loan. In addition, the master servicer may retain all prepayment
premiums, assumption fees and late payment charges, to the extent collected from
mortgagors, and any benefit which may accrue as a result of the investment of
funds in the applicable Payment Account. Any additional servicing compensation
will be described in the related prospectus supplement. Any subservicer will
receive a portion of the master servicer's compensation as its subservicing
compensation.
In addition to amounts payable to any subservicer, the master servicer
will pay or cause to be paid some of the ongoing expenses associated with each
trust fund and incurred by it in connection with its responsibilities under the
servicing agreement, including, if so specified in the related prospectus
supplement, payment of any fee or other amount payable in respect of any
alternative credit enhancement arrangements, payment of the fees and
disbursements of the trustee, any custodian appointed by the trustee and the
bond registrar, and payment of expenses incurred in enforcing the obligations of
subservicers and Sellers. The master servicer will be entitled to reimbursement
of expenses incurred in enforcing the obligations of subservicers and Sellers
under limited circumstances. In addition, the master servicer will be entitled
to reimbursements for some of its expenses incurred in connection with
liquidated mortgage loans and in connection with the restoration of mortgaged
properties, this right of reimbursement being prior to the rights of bondholders
to receive any related Liquidation Proceeds or Insurance Proceeds. If and to the
extent so provided in the related prospectus supplement, the master servicer
will be entitled to receive interest on amounts advanced to cover reimbursable
expenses for the period that the advances are outstanding at the rate specified
in the prospectus supplement, and the master servicer will be entitled to
payment of the interest periodically from general collections on the mortgage
21
loans in the related trust fund prior to any payment to bondholders or as
otherwise provided in the related servicing agreement and described in the
prospectus supplement.
The prospectus supplement for a series of bonds will specify whether
there will be any interest in the mortgage loans retained by the company. Any
retained interest will be a specified portion of the interest payable on each
mortgage loan in a mortgage pool and will not be part of the related trust fund.
Any retained interest will be established on a loan-by-loan basis and the amount
thereof with respect to each mortgage loan in a mortgage pool will be specified
on an exhibit to the related servicing agreement. Any partial recovery of
interest in respect of a mortgage loan will be allocated between the owners of
any retained interest and the holders of classes of bonds entitled to payments
of interest as provided in the related prospectus supplement and the applicable
servicing agreement.
If and to the extent provided in the related prospectus supplement, the
master servicer may be required to apply a portion of the servicing compensation
otherwise payable to it in respect of any period to any Prepayment Interest
Shortfalls resulting from mortgagor prepayments during that period. See "Yield
Considerations."
EVIDENCE AS TO COMPLIANCE
Each servicing agreement will provide that on or before a specified
date in each year, beginning the first such date that is at least a specified
number of months after the cut-off date, a firm of independent public
accountants will furnish a statement to the company and the trustee to the
effect that, on the basis of an examination by the firm conducted substantially
in compliance with the Uniform Single Attestation Program for Mortgage Bankers
or the Audit Program for mortgages serviced for Freddie Mac, the servicing of
mortgage loans under agreements (including the related servicing agreement)
substantially similar to each other was conducted in compliance with the
agreements except for significant exceptions or errors in records that, in the
opinion of the firm, the Uniform Single Attestation Program for Mortgage Bankers
or the Audit Program for mortgages serviced for Freddie Mac requires it to
report. In rendering its statement the firm may rely, as to the matters relating
to the direct servicing of mortgage loans by subservicers, upon comparable
statements for examinations conducted substantially in compliance with the
Uniform Single Attestation Program for Mortgage Bankers or the Audit Program for
mortgages serviced for Freddie Mac (rendered within one year of the statement)
of firms of independent public accountants with respect to those subservicers
which also have been the subject of this type of examination.
Each servicing agreement will also provide for delivery to the trustee,
on or before a specified date in each year, of an annual statement signed by one
or more officers of the master servicer to the effect that, to the best
knowledge of each officer, the master servicer has fulfilled in all material
respects its obligations under the servicing agreement throughout the preceding
year or, if there has been a material default in the fulfillment of any
obligation, the statement shall specify each known default and the nature and
status thereof. This statement may be provided as a single form making the
required statements as to more than one servicing agreement.
Copies of the annual accountants' statement and the annual statement of
officers of a master servicer may be obtained by bondholders without charge upon
written request to the master servicer or trustee.
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DESCRIPTION OF THE BONDS
GENERAL
The bonds will be issued in series. Each series of bonds (or, in some
instances, two or more series of bonds) will be issued pursuant to an indenture
between the related Issuer and the trustee, similar to the form filed as an
exhibit to the registration statement of which this prospectus is a part. The
trust fund will be created pursuant to an owner trust agreement between the
company and the owner trustee. Each indenture, along with the related servicing
agreement and owner trust agreement, will be filed with the Commission as an
exhibit to a Current Report on Form 8-K. Qualified counsel will render an
opinion to the effect that the trust fund's assets will not be considered assets
of the Seller or the company in the event of the bankruptcy Seller or the
company. The following summaries (together with additional summaries under "The
Agreements" below) describe the material provisions relating to the bonds common
to each Agreement.
Each series of bonds covered by a particular indenture will evidence
indebtedness of a separate trust fund created pursuant to the related owner
trust agreement. A trust fund will consist of, to the extent provided in the
owner trust agreement:
o the mortgage loans (and the related mortgage documents) or
interests therein (including any mortgage securities) underlying
a particular series of bonds as from time to time are subject to
the servicing agreement, exclusive of, if specified in the
related prospectus supplement, any interest retained by the
company or any of its affiliates with respect to each mortgage
loan;
o all payments and collections in respect of the mortgage loans or
mortgage securities due after the related cut-off date, as from
time to time are identified as deposited in respect thereof in
the related Payment Account as described below;
o any property acquired in respect of mortgage loans in the trust
fund, whether through foreclosure of a mortgage loan or by deed
in lieu of foreclosure;
o hazard insurance policies, Primary Insurance Policies and FHA
insurance policies, if any, maintained in respect of mortgage
loans in the trust fund and the proceeds of these policies;
o the rights of the company under any mortgage loan purchase
agreement, including in respect of any representations and
warranties therein; and
o any combination, as and to the extent specified in the related
prospectus supplement, of a financial guaranty insurance policy,
mortgage pool insurance policy, letter of credit, special hazard
insurance policy, or currency or interest rate exchange
agreements as described under "Description of Credit
Enhancement."
If provided in the related prospectus supplement, the original
principal amount of a series of bonds may exceed the principal balance of the
mortgage loans or mortgage securities initially being delivered to the trustee.
Cash in an amount equal to this difference will be deposited into a pre-funding
account maintained with the trustee. During the period set forth in the related
prospectus supplement, amounts on deposit in the pre-funding account may be used
to purchase additional mortgage loans or mortgage securities for the related
trust fund. Any amounts remaining in the pre-funding account at the
23
end of the period will be distributed as a principal prepayment to the holders
of the related series of bonds at the time and in the manner set forth in the
related prospectus supplement.
Each series of bonds may consist of any one or a combination of the
following:
o a single class of bonds;
o two or more classes of bonds, one or more classes of which will
be senior in right of payment to one or more of the other
classes, and as to which some classes of senior (or subordinate)
bonds may be senior to other classes of senior (or subordinate)
bonds, as described in the respective prospectus supplement;
o two or more classes of bonds, one or more classes of which will
be Strip Bonds;
o two or more classes of bonds which differ as to the timing,
sequential order, rate, pass- through rate or amount of
distributions of principal or interest or both, or as to which
distributions of principal or interest or both on a class may be
made upon the occurrence of specified events, in accordance with
a schedule or formula (including "planned amortization classes"
and "targeted amortization classes"), or on the basis of
collections from designated portions of the mortgage pool, and
which classes may include one or more classes of Accrual Bonds;
or
o other types of classes of bonds, as described in the related
prospectus supplement.
With respect to any series of bonds, the related Equity Certificates, insofar as
they represent the beneficial ownership interest in the Issuer, will be
subordinate to the related bonds. As to each series, the offered bonds will be
rated in one of the four highest rating categories by one or more Rating
Agencies. Credit support for the offered bonds of each series may be provided by
a financial guaranty insurance policy, mortgage pool insurance policy, letter of
credit, reserve fund, overcollateralization, and currency or interest rate
exchange agreements as described under "Description of Credit Enhancement," by
the subordination of one or more other classes of bonds as described under
"--Subordinate Bonds" or by any combination of the foregoing.
FORM OF BONDS
Except as described below, the offered bonds of each series will be
issued as physical bonds in fully registered form only in the denominations
specified in the related prospectus supplement, and will be transferrable and
exchangeable at the corporate trust office of the registrar named in the related
prospectus supplement. No service charge will be made for any registration of
exchange or transfer of offered bonds, but the trustee may require payment of a
sum sufficient to cover any tax or other governmental charge. A "bondholder" or
"holder" is the entity whose name appears on the records of the registrar
(consisting of or including the bond register) as the registered holder of a
bond.
If so specified in the related prospectus supplement, specified classes
of a series of bonds will be initially issued through the book-entry facilities
of the DTC. As to any class of DTC Registered Bonds, the record holder of the
bonds will be DTC's nominee. DTC is a limited-purpose trust company organized
under the laws of the State of New York, which holds bonds for its participants
and facilitates the clearance and settlement of bonds transactions between
participants through electronic book-entry changes in the accounts of
participants. Intermediaries have indirect access to DTC's clearance system.
24
No Beneficial Owner will be entitled to receive a bond representing its
interest in registered, certificated form, unless either (1) DTC ceases to act
as depository in respect thereof and a successor depository is not obtained, or
(2) the company elects in its sole discretion to discontinue the registration of
the bonds through DTC. Prior to one of these events, Beneficial Owners will not
be recognized by the trustee or the master servicer as holders of the related
bonds for purposes of the related indenture, and Beneficial Owners will be able
to exercise their rights as owners of the bonds only indirectly through DTC,
participants and Intermediaries. Any Beneficial Owner that desires to purchase,
sell or otherwise transfer any interest in DTC Registered Bonds may do so only
through DTC, either directly if the Beneficial Owner is a participant or
indirectly through participants and, if applicable, Intermediaries. Pursuant to
the procedures of DTC, transfers of the beneficial ownership of any DTC
Registered Bonds will be required to be made in minimum denominations specified
in the related prospectus supplement. The ability of a Beneficial Owner to
pledge DTC Registered Bonds to persons or entities that are not participants in
the DTC system, or to otherwise act with respect to the bonds, may be limited
because of the lack of physical bonds evidencing the bonds and because DTC may
act only on behalf of participants.
Distributions in respect of the DTC Registered Bonds will be forwarded
by the trustee or other specified person to DTC, and DTC will be responsible for
forwarding the payments to participants, each of which will be responsible for
disbursing the payments to the Beneficial Owners it represents or, if
applicable, to Intermediaries. Accordingly, Beneficial Owners may experience
delays in the receipt of payments in respect of their bonds. Under DTC's
procedures, DTC will take actions permitted to be taken by holders of any class
of DTC Registered Bonds under the indenture only at the direction of one or more
participants to whose account the DTC Registered Bonds are credited and whose
aggregate holdings represent no less than any minimum amount of Percentage
Interests or voting rights required therefor. DTC may take conflicting actions
with respect to any action of holders of bonds of any class to the extent that
participants authorize these actions. None of the master servicer, the company,
the trustee or any of their respective affiliates will have any liability for
any aspect of the records relating to or payments made on account of beneficial
ownership interests in the DTC Registered Bonds, or for maintaining, supervising
or reviewing any records relating to the beneficial ownership interests.
GLOBAL BONDS
Some of the offered bonds may be Global Bonds. Except in some limited
circumstances, the Global Bonds will be available only in book-entry form.
Investors in the Global Bonds may hold those Global Bonds through any of DTC,
Clearstream Banking, societe anonyme, formerly known as Cedelbank SA, or
Euroclear. The Global Bonds will be traceable 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 through Clearstream and
Euroclear will be conducted in the ordinary way in accordance with the normal
rules and operating procedures of Clearstream and Euroclear and in accordance
with conventional eurobond practice (i.e., seven calendar day settlement).
Secondary market trading between investors through DTC will be
conducted according to DTC's rules and procedures applicable to U.S. corporate
debt obligations.
Secondary cross-market trading between Clearstream or Euroclear and DTC
participants holding Bonds will be effected on a delivery-against-payment basis
through the respective Depositaries of Clearstream and Euroclear (in that
capacity) and as DTC participants.
25
Non-U.S. holders (as described below) of Global Bonds will be subject to
U.S. withholding taxes unless those holders meet various requirements and
deliver appropriate U.S. tax documents to the securities clearing organizations
or their participants.
All Global Bonds will be held in book-entry form by DTC in the name of
Cede & Co. as nominee of DTC. Investors' interests in the Global Bonds 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 relevant depositary
which in turn will hold those positions in their accounts as DTC participants.
Investors electing to hold their Global Bonds through DTC will follow
DTC settlement practices. 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 Bonds through Clearstream or
Euroclear accounts will follow the settlement procedures applicable to
conventional eurobonds, except that there will be no temporary global bond and
no "lock-up" or restricted period. Global Bonds will be credited to the
securities custody accounts on the settlement date against payment in same-day
funds.
Since the purchaser determines the place of delivery, it is important
to establish at the time of the trade where both the purchaser's and seller's
accounts are located to ensure that settlement can be made on the desired value
date.
Secondary market trading between DTC participants will be settled using
the procedures applicable to prior mortgage loan asset-backed bonds issues in
same-day funds. Secondary market trading between Clearstream participants or
Euroclear participants will be settled using the procedures applicable to
conventional eurobonds in same-day funds. When Global Bonds 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 relevant depositary, as the case may be, to
receive the Global Bonds against payment. Payment will include interest accrued
on the Global Bonds from and including the last coupon payment date to and
excluding the settlement date, on the basis of the actual number of days in that
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
relevant depositary to the DTC participant's account against delivery of the
Global Bonds. After settlement has been completed, the Global Bonds 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 Bonds 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 Bonds are credited to their account 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
26
drawn upon to finance settlement. Under this procedure, Clearstream participants
or Euroclear participants purchasing Global Bonds would incur overdraft charges
for one day, assuming they cleared the overdraft when the Global Bonds were
credited to their accounts. However, interest on the Global Bonds would accrue
from the value date. Therefore, in many cases the investment income on the
Global Bonds earned during that one-day period may substantially reduce or
offset the amount of those overdraft charges, although the 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 crediting Global Bonds to the
respective European depositary for the benefit of Clearstream participants or
Euroclear participants. The sale proceeds will be available to the DTC seller on
the settlement date. Thus, to the DTC participants a cross-market transaction
will settle no differently than a trade between two DTC participants.
Due to time zone differences in their favor, Clearstream participants
and Euroclear participants may employ their customary procedures for
transactions in which Global Bonds are to be transferred by the respective
clearing system, through the respective depositary, to a DTC participant. The
seller will send instructions to Clearstream or Euroclear through a Clearstream
participant or Euroclear participant at least one business day prior to
settlement. In these cases Clearstream or Euroclear will instruct the respective
depositary, as appropriate, to credit the Global Bonds to the DTC participant's
account against payment. Payment will include interest accrued on the Global
Bonds from and including the last coupon payment to and excluding the settlement
date on the basis of the actual number of days in that accrual period and a year
assumed to consist to 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
Clearstream participant or Euroclear participant the following day, and receipt
of the cash proceeds in the Clearstream participant's or Euroclear participant's
account would be back-valued to the value date (which would be the preceding
day, when settlement occurred in New York). Should the Clearstream participant
or Euroclear participant have a line of credit with its respective clearing
system and elect to be in debt in anticipation of receipt of the sale proceeds
in its account, the back-valuation will extinguish any overdraft incurred over
that one-day period. If settlement is not completed on the intended value date
(i.e., the trade fails), receipt of the cash proceeds in the Clearstream
participant's or Euroclear participant's account would instead be valued as of
the actual settlement date.
Finally, day traders that use Clearstream or Euroclear and that
purchase Global Bonds from DTC participants for delivery to Clearstream
participants or Euroclear participants should note that these trades would
automatically fail on the sale side unless affirmative action is taken. At least
three techniques should be readily available to eliminate this potential
problem:
o borrowing through Clearstream or Euroclear for one day (until
the purchase side of the trade is reflected in their
Clearstream or Euroclear accounts) in accordance with the
clearing system's customary procedures;
o borrowing the Global Bonds in the U.S. from a DTC participant
no later than one day prior to settlement, which would give
the Global Bonds sufficient time to be reflected in their
Clearstream or Euroclear account in order to settle the sale
side of the trade; or
o 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.
A beneficial owner of Global Bonds holding bonds 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
27
U.S. Persons (as defined below), unless (i) each clearing system, bank or other
financial institution that holds customers' bonds in the ordinary course of its
trade or business in the chain of intermediaries between that beneficial owner
and the U.S. entity required to withhold tax complies with applicable
certification requirements and (ii) that beneficial owner takes one of the
following steps to obtain an exemption or reduced tax rate: Exemption for
Non-U.S. Persons (Form W-8). Beneficial holders of Global Bonds that are
Non-U.S. Persons (as defined below) can obtain a complete exemption from the
withholding tax by filing a signed Form W-8 (Certificate of Foreign Status). If
the information shown on Form W-8 changes, a new Form W-8 must be filed within
30 days of that change.
A Non-U.S. Person (as defined below), including a non-U.S. corporation
or bank with a U.S. branch, for which the interest income is effectively
connected with its conduct of a trade or business in the United States, can
obtain an exemption from the withholding tax by filing Form 4224 (Exemption from
Withholding of Tax on Income Effectively Connected with the Conduct of a Trade
or Business in the United States).
Non-U.S. Persons 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 1001 (Holdership, Exemption or Reduced Rate
Certificate). If the treaty provides only for a reduced rate, withholding tax
will be imposed at that rate unless the filer alternatively files Form W-8. Form
1001 may be filed by Bondholders or their agent.
U.S. Persons can obtain a complete exemption from the withholding tax
by filing Form W-9 (Payer's Request for Taxpayer Identification Number and
Certification).
The holder of a Global Bond or, in the case of a Form 1001 or a Form
4224 filer, his agent, files by submitting the appropriate form to the person
through whom it holds the bond (the clearing agency, in the case of persons
holding directly on the books of the clearing agency). Form W-8 and Form 1001
are effective for three calendar years and Form 4224 is effective for one
calendar year. The term "U.S. Person" means a citizen or resident of the United
States, a corporation, partnership or other entity created or organized in, or
under the laws of, the United States or any political subdivision thereof
(except, in the case of a partnership, to the extent provided in regulations),
or an estate whose income is subject to United States federal income tax
regardless of its source, 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 United States Persons have the authority to control all substantial
decisions of the trust. The term "Non-U.S. Person" means any person who is not 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 Bonds.
Investors are advised to consult their own tax advisors for specific tax advice
concerning their holding and disposing of the Global Bonds.
ASSIGNMENT OF TRUST FUND ASSETS
At the time of issuance of a series of bonds, the company will assign,
or cause to be assigned, to the related trustee (or its nominee), without
recourse, the mortgage loans or mortgage securities being included in the
related trust fund, together with, all principal and interest received on or
with respect to the mortgage loans or mortgage securities after the cut-off
date, other than principal and interest due on or before the cut-off date. If
specified in the related prospectus supplement, the company or any of its
affiliates may retain an interest in the trust fund assets, if any, for itself
or transfer the same to others. The trustee will, concurrently with the
assignment, deliver the bonds of the series to or at the direction of the
company in exchange for the mortgage loans and/or mortgage securities in the
related trust fund. Each mortgage loan will be identified in a schedule
appearing as an exhibit to the related servicing agreement. The schedule will
include, among other things, information as to the principal balance of each
mortgage
28
loan in the related trust fund as of the cut-off date, as well as information
respecting the mortgage rate, the currently scheduled monthly payment of
principal and interest, the maturity of the mortgage note and the loan-to-value
ratio at origination or modification (without regard to any secondary
financing).
In addition, the company will, as to each mortgage loan, other than
mortgage loans underlying any mortgage securities and other than Contracts,
deliver, or cause to be delivered, to the related trustee (or to the custodian
described below) the following documents:
o the mortgage note endorsed, without recourse, either in blank or
to the order of the trustee (or its nominee),
o the mortgage with evidence of recording indicated on the mortgage
(except for any mortgage not returned from the public recording
office) or, in the case of a cooperative mortgage loan, on the
related financing statement,
o an assignment of the mortgage in blank or to the trustee (or its
nominee) in recordable form (or, with respect to a cooperative
mortgage loan, an assignment of the respective security
agreements, any applicable UCC financing statements, recognition
agreements, relevant stock certificates, related blank stock
powers and the related proprietary leases or occupancy
agreements),
o any intervening assignments of the mortgage with evidence of
recording on the assignment (except for any assignment not
returned from the public recording office),
o if applicable, any riders or modifications to the mortgage note
and mortgage, and
o any other documents set forth in the related mortgage loan
purchase agreement or servicing agreement.
The assignments may be blanket assignments covering mortgages on mortgaged
properties located in the same county, if permitted by law.
Notwithstanding the foregoing, a trust fund may include mortgage loans
where the original mortgage note is not delivered to the trustee if the company
delivers, or causes to be delivered, to the related trustee (or the custodian) a
copy or a duplicate original of the mortgage note, together with an affidavit
certifying that the original thereof has been lost or destroyed. In addition, if
the company cannot deliver, with respect to any mortgage loan, the mortgage or
any intervening assignment with evidence of recording on the assignment
concurrently with the execution and delivery of the related servicing agreement
because of a delay caused by the public recording office, the company will
deliver, or cause to be delivered, to the related trustee (or the custodian) a
true and correct photocopy of the mortgage or assignment as submitted for
recording within one year. The company will deliver, or cause to be delivered,
to the related trustee (or the custodian) the mortgage or assignment with
evidence of recording indicated on the assignment after receipt thereof from the
public recording office. If the company cannot deliver, with respect to any
mortgage loan, the mortgage or any intervening assignment with evidence of
recording on the mortgage or assignment concurrently with the execution and
delivery of the related servicing agreement because the mortgage or assignment
has been lost, the company will deliver, or cause to be delivered, to the
related trustee (or the custodian) a true and correct photocopy of the mortgage
or assignment with evidence of recording on the mortgage or assignment.
Assignments of the mortgage loans to the trustee (or its nominee) will be
recorded in the appropriate public recording office, except in states where, in
the opinion of counsel acceptable to the trustee, recording is not required to
protect the
29
trustee's interests in the mortgage loan against the claim of any subsequent
transferee or any successor to or creditor of the company or the originator of
the mortgage loan.
As to each Contract, the company will deliver, or cause to be
delivered, to the related trustee (or the custodian) the following documents:
o the original Contract endorsed, without recourse, to the order of
the trustee,
o copies of documents and instruments related to the Contract and
the security interest in the Manufactured Home securing the
Contract, and
o a blanket assignment to the trustee of all Contracts in the
related trust fund and the related documents and instruments.
In order to give notice of the right, title and interest of the bondholders to
the Contracts, the company will cause to be executed and delivered to the
trustee a UCC-1 financing statement identifying the trustee as the secured party
and identifying all Contracts as collateral.
The company will, as to each mortgage security included in a mortgage
pool, deliver, or cause to be delivered, to the related trustee (or the
custodian), a physical bond evidencing the mortgage security, registered in the
name of the related trustee (or its nominee), or endorsed in blank or to the
related trustee (or its nominee), or accompanied by transfer documents
sufficient to effect a transfer to the trustee (or its nominee).
The trustee (or the custodian) will hold the documents in trust for the
benefit of the related bondholders, and generally will review the documents
within 120 days after receipt thereof in the case of documents delivered
concurrently with the execution and delivery of the related indenture, and
within the time period specified in the related indenture in the case of all
other documents delivered. If any document is found to be missing or defective
in any material respect, the trustee (or the custodian) will be required to
promptly so notify the master servicer, the company, and the related Seller. If
the related Seller does not cure the omission or defect within a specified
period after notice is given thereto by the trustee, and the omission or defect
materially and adversely affects the interests of bondholders in the affected
mortgage loan or mortgage security, then, the related Seller will be obligated
to purchase the mortgage loan or mortgage security from the trustee at its
purchase price (or, if and to the extent it would otherwise be permitted to do
so for a breach of representation and warranty as described under "The Mortgage
Pools--Representations of Sellers," to substitute for the mortgage loan or
mortgage security). The trustee will be obligated to enforce this obligation of
the Seller to the extent described above under "The Mortgage
Pools--Representations by Sellers," but there can be no assurance that the
applicable Seller will fulfill its obligation to purchase (or substitute for)
the affected mortgage loan or mortgage security as described above. The company
will not be obligated to purchase or substitute for the mortgage loan or
mortgage security if the Seller defaults on its obligation to do so. This
purchase or substitution obligation constitutes the sole remedy available to the
related bondholders and the related trustee for omission of, or a material
defect in, a constituent document. Any affected mortgage loan or mortgage
security not so purchased or substituted for shall remain in the related trust
fund.
The trustee will be authorized at any time to appoint one or more
custodians pursuant to a custodial agreement to hold title to the mortgage loans
and/or mortgage securities in any mortgage pool, and to maintain possession of
and, if applicable, to review, the documents relating to the mortgage loans
and/or mortgage securities, in any case as the agent of the trustee. The
identity of any custodian to be appointed on the date of initial issuance of the
bonds will be set forth in the related prospectus supplement. A custodian may be
an affiliate of the company or the master servicer.
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Except in the case of a Designated Seller Transaction or as to mortgage
loans underlying any mortgage securities, the company will make representations
and warranties as to the types and geographical concentrations of the mortgage
loans and as to the accuracy of some of the information furnished to the related
trustee in respect of each mortgage loan (for example, the original
Loan-to-Value Ratio, the principal balance as of the cut-off date, the mortgage
rate and maturity). Upon a breach of any of these representations which
materially and adversely affects the interests of the bondholders in a mortgage
loan, the company will be obligated to cure the breach in all material respects,
to purchase the mortgage loan at its purchase price or, to substitute for the
mortgage loan a Qualified Substitute Mortgage Loan in accordance with the
provisions for substitution by Affiliated Sellers as described above under "The
Mortgage Pools--Representations by Sellers." However, the company will not be
required to repurchase or substitute for any mortgage loan in connection with a
breach of a representation and warranty if the substance of the breach also
constitutes fraud in the origination of the related mortgage loan. This purchase
or substitution obligation constitutes the sole remedy available to bondholders
or the trustee for a breach of a representation by the company. Any mortgage
loan not so purchased or substituted for shall remain in the related trust fund.
Pursuant to the related servicing agreement, the master servicer for
any mortgage pool, either directly or through subservicers, will service and
administer the mortgage loans included in the mortgage pool and assigned to the
related trustee as more fully set forth under "Servicing of Mortgage Loans." The
master servicer will make representations and warranties regarding its authority
to enter into, and its ability to perform its obligations under, the servicing
agreement.
PAYMENT ACCOUNT
GENERAL. The master servicer and/or the trustee will, as to each trust
fund, establish and maintain or cause to be established and maintained a Payment
Account, which will be established so as to comply with the standards of each
Rating Agency that has rated any one or more classes of bonds of the related
series. A Payment Account shall be maintained as an Eligible Account, and the
funds held therein may be held as cash or invested in Permitted Investments. Any
Permitted Investments shall not cause the company to register under the
Investment Company Act of 1940. Any interest or other income earned on funds in
the Payment Account will be paid to the related master servicer or trustee as
additional compensation. If permitted by the Rating Agency or Agencies and so
specified in the related prospectus supplement, a Payment Account may contain
funds relating to more than one series of collateralized asset-backed bonds and
may contain other funds representing payments on mortgage loans owned by the
related master servicer or serviced by it on behalf of others.
DEPOSITS. With respect to each series of bonds, the related master
servicer, trustee or special servicer will be required to deposit or cause to be
deposited in the Payment Account for the related trust fund within a period
following receipt (in the case of collections and payments), the following
payments and collections received, or advances made, by the master servicer, the
trustee or any special servicer subsequent to the cut-off date with respect to
the mortgage loans and/or mortgage securities in the trust fund (other than
payments due on or before the cut-off date):
o all payments on account of principal, including principal
prepayments, on the mortgage loans;
o all payments on account of interest on the mortgage loans,
including any default interest collected, in each case net of any
portion thereof retained by the master servicer, any special
servicer or subservicer as its servicing compensation or as
compensation to the trustee, and further net of any retained
interest of the company;
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o all payments on the mortgage securities;
o all Insurance Proceeds and Liquidation Proceeds;
o any amounts paid under any instrument or drawn from any fund that
constitutes credit enhancement for the related series of bonds as
described under "Description of Credit Enhancement";
o any advances made as described under "--Advances" below;
o any Buydown Funds (and, if applicable, investment earnings on the
Buydown Funds) required to be paid to bondholders, as described
below;
o any amounts paid by the master servicer to cover Prepayment
Interest Shortfalls arising out of the prepayment of mortgage
loans as described under "Servicing of Mortgage Loans--Servicing
and Other Compensation and Payment of Expenses; Retained
Interest";
o to the extent that any item does not constitute additional
servicing compensation to the master servicer or a special
servicer, any payments on account of modification or assumption
fees, late payment charges or prepayment premiums on the mortgage
loans;
o any amount required to be deposited by the master servicer or the
trustee in connection with losses realized on investments for the
benefit of the master servicer or the trustee, as the case may
be, of funds held in the Payment Account; and
o any other amounts required to be deposited in the Payment Account
as provided in the related servicing agreement and indenture and
described in this prospectus or in the related prospectus
supplement.
With respect to each buydown mortgage loan, the master servicer will be
required to deposit the related Buydown Funds provided to it in a Buydown
Account which will comply with the requirements set forth in this prospectus
with respect to the Payment Account. The terms of all buydown mortgage loans
provide for the contribution of Buydown Funds in an amount equal to or exceeding
either (1) the total payments to be made from the funds pursuant to the related
buydown plan or (2) if the Buydown Funds are to be deposited on a discounted
basis, that amount of Buydown Funds which, together with investment earnings on
the Buydown Funds at a rate as will support the scheduled level of payments due
under the buydown mortgage loan. Neither the master servicer nor the company
will be obligated to add to any discounted Buydown Funds any of its own funds
should investment earnings prove insufficient to maintain the scheduled level of
payments. To the extent that any insufficiency is not recoverable from the
mortgagor or, in an appropriate case, from the Seller, distributions to
bondholders may be affected. With respect to each buydown mortgage loan, the
master servicer will be required monthly to withdraw from the Buydown Account
and deposit in the Payment Account as described above the amount, if any, of the
Buydown Funds (and, if applicable, investment earnings on the Buydown Funds) for
each buydown mortgage loan that, when added to the amount due from the mortgagor
on the buydown mortgage loan, equals the full monthly payment which would be due
on the buydown mortgage loan if it were not subject to the buydown plan. The
Buydown Funds will in no event be a part of the related trust fund.
If the mortgagor on a buydown mortgage loan prepays the mortgage loan
in its entirety during the Buydown Period, the master servicer will be required
to withdraw from the Buydown Account and remit to the mortgagor or the other
designated party in accordance with the related buydown plan any Buydown
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Funds remaining in the Buydown Account. If a prepayment by a mortgagor during
the Buydown Period together with Buydown Funds will result in full prepayment of
a buydown mortgage loan, the master servicer generally will be required to
withdraw from the Buydown Account and deposit in the Payment Account the Buydown
Funds and investment earnings on the Buydown Funds, if any, which together with
the prepayment will result in a prepayment in full; provided that Buydown Funds
may not be available to cover a prepayment under some mortgage loan programs.
Any Buydown Funds so remitted to the master servicer in connection with a
prepayment described in the preceding sentence will be deemed to reduce the
amount that would be required to be paid by the mortgagor to repay fully the
related mortgage loan if the mortgage loan were not subject to the buydown plan.
Any investment earnings remaining in the Buydown Account after prepayment or
after termination of the Buydown Period will be remitted to the related
mortgagor or the other designated party pursuant to the Buydown Agreement
relating to each buydown mortgage loan. If the mortgagor defaults during the
Buydown Period with respect to a buydown mortgage loan and the property securing
the buydown mortgage loan is sold in liquidation (either by the master servicer,
the primary insurer, any pool insurer or any other insurer), the master servicer
will be required to withdraw from the Buydown Account the Buydown Funds and all
investment earnings on the Buydown Funds, if any, and either deposit the same in
the Payment Account or, alternatively, pay the same to the primary insurer or
the pool insurer, as the case may be, if the mortgaged property is transferred
to the insurer and the insurer pays all of the loss incurred in respect of the
default.
WITHDRAWALS. With respect to each series of bonds, the master servicer,
trustee or special servicer may make withdrawals from the Payment Account for
the related trust fund for any of the following purposes, unless otherwise
provided in the related agreement and described in the related prospectus
supplement:
(1) to make distributions to the related bondholders on each
distribution date;
(2) to reimburse the master servicer or any other specified person
for unreimbursed amounts advanced by it in respect of mortgage
loans in the trust fund as described under "--Advances" below,
these reimbursement to be made out of amounts received which were
identified and applied by the master servicer as late collections
of interest (net of related servicing fees) on and principal of
the particular mortgage loans with respect to which the advances
were made or out of amounts drawn under any form of credit
enhancement with respect to the mortgage loans;
(3) to reimburse the master servicer or a special servicer for unpaid
servicing fees earned by it and some unreimbursed servicing
expenses incurred by it with respect to mortgage loans in the
trust fund and properties acquired in respect thereof, these
reimbursement to be made out of amounts that represent
Liquidation Proceeds and Insurance Proceeds collected on the
particular mortgage loans and properties, and net income
collected on the particular properties, with respect to which the
fees were earned or the expenses were incurred or out of amounts
drawn under any form of credit enhancement with respect to the
mortgage loans and properties;
(4) to reimburse the master servicer or any other specified person
for any advances described in clause (2) above made by it and any
servicing expenses referred to in clause (3) above incurred by it
which, in the good faith judgment of the master servicer or the
other person, will not be recoverable from the amounts described
in clauses (2) and (3), respectively, the reimbursement to be
made from amounts collected on other mortgage loans in the trust
fund or, if and to the extent so provided by the related
servicing agreement and indenture and described in the related
prospectus supplement, only from
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that portion of amounts collected on the other mortgage loans
that is otherwise distributable on one or more classes of
subordinate bonds of the related series;
(5) if and to the extent described in the related prospectus
supplement, to pay the master servicer, a special servicer or
another specified entity (including a provider of credit
enhancement) interest accrued on the advances described in clause
(2) above made by it and the servicing expenses described in
clause (3) above incurred by it while these remain outstanding
and unreimbursed;
(6) to reimburse the master servicer, the company, or any of their
respective directors, officers, employees and agents, as the case
may be, for expenses, costs and liabilities incurred thereby, as
and to the extent described under "The Agreements--Certain
Matters Regarding the Master Servicer and the Company";
(7) if and to the extent described in the related prospectus
supplement, to pay the fees of the trustee;
(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 thereby, as and to the extent described
under "The Agreements--The Trustee";
(9) to pay the master servicer or the trustee, as additional
compensation, interest and investment income earned in respect of
amounts held in the Payment Account;
(10) to pay (generally from related income) the master servicer or a
special servicer for costs incurred in connection with the
operation, management and maintenance of any mortgaged property
acquired by the trust fund by foreclosure or by deed in lieu of
foreclosure;
(11) 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
thereof in connection with the liquidation of the mortgage loan
or property;
(12) to pay for the cost of various opinions of counsel obtained
pursuant to the related servicing agreement and indenture for the
benefit of the related bondholders;
(13) to pay to itself, the company, a Seller or any other appropriate
person all amounts received with respect to each mortgage loan
purchased, repurchased or removed from the trust fund pursuant to
the terms of the related servicing agreement and indenture and
not required to be distributed as of the date on which the
related purchase price is determined;
(14) to make any other withdrawals permitted by the related servicing
agreement and indenture and described in the related prospectus
supplement;
(15) to pay for costs and expenses incurred by the trust fund for
environmental site assessments performed with respect to
multifamily or commercial properties that constitute security for
defaulted mortgage loans, and for any containment, clean-up or
remediation of hazardous wastes and materials present on that
mortgaged properties, as
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described under "Servicing of Mortgage Loans--Realization Upon or
Sale of Defaulted Mortgage Loans"; and
(16) to clear and terminate the Payment Account upon the termination
of the trust fund.
DISTRIBUTIONS
Distributions on the bonds of each series will be made by or on behalf
of the related trustee or master servicer on each distribution date as specified
in the related prospectus supplement from the available distribution amount for
the series and the distribution date. The available distribution amount for any
series of bonds and any distribution date will generally refer to the total of
all payments or other collections (or advances in lieu thereof) on, under or in
respect of the mortgage loans and/or mortgage securities and any other assets
included in the related trust fund that are available for distribution to the
bondholders of the series on that date. The particular components of the
available distribution amount for any series on each distribution date will be
more specifically described in the related prospectus supplement.
Distributions on the bonds of each series (other than the final
distribution in retirement of any bond) will be made to the persons in whose
names the bonds are registered on the Record Date, and the amount of each
distribution will be determined as of the Determination Date. All distributions
with respect to each class of bonds on each distribution date will be allocated
in equal proportion among the outstanding bonds in the class. Payments will be
made either by wire transfer in immediately available funds to the account of a
bondholder at a bank or other entity having appropriate facilities therefor, if
the bondholder has provided the trustee or other person required to make the
payments with wiring instructions no later than five business days prior to the
related Record Date or other date specified in the related prospectus supplement
(and, if so provided in the related prospectus supplement, the bondholder holds
bonds in the requisite amount or denomination specified therein), or by check
mailed to the address of the bondholder as it appears on the bond register;
provided, however, that the final distribution in retirement of any class of
bonds will be made only upon presentation and surrender of the bonds at the
location specified in the notice to bondholders of the final distribution.
Payments will be made to each bondholder in accordance with the holder's
Percentage Interest in a particular class.
DISTRIBUTIONS OF INTEREST AND PRINCIPAL ON THE BONDS
Each class of bonds of each series, other than Strip Bonds that have no
bond interest rate, may have a different per annum rate at which interest
accrues on that class of bonds, which may be fixed, variable or adjustable, or
any combination of rates. The related prospectus supplement will specify the
bond interest rate or, in the case of a variable or adjustable bond interest
rate, the method for determining the bond interest rate, for each class. The
related prospectus supplement will specify whether interest on the bonds of the
series will be calculated on the basis of a 360-day year consisting of twelve
30-day months or on a different method.
Distributions of interest in respect of the bonds of any class, other
than any class of Accrual Bonds or Strip Bonds that is not entitled to any
distributions of interest, will be made on each distribution date based on the
accrued interest for the class and the distribution date, subject to the
sufficiency of the portion of the available distribution amount allocable to the
class on the distribution date. Prior to the time interest is distributable on
any class of Accrual Bonds, the amount of accrued interest otherwise
distributable on the class will be added to the principal balance thereof on
each distribution date. With respect to each class of interest-bearing bonds,
accrued interest for each distribution date will be equal to interest at the
applicable bond interest rate accrued for a specified period (generally one
month) on the outstanding principal balance thereof immediately prior to the
distribution date. Accrued interest for each
35
distribution date on Strip Bonds entitled to distributions of interest will be
similarly calculated except that it will accrue on a notional amount that is
based on either (1) based on the principal balances of some or all of the
mortgage loans and/or mortgage securities in the related trust fund or (2) equal
to the principal balances of one or more other classes of bonds of the same
series. Reference to a notional amount with respect to a class of Strip Bonds is
solely for convenience in making calculations of accrued interest and does not
represent the right to receive any distribution of principal. If so specified in
the related prospectus supplement, the amount of accrued interest that is
otherwise distributable on (or, in the case of Accrual Bonds, that may otherwise
be added to the principal balance of) one or more classes of the bonds of a
series will be reduced to the extent that any Prepayment Interest Shortfalls, as
described under "Yield Considerations", exceed the amount of any sums
(including, if and to the extent specified in the related prospectus supplement,
the master servicer's servicing compensation) that are applied to offset the
shortfalls. The particular manner in which the shortfalls will be allocated
among some or all of the classes of bonds of that series will be specified in
the related prospectus supplement. The related prospectus supplement will also
describe the extent to which the amount of accrued interest that is otherwise
distributable on (or, in the case of Accrual Bonds, that may otherwise be added
to the principal balance of) a class of offered bonds may be reduced as a result
of any other contingencies, including delinquencies, losses and Deferred
Interest on or in respect of the related mortgage loans or application of the
Relief Act with respect to the mortgage loans. Any reduction in the amount of
accrued interest otherwise distributable on a class of bonds by reason of the
allocation to the class of a portion of any Deferred Interest on or in respect
of the related mortgage loans will result in a corresponding increase in the
principal balance of the class.
As and to the extent described in the related prospectus supplement,
distributions of principal with respect to a series of bonds will be made on
each distribution date to the holders of the class or classes of bonds of the
series entitled thereto until the principal balance(s) of the bonds have been
reduced to zero. In the case of a series of bonds which includes two or more
classes of bonds, the timing, sequential order, priority of payment or amount of
distributions in respect of principal, and any schedule or formula or other
provisions applicable to the determination thereof (including distributions
among multiple classes of senior bonds or subordinate bonds), shall be as set
forth in the related prospectus supplement. Distributions of principal with
respect to one or more classes of bonds may be made at a rate that is faster
(and, in some cases, substantially faster) than the rate at which payments or
other collections of principal are received on the mortgage loans and/or
mortgage securities in the related trust fund, may not commence until the
occurrence of events such as the retirement of one or more other classes of
bonds of the same series, or may be made at a rate that is slower (and, in some
cases, substantially slower) than the rate at which payments or other
collections of principal are received on the mortgage loans and/or mortgage
securities. In addition, distributions of principal with respect to one or more
classes of bonds may be made, subject to available funds, based on a specified
principal payment schedule and, with respect to one or more classes of bonds,
may be contingent on the specified principal payment schedule for another class
of the same series and the rate at which payments and other collections of
principal on the mortgage loans and/or mortgage securities in the related trust
fund are received.
PRE-FUNDING ACCOUNT
If so specified in the related prospectus supplement, the agreements
may provide for the transfer by the Sellers of additional mortgage loans to the
related trust after the Closing Date. The additional mortgage loans will be
required to conform to the requirements set forth in the related Agreement or
other agreement providing for the transfer, and will be underwritten to the same
standards as the mortgage loans initially included in the trust fund as
described in the prospectus supplement. As specified in the related prospectus
supplement, the transfer may be funded by the establishment of a pre- funding
account with the trustee. If a pre-funding account is established, all or a
portion of the proceeds of the sale of one or more classes of bonds of the
related series will be deposited in the account to be released as additional
36
mortgage loans are transferred. A pre-funding account will be required to be
maintained as an Eligible Account, the amounts therein may be required to be
invested in Permitted Investments and the amount held therein shall at no time
exceed 40% of the aggregate outstanding principal balance of the related bonds.
The related Agreement or other agreement providing for the transfer of
additional mortgage loans generally will provide that the transfers must be made
within up to one year after the Closing Date, and that amounts set aside to fund
the transfers (whether in a pre-funding account or otherwise) and not so applied
within the required period of time will be deemed to be principal prepayments
and applied in the manner set forth in the prospectus supplement. To the extent
amounts in any pre-funding account have not been used to purchase additional
mortgage loans, holders of the bonds may receive an additional prepayment, which
may affect their yield to maturity. In addition, bondholders may not be able to
reinvest amounts received from any pre-funding account in comparable bonds, or
may only be able to do so at a lower interest rate.
DISTRIBUTIONS ON THE BONDS IN RESPECT OF PREPAYMENT PREMIUMS
Prepayment premiums will generally be retained by the master servicer
or by the Seller as additional compensation. However, if so provided in the
related prospectus supplement, prepayment premiums received on or in connection
with the mortgage loans or mortgage securities in any trust fund will be
distributed on each distribution date to the holders of the class or classes of
bonds of the related series entitled thereto in accordance with the provisions
described in the prospectus supplement.
ALLOCATION OF LOSSES AND SHORTFALLS
The amount of any losses or shortfalls in collections on the mortgage
loans and/or mortgage securities in any trust fund (to the extent not covered or
offset by draws on any reserve fund or under any instrument of credit
enhancement) will be allocated among the respective classes of bonds of the
related series in the priority and manner, and subject to the limitations,
specified in the related prospectus supplement. As described in the related
prospectus supplement, these allocations may result in reductions in the
entitlements to interest and/or principal balances of one or more classes of
bonds, or may be effected simply by a prioritization of payments among classes
of bonds.
ADVANCES
If and to the extent provided in the related prospectus supplement, and
subject to any limitations specified therein, the related master servicer may be
obligated to advance, or have the option of advancing, on or before each
distribution date, from its or their own funds or from excess funds held in the
related Payment Account that are not part of the available distribution amount
for the related series of bonds for the distribution date, an amount up to the
aggregate of any payments of interest (and, if specified in the related
prospectus supplement, principal) that were due on or in respect of the mortgage
loans during the related Due Period and were delinquent on the related
Determination Date. No notice will be given to the bondholders of these
advances. Scheduled payments on the mortgage loans in any trust fund that became
due during a given Due Period will, to the extent received by the related
Determination Date or advanced by the related master servicer or other specified
person, be distributed on the distribution date next succeeding the
Determination Date.
Advances are intended to maintain a regular flow of scheduled interest
and principal payments to holders of the class or classes of bonds entitled
thereto, rather than to guarantee or insure against losses. Accordingly, all
advances made from the master servicer's own funds will be reimbursable out of
related recoveries on the mortgage loans (including amounts received under any
fund or instrument constituting credit enhancement) respecting which advances
were made and other specific sources as may be identified in the related
prospectus supplement, including amounts which would otherwise be payable to
37
the offered bonds. No Nonrecoverable Advance will be required to be made by the
master servicer; and, if previously made by a master servicer, a Nonrecoverable
Advance will be reimbursable from any amounts in the related Payment Account
prior to any distributions being made to the related series of bondholders.
If advances have been made from excess funds in a Payment Account, the
master servicer that advanced the funds will be required to replace the funds in
the Payment Account on any future distribution date to the extent that funds
then in the Payment Account are insufficient to permit full distributions to
bondholders on that date. If so specified in the related prospectus supplement,
the obligation of a master servicer to make advances may be secured by a cash
advance reserve fund or a surety bond. If applicable, information regarding the
characteristics of, and the identity of any obligor on, a surety bond, will be
set forth in the related prospectus supplement.
If any person other than the master servicer has any obligation to make
advances as described above, the related prospectus supplement will identify the
person.
If and to the extent so provided in the related prospectus supplement,
any entity making advances will be entitled to receive interest on the advances
for the period that the advances are outstanding at the rate specified in the
prospectus supplement, and the entity will be entitled to payment of the
interest periodically from general collections on the mortgage loans in the
related trust fund prior to any payment to bondholders or as otherwise provided
in the related servicing agreement and described in the prospectus supplement.
As specified in the related prospectus supplement with respect to any
series of bonds as to which the trust fund includes mortgage securities, the
advancing obligations with respect to the underlying mortgage loans will be
pursuant to the terms of the mortgage securities, as may be supplemented by the
terms of the applicable servicing agreement, and may differ from the provisions
described above.
REPORTS TO BONDHOLDERS
With each distribution to bondholders of a particular class of offered
bonds, the related master servicer or trustee will forward or cause to be
forwarded to each holder of record of the class of bonds a statement or
statements with respect to the related trust fund setting forth the information
specifically described in the related servicing agreement or indenture, which
generally will include the following as applicable except as otherwise provided
therein:
o the amount, if any, of the distribution allocable to principal;
o the amount, if any, of the distribution allocable to interest;
o the amount, if any, of the distribution allocable to prepayment
premiums;
o with respect to a series consisting of two or more classes, the
outstanding principal balance or notional amount of each class
after giving effect to the distribution of principal on the
distribution date;
o the amount of servicing compensation received by the related
master servicer (and, if payable directly out of the related
trust fund, by any special servicer and any subservicer);
38
o the aggregate amount of advances included in the distributions on
the distribution date, and the aggregate amount of unreimbursed
advances at the close of business on the distribution date;
o the aggregate principal balance of the mortgage loans in the
related mortgage pool on, or as of a specified date shortly prior
to, the distribution date;
o the number and aggregate principal balance of any mortgage loans
in the related mortgage pool 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 been commenced;
o the book value of any real estate acquired the trust fund by
foreclosure or by a deed in lieu of foreclosure;
o the balance of the reserve fund, if any, at the close of business
on the distribution date;
o the amount of coverage under any financial guaranty insurance
policy, mortgage pool insurance policy or letter of credit
covering default risk as of the close of business on the
applicable Determination Date and a description of any credit
enhancement substituted therefor;
o the amount of any Special Hazard Losses, Fraud Losses and
Bankruptcy Losses as of the close of business on the applicable
distribution date and a description of any change in the
calculation of these amounts;
o with respect to any series of bonds as to which the trust fund
includes mortgage securities, additional information as required
under the related servicing agreement and specified in the
related prospectus supplement; and
o any other material information as required under the related
servicing agreement or indenture.
In the case of information furnished pursuant to the first three items
above, the amounts will be expressed as a dollar amount per minimum denomination
of the relevant class of offered bonds or per a specified portion of the minimum
denomination. In addition to the information described above, reports to
bondholders will contain other information as is set forth in the applicable
servicing agreement or indenture, which may include prepayments, reimbursements
to subservicers and the master servicer and losses borne by the related trust
fund.
In addition, within a reasonable period of time after the end of each
calendar year, the master servicer or trustee will furnish a report to each
holder of record of a class of offered bonds at any time during the calendar
year which, for example, will include information as to the aggregate of amounts
reported pursuant to the first three items above for the calendar year or, in
the event the person was a holder of record of a class of bonds during a portion
of the calendar year, for the applicable portion of the year.
39
DESCRIPTION OF CREDIT ENHANCEMENT
GENERAL
Credit support with respect to the offered bonds of each series may be
comprised of one or more of the following components. Each component will have
limitations and will provide coverage with respect to Realized Losses on the
related mortgage loans. Credit support will cover Defaulted Mortgage Losses, but
coverage may be limited or unavailable with respect to Special Hazard Losses,
Fraud Losses, Bankruptcy Losses and Extraordinary Losses. To the extent that the
credit support for the offered bonds of any series is exhausted, the holders
thereof will bear all further risk of loss.
As set forth below and in the applicable prospectus supplement,
coverage with respect to Realized Losses may be provided by one or more of a
financial guaranty insurance policy, a special hazard insurance policy, a
mortgage pool insurance policy or a letter of credit. In addition, if provided
in the applicable prospectus supplement, in lieu of or in addition to any or all
of the foregoing arrangements, credit enhancement may be in the form of a
reserve fund to cover the losses, in the form of subordination of one or more
classes of subordinate bonds to provide credit support to one or more classes of
senior bonds, in the form of overcollateralization, or in the form of a
combination of the foregoing. The credit support may be provided by an
assignment of the right to receive specified cash amounts, a deposit of cash
into a reserve fund or other pledged assets, or by banks, insurance companies,
guarantees or any combination thereof identified in the applicable prospectus
supplement.
The amounts and type of credit enhancement arrangement as well as the
provider thereof, if applicable, with respect to the offered bonds of each
series will be set forth in the related prospectus supplement. To the extent
provided in the applicable prospectus supplement and the indenture, the credit
enhancement arrangements may be periodically modified, reduced and substituted
for based on the aggregate outstanding principal balance of the mortgage loans
covered thereby. See "Description of Credit Enhancement--Reduction or
Substitution of Credit Enhancement." If specified in the applicable prospectus
supplement, credit support for the offered bonds of one series may cover the
offered bonds of one or more other series.
In general, references to "mortgage loans" under this "Description of
Credit Enhancement" section are to mortgage loans in a trust fund. However, if
so provided in the prospectus supplement for a series of bonds, any mortgage
securities included in the related trust fund and/or the related underlying
mortgage loans may be covered by one or more of the types of credit support
described in this prospectus. The related prospectus supplement will specify, as
to each form of credit support, the information indicated below with respect
thereto, to the extent the information is material and available.
SUBORDINATE BONDS
If so specified in the related prospectus supplement, one or more
classes of bonds of a series may be subordinate bonds. To the extent specified
in the related prospectus supplement, the rights of the holders of subordinate
bonds to receive distributions from the Payment Account on any distribution date
will be subordinated to the corresponding rights of the holders of senior bonds.
If so provided in the related prospectus supplement, the subordination of a
class may apply only in the event of (or may be limited to) some types of losses
or shortfalls. The related prospectus supplement will set forth information
concerning the manner and amount of subordination provided by a class or classes
of subordinate bonds in a series and the circumstances under which the
subordination will be available. The offered bonds of any series may include one
or more classes of subordinate bonds.
40
CROSS-SUPPORT
If the mortgage loans and/or mortgage securities in any trust fund are
divided into separate groups, each supporting a separate class or classes of
bonds of the related series, credit enhancement may be provided by cross-support
provisions requiring that distributions be made on senior bonds evidencing
interests in one group of mortgage loans and/or mortgage securities prior to
distributions on subordinate bonds evidencing interests in a different group of
mortgage loans and/or mortgage securities within the trust fund. The prospectus
supplement for a series that includes a cross-support provision will describe
the manner and conditions for applying the provisions.
OVERCOLLATERALIZATION
If so specified in the related prospectus supplement, interest
collections on the mortgage loans may exceed interest payments on the bonds for
the related distribution date. The excess interest may be deposited into a
reserve fund or applied as a payment of principal on the bonds. To the extent
excess interest is applied as principal payments on the bonds, the effect will
be to reduce the principal balance of the bonds relative to the outstanding
balance of the mortgage loans, thereby creating overcollateralization and
additional protection to the bondholders, as specified in the related prospectus
supplement. If so provided in the related prospectus supplement,
overcollateralization may also be provided as to any series of bonds by the
issuance of bonds in an initial aggregate principal amount which is less than
the aggregate principal amount of the related mortgage loans.
FINANCIAL GUARANTY INSURANCE POLICY
If so specified in the related prospectus supplement, a financial
guaranty insurance policy may be obtained and maintained for a class or series
of bonds. The insurer with respect to a financial guaranty insurance policy will
be described in the related prospectus supplement and a copy of the form of
financial guaranty insurance policy will be filed with the related Current
Report on Form 8-K.
A financial guaranty insurance policy will be unconditional and
irrevocable and will guarantee to holders of the applicable bonds that an amount
equal to the full amount of payments due to the holders will be received by the
trustee or its agent on behalf of the holders for payment on each distribution
date. The specific terms of any financial guaranty insurance policy will be set
forth in the related prospectus supplement. A financial guaranty insurance
policy may have limitations and generally will not insure the obligation of the
Sellers or the master servicer to purchase or substitute for a defective
mortgage loan and will not guarantee any specific rate of principal prepayments.
The insurer will be subrogated to the rights of each holder to the extent the
insurer makes payments under the financial guaranty insurance policy.
MORTGAGE POOL INSURANCE POLICIES
Any mortgage pool insurance policy obtained by the company for each
trust fund will be issued by the pool insurer named in the applicable prospectus
supplement. Each mortgage pool insurance policy will, subject to the limitations
described below, cover Defaulted Mortgage Losses in an amount equal to a
percentage specified in the applicable prospectus supplement of the aggregate
principal balance of the mortgage loans on the cut-off date. As set forth under
"-- Maintenance of Credit Enhancement" below, the master servicer will use
reasonable efforts to maintain the mortgage pool insurance policy and to present
claims thereunder to the pool insurer on behalf of itself, the related trustee
and the related bondholders. The mortgage pool insurance policies, however, are
not blanket policies against loss, since claims thereunder may only be made
respecting particular defaulted mortgage loans and only upon satisfaction of the
conditions precedent described below. Unless specified in the related prospectus
41
supplement, the mortgage pool insurance policies may not cover losses due to a
failure to pay or denial of a claim under a Primary Insurance Policy,
irrespective of the reason therefor.
Each mortgage pool insurance policy will generally provide that no
claims may be validly presented thereunder unless, among other things:
o any required Primary Insurance Policy is in effect for the
defaulted mortgage loan and a claim thereunder has been submitted
and settled,
o hazard insurance on the property securing the mortgage loan has
been kept in force and real estate taxes and other protection and
preservation expenses have been paid by the master servicer,
o if there has been physical loss or damage to the mortgaged
property, it has been restored to its condition (reasonable wear
and tear excepted) at the cut-off date and
o the insured has acquired good and merchantable title to the
mortgaged property free and clear of liens, except for permitted
encumbrances.
Upon satisfaction of these conditions, the pool insurer will have the option
either (1) to purchase the property securing the defaulted mortgage loan at a
price equal to the principal balance thereof plus accrued and unpaid interest at
the applicable mortgage rate to the date of purchase and expenses incurred by
the master servicer, special servicer or subservicer on behalf of the related
trustee and bondholders, or (2) to pay the amount by which the sum of the
principal balance of the defaulted mortgage loan plus accrued and unpaid
interest at the mortgage rate to the date of payment of the claim and the
aforementioned expenses exceeds the proceeds received from an approved sale of
the mortgaged property, in either case net of amounts paid or assumed to have
been paid under any related Primary Insurance Policy. Bondholders will
experience a shortfall in the amount of interest payable on the related bonds in
connection with the payment of claims under a mortgage pool insurance policy
because the pool insurer is only required to remit unpaid interest through the
date a claim is paid rather than through the end of the month in which the claim
is paid. In addition, the bondholders will also experience losses with respect
to the related bonds in connection with payments made under a mortgage pool
insurance policy to the extent that the master servicer expends funds to cover
unpaid real estate taxes or to repair the related mortgaged property in order to
make a claim under a mortgage pool insurance policy, as those amounts will not
be covered by payments under the policy and will be reimbursable to the master
servicer from funds otherwise payable to the bondholders. If any mortgaged
property securing a defaulted mortgage loan is damaged and proceeds, if any (see
"--Special Hazard Insurance Policies" below for risks which are not covered by
the policies), from the related hazard insurance policy or applicable special
hazard insurance policy are insufficient to restore the damaged property to a
condition sufficient to permit recovery under the mortgage pool insurance
policy, the master servicer is not required to expend its own funds to restore
the damaged property unless it determines (x) that the restoration will increase
the proceeds to one or more classes of bondholders on liquidation of the
mortgage loan after reimbursement of the master servicer for its expenses and
(y) that the expenses will be recoverable by it through Liquidation Proceeds or
Insurance Proceeds.
A mortgage pool insurance policy (and most Primary Insurance Policies)
will likely not insure against loss sustained by reason of a default arising
from, among other things, (1) fraud or negligence in the origination or
servicing of a mortgage loan, including misrepresentation by the mortgagor, the
Seller or other persons involved in the origination thereof, or (2) failure to
construct a mortgaged property in accordance with plans and specifications.
Depending upon the nature of the event, a breach of representation made by a
Seller may also have occurred. This breach, if it materially and adversely
affects
42
the interests of bondholders and cannot be cured, would give rise to a purchase
obligation on the part of the Seller, as more fully described under "The
Mortgage Pools--Representations by Sellers." However, this event would not give
rise to a breach of a representation and warranty or a purchase obligation on
the part of the company or master servicer.
The original amount of coverage under each mortgage pool insurance
policy will be reduced over the life of the related series of bonds by the
aggregate dollar amount of claims paid less the aggregate of the net amounts
realized by the pool insurer upon disposition of all foreclosed properties. The
amount of claims paid includes expenses incurred by the master servicer, special
servicer or subservicer as well as accrued interest on delinquent mortgage loans
to the date of payment of the claim. Accordingly, if aggregate net claims paid
under any mortgage pool insurance policy reach the original policy limit,
coverage under that mortgage pool insurance policy will be exhausted and any
further losses will be borne by holders of the related series of bonds. In
addition, unless the master servicer could determine that an advance in respect
of a delinquent mortgage loan would be recoverable to it from the proceeds of
the liquidation of the mortgage loan or otherwise, the master servicer would not
be obligated to make an advance respecting the delinquency since the advance
would not be ultimately recoverable to it from either the mortgage pool
insurance policy or from any other related source. See "Description of the
Bonds--Advances."
Since each mortgage pool insurance policy will require that the
property subject to a defaulted mortgage loan be restored to its original
condition prior to claiming against the pool insurer, the policy will not
provide coverage against hazard losses. As set forth under "Primary Mortgage
Insurance, Hazard Insurance; Claims Thereunder," the hazard policies covering
the mortgage loans typically exclude from coverage physical damage resulting
from a number of causes and, even when the damage is covered, may afford
recoveries which are significantly less than full replacement cost of the
losses. Further, no coverage in respect of Special Hazard Losses, Fraud Losses
or Bankruptcy Losses will cover all risks, and the amount of the coverage will
be limited. See "-- Special Hazard Insurance Policies" below. As a result, some
hazard risks will not be insured against and will therefore be borne by the
related bondholders.
LETTER OF CREDIT
If any component of credit enhancement as to the offered bonds of any
series is to be provided by a letter of credit, a bank will deliver to the
related trustee an irrevocable letter of credit. The letter of credit may
provide direct coverage with respect to the mortgage loans. The bank that
delivered the letter of credit, as well as the amount available under the letter
of credit with respect to each component of credit enhancement, will be
specified in the applicable prospectus supplement. If so specified in the
related prospectus supplement, the letter of credit may permit draws only in the
event of some types of losses and shortfalls. The letter of credit may also
provide for the payment of advances which the master servicer would be obligated
to make with respect to delinquent monthly mortgage payments. The amount
available under the letter of credit will, in all cases, be reduced to the
extent of the unreimbursed payments thereunder and may otherwise be reduced as
described in the related prospectus supplement. The letter of credit will expire
on the expiration date set forth in the related prospectus supplement, unless
earlier terminated or extended in accordance with its terms.
SPECIAL HAZARD INSURANCE POLICIES
Any special hazard insurance policy covering Special Hazard Losses
obtained by the company for a trust fund will be issued by the insurer named in
the applicable prospectus supplement. Each special hazard insurance policy will,
subject to limitations described below, protect holders of the related series of
bonds from Special Hazard Losses. See "Primary Mortgage Insurance, Hazard
Insurance; Claims
43
Thereunder." However, a special hazard insurance policy will not cover losses
occasioned by war, civil insurrection, some governmental actions, errors in
design, faulty workmanship or materials (except under some circumstances),
nuclear reaction, chemical contamination, waste by the mortgagor and other
risks. Aggregate claims under a special hazard insurance policy will be limited
to the amount set forth in the related prospectus supplement and will be subject
to reduction as described in the related prospectus supplement. A special hazard
insurance policy will provide that no claim may be paid unless hazard and, if
applicable, flood insurance on the property securing the mortgage loan has been
kept in force and other protection and preservation expenses have been paid by
the master servicer.
Subject to the foregoing limitations, a special hazard insurance policy
will provide that, where there has been damage to property securing a foreclosed
mortgage loan (title to which has been acquired by the insured) and to the
extent the damage is not covered by the hazard insurance policy or flood
insurance policy, if any, maintained by the mortgagor or the master servicer,
special servicer or the subservicer, the insurer will pay the lesser of (1) the
cost of repair or replacement of the property or (2) upon transfer of the
property to the insurer, the unpaid principal balance of the mortgage loan at
the time of acquisition of the property by foreclosure or deed in lieu of
foreclosure, plus accrued interest at the mortgage rate to the date of claim
settlement and expenses incurred by the master servicer, special servicer or
subservicer with respect to the property. If the property is transferred to a
third party in a sale approved by the issuer of the special hazard insurance
policy, the amount that the issuer will pay will be the amount under (ii) above
reduced by the net proceeds of the sale of the property. No claim may be validly
presented under the special hazard insurance policy unless hazard insurance on
the property securing a defaulted mortgage loan has been kept in force and other
reimbursable protection, preservation and foreclosure expenses have been paid
(all of which must be approved in advance by the issuer of the special hazard
insurance policy). If the unpaid principal balance plus accrued interest and
expenses is paid by the insurer, the amount of further coverage under the
related special hazard insurance policy will be reduced by that amount less any
net proceeds from the sale of the property. Any amount paid as the cost of
repair of the property will further reduce coverage by that amount. Restoration
of the property with the proceeds described under (1) above will satisfy the
condition under each mortgage pool insurance policy that the property be
restored before a claim under the mortgage pool insurance policy may be validly
presented with respect to the defaulted mortgage loan secured by the property.
The payment described under (2) above will render presentation of a claim in
respect of the mortgage loan under the related mortgage pool insurance policy
unnecessary. Therefore, so long as a mortgage pool insurance policy remains in
effect, the payment by the insurer under a special hazard insurance policy of
the cost of repair or of the unpaid principal balance of the related mortgage
loan plus accrued interest and expenses will not affect the total Insurance
Proceeds paid to bondholders, but will affect the relative amounts of coverage
remaining under the related special hazard insurance policy and mortgage pool
insurance policy.
As and to the extent set forth in the applicable prospectus supplement,
coverage in respect of Special Hazard Losses for a series of bonds may be
provided, in whole or in part, by a type of instrument other than a special
hazard insurance policy or by means of a special hazard representation of the
Seller or the company.
RESERVE FUNDS
If so provided in the related prospectus supplement, the company will
deposit or cause to be deposited in a reserve fund account any combination of
cash, one or more irrevocable letters of credit or one or more Permitted
Investments in specified amounts, or any other instrument satisfactory to the
relevant Rating Agency or Agencies, which will be applied and maintained in the
manner and under the conditions specified in the prospectus supplement. In the
alternative or in addition to the deposit, to the extent described in the
related prospectus supplement, a reserve fund may be funded through application
of all or a portion of amounts otherwise payable on any related subordinate
bonds, from the retained
44
interest of the company or otherwise. To the extent that the funding of the
reserve fund is dependent on amounts otherwise payable on related subordinate
bonds, any retained interest of the company or other cash flows attributable to
the related mortgage loans or on reinvestment income, the reserve fund may
provide less coverage than initially expected if the cash flows or reinvestment
income on which the funding is dependent are lower than anticipated. In
addition, with respect to any series of bonds as to which credit enhancement
includes a letter of credit, if so specified in the related prospectus
supplement, if specified conditions are met, the remaining amount of the letter
of credit may be drawn by the trustee and deposited in a reserve fund. Amounts
in a reserve fund may be distributed to bondholders, or applied to reimburse the
master servicer for outstanding advances, or may be used for other purposes, in
the manner and to the extent specified in the related prospectus supplement. The
related prospectus supplement will disclose whether a reserve fund is part of
the related trust fund. If set forth in the related prospectus supplement, a
reserve fund may provide coverage to more than one series of bonds.
In connection with the establishment of any reserve fund, the reserve
fund will be structured so that the trustee will have a perfected security
interest for the benefit of the bondholders in the assets in the reserve fund.
However, to the extent that the company, any affiliate thereof or any other
entity has an interest in any reserve fund, in the event of the bankruptcy,
receivership or insolvency of that entity, there could be delays in withdrawals
from the reserve fund and corresponding payments to the bondholders which could
adversely affect the yield to investors on the related bonds.
Amounts deposited in any reserve fund for a series will be invested in
Permitted Investments by, or at the direction of, and for the benefit of the
master servicer or any other person named in the related prospectus supplement.
CASH FLOW AGREEMENTS
If so provided in the related prospectus supplement, the trust fund 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 principal terms of a guaranteed investment contract or other
cash flow agreement, and the identity of the obligor, will be described in the
prospectus supplement for a series of bonds.
MAINTENANCE OF CREDIT ENHANCEMENT
To the extent that the applicable prospectus supplement does not
expressly provide for alternative credit enhancement arrangements in lieu of
some or all of the arrangements mentioned below, the following paragraphs shall
apply.
If a financial guaranty insurance policy has been obtained for a series
of bonds, the master servicer will be obligated to exercise reasonable efforts
to keep the financial guaranty insurance policy in full force and effect
throughout the term of the applicable indenture, unless coverage thereunder has
been exhausted through payment of claims or until the financial guaranty
insurance policy is replaced in accordance with the terms of the applicable
indenture. The master servicer will agree to pay the premiums for each financial
guaranty insurance policy on a timely basis. In the event the insurer ceases to
be a qualified insurer as described in the related prospectus supplement, or
fails to make a required payment under the related financial guaranty insurance
policy, the master servicer will have no obligation to replace the insurer. Any
losses associated with any reduction or withdrawal in rating by an applicable
Rating Agency shall be borne by the related bondholders.
If a mortgage pool insurance policy has been obtained for a series of
bonds, the master servicer will be obligated to exercise reasonable efforts to
keep the mortgage pool insurance policy (or an alternate
45
form of credit support) in full force and effect throughout the term of the
applicable servicing agreement, unless coverage thereunder has been exhausted
through payment of claims or until the mortgage pool insurance policy is
replaced in accordance with the terms of the applicable servicing agreement. The
master servicer will agree to pay the premiums for each mortgage pool insurance
policy on a timely basis. In the event the pool insurer ceases to be a qualified
insurer because it ceases to be qualified by law to transact pool insurance
business or coverage is terminated for any reason other than exhaustion of the
coverage, the master servicer will use reasonable efforts to obtain from another
qualified insurer a replacement insurance policy comparable to the mortgage pool
insurance policy with a total coverage equal to the then outstanding coverage of
the mortgage pool insurance policy, provided that, if the cost of the
replacement policy is greater than the cost of the mortgage pool insurance
policy, the coverage of the replacement policy will, unless otherwise agreed to
by the company, be reduced to a level such that its premium rate does not exceed
the premium rate on the mortgage pool insurance policy. In the event that the
pool insurer ceases to be a qualified insurer because it ceases to be approved
as an insurer by Freddie Mac, Fannie Mae or any successor entity, the master
servicer will be obligated to review, not less often than monthly, the financial
condition of the pool insurer with a view toward determining whether recoveries
under the mortgage pool insurance policy are jeopardized for reasons related to
the financial condition of the pool insurer. If the master servicer determines
that recoveries are so jeopardized, it will be obligated to exercise its best
reasonable efforts to obtain from another qualified insurer a replacement
insurance policy as described above, subject to the same cost limit. Any losses
associated with any reduction or withdrawal in rating by an applicable Rating
Agency shall be borne by the related bondholders.
If a letter of credit or alternate form of credit enhancement has been
obtained for a series of bonds, the master servicer will be obligated to
exercise reasonable efforts cause to be kept or to keep the letter of credit (or
an alternate form of credit support) in full force and effect throughout the
term of the applicable indenture, unless coverage thereunder has been exhausted
through payment of claims or otherwise, or substitution therefor is made as
described below under "--Reduction or Substitution of Credit Enhancement."
Unless otherwise specified in the applicable prospectus supplement, if a letter
of credit obtained for a series of bonds is scheduled to expire prior to the
date the final distribution on the bonds is made and coverage under the letter
of credit has not been exhausted and no substitution has occurred, the trustee
will draw the amount available under the letter of credit and maintain the
amount in trust for the bondholders.
In lieu of the master servicer's obligation to maintain a financial
guaranty insurance policy, mortgage pool insurance policy or letter of credit as
provided above, the master servicer may obtain a substitute financial guaranty
insurance policy, mortgage pool insurance policy or letter of credit. If the
master servicer obtains a substitute, it will maintain and keep the substitute
in full force and effect as provided in this prospectus. Prior to its obtaining
any substitute financial guaranty insurance policy, mortgage pool insurance
policy or letter of credit, the master servicer will obtain written confirmation
from the Rating Agency or Agencies that rated the related series of bonds that
the substitution of the financial guaranty insurance policy, mortgage pool
insurance policy or letter of credit for the existing credit enhancement will
not adversely affect the then-current ratings assigned to the bonds by the
Rating Agency or Agencies.
If a special hazard insurance policy has been obtained for a series of
bonds, the master servicer will also be obligated to exercise reasonable efforts
to maintain and keep the policy in full force and effect throughout the term of
the applicable servicing agreement, unless coverage thereunder has been
exhausted through payment of claims or otherwise or substitution therefor is
made as described below under "--Reduction or Substitution of Credit
Enhancement." If coverage for Special Hazard Losses takes the form of a special
hazard insurance policy, the policy will provide coverage against risks of the
type described in this prospectus under "Description of Credit
Enhancement--Special Hazard Insurance
46
Policies." The master servicer may obtain a substitute policy for the existing
special hazard insurance policy if prior to the substitution the master servicer
obtains written confirmation from the Rating Agency or Agencies that rated the
related bonds that the substitution shall not adversely affect the then-current
ratings assigned to the bonds by the Rating Agency or Agencies.
The master servicer, on behalf of itself, the trustee and bondholders,
will provide the trustee information required for the trustee to draw under the
letter of credit and will present claims to each pool insurer, to the issuer of
each special hazard insurance policy, and, in respect of defaulted mortgage
loans for which there is no subservicer, to each primary insurer and take any
reasonable steps as are necessary to permit recovery under the letter of credit,
insurance policies or comparable coverage respecting defaulted mortgage loans or
mortgage loans which are the subject of a bankruptcy proceeding. As set forth
above, all collections by the master servicer under any mortgage pool insurance
policy or any Primary Insurance Policy and, where the related property has not
been restored, any special hazard insurance policy, are to be deposited in the
related Payment Account, subject to withdrawal as described above. All draws
under any letter of credit are also to be deposited in the related Payment
Account. In those cases in which a mortgage loan is serviced by a subservicer,
the subservicer, on behalf of itself, the trustee and the bondholders will
present claims to the primary insurer, and all paid claims shall initially be
deposited in a subservicing account that generally meets the requirements for
the Payment Account prior to being delivered to the master servicer for deposit
in the related Payment Account.
If any property securing a defaulted mortgage loan is damaged and
proceeds, if any, from the related hazard insurance policy or any applicable
special hazard insurance policy are insufficient to restore the damaged property
to a condition sufficient to permit recovery under any financial guaranty
insurance policy, mortgage pool insurance policy, letter of credit or any
related Primary Insurance Policy, the master servicer is not required to expend
its own funds to restore the damaged property unless it determines (1) that the
restoration will increase the proceeds to one or more classes of bondholders on
liquidation of the mortgage loan after reimbursement of the master servicer for
its expenses and (2) that the expenses will be recoverable by it through
Liquidation Proceeds or Insurance Proceeds. If recovery under any financial
guaranty insurance policy, mortgage pool insurance policy, letter of credit or
any related Primary Insurance Policy is not available because the master
servicer has been unable to make the above determinations, has made the
determinations incorrectly or recovery is not available for any other reason,
the master servicer is nevertheless obligated to follow the normal practices and
procedures (subject to the preceding sentence) as it deems necessary or
advisable to realize upon the defaulted mortgage loan and in the event the
determination has been incorrectly made, is entitled to reimbursement of its
expenses in connection with the restoration.
REDUCTION OR SUBSTITUTION OF CREDIT ENHANCEMENT
The amount of credit support provided pursuant to any form of credit
enhancement may be reduced. In most cases, the amount available pursuant to any
form of credit enhancement will be subject to periodic reduction in accordance
with a schedule or formula on a nondiscretionary basis pursuant to the terms of
the related indenture. Additionally, in most cases, the form of credit support
(and any replacements therefor) may be replaced, reduced or terminated, and the
formula used in calculating the amount of coverage with respect to Bankruptcy
Losses, Special Hazard Losses or Fraud Losses may be changed, without the
consent of the bondholders, upon the written assurance from each applicable
Rating Agency that the then-current rating of the related series of bonds will
not be adversely affected. Furthermore, in the event that the credit rating of
any obligor under any applicable credit enhancement is downgraded, the credit
rating(s) of the related series of bonds may be downgraded to a corresponding
level, and, the master servicer will not be obligated to obtain replacement
credit support in order to restore the rating(s) of the related series of bonds.
The master servicer will also be permitted to replace the credit support with
other credit enhancement instruments issued by obligors whose credit ratings are
equivalent
47
to the downgraded level and in lower amounts which would satisfy the downgraded
level, provided that the then-current rating(s) of the related series of bonds
are maintained. Where the credit support is in the form of a reserve fund, a
permitted reduction in the amount of credit enhancement will result in a release
of all or a portion of the assets in the reserve fund to the company, the master
servicer or the other person that is entitled thereto. Any assets so released
will not be available for distributions in future periods.
OTHER FINANCIAL OBLIGATIONS RELATED TO THE BONDS
SWAPS AND YIELD SUPPLEMENT AGREEMENTS
The trustee on behalf of a trust fund may enter into interest rate
swaps and related caps, floors and collars to minimize the risk of bondholders
from adverse changes in interest rates, which are collectively referred to as
swaps, and other yield supplement agreements or similar yield maintenance
arrangements that do not involve swap agreements or other notional principal
contracts, which are collectively referred to as yield supplement agreements.
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 the 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.
Yield supplement agreements may be entered into to supplement the
interest rate or other rates on one or more classes of the bonds of any series.
Additionally, agreements relating to other types of derivative products that are
designed to provide credit enhancement to the related series may be entered into
by a trustee and one or more counterparties. The terms of any derivative product
agreement and any counterparties will be described in the accompanying
prospectus supplement.
There can be no assurance that the trustee will be able to enter into
or offset swaps or enter into yield supplement agreements or derivative product
agreements at any specific time or at prices or on other terms that are
advantageous. In addition, although the terms of the swaps and yield supplement
agreements may provide for termination under various circumstances, there can be
no assurance that the trustee will be able to terminate a swap or yield
supplement agreement when it would be economically advantageous to the trust
fund to do so.
PURCHASE OBLIGATIONS
Some types of trust assets and some classes of bonds of any series, as
specified in the accompanying prospectus supplement, may be subject to a
purchase obligation that would become applicable on one or more specified dates,
or upon the occurrence of one or more specified events, or on demand made by or
on behalf of the applicable bondholders. A purchase obligation may be in the
form of a conditional or unconditional purchase commitment, liquidity facility,
remarketing agreement, maturity guaranty, put option or demand feature. The
terms and conditions of each purchase obligation, including the purchase price,
timing and payment procedure, will be described in the accompanying prospectus
supplement. A purchase obligation relating to trust assets may apply to those
trust assets or to the related bonds. Each purchase obligation may be a secured
or unsecured obligation of the provider thereof, which may include a bank or
other financial institution or an insurance company. Each purchase obligation
will be evidenced by an instrument delivered to the trustee for the benefit of
the applicable bondholders of the
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related series. As specified in the accompanying prospectus supplement, each
purchase obligation relating to trust assets will be payable solely to the
trustee for the benefit of the bondholders of the related series. Other purchase
obligations may be payable to the trustee or directly to the holders of the
bonds to which that obligation relate.
PRIMARY MORTGAGE INSURANCE, HAZARD INSURANCE;
CLAIMS THEREUNDER
GENERAL
The mortgaged property with respect to each mortgage loan will be
required to be covered by a hazard insurance policy and, if required as
described below, a Primary Insurance Policy. The following is only a brief
description of these insurance policies and does not purport to summarize or
describe all of the provisions of these policies. The insurance is subject to
underwriting and approval of individual mortgage loans by the respective
insurers.
PRIMARY MORTGAGE INSURANCE POLICIES
In a securitization of single family loans, single family loans
included in the related mortgage pool having a loan-to-value ratio at
origination of over 80% (or other percentage as described in the related
prospectus supplement) may be required by the company to be covered by a Primary
Insurance Policy. The Primary Insurance Policy will insure against default on a
mortgage loan as to at least the principal amount thereof exceeding 75% of the
Value of the related mortgaged property (or other percentage as described in the
related prospectus supplement) at origination of the mortgage loan, unless and
until the principal balance of the mortgage loan is reduced to a level that
would produce a loan-to- value ratio equal to or less than at least 80% (or
other percentage as described in the prospectus supplement). The company will
represent and warrant that, to the best of the company's knowledge, mortgage
loans of this type are so covered. This type of mortgage loan will not be
considered to be an exception to the foregoing standard if no Primary Insurance
Policy was obtained at origination but the mortgage loan has amortized to below
the above loan-to-value ratio percentage as of the applicable cut- off date.
Mortgage loans which are subject to negative amortization will only be covered
by a Primary Insurance Policy if the coverage was so required upon their
origination, notwithstanding that subsequent negative amortization may cause the
mortgage loan's loan-to-value ratio, based on the then-current balance, to
subsequently exceed the limits which would have required the coverage upon their
origination. Multifamily, commercial and mixed-use loans will not be covered by
a Primary Insurance Policy, regardless of the related loan-to-value ratio.
While the terms and conditions of the Primary Insurance Policies issued
by a primary insurer will differ from those in Primary Insurance Policies issued
by other primary insurers, each Primary Insurance Policy will in general cover
the Primary Insurance Covered Loss. The primary insurer generally will be
required to pay:
o the insured percentage of the Primary Insurance Covered Loss;
o the entire amount of the Primary Insurance Covered Loss, after
receipt by the primary insurer of good and merchantable title to,
and possession of, the mortgaged property; or
o at the option of the Primary Insurer, the sum of the delinquent
monthly payments plus any advances made by the insured, both to
the date of the claim payment and, thereafter, monthly payments
in the amount that would have become due under the mortgage loan
if it had not been discharged plus any advances made by the
insured until the earlier of (1)
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the date the mortgage loan would have been discharged in full if
the default had not occurred or (2) an approved sale.
As conditions precedent to the filing or payment of a claim under a
Primary Insurance Policy, in the event of default by the mortgagor, the insured
will typically be required, among other things, to:
o advance or discharge (1) hazard insurance premiums and (2) as
necessary and approved in advance by the primary insurer, real
estate taxes, protection and preservation expenses and
foreclosure and related costs;
o 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 Insurance Policy
(ordinary wear and tear excepted); and
o tender to the primary insurer good and merchantable title to, and
possession of, the mortgaged property.
For any single family loan for which the coverage is required under the
standard described above, the master servicer will maintain or cause each
subservicer to maintain, as the case may be, in full force and effect and to the
extent coverage is available a Primary Insurance Policy with regard to each
single family loan, provided that the Primary Insurance Policy was in place as
of the cut-off date and the company had knowledge of the Primary Insurance
Policy. In the event the company gains knowledge that as of the Closing Date, a
mortgage loan which required a Primary Insurance Policy did not have one, then
the master servicer is required to use reasonable efforts to obtain and maintain
a Primary Insurance Policy to the extent that the policy is obtainable at a
reasonable price. The master servicer or the Seller will not cancel or refuse to
renew a Primary Insurance Policy in effect at the time of the initial issuance
of a series of bonds that is required to be kept in force under the applicable
indenture unless the replacement Primary Insurance Policy for the canceled or
non-renewed policy is maintained with an insurer whose claims- paying ability is
acceptable to the Rating Agency or Agencies that rated the series of bonds for
collateralized asset-backed bonds having a rating equal to or better than the
highest then-current rating of any class of the series of bonds. For further
information regarding the extent of coverage under any mortgage pool insurance
policy or Primary Insurance Policy, see "Description of Credit
Enhancement--Mortgage Pool Insurance Policies."
HAZARD INSURANCE POLICIES
The terms of the mortgage loans require each mortgagor to maintain a
hazard insurance policy for their mortgage loan. Additionally, the servicing
agreement will require the master servicer to cause to be maintained for each
mortgage loan a hazard insurance policy providing for no less than the coverage
of the standard form of fire insurance policy with extended coverage customary
in the state in which the property is located. The coverage generally will be in
an amount equal to the lesser of the principal balance owing on the mortgage
loan or 100% of the insurable value of the improvements securing the mortgage
loan except that, if generally available, the coverage must not be less than the
minimum amount required under the terms thereof to fully compensate for any
damage or loss on a replacement cost basis. The ability of the master servicer
to ensure that hazard insurance proceeds are appropriately applied may be
dependent on its being named as an additional insured under any hazard insurance
policy and under any flood insurance policy referred to below, or upon the
extent to which information in this regard is furnished to the master servicer
by mortgagors or subservicers.
As set forth above, all amounts collected by the master servicer under
any hazard policy (except for amounts to be applied to the restoration or repair
of the mortgaged property or released to the
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mortgagor in accordance with the master servicer's normal servicing procedures)
will be deposited in the related Payment Account. The servicing agreement will
provide that the master servicer may satisfy its obligation to cause hazard
policies to be maintained by maintaining a blanket policy insuring against
losses on the mortgage loans. If the blanket policy contains a deductible
clause, the master servicer will deposit in the applicable Payment Account all
sums which would have been deposited therein but for the clause.
In general, the standard form of fire and extended coverage policy
covers physical damage to or destruction of the improvements on the property by
fire, lightning, explosion, smoke, windstorm, hail, 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 thereof are dictated by respective state laws, and
most of these policies typically do not cover any physical damage resulting from
the following: war, revolution, governmental actions, floods and other
water-related causes, earth movement (including earthquakes, landslides and
mudflows), nuclear reactions, wet or dry rot, vermin, rodents, insects or
domestic animals, theft and, depending on the case, vandalism. The foregoing
list is merely indicative of the kinds of uninsured risks and is not intended to
be all-inclusive. Where the improvements securing a mortgage loan are located in
a federally designated flood area at the time of origination of the mortgage
loan, the servicing agreement requires the master servicer to cause to be
maintained for this mortgage loan, flood insurance (to the extent available) in
an amount equal in general to the lesser of the amount required to compensate
for any loss or damage on a replacement cost basis or the maximum insurance
available under the federal flood insurance program.
The hazard insurance policies covering the mortgaged properties
typically contain a co-insurance clause which 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 in order to
recover the full amount of any partial loss. If the insured's coverage falls
below this specified percentage, the clause generally provides that the
insurer's liability in the event of partial loss does not exceed the greater of
(1) the replacement cost of the improvements damaged or destroyed less physical
depreciation or (2) the proportion of the loss as the amount of insurance
carried bears to the specified percentage of the full replacement cost of the
improvements.
Since the amount of hazard insurance that mortgagors are required to
maintain on the improvements securing the mortgage loans may decline as the
principal balances of the related mortgage loans decrease, and since residential
properties have historically appreciated in value over time, hazard insurance
proceeds could be insufficient to restore fully the damaged property in the
event of a partial loss. See "Description of Credit Enhancement--Special Hazard
Insurance Policies" for a description of the limited protection afforded by any
special hazard insurance policy against losses occasioned by hazards which are
otherwise uninsured against (including losses caused by the application of the
co- insurance clause described in the preceding paragraph).
Under the terms of the mortgage loans, mortgagors are generally
required to present claims to insurers under hazard insurance policies
maintained on the mortgaged properties. The master servicer, on behalf of the
trustee and bondholders, is obligated to present claims under any special hazard
insurance policy and any blanket insurance policy insuring against hazard losses
on the mortgaged properties. However, the ability of the master servicer to
present the claims is dependent upon the extent to which information in this
regard is furnished to the master servicer or the subservicers by mortgagors.
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FHA INSURANCE
The FHA is responsible for administering various federal programs,
including mortgage insurance, authorized under The Housing Act and the United
States Housing Act of 1937, as amended.
There are two primary FHA insurance programs that are available for
multifamily mortgage loans. Sections 221(d)(3) and (d)(4) of the Housing Act
allow HUD to insure mortgage loans that are secured by newly constructed and
substantially rehabilitated multifamily rental projects. Section 244 of the
Housing Act provides for co-insurance of such mortgage loans made under Sections
221 (d)(3) and (d)(4) by HUD/FHA and a HUD-approved co-insurer. Generally the
term of such a mortgage 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 mortgage loans
made for the purchase or refinancing of existing apartment projects which are at
least three years old. Section 244 also provides for co-insurance of mortgage
loans made under Section 223(f). Under Section 223(f), the loan proceeds cannot
be used for substantial rehabilitation work, but repairs may be made for up to,
in general, the greater of 15% of the value of the project or a dollar amount
per apartment unit established from time to time by HUD. In general the loan
term may not exceed 35 years and a loan to value ratio of no more than 85% is
required for the purchase of a project and 70% for the refinancing of a project.
HUD has the option, in most cases, to pay insurance claims in cash or
in debentures issued by HUD. Presently, 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
debenture interest rate. The master servicer will be obligated to purchase a
debenture issued in satisfaction of a defaulted FHA insured mortgage loan
serviced by it for an amount equal to the principal amount of any the debenture.
The master servicer will be required to take steps reasonably necessary
to keep FHA insurance in full force and effect.
VA MORTGAGE GUARANTY
The Servicemen's Readjustment Act of 1944, as amended, permits a
veteran or, in some instances, his or her spouse, to obtain a mortgage loan
guaranty by the VA covering mortgage financing of the purchase of a one-to
four-family dwelling unit to be occupied as the veteran's home at an interest
rate not exceeding the maximum rate in effect at the time the loan is made, as
established by HUD. The program has no limit on the amount of a mortgage loan,
requires no down payment for the purchaser and permits the guaranty of mortgage
loans with terms, limited by the estimated economic life of the property, up to
30 years. The maximum guaranty that may be issued by the VA under this program
is 50% of the original principal amount of the mortgage loan up to a dollar
limit established by the VA. The liability on the guaranty is reduced or
increased pro rata with any reduction or increase in amount of indebtedness, but
in no event will the amount payable on the guaranty exceed the amount of the
original guaranty. Notwithstanding the dollar and percentage limitations of the
guaranty, a mortgagee will ordinarily suffer a monetary loss only when the
difference between the unsatisfied indebtedness and the proceeds of a
foreclosure sale of mortgaged premises is greater than the original guaranty as
adjusted. The VA may, at its option, and without regard to the guaranty, make
full payment to a mortgagee of the unsatisfied indebtedness on a mortgage upon
its assignment to the VA.
Since there is no limit imposed by the VA on the principal amount of a
VA-guaranteed mortgage loan but there is a limit on the amount of the VA
guaranty, additional coverage under a Primary Mortgage Insurance Policy may be
required by the company for VA loans in excess of amounts specified by the
52
VA. The amount of the additional coverage will be set forth in the related
prospectus supplement. Any VA guaranty relating to Contracts underlying a series
of bonds will be described in the related prospectus supplement.
THE COMPANY
The company is a wholly-owned subsidiary of Impac Mortgage Holdings,
Inc. The company was incorporated in the State of California on April 12, 1996.
The company was organized for the purpose of serving as a private secondary
mortgage market conduit.
The company maintains its principal office at 1401 Dove Street, Newport
Beach, California 92660, and its telephone number is (949) 475-3700.
IMPAC FUNDING CORPORATION
Impac Funding Corporation, an affiliate of the company, may be a Seller
and may act as master servicer with respect to a mortgage pool. Impac Funding is
a mortgage banking conduit that acquires conventional one- to four-family
residential mortgage loans nationwide and has, from time to time, acquired
condominium conversion loans. Impac Funding is a non-consolidating subsidiary of
Impac Mortgage Holdings, Inc. Impac Funding primarily acquires mortgage loans
from approved correspondents.
Prior to November 1995, Impac Funding was a division of Imperial Credit
Industries, Inc. In November 1995, Imperial Credit Industries, Inc. restructured
its operations pursuant to which Impac Funding became a separate corporation and
Imperial Credit Industries, Inc. contributed, among other things, all of the
outstanding nonvoting preferred stock of Impac Funding, which represents 99% of
the economic interest in Impac Funding, to Impac Mortgage Holdings, Inc., in
exchange for approximately 10% of the common stock of Impac Mortgage Holdings,
Inc. The common stock of Impac Funding was retained by Imperial Credit
Industries, Inc. until March 1997 when it was distributed to certain officers
and/or directors of Impac Funding who are also officers and/or directors of
Impac Mortgage Holdings, Inc.
Impac Funding's executive offices are located at 1401 Dove Street,
Newport Beach, California 92660, and its telephone number is (949) 475-3700.
IMPAC MORTGAGE HOLDINGS, INC.
Impac Mortgage Holdings, Inc. is a publicly traded, recently formed
specialty finance company which operates three businesses: (1) long-term
investment operations, (2) conduit operations, and (3) warehouse lending
operations. The long-term investment operations is a recently-created business
that invests primarily in nonconforming residential mortgage loans and bonds
backed by such loans. The conduit operations, conducted by Impac Funding,
primarily purchases and sells or securitizes non- conforming mortgage loans, and
the warehouse lending operations provides short-term lines of credit to
originators of mortgage loans. These two businesses include certain ongoing
operations contributed to Impac Mortgage Holdings by Imperial Credit Industries,
Inc., a leading specialty finance company, in November 1995. Impac Mortgage
Holdings is organized as a real estate investment trust for tax purposes, which
allows it generally to pass through earnings to stockholders without federal
income tax at the corporate level.
53
Impac Mortgage Holdings, Inc.'s executive offices are located at 1401
Dove Street, Newport Beach, California 92660, and its telephone number is (949)
475-3700.
THE AGREEMENTS
GENERAL
Each series of bonds will be issued pursuant to an indenture. The
parties to each indenture will be the related Issuer and the trustee. The Issuer
will be created pursuant to an owner trust agreement between the company and the
owner trustee.
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 bonds and the
nature of the related trust fund. The following summaries describe provisions
that may appear in either the servicing agreement or indenture. The prospectus
supplement for a series of bonds will describe any provision of the related
Agreements that materially differs from the description thereof set forth below.
The company will provide a copy of the Agreement (without exhibits) that relates
to any series of bonds without charge upon written request of a holder of an
offered bond of the series addressed to it at its principal executive offices
specified in this prospectus under "The Company".
CERTAIN MATTERS REGARDING THE MASTER SERVICER AND THE COMPANY
The servicing agreement for each series of bonds will provide that the
master servicer may not resign from its obligations and duties except upon a
determination that performance of the duties is no longer permissible under
applicable law or except (1) in connection with a permitted transfer of
servicing or (2) upon appointment of a successor servicer reasonably acceptable
to the trustee and upon receipt by the trustee of a letter from each Rating
Agency generally to the effect that the resignation and appointment will not, in
and of itself, result in a downgrading of the bonds. No resignation will become
effective until the trustee or a successor servicer has assumed the master
servicer's responsibilities, duties, liabilities and obligations under the
servicing agreement.
Each servicing agreement and servicing agreement will also provide that
the master servicer, the company and their directors, officers, employees or
agents will not be under any liability to the trust fund or the bondholders for
any action taken or for refraining from the taking of any action in good faith,
or for errors in judgment, unless the liability which would otherwise be imposed
was by reason of willful misfeasance, bad faith or gross negligence in the
performance of duties or by reason of reckless disregard of obligations and
duties. Each servicing agreement will further provide that the master servicer,
the company, and any director, officer, employee or agent of the master servicer
or the company are entitled to indemnification by the trust fund and will be
held harmless against any loss, liability or expense incurred in connection with
any legal action relating to the servicing agreement or the related series of
bonds, other than any loss, liability or expense related to any specific
mortgage loan or mortgage loans (except a loss, liability or expense otherwise
reimbursable pursuant to the servicing agreement) and any loss, liability or
expense incurred by reason of willful misfeasance, bad faith or gross negligence
in the performance of its duties or by reason of reckless disregard of
obligations and duties. In addition, each servicing agreement will provide that
neither the master servicer nor the company will be under any obligation to
appear in, prosecute or defend any legal or administrative action that is not
incidental to its respective duties under the servicing agreement and which in
its opinion may involve it in any expense or liability. The master servicer or
the company may, however, in its discretion undertake any action which it may
deem necessary or desirable with respect to the servicing agreement and the
rights and duties of the parties to that agreement and the interests of the
bondholders. The legal expenses and costs of the action
54
and any resulting liability will be expenses, costs and liabilities of the trust
fund, and the master servicer or the company, as the case may be, will be
entitled reimbursement from funds otherwise distributable to bondholders.
Any person into which the master servicer may be merged or
consolidated, any person resulting from any merger or consolidation to which the
master servicer is a party or any person succeeding to the business of the
master servicer will be the successor of the master servicer under the related
servicing agreement, provided that (1) the person is qualified to service
mortgage loans on behalf of Fannie Mae or Freddie Mac and (2) the merger,
consolidation or succession does not adversely affect the then-current ratings
of the classes of bonds of the related series that have been rated. In addition,
notwithstanding the prohibition on its resignation, the master servicer may
assign its rights under a servicing agreement to any person to whom the master
servicer is transferring a substantial portion of its mortgage servicing
portfolio, provided clauses (1) and (2) above are satisfied and the person is
reasonably satisfactory to the company and the trustee. In the case of an
assignment, the master servicer will be released from its obligations under the
servicing agreement, exclusive of liabilities and obligations incurred by it
prior to the time of the assignment.
EVENTS OF DEFAULT AND RIGHTS UPON EVENT DEFAULT
SERVICING AGREEMENT
For a series of bonds, a servicing default under the related servicing
agreement generally will include:
o any failure by the master servicer to make a required deposit to
the Payment Account or, if the master servicer is so required, to
distribute to the holders of any class of bonds or Equity
Certificates of the series any required payment which continues
unremedied for 5 business days (or other period of time described
in the related prospectus supplement) after the giving of written
notice of the failure to the master servicer by the trustee or
the Issuer;
o any failure by the master servicer duly to observe or perform in
any material respect any other of its covenants or agreements in
the servicing agreement with respect to the series of bonds which
continues unremedied for 45 days after the giving of written
notice of the failure to the master servicer by the trustee or
the Issuer;
o events of insolvency, readjustment of debt, marshaling of assets
and liabilities or similar proceedings regarding the master
servicer and some actions by the master servicer indicating its
insolvency or inability to pay its obligations, as specified in
the related servicing agreement; and
o any other servicing default as set forth in the servicing
agreement.
So long as a servicing default remains unremedied, either the company
or the trustee may, by written notification to the master servicer and to the
Issuer or the trustee or trust fund, as applicable, terminate all of the rights
and obligations of the master servicer under the servicing agreement (other than
any right of the master servicer as bondholder or as holder of the Equity
Certificates and other than the right to receive servicing compensation and
expenses for servicing the mortgage loans during any period prior to the date of
the termination), whereupon the trustee will succeed to all responsibilities,
duties and liabilities of the master servicer under the servicing agreement
(other than any obligation to purchase mortgage loans) and will be entitled to
similar compensation arrangements. In the event that the trustee
55
would be obligated to succeed the master servicer but is unwilling so to act, it
may appoint (or if it is unable so to act, it shall appoint) or petition a court
of competent jurisdiction for the appointment of an approved mortgage servicing
institution with a net worth of at least $15,000,000 to act as successor to the
master servicer under the servicing agreement (unless otherwise set forth in the
servicing agreement). Pending the appointment, the trustee is obligated to act
in the capacity. The trustee and the successor may agree upon the servicing
compensation to be paid, which in no event may be greater than the compensation
to the initial master servicer under the servicing agreement.
INDENTURE
An event of default under the indenture generally will include:
o a default for five days or more (or other period of time
described in the related prospectus supplement) in the payment of
any principal of or interest on any bond of the series;
o failure to perform any other covenant of the company or the trust
fund in the indenture which continues for a period of thirty days
after notice thereof is given in accordance with the procedures
described in the related prospectus supplement;
o any representation or warranty made by the company or the trust
fund in the indenture or in any certificate or other writing
delivered pursuant thereto or in connection therewith with
respect to or affecting the series having been incorrect in a
material respect as of the time made, and the breach is not cured
within thirty days after notice thereof is given in accordance
with the procedures described in the related prospectus
supplement;
o events of bankruptcy, insolvency, receivership or liquidation of
the company or the trust fund, as specified in the indenture; or
o any other event of default provided with respect to bonds of that
series.
If an event of default with respect to the bonds of any series at the
time outstanding occurs and is continuing, the trustee or the holders of a
majority of the then aggregate outstanding amount of the bonds of the series may
declare the principal amount of all the bonds of the series to be due and
payable immediately. The declaration may, in some circumstances, be rescinded
and annulled by the holders of a majority in aggregate outstanding amount of the
related bonds.
If following an event of default with respect to any series of bonds,
the bonds of the series have been declared to be due and payable, the trustee
may, in its discretion, notwithstanding the acceleration, elect to maintain
possession of the collateral securing the bonds of the series and to continue to
apply payments on the collateral as if there had been no declaration of
acceleration if the collateral continues to provide sufficient funds for the
payment of principal of and interest on the bonds of the series as they would
have become due if there had not been a declaration. In addition, the trustee
may not sell or otherwise liquidate the collateral securing the bonds of a
series following an event of default, unless (1) the holders of 100% of the then
aggregate outstanding amount of the bonds of the series consent to the sale, (2)
the proceeds of the sale or liquidation are sufficient to pay in full the
principal of and accrued interest, due and unpaid, on the outstanding bonds of
the series at the date of the sale or (3) the trustee determines that the
collateral would not be sufficient on an ongoing basis to make all payments on
the bonds as the payments would have become due if the bonds had not been
declared due and payable, and the trustee obtains the consent of the holders of
66 2/3% of the then aggregate outstanding amount of the bonds of the series.
56
In the event that the trustee liquidates the collateral in connection
with an event of default, the indenture provides that the trustee will have a
prior lien on the proceeds of the liquidation for unpaid fees and expenses. As a
result, upon the occurrence of the event of default, the amount available for
payments to the bondholders would be less than would otherwise be the case.
However, the 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 bondholders after the occurrence of the
event of default.
In the event the principal of the bonds of a series is declared due and
payable, as described above, the holders of the bonds issued at a discount from
par may be entitled to receive no more than an amount equal to the unpaid
principal amount thereof less the amount of the discount that is unamortized.
No bondholder or holder of an Equity Certificate generally will have
any right under an owner trust agreement or indenture to institute any
proceeding with respect to the Agreement unless (1) that holder previously has
given to the trustee written notice of default and the continuance thereof, (2)
the holders of bonds or Equity Certificates of any class evidencing not less
than 25% of the aggregate Percentage Interests constituting that class (a) have
made written request upon the trustee to institute the proceeding in its own
name as trustee and (b) have offered to the trustee reasonable security or
indemnity against the costs, expenses and liabilities that may be incurred in or
because of the proceeding, (3) the trustee has neglected or refused to institute
the proceeding for 60 days after receipt of the request and indemnity and (4) no
direction inconsistent with the written request has been given to the trustee
during the 60 day period by the holders of a majority of the bond balances of
that class.
AMENDMENT
With respect to each series of bonds, each related servicing agreement
or indenture may be amended by the parties thereto without the consent of any of
the holders of the bonds covered by the Agreement, to cure any ambiguity, to
correct, modify or supplement any provision therein, or to make any other
provisions with respect to matters or questions arising under the Agreement
which are not inconsistent with the provisions thereof, provided that the action
will not adversely affect in any material respect the interests of any holder of
bonds covered by the Agreement. Each Agreement may also be amended by the
parties thereto with the consent of the holders of bonds evidencing not less
than 66% of the voting rights, for any purpose; provided, however, that the
amendment may not:
(1) reduce in any manner the amount of or delay the timing of,
payments received on trust fund assets which are required to be
distributed on any bond without the consent of the holder of the
bond,
(2) adversely affect in any material respect the interests of the
holders of any class of bonds in a manner other than as described
in (1), without the consent of the holders of bonds of the class
evidencing not less than 66% of the aggregate voting rights of
the class or
(3) reduce the aforesaid percentage of voting rights required for the
consent to the amendment without the consent of the holders of
all bonds covered by the Agreement then outstanding.
The voting rights evidenced by any bond will be the portion of the voting rights
of all of the bonds in the related series allocated in the manner described in
the related prospectus supplement.
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TERMINATION; RETIREMENT OF BONDS
The obligations created by the related Agreements for each series of
bonds (other than the limited payment and notice obligations of the trustee and
the company, respectively) will terminate upon the payment to bondholders of
that series of all amounts held in the Payment Account or by the master servicer
and required to be paid to them pursuant to the Agreements following the earlier
of (1) the final payment or other liquidation or disposition (or any advance
with respect thereto) of the last mortgage loan, REO property and/or mortgage
security subject thereto and (2) the purchase by the master servicer or the
company or if specified in the prospectus supplement, by the holder of the
Equity Certificates, from the trust fund for the series of all remaining
mortgage loans, REO properties and/or mortgage securities. In addition to the
foregoing, the master servicer or the company will have the option to purchase,
in whole but not in part, the bonds specified in the related prospectus
supplement in the manner set forth in the related prospectus supplement. With
respect to any series of bonds, the purchase shall not be made unless the
aggregate principal balance of the bonds as of the date is equal to or less than
the percentage specified in the related prospectus supplement (which shall not
be greater than 25%) of the aggregate principal balance of the bonds as of the
Closing Date or a period specified in the related prospectus supplement (which
shall not be shorter than seven years) has elapsed since the initial
distribution date. Upon the purchase of the bonds or at any time thereafter, at
the option of the master servicer or the company, the assets of the trust fund
may be sold, thereby effecting a retirement of the bonds and the termination of
the trust fund, or the bonds so purchased may be held or resold by the master
servicer or the company. In no event, however, will the trust created by the
indenture continue beyond the expiration of 21 years from the death of the
survivor of the persons named in the indenture. Written notice of termination of
the indenture will be given to each bondholder, and the final distribution will
be made only upon surrender and cancellation of the bonds at an office or agency
appointed by the trustee which will be specified in the notice of termination.
If the bondholders are permitted to terminate the trust under the applicable
indenture, a penalty may be imposed upon the bondholders based upon the fee that
would be foregone by the master servicer because of the termination.
The purchase of mortgage loans and property acquired in respect of
mortgage loans evidenced by a series of bonds shall be made at the option of the
master servicer, the company or the holder of the Equity Certificates at the
price specified in the related prospectus supplement. The exercise of the right
will effect early retirement of the bonds of that series, but the right of the
master servicer, the company or, if applicable, the holder to so purchase is
subject to the aggregate principal balance of the mortgage loans and/or mortgage
securities in the trust fund for that series as of the distribution date on
which the purchase proceeds are to be distributed to bondholders being less than
the percentage specified in the related prospectus supplement of the aggregate
principal balance of the mortgage loans and/or mortgage securities at the
cut-off date for that series. The prospectus supplement for each series of bonds
will set forth the amounts that the holders of the bonds will be entitled to
receive upon the early retirement. The early termination may adversely affect
the yield to holders of the bonds.
Following any optional termination, there will be no continuing direct
or indirect liability of the trust fund or any bondholder as sellers of the
assets of the trust fund.
THE TRUSTEE
The trustee under each indenture will be named in the related
prospectus supplement. The commercial bank, national banking association,
banking corporation or trust company that serves as trustee may have typical
banking relationships with the company and its affiliates. The trustee shall at
all times be a corporation or an association organized and doing business under
the laws of any state or the United States of America, authorized under the laws
to exercise corporate trust powers, having a
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combined capital and surplus of at least $15,000,000 and subject to supervision
or examination by federal or state authority.
DUTIES OF THE TRUSTEE
The trustee for each series of bonds will make no representation as to
the validity or sufficiency of the related Agreements, the bonds or any
underlying mortgage loan, mortgage security or related document and will not be
accountable for the use or application by or on behalf of any master servicer or
special servicer of any funds paid to the master servicer or special servicer in
respect of the bonds or the underlying mortgage loans or mortgage securities, or
any funds deposited into or withdrawn from the Payment Account for the series or
any other account by or on behalf of the master servicer or special servicer. If
no event of default has occurred and is continuing, the trustee for each series
of bonds will be required to perform only those duties specifically required
under the related indenture. However, upon receipt of any of the various
certificates, reports or other instruments required to be furnished to it
pursuant to the related Agreement, a trustee will be required to examine the
documents and to determine whether they conform to the requirements of the
agreement.
SOME MATTERS REGARDING THE TRUSTEE
As and to the extent described in the related prospectus supplement,
the fees and normal disbursements of any trustee may be the expense of the
related master servicer or other specified person or may be required to be borne
by the related trust fund.
The trustee for each series of bonds generally will be entitled to
indemnification, from amounts held in the Payment Account for the series, for
any loss, liability or expense incurred by the trustee in connection with the
trustee's acceptance or administration of its trusts under the related indenture
unless the loss, liability, cost or expense was incurred by reason of willful
misfeasance, bad faith or gross negligence on the part of the trustee in the
performance of its obligations and duties, or by reason of its reckless
disregard of its obligations or duties.
RESIGNATION AND REMOVAL OF THE TRUSTEE
The trustee may resign at any time, in which event the company will be
obligated to appoint a successor trustee. The company may also remove the
trustee if the trustee ceases to be eligible to continue under the indenture or
if the trustee becomes insolvent. Upon becoming aware of the circumstances, the
company will be obligated to appoint a successor trustee. The trustee may also
be removed at any time by the holders of bonds evidencing not less than 51% of
the aggregate undivided interests (or, if applicable, voting rights) in the
related 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.
YIELD CONSIDERATIONS
The yield to maturity of an offered bond will depend on the price paid
by the holder for the bond, the bond interest rate on a bond entitled to
payments of interest (which bond interest rate may vary if so specified in the
related prospectus supplement) and the rate and timing of principal payments
(including prepayments, defaults, liquidations and repurchases) on the mortgage
loans and the allocation thereof to reduce the principal balance of the bond (or
notional amount thereof if applicable) and other factors.
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A class of bonds may be entitled to payments of interest at a fixed
bond interest rate, a variable bond interest rate or adjustable bond interest
rate, or any combination of the bond interest rates, each as specified in the
related prospectus supplement. A variable bond interest rate may be calculated
based on the weighted average of the Net Mortgage Rates of the related mortgage
loans for the month preceding the distribution date if so specified in the
related prospectus supplement. As will be described in the related prospectus
supplement, the aggregate payments of interest on a class of bonds, and their
yield to maturity, will be affected by the rate of payment of principal on the
bonds (or the rate of reduction in the notional balance of bonds entitled only
to payments of interest) and, in the case of bonds evidencing interests in ARM
Loans, by changes in the Net Mortgage Rates on the ARM Loans. See "Maturity and
Prepayment Considerations" below. The yield on the bonds will also be affected
by liquidations of mortgage loans following mortgagor defaults and by purchases
of mortgage loans in the event of breaches of representations made in respect of
the mortgage loans by the company, the master servicer and others, or
conversions of ARM Loans to a fixed interest rate. See "The Mortgage
Pools--Representations by Sellers" and "Descriptions of the Bonds--Assignment of
Trust Fund Assets" above. Holders of Strip Bonds or a class of bonds having a
bond interest rate that varies based on the weighted average mortgage rate of
the underlying mortgage loans may be affected by disproportionate prepayments
and repurchases of mortgage loans having higher Net Mortgage Rates or rates
applicable to the Strip Bonds, as applicable.
With respect to any series of bonds, a period of time will elapse
between the date upon which payments on the related mortgage loans are due and
the distribution date on which the payments are passed through to bondholders.
That delay will effectively reduce the yield that would otherwise be produced if
payments on the mortgage loans were distributed to bondholders on or near the
date they were due.
In general, if a class of bonds is purchased at initial issuance at a
premium and payments of principal on the related mortgage loans occur at a rate
faster than anticipated at the time of purchase, the purchaser's actual yield to
maturity will be lower than that assumed at the time of purchase. Similarly, if
a class of bonds is purchased at initial issuance at a discount and payments of
principal on the related mortgage loans occur at a rate slower than that assumed
at the time of purchase, the purchaser's actual yield to maturity will be lower
than that originally anticipated. The effect of principal prepayments,
liquidations and purchases on yield will be particularly significant in the case
of a series of bonds having a class entitled to payments of interest only or to
payments of interest that are disproportionately high relative to the principal
payments to which the class is entitled. This class will likely be sold at a
substantial premium to its principal balance and any faster than anticipated
rate of prepayments will adversely affect the yield to holders thereof.
Extremely rapid prepayments may result in the failure of the holders to recoup
their original investment. In addition, the yield to maturity on other types of
classes of bonds, including Accrual Bonds and bonds with a bond interest rate
which fluctuates inversely with or at a multiple of an index, may be relatively
more sensitive to the rate of prepayment on the related mortgage loans than
other classes of bonds.
The timing of changes in the rate of principal payments on or
repurchases of the mortgage loans may significantly affect an investor's actual
yield to maturity, even if the average rate of principal payments experienced
over time is consistent with an investor's expectation. In general, the earlier
a prepayment of principal on the underlying mortgage loans or a repurchase
thereof, the greater will be the effect on an investor's yield to maturity. As a
result, the effect on an investor's yield of principal payments and repurchases
occurring at a rate higher (or lower) than the rate anticipated by the investor
during the period immediately following the issuance of a series of bonds would
not be fully offset by a subsequent like reduction (or increase) in the rate of
principal payments.
When a principal prepayment in full is made on a mortgage loan, the
borrower is generally charged interest only for the period from the due date of
the preceding scheduled payment up to the date
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of the prepayment, instead of for the full accrual period, that is, the period
from the due date of the preceding scheduled payment up to the due date for the
next scheduled payment. In addition, a partial principal prepayment may likewise
be applied as of a date prior to the next scheduled due date (and, accordingly,
be accompanied by accrued interest for less than the full accrual period).
However, interest accrued and distributable on any series of bonds on any
distribution date will generally correspond to interest accrued on the principal
balance of mortgage loans for their respective full accrual periods.
Consequently, if a prepayment on any mortgage loan is distributable to
bondholders on a particular distribution date, but the prepayment is not
accompanied by accrued interest for the full accrual period, the interest
charged to the borrower (net of servicing and administrative fees and any
retained interest of the company) may be less than the corresponding amount of
interest accrued and otherwise payable on the related mortgage loan, and a
Prepayment Interest Shortfall will result. If and to the extent that the
shortfall is allocated to a class of offered bonds, its yield will be adversely
affected. The prospectus supplement for a series of bonds will describe the
manner in which the shortfalls will be allocated among the classes of the bonds.
If so specified in the related prospectus supplement, the master servicer will
be required to apply some or all of its servicing compensation for the
corresponding period to offset the amount of the shortfalls. The related
prospectus supplement will also describe any other amounts available to offset
the shortfalls. See "Servicing of Mortgage Loans--Servicing and Other
Compensation and Payment of Expenses; Retained Interest".
The trust fund with respect to any series may include convertible ARM
Loans. As is the case with conventional, fixed-rate mortgage loans originated in
a high interest rate environment which may be subject to a greater rate of
principal prepayments when interest rates decrease, convertible ARM Loans may be
subject to a greater rate of principal prepayments (or purchases by the related
subservicer or the master servicer) due to their refinancing or conversion to
fixed interest rate loans in a low interest rate environment. For example, if
prevailing interest rates fall significantly, convertible ARM Loans could be
subject to higher prepayment and conversion rates than if prevailing interest
rates remain constant because the availability of fixed-rate or other
adjustable-rate mortgage loans at competitive interest rates may encourage
mortgagors to refinance their adjustable-rate mortgages to "lock in" a lower
fixed interest rate or to take advantage of the availability of other
adjustable-rate mortgage loans, or, in the case of convertible adjustable-rate
mortgage loans, to exercise their option to convert the adjustable interest
rates to fixed interest rates. The conversion feature may also be exercised in a
rising interest rate environment as mortgagors attempt to limit their risk of
higher rates. A rising interest rate environment may also result in an increase
in the rate of defaults on the mortgage loans. If the related subservicer or the
master servicer purchases convertible ARM Loans, a mortgagor's exercise of the
conversion option will result in a distribution of the principal portion thereof
to the bondholders, as described in this prospectus. Alternatively, to the
extent subservicers or the master servicer fail to purchase converting ARM
Loans, the mortgage pool will include fixed-rate mortgage loans.
The rate of defaults on the mortgage loans will also affect the rate
and timing of principal payments on the mortgage loans and thus the yield on the
bonds. In general, defaults on single family loans are expected to occur with
greater frequency in their early years. The rate of default on single family
loans which are refinance or limited documentation mortgage loans, and on
mortgage loans, with high loan-to- value ratios, may be higher than for other
types of mortgage loans. Furthermore, the rate and timing of prepayments,
defaults and liquidations on the mortgage loans will be affected by the general
economic condition of the region of the country in which the related mortgaged
properties 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.
With respect to some mortgage loans in a mortgage pool, the mortgage
rate at origination may be below the rate that would result if the index and
margin relating thereto were applied at origination.
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Under the applicable underwriting standards, the mortgagor under each mortgage
loan generally will be qualified, or the mortgage loan otherwise approved, on
the basis of the mortgage rate in effect at origination. The repayment of the
mortgage loan may thus be dependent on the ability of the mortgagor to make
larger level monthly payments following the adjustment of the mortgage rate. In
addition, the periodic increase in the amount paid by the mortgagor of a buydown
mortgage loan during or at the end of the applicable Buydown Period may create a
greater financial burden for the mortgagor, who might not have otherwise
qualified for a mortgage under applicable underwriting guidelines, and may
accordingly increase the risk of default with respect to the related mortgage
loan.
The mortgage rates on 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 Indices applicable at origination and the related Note Margins), the amount
of interest accruing on the principal balance of the mortgage loans may exceed
the amount of their minimum scheduled monthly payment. As a result, a portion of
the accrued interest on negatively amortizing mortgage loans may become Deferred
Interest which will be added to the principal balance thereof and will bear
interest at the applicable mortgage rate. The addition of the Deferred Interest
to the principal balance of any related class or classes of bonds will lengthen
the weighted average life thereof and may adversely affect yield to holders
thereof, depending upon the price at which the bonds were purchased. In
addition, with respect to ARM Loans subject to negative amortization, during a
period of declining interest rates, it might be expected that each minimum
scheduled monthly payment on the mortgage loan would exceed the amount of
scheduled principal and accrued interest on the principal balance thereof, and
since the excess will be applied to reduce the principal balance of the related
class or classes of bonds, the weighted average life of the bonds will be
reduced and may adversely affect yield to holders thereof, depending upon the
price at which the bonds were purchased.
MATURITY AND PREPAYMENT CONSIDERATIONS
As indicated above under "The Mortgage Pools," the original terms to
maturity of the mortgage loans in a given mortgage pool will vary depending upon
the type of mortgage loans included in the mortgage pool. The prospectus
supplement for a series of bonds will contain information with respect to the
types and maturities of the mortgage loans in the related mortgage pool. All of
the mortgage loans may be prepaid without penalty in full or in part at any
time. The prepayment experience with respect to the mortgage loans in a mortgage
pool will affect the life and yield of the related series of bonds.
With respect to balloon loans, payment of the balloon payment (which,
based on the amortization schedule of the mortgage loans, is expected to be a
substantial amount) will generally depend on the mortgagor's ability to obtain
refinancing of the mortgage loans or to sell the mortgaged property prior to the
maturity of the balloon loan. 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 mortgagor's financial situation, prevailing
mortgage loan interest rates, the mortgagor's equity in the related mortgaged
property, tax laws and prevailing general economic conditions. None of the
company, the master servicer, or any of their affiliates will be obligated to
refinance or repurchase any mortgage loan or to sell the mortgaged property.
The extent of prepayments of principal of the mortgage loans may be
affected by a number of factors, including solicitations and the availability of
mortgage credit, the relative economic vitality of the area in which the
mortgaged properties are located and, in the case of multifamily, commercial and
mixed-use loans, the quality of management of the mortgage properties, the
servicing of the mortgage loans, possible changes in tax laws and other
opportunities for investment. In addition, the rate of
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principal payments on the mortgage loans may be affected by the existence of
lock-out periods and requirements that principal prepayments be accompanied by
prepayment premiums, as well as due-on- sale and due-on-encumbrance provisions,
and by the extent to which the provisions may be practicably enforced. See
"Servicing of Mortgage Loans--Collection and Other Servicing Procedures;
Mortgage Loan Modifications" and "Legal Aspects of the Mortgage
Loans--Enforceability of Some Provisions" for a description of provisions of the
servicing agreement and legal aspects of mortgage loans that may affect the
prepayment experience on the mortgage loans.
The rate of prepayment on a pool of mortgage loans is also affected by
prevailing market interest rates for mortgage loans of a comparable type, term
and risk level. When the prevailing market interest rate is below a mortgage
coupon, a borrower may have an increased incentive to refinance its mortgage
loan. In addition, as prevailing market interest rates decline, even borrowers
with ARM Loans that have experienced a corresponding interest rate decline may
have an increased incentive to refinance for purposes of either (1) converting
to a fixed rate loan and thereby "locking in" the rate or (2) taking advantage
of the initial "teaser rate" (a mortgage interest rate below what it would
otherwise be if the applicable index and gross margin were applied) on another
adjustable rate mortgage loan. Moreover, although the mortgage rates on ARM
Loans will be subject to periodic adjustments, the adjustments generally will
not increase or decrease the mortgage rates by more than a fixed percentage
amount on each adjustment date, will not increase the mortgage rates over a
fixed percentage amount during the life of any ARM Loan and will be based on an
index (which may not rise and fall consistently with mortgage interest rates)
plus the related Note Margin (which may be different from margins being used at
the time for newly originated adjustable rate mortgage loans). As a result, the
mortgage rates on the ARM Loans at any time may not equal the prevailing rates
for similar, newly originated adjustable rate mortgage loans. In high interest
rate environments, the prevailing rates on fixed-rate mortgage loans may be
sufficiently high in relation to the then-current mortgage rates on newly
originated ARM Loans that the rate of prepayment may increase as a result of
refinancings. There can be no assurance as to the rate of prepayments on the
mortgage loans during any period or over the life of any series of bonds.
If the applicable servicing agreement for a series of bonds provides
for a pre-funding account or other means of funding the transfer of additional
mortgage loans to the related trust fund, as described under "Description of the
Bonds--Pre-Funding Account" in this prospectus, and the trust fund is unable to
acquire the additional mortgage loans within any applicable time limit, the
amounts set aside for the purpose may be applied as principal payments on one or
more classes of bonds of the series. See "Yield Considerations."
There can be no assurance as to the rate of prepayment of the mortgage
loans. The company is not aware of any publicly available statistics relating to
the principal prepayment experience of diverse portfolios of mortgage loans such
as the mortgage loans over an extended period of time. All statistics known to
the company that have been compiled with respect to prepayment experience on
mortgage loans indicate that while some mortgage loans may remain outstanding
until their stated maturities, a substantial number will be paid prior to their
respective stated maturities. No representation is made as to the particular
factors that will affect the prepayment of the mortgage loans or as to the
relative importance of these factors.
As described in this prospectus and in the prospectus supplement, the
master servicer, the company or a person specified in the related prospectus
supplement (other than the holder of any class of offered bonds) may have the
option to purchase the assets in a trust fund and effect early retirement of the
related series of bonds. See "The Agreements--Termination; Retirement of Bonds."
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LEGAL ASPECTS OF MORTGAGE LOANS
The following discussion summarizes legal aspects of mortgage loans
that is general in nature. The summaries do not purport to be complete. They do
not reflect the laws of any particular state nor the laws of all states in which
the mortgaged properties may be situated. This is because these legal aspects
are governed in part by the law of the state that applies to a particular
mortgaged property and the laws of the states may vary substantially. You should
refer to the applicable federal and state laws governing the mortgage loans.
MORTGAGES
Each single family, multifamily, commercial and mixed-use loan and, if
applicable, the Contracts (in each case other than cooperative mortgage loans),
will be evidenced by a note or bond and secured by an instrument granting a
security interest in real property, which may be a mortgage, deed of trust or a
deed to secure debt, depending upon the prevailing practice and law in the state
in which the related mortgaged property is located, and may have first, second
or third priority. Mortgages and deeds to secure debt are referred to as
"mortgages." Contracts evidence both the obligation of the obligor to repay the
loan evidenced thereby and grant a security interest in the related Manufactured
Homes to secure repayment of the loan. However, as Manufactured Homes have
become larger and often have been attached to their sites without any apparent
intention by the borrowers to move them, courts in many states have held that
Manufactured Homes may become subject to real estate title and recording laws.
See "--Contracts" below. In some states, a mortgage or deed of trust creates a
lien upon the real property encumbered by the mortgage or deed of trust.
However, in other states, the mortgage or deed of trust conveys legal title to
the property respectively, to the mortgagee or to a trustee for the benefit of
the mortgagee subject to a condition subsequent (i.e., the payment of the
indebtedness secured thereby). The lien created by the mortgage or deed of trust
is not prior to the lien for real estate taxes and assessments and other charges
imposed under governmental police powers. Priority between mortgages depends on
their terms or on the terms of separate subordination or inter-creditor
agreements, the knowledge of the parties in some cases and generally on the
order of recordation of the mortgage in the appropriate recording office. There
are two parties to a mortgage, the mortgagor, who is the borrower and homeowner,
and the mortgagee, who is the lender. Under the mortgage instrument, the
mortgagor delivers to the mortgagee a note or bond and the mortgage. In the case
of a land trust, there are three parties because title to the property is held
by a land trustee under a land trust agreement of which the borrower is the
beneficiary; at origination of a mortgage loan, the borrower executes a separate
undertaking to make payments on the mortgage note. Although a deed of trust is
similar to a mortgage, a deed of trust has three parties: the trustor who is the
borrower-homeowner; the beneficiary who is the lender; and a third-party grantee
called the trustee. Under a deed of trust, the borrower grants the property,
irrevocably until the debt is paid, in trust, generally with a power of sale, to
the trustee to secure payment of the obligation. The trustee's authority under a
deed of trust, the grantee's authority under a deed to secure debt and the
mortgagee's authority under a mortgage are governed by the law of the state in
which the real property is located, the express provisions of the deed of trust
or mortgage, and, in deed of trust transactions, the directions of the
beneficiary.
COOPERATIVE MORTGAGE LOANS
If specified in the prospectus supplement relating to a series of
certificates, the mortgage loans and Contracts may include cooperative mortgage
loans. Each mortgage note evidencing a cooperative mortgage loan will be secured
by a security interest in shares issued by the related Cooperative, and in the
related proprietary lease or occupancy agreement granting exclusive rights to
occupy a specific dwelling unit in the Cooperative's building. The security
agreement will create a lien upon the shares of the Cooperative, the priority of
which will depend on, among other things, the terms of the particular security
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agreement as well as the order of recordation and/or filing of the agreement (or
financing statements related thereto) in the appropriate recording office.
All Cooperative buildings relating to the cooperative mortgage loans
are located primarily in the State of New York. Generally, each Cooperative owns
in fee or has a long-term leasehold interest in all the real property and owns
in fee or leases the building and all separate dwelling units therein. 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 an underlying mortgage (or mortgages) on the
Cooperative's 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 mortgagor or lessor, as the case may be, is also responsible for fulfilling
the mortgage or rental obligations. An underlying mortgage loan is ordinarily
obtained by the Cooperative in connection with either the construction or
purchase of the Cooperative's building or the 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 is generally subordinate
to the interest of the holder of an underlying 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 an underlying mortgage, the mortgagee holding an
underlying 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. In
addition, an underlying 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 the
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 agreements. In either event, a foreclosure by the holder of
an underlying mortgage or the termination of the underlying lease could
eliminate or significantly diminish the value of any collateral held by the
mortgagee who financed the purchase by an individual tenant-stockholder of
shares of the Cooperative or, in the case of the mortgage loans, the collateral
securing the cooperative mortgage loans.
Each Cooperative is owned by shareholders (referred to as
tenant-stockholders) who, through ownership of stock or shares in the
Cooperative, receive proprietary leases or occupancy agreements which confer
exclusive rights to occupy specific dwellings. Generally, a tenant-stockholder
of a Cooperative must make a monthly payment to the Cooperative pursuant to the
proprietary lease, which payment represents the tenant-stockholder's
proportional share of the Cooperative's payments for its underlying mortgage,
real property taxes, maintenance expenses and other capital or ordinary
expenses. An ownership interest in a Cooperative and accompanying occupancy
rights may be financed through a cooperative mortgage loan evidenced by a
mortgage 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
shares of the related Cooperative. The mortgagee 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 mortgagee'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 mortgage 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 on Shares of Cooperatives"
below.
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TAX ASPECTS OF COOPERATIVE OWNERSHIP
In general, a "tenant-stockholder" (as defined in Section 216(b)(2) of
the Code) of a corporation that qualifies as a "cooperative housing corporation"
within the meaning of Section 216(b)(1) of the Code is allowed a deduction for
amounts paid or accrued within his taxable year to the corporation representing
his proportionate share of interest expenses and real estate taxes allowable as
a deduction under Section 216(a) of the Code to the corporation under Sections
163 and 164 of the Code. In order for a corporation to qualify under Section
216(b)(1) of the Code for its taxable year in which the items are allowable as a
deduction to the corporation, the section requires, among other things, that at
least 80% of the gross income of the corporation be derived from its
tenant-stockholders. By virtue of this requirement, the status of a corporation
for purposes of Section 216(b)(1) of the Code must be determined on a year-to-
year basis. Consequently, there can be no assurance that Cooperatives relating
to the cooperative mortgage loans will qualify under the section for any
particular year. In the event that the Cooperative fails to qualify for one or
more years, the value of the collateral securing any related cooperative
mortgage loans could be significantly impaired because no deduction would be
allowable to tenant- stockholders under Section 216(a) of the Code with respect
to those years. In view of the significance of the tax benefits accorded
tenant-stockholders of a corporation that qualifies under Section 216(b)(1) of
the Code, the likelihood that a failure would be permitted to continue over a
period of years appears remote.
LEASES AND RENTS
Mortgages that encumber income-producing multifamily and commercial
properties often 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 (unless rents
are to be paid directly to the lender) 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.
CONTRACTS
Under the laws of most states, manufactured housing constitutes
personal property and is subject to the motor vehicle registration laws of the
state or other jurisdiction in which the unit is located. In a few states, where
certificates of title are not required for manufactured homes, security
interests are perfected by the filing of a financing statement under Article 9
of the UCC which has been adopted by all states. Financing statements are
effective for five years and must be renewed prior to the end of each five year
period. The certificate of title laws adopted by the majority of states provide
that ownership of motor vehicles and manufactured housing shall be evidenced by
a certificate of title issued by the motor vehicles department (or a similar
entity) of the state. In the states that have enacted certificate of title laws,
a security interest in a unit of manufactured housing, so long as it is not
attached to land in so permanent a fashion as to become a fixture, is generally
perfected by the recording of the interest on the certificate of title to the
unit in the appropriate motor vehicle registration office or by delivery of the
required documents and payment of a fee to the office, depending on state law.
The master servicer will be required under the related servicing
agreement to effect the notation or delivery of the required documents and fees,
and to obtain possession of the certificate of title, as appropriate under the
laws of the state in which any Manufactured Home is registered. In the event the
master servicer fails, due to clerical errors or otherwise, to effect the
notation or delivery, or files the security interest under the wrong law (for
example, under a motor vehicle title statute rather than under the UCC, in a few
states), the trustee may not have a first priority security interest in the
Manufactured
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Home securing a Contract. As manufactured homes have become larger and often
have been attached to their sites without any apparent intention by the
borrowers to move them, courts in many states have held that manufactured homes
may become subject to real estate title and recording laws. As a result, a
security interest in a manufactured home could be rendered subordinate to the
interests of other parties claiming an interest in the home under applicable
state real estate law. In order to perfect a security interest in a manufactured
home under real estate laws, the holder of the security interest must file
either a "fixture filing" under the provisions of the UCC or a real estate
mortgage under the real estate laws of the state where the home is located.
These filings must be made in the real estate records office of the county where
the home is located. Generally, Contracts will contain provisions prohibiting
the obligor from permanently attaching the Manufactured Home to its site. So
long as the obligor 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 Seller and transferred to the company.
The company will assign or cause to be assigned a security interest in
the Manufactured Homes to the trustee, on behalf of the bondholders. Neither the
company, the master servicer nor the trustee will amend the certificates of
title to identify the trustee, on behalf of the bondholders, as the new secured
party and, accordingly, the company or the Seller will continue to be named as
the secured party on the certificates of title relating to the Manufactured
Homes. In most states, the assignment is an effective conveyance of the security
interest without amendment of any lien noted on the related certificate of title
and the new secured party succeeds to the company's rights as the secured party.
However, in some states there exists a risk that, in the absence of an amendment
to the certificate of title, the assignment of the security interest might not
be held effective against creditors of the company or Seller.
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 company on
the certificate of title or delivery of the required documents and fees will be
sufficient to protect the trustee against the rights of subsequent purchasers of
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 company
has failed to perfect or cause to be perfected the security interest assigned to
the trust fund, the 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, on
behalf of the bondholders, as the new secured party on the certificate of title
that, through fraud or negligence, the security interest of the trustee could be
released.
In the event that 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 until the owner re-registers the Manufactured Home in the state. If
the owner were to relocate a Manufactured Home to another state and re-register
the Manufactured Home in the state, and if the company did not take steps to
re-perfect its security interest in the 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 company 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 company would
receive notice of surrender if the security interest in the Manufactured Home is
noted on the certificate of title. Accordingly, the company 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
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registration of a manufactured home, re-registration could defeat perfection.
Similarly, when an obligor under a manufactured housing conditional sales
contract sells a manufactured home, the obligee must surrender possession of the
certificate of title or it will receive notice as a result of its lien noted
thereon and accordingly will have an opportunity to require satisfaction of the
related manufactured housing conditional sales contract before release of the
lien. Under each related servicing agreement, the master servicer will be
obligated to take these steps, at the master 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 take priority even over a perfected security interest. The
company will obtain the representation of the related Seller that it has no
knowledge of any of these liens with respect to any Manufactured Home securing a
Contract. However, these liens could arise at any time during the term of a
Contract. No notice will be given to the trustee or bondholders in the event
this type of lien arises.
FORECLOSURE ON MORTGAGES AND SOME CONTRACTS
Foreclosure of a deed of trust is generally accomplished by a
non-judicial trustee's sale under a specific provision in the deed of trust
which authorizes the trustee to sell the property upon any default by the
borrower under the terms of the note or deed of trust. In addition to any notice
requirements contained in a deed of trust, in some states, the trustee must
record a notice of default and send a copy to the borrower trustor and to any
person who has recorded a request for a copy of notice of default and notice of
sale. In addition, the trustee must provide notice in some states to any other
individual having an interest of record in the real property, including any
junior lienholders. If the deed of trust is not reinstated within a specified
period, a notice of sale must be posted in a public place and, in most states,
published for a specific period of time in one or more newspapers in a specified
manner prior to the date of trustee's sale. In addition, some state laws require
that a copy of the notice of sale be posted on the property and sent to all
parties having an interest of record in the real property.
In some states, the borrower-trustor has the right to reinstate the
loan at any time following default until shortly before the trustee's sale. In
general, in these states, the borrower, or any other person having a junior
encumbrance on the real estate, may, during a reinstatement period, cure the
default by paying the entire amount in arrears plus the costs and expenses
incurred in enforcing the obligation.
Foreclosure of a mortgage is generally accomplished by judicial action.
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
necessary parties. Judicial foreclosure proceedings are often not contested by
any of the applicable parties. If the mortgagee's right to foreclose is
contested, the legal proceedings necessary to resolve the issue can be
time-consuming.
In the case of foreclosure under either a mortgage or a deed of trust,
the sale by the referee or other designated officer or by the trustee is a
public sale. However, because of the difficulty a potential buyer at the sale
would have in determining the exact status of title and because the physical
condition of the property may have deteriorated during the foreclosure
proceedings, it is uncommon for a third party to purchase the property at a
foreclosure sale. Rather, it is common for the lender to purchase the property
from the trustee or referee for a credit bid less than or equal to the unpaid
principal amount of the note plus the accrued and unpaid interest and the
expense of foreclosure, in which case the mortgagor's debt will be extinguished
unless the lender purchases the property for a lesser amount in order to
preserve its right against a borrower to seek a deficiency judgment and the
remedy is available under state law and the related loan documents. In the same
states, there is a statutory minimum purchase price which the lender may offer
for the property and generally, state law controls the amount of foreclosure
costs and expenses,
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including attorneys' fees, which may be recovered by a lender. Thereafter,
subject to the right of the borrower in some states to remain in possession
during the redemption period, the lender will assume the burdens of ownership,
including obtaining hazard insurance, paying taxes and making the repairs at its
own expense as are necessary to render the property suitable for sale.
Generally, the lender will obtain the services of a real estate broker and pay
the broker's commission in connection with the sale of the property. Depending
upon market conditions, the ultimate proceeds of the sale of the property may
not equal the lender's investment in the property and, in some states, the
lender may be entitled to a deficiency judgment. Any loss may be reduced by the
receipt of any mortgage insurance proceeds or other forms of credit enhancement
for a series of bonds. See "Description of Credit Enhancement".
A junior mortgagee may not foreclose on the property securing a junior
mortgage unless it forecloses subject to the senior mortgages. The junior
mortgagee must either pay the entire amount due on the senior mortgages prior to
or at the time of the foreclosure sale or undertake to pay on any senior
mortgages that the mortgagor is currently in a state of default under. Under
either course of action, the junior mortgagee may add the amounts paid to the
balance due on the junior loan, and may be subrogated to the rights of the
senior mortgagees. In addition, in the event that the foreclosure of a junior
mortgage triggers the enforcement of a "due-on-sale" clause, the junior
mortgagee may be required to pay the full amount of the senior mortgages to the
senior mortgagees. Accordingly, with respect to those single family loans which
are junior mortgage loans, if the lender purchases the property, the lender's
title will be subject to all senior liens and claims and 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 or deed of trust under which the sale was
conducted. Any remaining proceeds are generally payable to the holders of junior
mortgages or deeds of trust 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 mortgagor or trustor. The payment of the proceeds to
the holders of junior mortgages may occur in the foreclosure action of the
senior mortgagee or may require the institution of separate legal proceeds.
In foreclosure, courts have imposed general equitable principles. The
equitable principles are generally designed to relieve the borrower from the
legal effect of its defaults under the loan documents. Examples of judicial
remedies that have been fashioned include judicial requirements that the lender
undertake affirmative and expensive actions to determine the causes for the
borrower's default and the likelihood that the borrower will be able to
reinstate the loan. In some cases, courts have substituted their judgment for
the lender's judgment and have required that lenders reinstate loans or recast
payment schedules in order to accommodate borrowers who are suffering from
temporary financial disability. In other cases, courts have limited the right of
a lender to foreclose if the default under the mortgage instrument is not
monetary, such as the borrower's failure to adequately maintain the property or
the borrower's execution of a second mortgage or deed of trust affecting the
property. Finally, some courts have been faced with the issue of whether or not
federal or state constitutional provisions reflecting due process concerns for
adequate notice require that borrowers under deeds of trust or mortgages receive
notices in addition to the statutorily-prescribed minimums. For the most part,
these cases have upheld the notice provisions as being reasonable or have found
that the sale by a trustee under a deed of trust, or under a mortgage having a
power of sale, does not involve sufficient state action to afford constitutional
protection to the borrower.
FORECLOSURE ON SHARES OF COOPERATIVES
The Cooperative shares owned by the tenant-stockholder, together with the
rights of the tenant- stockholder under the proprietary lease or occupancy
agreement, are pledged to the lender and are, in almost all cases, subject to
restrictions on transfer as set forth in the Cooperative's certificate of
incorporation and by-laws, as well as in the proprietary lease or occupancy
agreement. The Cooperative
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may cancel the proprietary lease or occupancy agreement, even while pledged, for
failure by the tenant- stockholder to pay its obligations or charges owed by the
tenant-stockholder, including mechanics' liens against the Cooperative's
building incurred by the tenant-stockholder. Generally, obligations and charges
arising under a proprietary lease or occupancy agreement which are owed to the
Cooperative are made liens upon the shares to which the proprietary lease or
occupancy agreement relates. In addition, the Cooperative may generally
terminate a proprietary lease or occupancy agreement in the event the borrower
breaches its covenants in the proprietary lease or occupancy agreement.
Typically, the lender and the Cooperative enter into a recognition agreement
which, together with any lender protection provisions contained in the
proprietary lease or occupancy agreement, establishes the rights and obligations
of both parties in the event of a default by the tenant-stockholder on its
obligations under the proprietary lease or occupancy agreement. A default by the
tenant-stockholder under the proprietary lease or occupancy agreement will
usually constitute a default under the security agreement between the lender and
the tenant-stockholder.
The recognition agreement generally provides that, in the event that
the tenant-stockholder has defaulted under the proprietary lease or occupancy
agreement, the Cooperative will take no action to terminate the lease or
agreement until the lender has been provided with notice of and 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 a sale of the shares and the
proprietary lease or occupancy agreement allocated to the dwelling, subject,
however, to the Cooperative's right to sums due under the proprietary lease or
occupancy agreement or which have become liens on the shares relating to the
proprietary lease or occupancy agreement. The total amount owed to the
Cooperative by the tenant-stockholder, which the lender generally cannot
restrict and does not monitor, could reduce the amount realized upon a sale of
the collateral below the outstanding principal balance of the cooperative
mortgage loan and accrued and unpaid interest on the loan.
Recognition agreements also generally provide that in the event the
lender succeeds to the tenant- shareholder's shares and proprietary lease or
occupancy agreement as the result of realizing upon its collateral for a
cooperative mortgage loan, the lender must obtain the approval or consent of the
board of directors of the Cooperative as required by the proprietary lease
before transferring the Cooperative shares or assigning the proprietary lease.
The approval or consent is usually based on the prospective purchaser's income
and net worth, among other factors, and may significantly reduce the number of
potential purchasers, which could limit the ability of the lender to sell and
realize upon the value of the collateral. Generally, the lender is not limited
in any rights it may have to dispossess the tenant- stockholder.
Because of the nature of cooperative mortgage loans, lenders do not
require the tenant- stockholder (i.e., the borrower) to obtain title insurance
of any type. Consequently, the existence of any prior liens or other
imperfections of title affecting the Cooperative's building or real estate also
may adversely affect the marketability of the shares allocated to the dwelling
unit in the event of foreclosure.
In New York, foreclosure on the Cooperative shares is accomplished by
public sale in accordance with the provisions of Article 9 of the New York UCC
and the security agreement relating to those shares. Article 9 of the New York
UCC requires that a sale be conducted in a "commercially reasonable" manner.
Whether a 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 sale and the sale price. Generally, a sale conducted
according to the usual practice of banks selling similar collateral in the same
area will be considered reasonably conducted.
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Article 9 of the UCC provides that the proceeds of the sale will be
applied first to pay the costs and expenses of the sale and then to satisfy the
indebtedness secured by the lender's security interest. The recognition
agreement, however, generally provides that the lender's right to reimbursement
is subject to the right of the Cooperative corporation 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. See "--Anti-Deficiency Legislation and
Other Limitations on Lenders" below.
REPOSSESSION WITH RESPECT TO CONTRACTS
GENERAL. Repossession of manufactured housing is governed by state law.
A few states have enacted legislation that requires that the debtor be given an
opportunity to cure its default (typically 30 days to bring the account current)
before repossession can commence. So long as a manufactured home has not become
so attached to real estate that it would be treated as a part of the real estate
under the law of the state where it is located, repossession of the home in the
event of a default by the obligor generally will be governed by the UCC (except
in Louisiana). Article 9 of the UCC provides the statutory framework for the
repossession of manufactured housing. While the UCC as adopted by the various
states may vary in small particulars, the general repossession procedure
established by the UCC is as follows:
o Except in those states where the debtor must receive notice of
the right to cure a default, repossession can commence
immediately upon default without prior notice. Repossession may
be effected either through self-help (peaceable retaking without
court order), voluntary repossession or through judicial process
(repossession pursuant to court-issued writ of replevin). The
self-help and/or voluntary repossession methods are more commonly
employed, and are accomplished simply by retaking possession of
the manufactured home. In cases in which the debtor objects or
raises a defense to repossession, a court order must be obtained
from the appropriate state court, and the manufactured home must
then be repossessed in accordance with that order. Whether the
method employed is self-help, voluntary repossession or judicial
repossession, the repossession can be accomplished either by an
actual physical removal of the manufactured home to a secure
location for refurbishment and resale or by removing the
occupants and their belongings from the manufactured home and
maintaining possession of the manufactured home on the location
where the occupants were residing. Various factors may affect
whether the manufactured home is physically removed or left on
location, such as the nature and term of the lease of the site on
which it is located and the condition of the unit. In many cases,
leaving the manufactured home on location is preferable, in the
event that the home is already set up, because the expenses of
retaking and redelivery will be saved. However, in those cases
where the home is left on location, expenses for site rentals
will usually be incurred.
o Once repossession has been achieved, preparation for the
subsequent disposition of the manufactured home can commence. The
disposition may be by public or private sale provided the method,
manner, time, place and terms of the sale are commercially
reasonable.
o Sale proceeds are to be applied first to repossession expenses
(expenses incurred in retaking, storage, preparing for sale to
include refurbishing costs and selling) and then to satisfaction
of the indebtedness. While some states impose prohibitions or
limitations on deficiency judgments if the net proceeds from
resale do not cover the full amount of the indebtedness, the
remainder may be sought from the debtor in the form of a
deficiency
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judgement in those states that do not prohibit or limit the
judgments. The deficiency judgment is a personal judgment against
the debtor for the shortfall. Occasionally, after resale of a
manufactured home and payment of all expenses and indebtedness,
there is a surplus of funds. In that case, the UCC requires the
party suing for the deficiency judgment to remit the surplus to
the debtor. Because the defaulting owner of a manufactured home
generally has very little capital or income available following
repossession, a deficiency judgment may not be sought in many
cases or, if obtained, will be settled at a significant discount
in light of the defaulting owner's strained financial condition.
LOUISIANA LAW. Any contract secured by a manufactured home located in
Louisiana will be governed by Louisiana law rather than Article 9 of the UCC.
Louisiana laws provide similar mechanisms for perfection and enforcement of
security interests in manufactured housing used as collateral for an installment
sale contract or installment loan agreement.
Under Louisiana law, a manufactured home that has been permanently
affixed to real estate will nevertheless remain subject to the motor vehicle
registration laws unless the obligor and any holder of a security interest in
the property execute and file in the real estate records for the parish in which
the property is located a document converting the unit into real property. A
manufactured home that is converted into real property but is then removed from
its site can be converted back to personal property governed by the motor
vehicle registration laws if the obligor executes and files various documents in
the appropriate real estate records and all mortgagees under real estate
mortgages on the property and the land to which it was affixed file releases
with the motor vehicle commission.
So long as a manufactured home remains subject to the Louisiana motor
vehicle laws, liens are recorded on the certificate of title by the motor
vehicle commissioner and repossession can be accomplished by voluntary consent
of the obligor, executory process (repossession proceedings which must be
initiated through the courts but which involve minimal court supervision) or a
civil suit for possession. In connection with a voluntary surrender, the obligor
must be given a full release from liability for all amounts due under the
contract. In executory process repossessions, a sheriff's sale (without court
supervision) is permitted, unless the obligor brings suit to enjoin the sale,
and the lender is prohibited from seeking a deficiency judgment against the
obligor unless the lender obtained an appraisal of the manufactured home prior
to the sale and the property was sold for at least two-thirds of its appraised
value.
RIGHTS OF REDEMPTION
SINGLE FAMILY, MULTIFAMILY AND COMMERCIAL PROPERTIES. The purposes of a
foreclosure action in respect of a mortgaged property is to enable the lender to
realize upon its security and to bar the borrower, and all persons who have
interests in the property that are subordinate to that of the foreclosing
lender, from exercise of their "equity of redemption". The doctrine of equity of
redemption provides that, until the property encumbered by a mortgage has been
sold in accordance with a properly conducted foreclosure and foreclosure sale,
those having interests that are subordinate to that of the foreclosing lender
have an equity of redemption and may redeem the property by paying the entire
debt with interest. 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 terminated.
The equity of redemption is a common-law (non-statutory) right which
should be distinguished from 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. In some states, statutory redemption may occur only upon
payment of the
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foreclosure sale price. In other states, redemption may be permitted 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 because the exercise of a right of redemption would defeat
the title of any purchase through a foreclosure. 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.
MANUFACTURED HOMES. While state laws do not usually require notice to
be given to debtors prior to repossession, many states do require delivery of a
notice of default and of the debtor's right to cure defaults before
repossession. The law in most states also requires that the debtor be given
notice of sale prior to the resale of the home so that the owner may redeem at
or before resale. In addition, the sale must comply with the requirements of the
UCC.
ANTI-DEFICIENCY LEGISLATION AND OTHER LIMITATIONS ON LENDERS
SINGLE FAMILY, MULTIFAMILY AND COMMERCIAL LOANS. Some states have
imposed statutory prohibitions which limit the remedies of a beneficiary under a
deed of trust or a mortgagee under a mortgage. In some states (including
California), statutes limit the right of the beneficiary or mortgagee to obtain
a deficiency judgment against the borrower following non-judicial foreclosure by
power of sale. A deficiency judgment is a personal judgment against the former
borrower equal in most cases to the difference between the net amount realized
upon the public sale of the real property and the amount due to the lender. In
the case of a mortgage loan secured by a property owned by a trust where the
mortgage note is executed on behalf of the trust, a deficiency judgment against
the trust following foreclosure or sale under a deed of trust, even if
obtainable under applicable law, may be of little value to the mortgagee or
beneficiary if there are no trust assets against which the deficiency judgment
may be executed. Some state statutes require the beneficiary or mortgagee to
exhaust the security afforded under a deed of trust or mortgage by foreclosure
in an attempt to satisfy the full debt before bringing a personal action against
the borrower. In other states, the lender has the option of bringing a personal
action against the borrower on the debt without first exhausting the 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. Consequently, the practical
effect of the election requirement, in those states permitting the election, is
that lenders will usually proceed against the security first rather than
bringing a personal action against the borrower. Finally, in some states,
statutory provisions limit any deficiency judgment against the former borrower
following a foreclosure to the excess of the outstanding debt over the fair
value of the property at the time of the public sale. The purpose of these
statutes is generally to prevent a beneficiary or mortgagee from obtaining a
large deficiency judgment against the former borrower as a result of low or no
bids at the judicial sale.
Generally, Article 9 of the UCC governs foreclosure on Cooperative
shares and the related proprietary lease or occupancy agreement. Some courts
have interpreted Article 9 to prohibit or limit a deficiency award in some
circumstances, including circumstances where the disposition of the collateral
(which, in the case of a cooperative mortgage loan, would be the shares of the
Cooperative and the related proprietary lease or occupancy agreement) was not
conducted in a commercially reasonable manner.
In addition to laws limiting or prohibiting deficiency judgments,
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 the secured mortgage lender to realize upon collateral
or enforce a deficiency judgment. For example, under the federal Bankruptcy
Code, virtually all actions (including foreclosure actions and deficiency
judgment proceedings) to collect a debt are automatically stayed upon the filing
of the bankruptcy petition and, often, no interest or principal payments are
made during the
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course of the bankruptcy case. The delay and the consequences thereof caused by
the automatic stay can be significant. Also, under the Bankruptcy Code, the
filing of a petition in a bankruptcy by or on behalf of a junior lienor may stay
the senior lender from taking action to foreclose out the junior lien. Moreover,
with respect to federal bankruptcy law, a court with federal bankruptcy
jurisdiction may permit a debtor through his or her Chapter 11 or Chapter 13
rehabilitative plan to cure a monetary default in respect of a mortgage loan on
a debtor's residence by paying arrearage within a reasonable time period and
reinstating the original mortgage loan payment schedule even though the lender
accelerated the mortgage loan and final judgment of foreclosure had been entered
in state court (provided no sale of the residence had yet occurred) prior to the
filing of the debtor's petition. Some courts with federal bankruptcy
jurisdiction have approved plans, based on the particular facts of the
reorganization case, that effected the curing of a mortgage loan default by
paying arrearage over a number of years.
Courts with federal bankruptcy jurisdiction have also indicated that
the terms of a mortgage loan secured by property of the debtor may be modified.
These courts have allowed modifications that include reducing the amount of each
monthly payment, changing the rate of interest, altering the repayment schedule,
forgiving all or a portion of the debt and reducing the lender's security
interest to the value of the residence, thus leaving the lender a general
unsecured creditor for the difference between the value of the residence and the
outstanding balance of the loan. Generally, however, the terms of a mortgage
loan secured only by a mortgage on real property that is the debtor's principal
residence may not be modified pursuant to a plan confirmed pursuant to Chapter
13 except with respect to mortgage payment arrearages, which may be cured within
a reasonable time period.
In the case of income-producing multifamily properties, federal
bankruptcy law may also have the effect of interfering with or affecting the
ability of the secured lender to enforce the borrower's assignment of rents and
leases related to the mortgaged property. Under Section 362 of the Bankruptcy
Code, the lender will be stayed from enforcing the assignment, and the legal
proceedings necessary to resolve the issue could be time-consuming, with
resulting delays in the lender's receipt of the rents.
Tax liens arising under the Code may have 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.
CONTRACTS. In addition to the laws limiting or prohibiting deficiency
judgments, numerous other statutory provisions, including federal bankruptcy
laws and related state laws, may interfere with or affect the ability of a
lender to realize upon collateral and/or enforce a deficiency judgment. For
example, in a Chapter 13 proceeding under the federal bankruptcy law, a court
may prevent a lender from repossessing a home, and, as part of the
rehabilitation plan, reduce the amount of the secured indebtedness to the market
value of the home at the time of bankruptcy (as determined by the court),
leaving the party providing financing as a general unsecured creditor for the
remainder of the indebtedness. A bankruptcy court may also reduce the monthly
payments due under a contract or change the rate of interest and time of
repayment of the indebtedness.
ENVIRONMENTAL LEGISLATION
Under CERCLA, and under state law in some states, a secured party which
takes a deed-in-lieu of foreclosure, purchases a mortgaged property at a
foreclosure sale, or operates a mortgaged property may
74
become liable for the costs of cleaning up hazardous substances regardless of
whether they have contaminated the property. CERCLA imposes strict, as well as
joint and several, liability on several classes of potentially responsible
parties, including current owners and operators of the property who did not
cause or contribute to the contamination. Furthermore, liability under CERCLA is
not limited to the original or unamortized principal balance of a loan or to the
value of the property securing a loan. Lenders may be held liable under CERCLA
as owners or operators unless they qualify for the secured creditor exemption to
CERCLA. This exemption exempts from the definition of owners and operators those
who, without participating in the management of a facility, hold indicia of
ownership primarily to protect a security interest in the facility.
The Conservation Act amended, among other things, the provisions of
CERCLA with respect to lender liability and the secured creditor exemption. The
Conservation Act offers substantial protection to lenders by defining the
activities in which a lender can engage and still have the benefit of the
secured creditor exemption. In order for lender to be deemed to have
participated in the management of a mortgaged property, the lender must actually
participate in the operational affairs of the property of the borrower. The
Conservation Act provides that "merely having the capacity to influence, or
unexercised right to control" operations does not constitute participation in
management. A lender will lose the protection of the secured creditor exemption
only if it exercises decision-making control over the borrower's environmental
compliance and hazardous substance handling and disposal practices, or assumes
day-to-day management of all operational functions of the mortgaged property.
The Conservation Act also provides that a lender will continue to have the
benefit of the secured creditor exemption even if it forecloses on a mortgaged
property, purchases it at a foreclosure sale or accepts a deed-in-lieu of
foreclosure provided that the lender seeks to sell the mortgaged property at the
earliest practicable commercially reasonable time on commercially reasonable
terms.
Other federal and state laws may impose liability on a secured party
which takes a deed-in-lieu of foreclosure, purchases a mortgaged property at a
foreclosure sale, or operates a mortgaged property on which contaminants other
than CERCLA hazardous substances are present, including petroleum, agricultural
chemicals, hazardous wastes, asbestos, radon, and lead-based paint. The cleanup
costs may be substantial. It is possible that the cleanup costs could become a
liability of a trust fund and reduce the amounts otherwise distributable to the
holders of the related series of bonds. Moreover, federal statutes and states by
statute may impose a lien for any cleanup costs incurred by the state on the
property that is the subject of the cleanup costs. All subsequent liens on the
property generally are subordinated to the lien and, in some states, even prior
recorded liens are subordinated to such lien. In the latter states, the security
interest of the trustee in a related parcel of real property that is subject to
the lien could be adversely affected.
Traditionally, many residential mortgage lenders have not taken steps
to evaluate whether contaminants are present with respect to any mortgaged
property prior to the origination of the mortgage loan or prior to foreclosure
or accepting a deed-in-lieu of foreclosure. Accordingly, the company has not
made and will not make the evaluations prior to the origination of the mortgage
loans. Neither the company nor any replacement servicer will be required by any
Agreement to undertake these evaluations prior to foreclosure or accepting a
deed-in-lieu of foreclosure. The company does not make any representations or
warranties or assume any liability with respect to the absence or effect of
contaminants on any related real property or any casualty resulting from the
presence or effect of contaminants. However, the company will not be obligated
to foreclose on related real property or accept a deed-in-lieu of foreclosure if
it knows or reasonably believes that there are material contaminated conditions
on the property. A failure so to foreclose may reduce the amounts otherwise
available to bondholders of the related series.
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CONSUMER PROTECTION LAWS WITH RESPECT TO CONTRACTS
Numerous federal and state consumer protection laws impose substantial
requirements upon creditors involved in consumer finance. These laws include the
federal Truth-in-Lending Act, Regulation "Z", the Equal Credit Opportunity Act,
Regulation "B", the Fair Credit Reporting Act, and related statutes. These laws
can impose specific statutory liabilities upon creditors who fail to comply with
their provisions. In some cases, this liability may affect an assignee's ability
to enforce a contract.
Manufactured housing contracts often contain provisions obligating the
obligor to pay late charges if payments are not timely made. Federal and state
law may specifically limit the amount of late charges that may be collected.
Under the related servicing agreement, late charges will be retained by the
master servicer as additional servicing compensation, and any inability to
collect these amounts will not affect payments to bondholders.
Courts have imposed general equitable principles upon repossession and
litigation involving deficiency balances. These equitable principles are
generally designed to relieve a consumer from the legal consequences of a
default.
In several cases, consumers have asserted that the remedies provided to
secured parties under the UCC and related laws violate the due process
protections provided under the 14th Amendment to the Constitution of the United
States. For the most part, courts have upheld the notice provisions of the UCC
and related laws as reasonable or have found that the repossession and resale by
the creditor does not involve sufficient state action to afford constitutional
protection to consumers.
The FTC Rule has the effect of subjecting a seller (and some related
creditors and their assignees) in a consumer credit transaction and any assignee
of the creditor to all claims and defenses which the debtor in the transaction
could assert against the seller of the goods. Liability under the FTC Rule is
limited to the amounts paid by a debtor on the contract, and the holder of the
contract may also be unable to collect amounts still due under the contract.
Most of the Contracts in a trust fund will be subject to the requirements of the
FTC Rule. Accordingly, the trust fund, as holder of the Contracts, will be
subject to any claims or defenses that the purchaser of the related manufactured
home may assert against the seller of the manufactured home, subject to a
maximum liability equal to the amounts paid by the obligor on the Contract. If
an obligor is successful in asserting the claim or defense, and if the Seller
had or should have had knowledge of the claim or defense, the master servicer
will have the right to require the Seller to repurchase the Contract because of
a breach of its Seller's representation and warranty that no claims or defenses
exist that would affect the obligor's obligation to make the required payments
under the Contract. The Seller would then have the right to require the
originating dealer to repurchase the Contract from it and might also have the
right to recover from the dealer any losses suffered by the Seller with respect
to which the dealer would have been primarily liable to the obligor.
ENFORCEABILITY OF SOME PROVISIONS
TRANSFER OF MORTGAGED PROPERTIES. Unless the related prospectus
supplement indicates otherwise, the mortgage loans generally contain due-on-sale
clauses. These clauses permit the lender to accelerate the maturity of the loan
if the borrower sells, transfers or conveys the property without the prior
consent of the lender. The enforceability of these 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, 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. The Garn-St
Germain Act does "encourage" lenders to permit assumption of loans at
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the original rate of interest or at some other rate less than the average of the
original rate and the market rate.
The Garn-St Germain Act also sets forth nine specific instances in
which a mortgage lender covered by the Garn-St Germain Act may not exercise a
due-on-sale clause, notwithstanding the fact that a transfer of the property may
have occurred. These include intra-family transfers, 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
loan bearing an interest rate below the current market rate being assumed by the
buyer rather than being paid off, which may have an impact upon the average life
of the mortgage loans and the number of mortgage loans which may be outstanding
until maturity.
TRANSFER OF MANUFACTURED HOMES. Generally, manufactured housing
contracts contain provisions prohibiting the sale or transfer of the related
manufactured homes without the consent of the obligee on the contract and
permitting the acceleration of the maturity of the contracts by the obligee on
the contract upon the sale or transfer that is not consented to. The master
servicer will, to the extent it has knowledge of the conveyance or proposed
conveyance, exercise or cause to be exercised its rights to accelerate the
maturity of the related Contracts through enforcement of due-on-sale clauses,
subject to applicable state law. In some cases, the transfer may be made by a
delinquent obligor in order to avoid a repossession proceeding with respect to a
Manufactured Home.
In the case of a transfer of a Manufactured Home as to which the master
servicer desires to accelerate the maturity of the related Contract, the master
servicer's ability to do so will depend on the enforceability under state law of
the due-on-sale clause. The Garn-St Germain Act preempts, subject to certain
exceptions and conditions, state laws prohibiting enforcement of due-on-sale
clauses applicable to the Manufactured Homes. Consequently, in some cases the
master servicer may be prohibited from enforcing a due-on-sale clause in respect
of a Manufactured Home.
LATE PAYMENT CHARGES AND PREPAYMENT RESTRICTIONS. Notes and mortgages,
as well as manufactured housing conditional sales contracts and installment loan
agreements, may contain provisions that obligate the borrower to pay a late
charge or additional interest if payments are not timely made, and in some
circumstances, may prohibit prepayments for a specified period and/or condition
prepayments upon the borrower's payment of prepayment fees or yield maintenance
penalties. In some states, there are or may be specific limitations upon the
late charges which a lender may collect from a borrower for delinquent payments.
Some states also limit the amounts that a lender may collect from a borrower as
an additional charge if the loan is prepaid. In addition, the enforceability of
provisions that provide for prepayment fees or penalties upon an involuntary
prepayment is unclear under the laws of many states.
SUBORDINATE FINANCING
When the mortgagor encumbers mortgaged property with one or more junior
liens, the senior lender is subjected to additional risk. First, the mortgagor
may have difficulty servicing and repaying multiple loans. In addition, if the
junior loan permits recourse to the mortgagor (as junior loans often do) and the
senior loan does not, a mortgagor may be more likely to repay sums due on the
junior loan than those on the senior loan. Second, acts of the senior lender
that prejudice the junior lender or impair the junior lender's security may
create a superior equity in favor of the junior lender. For example, if the
mortgagor and the senior lender agree to an increase in the principal amount of
or the interest rate payable
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on the senior loan, the senior lender may lose its priority to the extent an
existing junior lender is harmed or the mortgagor is additionally burdened.
Third, if the mortgagor defaults on the senior loan and/or any junior loan or
loans, the existence of junior loans and actions taken by junior lenders can
impair the security available to the senior lender and can interfere with or
delay the taking of action by the senior lender. Moreover, the bankruptcy of a
junior lender may operate to stay foreclosure or similar proceedings by the
senior lender.
INSTALLMENT CONTRACTS
The trust fund assets may also consist of installment sales contracts.
Under an installment contract the seller (referred to in this section as the
"lender") retains legal title to the property and enters into an agreement with
the purchaser (referred to in this section as the "borrower") for the payment of
the purchase price, plus interest, over the term of the contract. Only after
full performance by the borrower of the installment contract is the lender
obligated to convey title to the property to the purchaser. As with mortgage or
deed of trust financing, during the effective period of the installment
contract, the borrower is generally responsible for the maintaining the property
in good condition and for paying real estate taxes, assessments and hazard
insurance premiums associated with the property.
The method of enforcing the rights of the lender under an installment
contract varies on a state- by- state basis depending upon the extent to which
state courts are willing, or able pursuant to state statute, to enforce the
contract strictly according to its terms. The terms of installment contracts
generally provide that upon a default by the borrower, the borrower loses his or
her right to occupy the property, the entire indebtedness is accelerated and the
buyer's equitable interest in the property is forfeited. The lender in this
situation is not required to foreclose in order to obtain title to the property,
although in some cases a quiet title action is in order if the borrower has
filed the installment contract in local land records and an ejectment action may
be necessary to recover possession. In a few states, particularly in cases of
borrower default during the early years of an installment contract, the courts
will permit ejectment of the buyer and a forfeiture of his or her interest in
the property. However, most state legislatures have enacted provisions by
analogy to mortgage law protecting borrowers under installment contracts from
the harsh consequences of forfeiture. Under these statutes, a judicial or
nonjudicial foreclosure may be required, the lender may be required to give
notice of default and the borrower may be granted some grace period during which
the installment contract may be reinstated upon full payment of the defaulted
amount and the borrower may have a post-foreclosure statutory redemption right.
In other states, courts in equity may permit a borrower with significant
investment in the property under an installment contract for the sale of real
estate to share in the proceeds of sale of the property after the indebtedness
is repaid or may otherwise refuse to enforce the forfeiture clause.
Nevertheless, the lender's procedures for obtaining possession and clear title
under an installment contract in a given state are simpler and less time
consuming and costly than are the procedures for foreclosing and obtaining clear
title to a property subject to one or more liens.
APPLICABILITY OF USURY LAWS
Title V provides that state usury limitations shall not apply to some
types of residential first mortgage loans originated by some lenders after March
31, 1980. A similar federal statute was in effect with respect to mortgage loans
made during the first three months of 1980. The Office of Thrift Supervision is
authorized to issue rules and regulations and to publish interpretations
governing implementation of Title V. The statute authorized any state to
reimpose interest rate limits by adopting, before April 1, 1983, a law or
constitutional provision which 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 or to limit discount points or other charges.
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Title V also provides that, subject to the following conditions, state
usury limitations shall not apply to any loan that is secured by a first lien on
some kinds of manufactured housing. Contracts would be covered if they satisfy
conditions including, among other things, terms governing any prepayments, late
charges and deferral fees and requiring a 30-day notice period prior to
instituting any action leading to repossession of or foreclosure with respect to
the related unit. Title V authorized any state to reimpose limitations on
interest rates and finance charges by adopting before April 1, 1983 a law or
constitutional provision which expressly rejects application of the federal law.
Fifteen states adopted this type of law prior to the April 1, 1983 deadline. In
addition, even where Title V was not so rejected, any state is authorized by the
law to adopt a provision limiting discount points or other charges on loans
covered by Title V. In any state in which application of Title V was expressly
rejected or a provision limiting discount points or other charges has been
adopted, no Contract which imposes finance charges or provides for discount
points or charges in excess of permitted levels has been included in the trust
fund.
Usury limits apply to junior mortgage loans in many states. Any
applicable usury limits in effect at origination will be reflected in the
maximum mortgage rates for ARM Loans, as set forth in the related prospectus
supplement.
As indicated above under "The Mortgage Pools--Representations by
Sellers," each Seller of a mortgage loan will have represented that the mortgage
loan was originated in compliance with then applicable state laws, including
usury laws, in all material respects. However, the mortgage rates on the
mortgage loans will be subject to applicable usury laws as in effect from time
to time.
ALTERNATIVE MORTGAGE INSTRUMENTS
Alternative mortgage instruments, including adjustable rate mortgage
loans and early ownership mortgage loans, originated by non-federally chartered
lenders historically have been subjected to a variety of restrictions. The
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. Title
VIII provides that, notwithstanding any state law to the contrary, (1)
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,
(2) 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 (3) all other non-federally chartered housing
creditors, including state-chartered savings and loan associations,
state-chartered savings banks and mutual savings banks and mortgage banking
companies, may originate alternative mortgage instruments in accordance with the
regulations promulgated by the Federal Home Loan Bank Board, predecessor to the
Office of Thrift Supervision, with respect to origination of alternative
mortgage instruments by federal savings and loan associations. Title VIII
provides that any state may reject applicability of the provisions of Title VIII
by adopting, prior to October 15, 1985, a law or constitutional provision
expressly rejecting the applicability of the provisions. Some states have taken
this action.
FORMALDEHYDE LITIGATION WITH RESPECT TO CONTRACTS
A number of lawsuits are pending in the United States alleging personal
injury from exposure to the chemical formaldehyde, which is present in many
building materials, including components of manufactured housing such as plywood
flooring and wall paneling. Some of these lawsuits are pending against
manufacturers of manufactured housing, suppliers of component parts, and related
persons in the distribution process. The company is aware of a limited number of
cases in which plaintiffs have won judgments in these lawsuits.
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Under the FTC Rule, which is described above under "Consumer Protection
Laws", the holder of any Contract secured by a Manufactured Home with respect to
which a formaldehyde claim has been successfully asserted may be liable to the
obligor for the amount paid by the obligor on the related Contract and may be
unable to collect amounts still due under the Contract. In the event an obligor
is successful in asserting this claim, the related bondholders could suffer a
loss if (1) the related Seller fails or cannot be required to repurchase the
affected Contract for a breach of representation and warranty and (2) the master
servicer or the trustee were unsuccessful in asserting any claim of contribution
or subrogation on behalf of the bondholders against the manufacturer or other
persons who were directly liable to the plaintiff for the damages. Typical
products liability insurance policies held by manufacturers and component
suppliers of manufactured homes may not cover liabilities arising from
formaldehyde in manufactured housing, with the result that recoveries from these
manufacturers, suppliers or other persons may be limited to their corporate
assets without the benefit of insurance.
SOLDIERS' AND SAILORS' CIVIL RELIEF ACT OF 1940
Under the terms of the Relief Act, a mortgagor who enters military
service after the origination of the mortgagor's mortgage loan (including a
mortgagor who was in reserve status and is called to active duty after
origination of the mortgage loan), may not be charged interest (including fees
and charges) above an annual rate of 6% during the period of the mortgagor's
active duty status, unless a court orders otherwise upon application of the
lender. The Relief Act applies to mortgagors 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 mortgagors 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 master servicer
to collect full amounts of interest on the mortgage loans subject to the Relief
Act. Any shortfall in interest collections resulting from the application of the
Relief Act or similar legislation or regulations, which would not be recoverable
from the related mortgage loans, would result in a reduction of the amounts
distributable to the holders of the related bonds, and would not be covered by
advances by the master servicer or other entity or by any form of credit
enhancement provided in connection with the related series of bonds, unless
described in the prospectus supplement. In addition, the Relief Act imposes
limitations that would impair the ability of the master servicer to foreclose on
an affected single family loan or enforce rights under a Contract during the
mortgagor's period of active duty status, and, under some circumstances, during
an additional three month period thereafter. Thus, in the event that the Relief
Act or similar legislation or regulations applies to any mortgage loan which
goes into default, there may be delays in payment and losses on the related
bonds in connection therewith. Any other interest shortfalls, deferrals or
forgiveness of payments on the mortgage loans resulting from similar legislation
or regulations may result in delays in payments or losses to bondholders of the
related series.
FORFEITURES IN DRUG AND RICO PROCEEDINGS
Federal law provides that property owned by persons convicted of
drug-related crimes or of criminal violations of RICO can be seized by the
government if the property was used in, or purchased with the proceeds of, these
crimes. Under procedures contained in 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
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lender was, at the time of execution of the mortgage, "reasonably without cause
to believe" that the property was used in, or purchased with the proceeds of,
illegal drug or RICO activities.
JUNIOR MORTGAGES
Some of the mortgage loans may be secured by mortgages or deeds of
trust which are junior to senior mortgages or deeds of trust which are not part
of the trust fund. The rights of the bondholders, as mortgagee under a junior
mortgage, are subordinate to those of the mortgagee under the senior mortgage,
including the prior rights of the senior mortgagee to receive hazard insurance
and condemnation proceeds and to cause the property securing the mortgage loan
to be sold upon default of the mortgagor, which may extinguish the junior
mortgagee's lien unless the junior mortgagee asserts its subordinate interest in
the property in foreclosure litigation and, in some cases, either reinitiates or
satisfies the defaulted senior loan or loans. A junior mortgagee may satisfy a
defaulted senior loan in full or, in some states, may cure the default and bring
the senior loan current thereby reinstating the senior loan, in either event
usually adding the amounts expended to the balance due on the junior loan. In
most states, absent a provision in the mortgage or deed of trust, no notice of
default is required to be given to a junior mortgagee. Where applicable law or
the terms of the senior mortgage or deed of trust do not require notice of
default to the junior mortgagee, the lack of this notice may prevent the junior
mortgagee from exercising any right to reinstate the loan which applicable law
may provide.
The standard form of the mortgage or deed of trust used by most
institutional lenders confers on the mortgagee the right both to receive all
proceeds collected under any hazard insurance policy and all awards made in
connection with condemnation proceedings, and to apply the proceeds and awards
to any indebtedness secured by the mortgage or deed of trust, in the order the
mortgagee may determine. Thus, in the event improvements on the property are
damaged or destroyed by fire or other casualty, or in the event the property is
taken by condemnation, the mortgagee or beneficiary under underlying senior
mortgages will have the prior right to collect any insurance proceeds payable
under a hazard insurance policy and any award of damages in connection with the
condemnation and to apply the same to the indebtedness secured by the senior
mortgages. Proceeds in excess of the amount of senior mortgage indebtedness, in
most cases, may be applied to the indebtedness of junior mortgages in the order
of their priority.
Another provision sometimes found in the form of the mortgage or deed
of trust used by institutional lenders obligates the mortgagor to pay before
delinquency all taxes and assessments on the property and, when due, all
encumbrances, charges and liens on the property which are prior to the mortgage
or deed of trust, to provide and maintain fire insurance on the property, to
maintain and repair the property and not to commit or permit any waste thereof,
and to appear in and defend any action or proceeding purporting to affect the
property or the rights of the mortgagee under the mortgage. Upon a failure of
the mortgagor to perform any of these obligations, the mortgagee or beneficiary
is given the right under some mortgages or deeds of trust to perform the
obligation itself, at its election, with the mortgagor agreeing to reimburse the
mortgagee for any sums expended by the mortgagee on behalf of the mortgagor. All
sums so expended by a senior mortgagee become part of the indebtedness secured
by the senior mortgage.
NEGATIVE AMORTIZATION LOANS
A recent case decided by the United States Court of Appeals, First
Circuit, held that state restrictions on the compounding of interest are not
preempted by the provisions of the DIDMC and as a result, a mortgage loan that
provided for negative amortization violated New Hampshire's requirement that
first mortgage loans provide for computation of interest on a simple interest
basis. The holding was limited to the effect of DIDMC on state laws regarding
the compounding of interest and the court did not
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address the applicability of the Alternative Mortgage Transaction Parity Act of
1982, which authorizes lender to make residential mortgage loans that provide
for negative amortization. The First Circuit's decision is binding authority
only on Federal District Courts in Maine, New Hampshire, Massachusetts, Rhode
Island and Puerto Rico.
FEDERAL INCOME TAX CONSEQUENCES
GENERAL
The following discussion is the opinion of Thacher Proffitt & Wood,
counsel to the company, with respect to the anticipated material federal income
tax consequences of the purchase, ownership and disposition of offered bonds
offered under this prospectus and the prospectus supplement insofar as it
relates to matters of law or legal conclusions with respect thereto. This
discussion is directed solely to bondholders that hold the bonds as capital
assets within the meaning of Section 1221 of the Code and does not purport to
discuss all federal income tax consequences that may be applicable to the
individual circumstances of particular categories of investors, some of which
(such as banks, insurance companies and foreign investors) may be subject to
special treatment under the Code. Further, the authorities on which this
discussion, and the opinion referred to below, are based are subject to change
or differing interpretations, which could apply retroactively. Prospective
investors should note that no rulings have been or will be sought from the IRS
with respect to any of the federal income tax consequences discussed below, and
no assurance can be given the IRS will not take contrary positions. Taxpayers
and preparers of tax returns (including those filed by any issuer) should be
aware that under applicable Treasury regulations a provider of advice on
specific issues of law is not considered an income tax return preparer unless
the advice (1) is given with respect to events that have occurred at the time
the advice is rendered and is not given with respect to the consequences of
contemplated actions, and (2) is directly relevant to the determination of an
entry on a tax return. Accordingly, taxpayers should consult their own tax
advisors and tax return preparers regarding the preparation of any item on a tax
return, even where the anticipated tax treatment has been discussed in this
prospectus. In addition to the federal income tax consequences described in this
prospectus, potential investors should consider the state and local tax
consequences, if any, of the purchase, ownership and disposition of the bonds.
See "State and Other Tax Consequences."
The following discussion is based in part upon the OID Regulations. The
OID Regulations do not adequately address issues relevant to bonds such as the
offered bonds. In some instances, the OID Regulations provide that they are not
applicable to bonds such as the offered bonds.
On or prior to the date of the related prospectus supplement with
respect to the proposed issuance of each series of bonds, Thacher Proffitt &
Wood, counsel to the company, will deliver its opinion to the effect that,
assuming compliance with all provisions of the indenture, owner trust agreement
and other related documents, for federal income tax purposes (1) the bonds will
be treated as indebtedness and (2) the Issuer, as created pursuant to the terms
and conditions of the owner trust agreement, will not be characterized as an
association (or publicly traded partnership) taxable as a corporation or as a
taxable mortgage pool. For purposes of this tax discussion, references to a
"bondholder" or a "holder" are to the beneficial owner of a bond.
STATUS AS REAL PROPERTY LOANS
(1) Bonds held by a domestic building and loan association will not
constitute "loans . . . secured by an interest in real property" within the
meaning of Code section 7701(a)(19)(C)(v); and (2) bonds held by a real estate
investment trust will not constitute "real estate assets" within the meaning of
Code section
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856(c)(4)(A) and interest on bonds will not be considered "interest on
obligations secured by mortgages on real property" within the meaning of Code
section 856(c)(3)(B). In addition, the bonds will not be "qualified mortgages"
within the meaning of Section 860G(a)(3) of the Code.
TAXATION OF OWNERS OF BONDS.
Interest and Original Issue Discount. A bond may be issued with
"original issue discount" within the meaning of Section 1273(a) of the Code. Any
holder of a bond issued with original issue discount generally will be required
to include original issue discount in income as it accrues, in accordance with
the "constant yield" method described below, in advance of the receipt of the
cash attributable to that income. In addition, Section 1272(a)(6) of the Code
provides special rules applicable to bonds and some other debt instruments
issued with original issue discount; regulations have not been issued under that
section.
The Code requires that a reasonable prepayment assumption be used with
respect to mortgage loans held by a trust fund in computing the accrual of
original issue discount on bonds issued by that trust fund, and that adjustments
be made in the amount and rate of accrual of that discount to reflect
differences between the actual prepayment rate and the prepayment assumption.
The prepayment assumption is to be determined in a manner prescribed in Treasury
regulations; as noted above, those regulations have not been issued. The
Committee Report indicates that the regulations will provide that the prepayment
assumption used with respect to a bond must be the same as that used in pricing
the initial offering of the bond. The Prepayment Assumption used in reporting
original issue discount for each series of bonds will be consistent with this
standard and will be disclosed in the related prospectus supplement. However,
none of the company, the master servicer or the trustee will make any
representation that the mortgage loans will in fact prepay at a rate conforming
to the Prepayment Assumption or at any other rate.
The original issue discount, if any, on a bond will be the excess of
its stated redemption price at maturity over its issue price. The issue price of
a particular class of bonds will be the first cash price at which a substantial
amount of bonds of that class is sold (excluding sales to bond houses, brokers
and underwriters). If less than a substantial amount of a particular class of
bonds is sold for cash on or prior to the Closing Date, the issue price for that
class will be the fair market value of that class on the Closing Date. Under the
OID Regulations, the stated redemption price of a bond is equal to the total of
all payments to be made on the bond other than "qualified stated interest."
"Qualified stated interest" is interest that is unconditionally payable at least
annually (during the entire term of the instrument) at a single fixed rate, or
at a "qualified floating rate," an "objective rate," a combination of a single
fixed rate and one or more "qualified floating rates" or one "qualified inverse
floating rate," or a combination of "qualified floating rates" that does not
operate in a manner that accelerates or defers interest payments on the bond.
In the case of bonds bearing adjustable interest rates, the
determination of the total amount of original issue discount and the timing of
the inclusion thereof will vary according to the characteristics of the bonds.
If the original issue discount rules apply to the bonds in a particular series,
the related prospectus supplement will describe the manner in which these rules
will be applied with respect to the bonds in that series that bear an adjustable
interest rate in preparing information returns to the bondholders and the IRS.
The first interest payment on a bond may be made more than one month
after the date of issuance, which is a period longer than the subsequent monthly
intervals between interest payments. Assuming the "accrual period" (as defined
below) for original issue discount is each monthly period that ends on the day
prior to each distribution date, in some cases, as a consequence of this "long
first accrual
83
period," some or all interest payments may be required to be included in the
stated redemption price of the bond and accounted for as original issue
discount. Because interest on bonds must in any event be accounted for under an
accrual method, applying this analysis would result in only a slight difference
in the timing of the inclusion in income of the yield on the bonds.
In addition, if the accrued interest to be paid on the first
distribution date is computed with respect to a period that begins prior to the
Closing Date, a portion of the purchase price paid for a bond will reflect the
accrued interest. In such cases, information returns to the bondholders and the
IRS will be based on the position that the portion of the purchase price paid
for the interest accrued with respect to periods prior to the Closing Date is
treated as part of the overall cost of the bond (and not as a separate asset the
cost of which is recovered entirely out of interest received on the next
distribution date) and that portion of the interest paid on the first
distribution date in excess of interest accrued for a number of days
corresponding to the number of days from the Closing Date to the first
distribution date should be included in the stated redemption price of the bond.
However, the OID Regulations state that all or some portion of the accrued
interest may be treated as a separate asset the cost of which is recovered
entirely out of interest paid on the first distribution date. It is unclear how
an election to do so would be made under the OID Regulations and whether such an
election could be made unilaterally by a bondholder.
Notwithstanding the general definition of original issue discount,
original issue discount on a bond will be considered to be de minimis if it is
less than 0.25% of the stated redemption price of the bond multiplied by its
weighted average life. For this purpose, the weighted average life of a bond is
computed as the sum of the amounts determined, as to each payment included in
the stated redemption price of the bond, by multiplying (1) the number of
complete years (rounding down for partial years) from the issue date until that
payment is expected to be made (presumably taking into account the Prepayment
Assumption) by (2) a fraction, the numerator of which is the amount of the
payment, and the denominator of which is the stated redemption price at maturity
of the bond. Under the OID Regulations, original issue discount of only a de
minimis amount (other than de minimis original issue discount attributable to a
so-called "teaser" interest rate or an initial interest holiday) will be
included in income as each payment of stated principal is made, based on the
product of the total amount of de minimis original issue discount attributable
to that bond and a fraction, the numerator of which is the amount of the
principal payment and the denominator of which is the outstanding stated
principal amount of the bond. The OID Regulations also would permit a bondholder
to elect to accrue de minimis original issue discount into income currently
based on a constant yield method. See "Taxation of Owners of Bonds--Market
Discount" below for a description of this election under the OID Regulations.
If original issue discount on a bond is in excess of a de minimis
amount, the holder of the bond must include in ordinary gross income the sum of
the "daily portions" of original issue discount for each day during its taxable
year on which it held the bond, including the purchase date but excluding the
disposition date. In the case of an original holder of a bond, the daily
portions of original issue discount will be determined as follows.
As to each "accrual period," that is, each period that ends on a date
that corresponds to the day prior to each distribution date and begins on the
first day following the immediately preceding accrual period (or in the case of
the first such period, begins on the Closing Date), a calculation will be made
of the portion of the original issue discount that accrued during the accrual
period. The portion of original issue discount that accrues in any accrual
period will equal the excess, if any, of (1) the sum of (a) the present value,
as of the end of the accrual period, of all of the distributions remaining to be
made on the bond, if any, in future periods and (b) the distributions made on
the bond during the accrual period of amounts included in the stated redemption
price, over (2) the adjusted issue price of the bond at the beginning of the
accrual period. The present value of the remaining distributions referred to in
the preceding sentence will be calculated (1) assuming that distributions on the
bond will be received in
84
future periods based on the mortgage loans being prepaid at a rate equal to the
Prepayment Assumption, (2) using a discount rate equal to the original yield to
maturity of the bond and (3) taking into account events (including actual
prepayments) that have occurred before the close of the accrual period. For
these purposes, the original yield to maturity of the bond will be calculated
based on its issue price and assuming that distributions on the bond will be
made in all accrual periods based on the mortgage loans being prepaid at a rate
equal to the Prepayment Assumption. The adjusted issue price of a bond at the
beginning of any accrual period will equal the issue price of the bond,
increased by the aggregate amount of original issue discount that accrued with
respect to the bond in prior accrual periods, and reduced by the amount of any
distributions made on the bond in prior accrual periods of amounts included in
the stated redemption price. The original issue discount accruing during any
accrual period, computed as described above, will be allocated ratably to each
day during the accrual period to determine the daily portion of original issue
discount for that day.
A subsequent purchaser of a bond that purchases a bond that is treated
as having been issued with original issue discount at a cost (excluding any
portion of the cost attributable to accrued qualified stated interest) less than
its remaining stated redemption price will also be required to include in gross
income the daily portions of any original issue discount with respect to the
bond. However, each such daily portion will be reduced, if the cost of the bond
is in excess of its "adjusted issue price," in proportion to the ratio the
excess bears to the aggregate original issue discount remaining to be accrued on
the bond. The adjusted issue price of a bond on any given day equals the sum of
(1) the adjusted issue price (or, in the case of the first accrual period, the
issue price) of the bond at the beginning of the accrual period which includes
that day and (2) the daily portions of original issue discount for all days
during the accrual period prior to that day.
Market Discount. A bondholder that purchases a bond at a market
discount, that is, in the case of a bond issued without original issue discount,
at a purchase price less than its remaining stated principal amount, or in the
case of a bond issued with original issue discount, at a purchase price less
than its adjusted issue price will recognize gain upon receipt of each
distribution representing stated redemption price. In particular, under Section
1276 of the Code such a bondholder generally will be required to allocate the
portion of each distribution representing stated redemption price first to
accrued market discount not previously included in income, and to recognize
ordinary income to that extent. A bondholder may elect to include market
discount in income currently as it accrues rather than including it on a
deferred basis in accordance with the foregoing. If made, the election will
apply to all market discount bonds acquired by the bondholder on or after the
first day of the first taxable year to which the election applies. In addition,
the OID Regulations permit a bondholder to elect to accrue all interest,
discount (including de minimis market or original issue discount) in income as
interest, and to amortize premium, based on a constant yield method. If such an
election were made with respect to a bond with market discount, the bondholder
would be deemed to have made an election to include currently market discount in
income with respect to all other debt instruments having market discount that
the bondholder acquires during the taxable year of the election or thereafter,
and possibly previously acquired instruments. Similarly, a bondholder that made
this election for a bond that is acquired at a premium would be deemed to have
made an election to amortize bond premium with respect to all debt instruments
having amortizable bond premium that the bondholder owns or acquires. See
"Taxation of Owners of Bonds--Premium" below. Each of these elections to accrue
interest, discount and premium with respect to a bond on a constant yield method
or as interest would be irrevocable, except with the approval of the IRS.
However, market discount with respect to a bond will be considered to
be de minimis for purposes of Section 1276 of the Code if the market discount is
less than 0.25% of the remaining stated redemption price of the bond multiplied
by the number of complete years to maturity remaining after the date of its
purchase. In interpreting a similar rule with respect to original issue discount
on obligations
85
payable in installments, the OID Regulations refer to the weighted average
maturity of obligations, and it is likely that the same rule will be applied
with respect to market discount, presumably taking into account the Prepayment
Assumption. If market discount is treated as de minimis under this rule, it
appears that the actual discount would be treated in a manner similar to
original issue discount of a de minimis amount. See "Taxation of Owners of
Bonds--Interest and Original Issue Discount" above. This treatment would result
in discount being included in income at a slower rate than discount would be
required to be included in income using the method described above.
Section 1276(b)(3) of the Code specifically authorizes the Treasury
Department to issue regulations providing for the method for accruing market
discount on debt instruments, the principal of which is payable in more than one
installment. Until regulations are issued by the Treasury Department, the rules
described in the Committee Report apply. The Committee Report indicates that in
each accrual period market discount on bonds should accrue, at the bondholder's
option: (1) on the basis of a constant yield method, (2) in the case of a bond
issued without original issue discount, in an amount that bears the same ratio
to the total remaining market discount as the stated interest paid in the
accrual period bears to the total amount of stated interest remaining to be paid
on the bond as of the beginning of the accrual period, or (3) in the case of a
bond issued with original issue discount, in an amount that bears the same ratio
to the total remaining market discount as the original issue discount accrued in
the accrual period bears to the total original issue discount remaining on the
bond at the beginning of the accrual period. Moreover, the Prepayment Assumption
used in calculating the accrual of original issue discount is also used in
calculating the accrual of market discount. Because the regulations referred to
in this paragraph have not been issued, it is not possible to predict what
effect these regulations might have on the tax treatment of a bond purchased at
a discount in the secondary market.
To the extent that bonds provide for monthly or other periodic
distributions throughout their term, the effect of these rules may be to require
market discount to be includible in income at a rate that is not significantly
slower than the rate at which the discount would accrue if it were original
issue discount. Moreover, in any event a holder of a bond generally will be
required to treat a portion of any gain on the sale or exchange of the bond 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.
Further, under Section 1277 of the Code a holder of a bond may be
required to defer a portion of its interest deductions for the taxable year
attributable to any indebtedness incurred or continued to purchase or carry a
bond purchased with market discount. For these purposes, the de minimis rule
referred to above applies. Any such deferred interest expense would not exceed
the market discount that accrues during the taxable year and is, in general,
allowed as a deduction not later than the year in which the market discount is
includible in income. If a holder elects to include market discount in income
currently as it accrues on all market discount instruments acquired by the
holder in that taxable year or thereafter, the interest deferral rule described
above will not apply.
Premium. A bond purchased at a cost (excluding any portion of the cost
attributable to accrued qualified stated interest) greater than its remaining
stated redemption price will be considered to be purchased at a premium. The
holder of a bond may elect under Section 171 of the Code to amortize the premium
under the constant yield method over the life of the bond. If made, the election
will apply to all debt instruments having amortizable bond premium that the
holder owns or subsequently acquires. Amortizable premium will be treated as an
offset to interest income on the related debt instrument, rather than as a
separate interest deduction. The OID Regulations also permit bondholders to
elect to include all interest, discount and premium in income based on a
constant yield method, further treating the bondholder as having made the
election to amortize premium generally. See "Taxation of Owners of Bonds--Market
Discount" above. The Committee Report states that the same rules that apply to
accrual
86
of market discount (which rules will require use of a Prepayment Assumption in
accruing market discount with respect to bonds without regard to whether the
bonds have original issue discount) will also apply in amortizing bond premium
under Section 171 of the Code.
Realized Losses. Under Section 166 of the Code, both corporate holders
of the bonds and noncorporate holders of the bonds that acquire the bonds in
connection with a trade or business should be allowed to deduct, as ordinary
losses, any losses sustained during a taxable year in which their bonds become
wholly or partially worthless as the result of one or more realized losses on
the mortgage loans. However, it appears that a noncorporate holder that does not
acquire a bond in connection with a trade or business will not be entitled to
deduct a loss under Section 166 of the Code until the holder's bond becomes
wholly worthless (i.e., until its outstanding principal balance has been reduced
to zero) and that the loss will be characterized as a short-term capital loss.
Each holder of a bond will be required to accrue interest and original
issue discount with respect to the bond, without giving effect to any reductions
in distributions attributable to defaults or delinquencies on the mortgage loans
or the bond underlying the bonds, as the case may be, until it can be
established this the reduction ultimately will not be recoverable. As a result,
the amount of taxable income reported in any period by the holder of a bond
could exceed the amount of economic income actually realized by that holder in
the period. Although the holder of a bond eventually will recognize a loss or
reduction in income attributable to previously accrued and included income that
as the result of a realized loss ultimately will not be realized, the law is
unclear with respect to the timing and character of this loss or reduction in
income.
SALES OF BONDS. If a bond is sold, the selling bondholder will
recognize gain or loss equal to the difference between the amount realized on
the sale and its adjusted basis in the bond. The adjusted basis of a bond
generally will equal the cost of the bond to the bondholder, increased by income
reported by the bondholder with respect to the bond (including original issue
discount and market discount income) and reduced (but not below zero) by
distributions on the bond received by the bondholder and by any amortized
premium. Except as provided in the following three paragraphs, any such gain or
loss will be capital gain or loss, provided the bond is held as a capital asset
(generally, property held for investment) within the meaning of Section 1221 of
the Code.
Gain recognized on the sale of a bond by a seller who purchased the
bond at a market discount will be taxable as ordinary income in an amount not
exceeding the portion of the discount that accrued during the period the bond
was held by the holder, reduced by any market discount included in income under
the rules described above under "--Taxation of Owners of Bonds--Market Discount"
and "Premium."
A portion of any gain from the sale of a bond that might otherwise be
capital gain may be treated as ordinary income to the extent that the bond is
held as part of a "conversion transaction" within the meaning of Section 1258 of
the Code. A conversion transaction generally is one in which the taxpayer has
taken two or more positions in the same or similar property that reduce or
eliminate market risk, if substantially all of the taxpayer's return is
attributable to the time value of the taxpayer's net investment in the
transaction. The amount of gain so realized in a conversion transaction that is
recharacterized as ordinary income generally will not exceed the amount of
interest that would have accrued on the taxpayer's net investment at 120% of the
appropriate "applicable Federal rate" (which rate is computed and published
monthly by the IRS) at the time the taxpayer enters into the conversion
transaction, subject to appropriate reduction for prior inclusion of interest
and other ordinary income items from the transaction.
87
Finally, a taxpayer may elect to have net capital gain taxed at
ordinary income rates rather than capital gains rates in order to include the
net capital gain in total net investment income for the taxable year, for
purposes of the rule that limits the deduction of interest on indebtedness
incurred to purchase or carry property held for investment to a taxpayer's net
investment income.
INFORMATION REPORTING. The Servicer is required to furnish or cause to
be furnished to each bondholder with each payment a statement setting forth the
amount of that payment allocable to principal on the bond and to interest
thereon. In addition, the Servicer is required to furnish or cause to be
furnished, within a reasonable time after the end of each calendar year, to each
bondholder who was a holder at any time during that year, a report indicating
such other customary factual information as the Servicer deems necessary to
enable holders of bonds to prepare their tax returns and will furnish comparable
information to the IRS as and when required by law to do so. If the bonds are
issued with OID, the Servicer will provide or cause to be provided to the IRS
and, as applicable, to the bondholder information statements with respect to OID
as required by the Code or as holders of those bonds may reasonably request from
time to time. If the bonds are issued with OID, those information reports, even
if otherwise accepted as accurate by the IRS, will in any event be accurate only
as to an initial bondholder which purchased its bond at the initial offering
price used in preparing those reports. Bondholders should consult their own tax
advisors to determine the amount of any OID and market discount includible in
income during a calendar year.
As applicable, the bond information reports will include a statement of
the adjusted issue price of the bonds at the beginning of each Collection
Period. In addition, the reports will include information required by
regulations for computing the accrual of any market discount. Because exact
computation of the accrual of market discount on a constant yield method would
require information relating to the bondholder's purchase price that the
Servicer will not have, such regulations only require that information
pertaining to the appropriate proportionate method of accruing market discount
be provided. See "MARKET DISCOUNT" above.
As applicable, the bond information reports will include a statement of
the adjusted issue price of the bond at the beginning of each accrual period. In
addition, the reports will include information required by regulations with
respect to computing the accrual of any market discount. Because exact
computation of the accrual of market discount on a constant yield method would
require information relating to the holder's purchase price that the trust fund
may not have, Treasury regulations only require that information pertaining to
the appropriate proportionate method of accruing market discount be provided.
See "--Taxation of Owners of Bonds--Market Discount."
BACKUP WITHHOLDING WITH RESPECT TO BONDS. Payments of interest and
principal, as well as payments of proceeds from the sale of the bonds, may be
subject to the "backup withholding tax" under Section 3406 of the Code,
currently at a rate of 30.5%, but subject to reduction through 2010, if
recipients of the payments fail to furnish to the payor certain information,
including their taxpayer identification numbers, or otherwise fail to establish
an exemption from the backup withholding tax. Any amounts deducted and withheld
from a distribution to a recipient would be allowed as a credit against the
recipient's federal income tax. Furthermore, penalties may be imposed by the IRS
on a recipient of payments that is required to supply information but that does
not do so in the proper manner.
FOREIGN INVESTORS IN BONDS. A bondholder that is not a United States
Person and is not subject to federal income tax as a result of any direct or
indirect connection to the United States in addition to its ownership of a bond
will not be subject to United States federal income or withholding tax in
respect of a distribution on a bond, provided that the holder complies to the
extent necessary with certain identification requirements, including delivery of
a statement, signed by the bondholder under penalties of perjury, certifying
that the bondholder is not a United States person and providing the name and
address
88
of the bondholder and provided further that the non-United States Person (i)
does not own directly or indirectly 10% or more of the voting power of all
classes of stock in the Issuer entitled to vote, (ii) is not a bank that is
treated as receiving that interest "on an extension of credit made under a loan
agreement entered into in the ordinary course of its trade or business", or
(iii) is not a "controlled foreign corporation", within the meaning of section
957 of the Code, with respect to which the Issuer is a "related person", within
the meaning of section 881(c)(3)(C) of the Code. If the holder does not qualify
for exemption, distributions of interest, including distributions in respect of
accrued original issue discount, to the holder may be subject to a tax rate of
30%, subject to reduction under any applicable tax treaty, provided the
bondholder supplies at the time of its initial purchase, and at all subsequent
times as are required under the Treasury regulations, a properly executed IRS
Form W-8BEN to report its eligibility for that reduced rate or exemption.
A bondholder that is not a U.S. Person will not be subject to U.S.
federal income tax on the gain realized on the sale, exchange or other
disposition of the bond unless (i) that bondholder is an individual who is
present in the United States for 183 days or more in the taxable year of sale,
exchange or other disposition and certain other conditions are met; (ii) the
gain is effectively connected with the conduct by the bondholder of a trade or
business within the United States and, if an income tax treaty applies, is
attributable to a United States permanent establishment of the bondholder; or
(iii) the bondholder is subject to certain rules applicable to expatriates.
Interest on or gain from the sale, exchange of other disposition of a
bond received by a bondholder that is not a United States Person, which
constitutes income that is effectively connected with a United States trade or
business carried on by the bondholder, will not be subject to withholding tax,
but rather will be subject to United States federal income tax at the graduated
rates applicable to U.S. persons, PROVIDED the bondholder provides a properly
executed IRS Form W-8ECI, certifying that the income is, or is expected to be,
effectively connected with the conduct of a trade or business within the United
States of that bondholder and that this income is includible in the bondholder's
gross income for the taxable year. This statement must include, among other
things, the name and address of the bondholder, the bondholder's identifying
number and the trade or business with which the income is, or is expected to be,
effectively connected.
Special rules apply to partnerships, estates and trusts, and in certain
circumstances certifications as to foreign status and other matters may be
required to be provided by partners and beneficiaries thereof.
In addition, the foregoing rules will not apply to exempt a United
States shareholder of a controlled foreign corporation from taxation on the
United States shareholder's allocable portion of the interest income received by
the controlled foreign corporation.
Further, it appears that a bond would not be included in the estate of
a non-resident alien individual and would not be subject to United States estate
taxes. However, bondholders who are non- resident alien individuals should
consult their tax advisors concerning this question.
NEW WITHHOLDING REGULATIONS
The Treasury Department has issued new final regulations which revise
procedures for complying with, or obtaining exemptions under, the withholding,
backup withholding and information reporting rules described above. Prospective
investors are urged to consult their tax advisors regarding the procedures for
obtaining an exemption from withholding under the new regulations.
89
STATE AND OTHER TAX CONSEQUENCES
In addition to the federal income tax consequences described in
"Federal Income Tax Consequences", potential investors should consider the state
and local tax consequences of the acquisition, ownership, and disposition of the
bonds offered under this prospectus and the prospectus supplement. State tax law
may differ substantially from the corresponding federal tax law, and the
discussion above does not purport to describe any aspect of the tax laws of any
state or other jurisdiction. Therefore, prospective investors should consult
their own tax advisors with respect to the various state and other tax
consequences of investments in the bonds offered under this prospectus and the
prospectus supplement.
ERISA CONSIDERATIONS
Sections 404 and 406 of ERISA impose fiduciary and prohibited
transaction restrictions on ERISA Plans and on various other retirement plans
and arrangements, including bank collective investment funds and insurance
company general and separate accounts in which ERISA Plans are invested. Section
4975 of the Code imposes essentially the same prohibited transaction
restrictions on Tax Favored Plans. ERISA and the Code prohibit a broad range of
transactions involving assets of Plans and Parties in Interest, unless a
statutory or administrative exemption is available with respect to any such
transaction.
Some employee benefit plans, including governmental plans (as defined
in Section 3(32) of ERISA), and, if no election has been made under Section
410(d) of the Code, church plans (as defined in Section 3(33) of ERISA) are not
subject to the ERISA requirements. Accordingly, assets of these plans may be
invested in the bonds without regard to the ERISA considerations described
below, subject to the provisions of other applicable federal, state and local
law. Any such plan which is qualified and exempt from taxation under Sections
401(a) and 501(a) of the Code, however, is subject to the prohibited transaction
rules set forth in Section 503 of the Code.
ERISA generally imposes on Plan fiduciaries general fiduciary
requirements, including those of investment prudence and diversification and the
requirement that a Plan's investments be made in accordance with the documents
governing the Plan. Any person who has discretionary authority or control with
respect to the management or disposition of Plan Assets and any person who
provides investment advice with respect to Plan Assets for a fee is a fiduciary
of the investing Plan. If the mortgage loans and other assets included in the
trust fund were to constitute Plan Assets, then any party exercising management
or discretionary control with respect to those Plan Assets may be deemed to be a
Plan "fiduciary," and thus subject to the fiduciary responsibility provisions of
ERISA and the prohibited transaction provisions of ERISA and Section 4975 of the
Code with respect to any investing Plan. In addition, the acquisition or holding
of bonds by or on behalf of a Plan or with Plan Assets, as well as the operation
of the trust fund, may constitute or involve a prohibited transaction under
ERISA and the Code unless a statutory or administrative exemption is available.
Further, ERISA and the Code prohibit a broad range of transactions involving
Plan Assets and persons, called Parties in Interest unless a statutory or
administrative exemption is available. Some Parties in Interest that participate
in a prohibited transaction may be subject to a penalty (or an excise tax)
imposed under Section 502(i) of ERISA or Section 4975 of the Code, unless a
statutory or administrative exemption is available with respect to any
transaction of this sort.
Some transactions involving the trust fund might be deemed to
constitute prohibited transactions under ERISA and the Code with respect to a
Plan that purchases the bonds, if the mortgage loans and other assets included
in a trust fund are deemed to be assets of the Plan. The DOL has promulgated the
DOL Regulations concerning whether or not a Plan's assets, or "Plan Assets"
would be deemed to include
90
an interest in the underlying assets of an entity, including a trust fund, for
purposes of applying the general fiduciary responsibility provisions of ERISA
and the prohibited transaction provisions of ERISA and the Code. Under the DOL
Regulations, generally, when a Plan acquires an "equity interest" in another
entity (such as the trust fund), the underlying assets of that entity may be
considered to be Plan Assets unless an exception applies. Exceptions contained
in the DOL Regulations provide that a Plan's assets will not include an
undivided interest in each asset of an entity in which the Plan makes an equity
investment if: (1) the entity is an operating company; (2) the equity investment
made by the Plan is either a "publicly-offered security" that is "widely held,"
both as defined in the DOL Regulations, or a security issued by an investment
company registered under the Investment Company Act of 1940, as amended; or (3)
Benefit Plan Investors do not own 25% or more in value of any class of equity
securities issued by the entity. In addition, the DOL Regulations provide that
the term "equity interest" means any interest in an entity other than an
instrument which is treated as indebtedness under applicable local law and which
has no "substantial equity features." Under the DOL Regulations, Plan Assets
will be deemed to include an interest in the instrument evidencing the equity
interest of a Plan (such as a bond with "substantial equity features"), and,
because of the factual nature of some of the rules set forth in the DOL
Regulations, Plan Assets may be deemed to include an interest in the underlying
assets of the entity in which a Plan acquires an interest (such as the trust
fund). Without regard to whether the bonds are characterized as equity
interests, the purchase, sale and holding of bonds by or on behalf of a Plan
could be considered to give rise to a prohibited transaction if the Issuer, the
trustee or any of their respective affiliates is or becomes a Party in Interest
with respect to the Plan. Neither Plans nor persons investing Plan Assets should
acquire or hold bonds in reliance upon the availability of any exception under
the DOL Regulations.
The DOL has issued Exemptions to some underwriters, which generally
exempts from the application of the prohibited transaction provisions of Section
406 of ERISA, and the excise taxes imposed on those prohibited transactions
pursuant to Section 4975(a) and (b) of the Code, some transactions, among
others, relating to the servicing and operation of mortgage pools and the
initial purchase, holding and subsequent resale of mortgage-backed bonds or
other "securities" underwritten by an Underwriter, as defined below, provided
that the conditions set forth in the Exemption are satisfied. For purposes of
this Section "ERISA Considerations", the term "Underwriter" shall include (1)
the underwriter, (2) any person directly or indirectly, through one or more
intermediaries, controlling, controlled by or under common control with the
underwriter and (3) any member of the underwriting syndicate or selling group of
which a person described in (1) or (2) is a manager or co-manager with respect
to a class of securities.
The Exemption sets forth seven general conditions which must be
satisfied for the Exemption to apply. First, the acquisition of bonds by a Plan
or with Plan Assets 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 Exemption only applies to bonds evidencing rights and interests that are not
subordinated to the rights and interests evidenced by other bonds of the same
trust, unless none of the mortgage loans has a loan-to- value ratio or combined
loan-to-value ratio at the date of issuance of the bonds that exceeds 100%.
Third, the bonds at the time of acquisition by a Plan or with Plan Assets must
be rated in one of the four highest generic rating categories by an Exemption
Rating Agency. However, the bonds must be rated in one of the two highest
generic categories by an Exemption Rating Agency if the loan-to-value ratio or
combined loan-to-value ratio of any one- to four-family residential mortgage
loan or home equity loan held in the trust exceeds 100% but does not exceed 125%
at the date of issuance of the bonds, and in that case the Exemption will not
apply: (1) to any of the bonds if any mortgage loan or other asset held in the
trust (other than a one- to four-family residential mortgage loan or home equity
loan) has a loan-to-value ratio or combined loan-to-value ratio that exceeds
100% at the Closing Date or (2) to any subordinate bonds. Fourth, the trustee
cannot be an affiliate of any member of the Restricted Group. Fifth, the sum of
all payments made to and retained by the Underwriter(s) must represent not more
than reasonable compensation for underwriting the bonds; the sum of all payments
made to and retained by the company
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pursuant to the assignment of the assets to the related trust fund must
represent not more than the fair market value of the obligations; and the sum of
all payments made to and retained by the master servicer, the special servicer
and any subservicer must represent not more than reasonable compensation for the
person's services under the related Agreement and reimbursement of the person's
reasonable expenses in connection therewith. Sixth, the investing Plan or Plan
Asset investor must be an accredited investor as defined in Rule 501(a)(1) of
Regulation D of the Commission under the Securities Act. Seventh, for Issuers
other than certain trusts, the documents establishing the Issuer and governing
the transaction must contain certain provisions as described in the Exemption
intended to protect the assets of the Issuer from creditors of the Company. In
addition, except as otherwise specified in the accompanying prospectus
supplement, the exemptive relief afforded by the Exemption may not apply to any
bonds where the related trust contains a swap, a yield maintenance agreement or
a pre-funding arrangement.
The Exemption also requires that the trust fund meet the following
requirements: (1) the trust fund must consist solely of assets of the type that
have been included in other investment pools; (2) bonds evidencing interests in
the other investment pools must have been rated in one of the four highest
generic categories of one of the Exemption Rating Agencies for at least one year
prior to the acquisition of bonds by or on behalf of a Plan or with Plan Assets;
and (3) bonds evidencing interests in the other investment pools must have been
purchased by investors other than Plans for at least one year prior to any
acquisition of bonds by or on behalf of a Plan or with Plan Assets.
A fiduciary of a Plan or any person investing Plan Assets to purchase a
bond must make its own determination that the conditions set forth above will be
satisfied with respect to the bond.
If the general conditions of the Exemption are satisfied, the Exemption
may provide an exemption from the restrictions imposed by Sections 406(a) and
407(a) of ERISA, and the excise taxes imposed by Sections 4975(a) and (b) of the
Code by reason of Sections 4975(c)(1)(A) through (D) of the Code, in connection
with the direct or indirect sale, exchange or transfer of bonds in the initial
issuance of the bonds or the direct or indirect acquisition or disposition in
the secondary market of bonds by a Plan or with Plan Assets or the continued
holding of bonds acquired by a Plan or with Plan Assets pursuant to either of
the foregoing. However, no exemption is provided from the restrictions of
Sections 406(a)(1)(E), 406(a)(2) and 407 of ERISA for the acquisition or holding
of a bond on behalf of an "Excluded Plan" by any person who has discretionary
authority or renders investment advice with respect to the assets of an Excluded
Plan. For purposes of the bonds, an Excluded Plan is a Plan sponsored by any
member of the Restricted Group.
If the specific conditions of the Exemption are also satisfied, the
Exemption may provide an exemption from the restrictions imposed by Sections
406(b)(1) and (b)(2) of ERISA, and the excise taxes imposed by Sections 4975(a)
and (b) of the Code by reason of Section 4975(c)(1)(E) of the Code, in
connection with (1) the direct or indirect sale, exchange or transfer of bonds
in the initial issuance of bonds between the company or an Underwriter and a
Plan when the person who has discretionary authority or renders investment
advice with respect to the investment of Plan Assets in the securities is (a) a
mortgagor with respect to 5% or less of the fair market value of the trust fund
assets or (b) an affiliate of such a person, (2) the direct or indirect
acquisition or disposition in the secondary market of securities by a Plan or
with Plan Assets and (3) the continued holding of securities acquired by a Plan
or with Plan Assets pursuant to either of the foregoing.
Further, if the specific conditions of the Exemption are satisfied, the
Exemption may provide an exemption from the restrictions imposed by Sections
406(a), 406(b) and 407 of ERISA, and the excise taxes imposed by Sections
4975(a) and (b) of the Code by reason of Section 4975(c) of the Code for
transactions in connection with the servicing, management and operation of the
trust fund. The company expects that the specific conditions of the Exemption
required for this purpose will be satisfied with
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respect to the securities so that the Exemption would provide an exemption from
the restrictions imposed by Sections 406(a) and (b) of ERISA (as well as the
excise taxes imposed by Sections 4975(a) and (b) of the Code by reason of
Section 4975(c) of the Code) for transactions in connection with the servicing,
management and operation of the trust fund, provided that the general conditions
of the Exemption are satisfied.
The Exemption also may provide an exemption from the application of the
prohibited transaction provisions of Sections 406(a) and 407(a) of ERISA, and
the excise taxes imposed by Section 4975(a) and (b) of the Code by reason of
Sections 4975(c)(1)(A) through (D) of the Code if the restrictions are deemed to
otherwise apply merely because a person is deemed to be a Party in Interest with
respect to an investing Plan by virtue of providing services to the Plan (or by
virtue of having a specified relationship to such a person) solely as a result
of the Plan's ownership of securities.
The Exemptions extend exemptive relief to mortgage-backed and
asset-backed bonds transactions using pre-funding accounts for trusts issuing
bonds. With respect to the bonds, the amendment will generally allow mortgage
loans supporting payments to bondholders, and having a value equal to no more
than 25% of the total principal amount of the bonds being offered by a trust
fund, to be transferred to the trust fund within the Pre-Funding Period instead
of requiring that all the mortgage loans be either identified or transferred on
or before the Closing Date. In general, the relief applies to the purchase, sale
and holding of bonds which otherwise qualify for the Exemption, provided that
the following general conditions are met:
o the ratio of the amount allocated to the pre-funding account
to the total principal amount of the bonds being offered must
be less than or equal to 25%;
o all additional mortgage loans transferred to the related trust
fund after the Closing Date must meet the same terms and
conditions for eligibility as the original mortgage loans used
to create the trust fund, which terms and conditions have been
approved by one of the Exemption Rating Agencies;
o the transfer of the additional mortgage loans to the trust
fund during the Pre-Funding Period must not result in the
bonds to be covered by the Exemptions receiving a lower credit
rating from an Exemption Rating Agency upon termination of the
Pre-Funding Period than the rating that was obtained at the
time of the initial issuance of the bonds by the trust fund;
o solely as a result of the use of pre-funding, the weighted
average annual percentage interest rate for the mortgage loans
included in the related trust fund on the Closing Date and all
additional mortgage loans transferred to the related trust
fund after the Closing Date at the end of the Pre- Funding
Period must not be more than 100 basis points lower than the
rate for the mortgage loans which were transferred to the
trust fund on the Closing Date;
o either:
(1) the characteristics of the additional mortgage
loans transferred to the related trust fund after the Closing
Date must be monitored by an insurer or other credit support
provider which is independent of the company; or
(2) an independent accountant retained by the company
must provide the company with a letter (with copies provided
to the Exemption Rating Agency rating the
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bonds, the Underwriter and the trustee) stating whether or not
the characteristics of the additional mortgage loans
transferred to the related trust fund after the Closing Date
conform to the characteristics described in the prospectus or
prospectus supplement and/or agreement. In preparing the
letter, the independent accountant must use the same type of
procedures as were applicable to the mortgage loans which were
transferred to the trust fund as of the Closing Date;
o the Pre-Funding Period must end no later than three months or
90 days after the Closing Date or earlier in some
circumstances if the pre-funding accounts falls below the
minimum level specified in the Agreement or an event of
default occurs;
o amounts transferred to any pre-funding accounts and/or
capitalized interest account used in connection with the
pre-funding may be invested only in investments which are
permitted by the Exemption Rating Agencies rating the bonds
and must:
(1) be 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 the obligations are backed by the full faith
and credit of the United States); or
(2) have been rated (or the obligor has been rated)
in one of the three highest generic rating categories by one
of the Exemption Rating Agencies ("ERISA Permitted
Investments");
o the prospectus or prospectus supplement must describe the
duration of the Pre-Funding Period;
o the trustee (or any agent with which the trustee contracts to
provide trust services) must be a substantial financial
institution or trust company experienced in trust activities
and familiar with its duties, responsibilities and liabilities
with ERISA. The trustee, as legal owner of the trust fund,
must enforce all the rights created in favor of bondholders of
the trust fund, including employee benefit plans subject to
ERISA.
In addition to the Exemption, a Plan fiduciary or other Plan Asset
investor should consider any available class exemptions granted by the DOL,
which may provide relief from some of the prohibited transaction provisions of
ERISA and the related excise tax provisions of the Code, including PTCE 83-1,
regarding transactions involving mortgage pool investment trusts; PTCE 84-14,
regarding transactions effected by a "qualified professional asset manager";
PTCE 90-1, regarding transactions by insurance company pooled separate accounts;
PTCE 91-38, regarding investments by bank collective investment funds; PTCE
95-60, regarding transactions by insurance company general accounts; and PTCE
96-23, regarding transactions effected by an "in-house asset manager."
Insurance companies contemplating the investment of general account
assets in the bonds should consult with their legal advisors with respect to the
applicability of Section 401(c) of ERISA. The DOL issued final regulations under
Section 401(c) which became effective on July 5, 2001.
REPRESENTATION FROM PLANS INVESTING IN BONDS WITH "SUBSTANTIAL EQUITY FEATURES"
OR NON-EXEMPT BONDS
Because the exemptive relief afforded by the Exemption (or any similar
exemption that might be available) will not apply to the purchase, sale or
holding of certain bonds, such as bonds with "substantial
94
equity features," subordinate bonds in trusts containing mortgage loans with
loan-to-value ratios in excess of 100%, any bonds which are not rated in one of
the four highest generic rating categories by the Exemption Rating Agencies
transfers of any the bonds to a Plan, to a trustee or other person acting on
behalf of any Plan, or to any other person investing Plan Assets to effect the
acquisition will not be registered by the trustee unless the transferee provides
the company, the trustee and the master servicer with an opinion of counsel
satisfactory to the company, the trustee (or Indenture Trustee in the case of
transfer of bonds) and the master servicer, which opinion will not be at the
expense of the company, the trustee (or the Indenture Trustee in the case of the
transfer of bonds) or the master servicer, that the purchase of the bonds by or
on behalf of the Plan is permissible under applicable law, will not constitute
or result in any non-exempt prohibited transaction under ERISA or Section 4975
of the Code and will not subject the company, the trustee (or the indenture
trustee in the case of the transfer of bonds) or the master servicer to any
obligation in addition to those undertaken in the related Agreement.
In lieu of an opinion of counsel, the transferee may provide a
certification substantially to the effect that the purchase of bonds by or on
behalf of a Plan is permissible under applicable law, will not constitute or
result in any non-exempt prohibited transaction under ERISA or Section 4975 of
the Code and will not subject the company, the trustee or the master servicer to
any obligation in addition to those undertaken in the Agreement and the
following statements are correct: (1) the transferee is an insurance company,
(2) the source of funds used to purchase the bonds is an "insurance company
general account" (as that term is defined in PTCE 95-60), (3) the conditions set
forth in Sections I and III of PTCE 95-60 have been satisfied and (4) there is
no Plan with respect to which the amount of the general account's reserves and
liabilities for contracts held by or on behalf of the Plan and all other Plans
maintained by the same employer (or any "affiliate" thereof, as defined in PTCE
95-60) or by the same employee organization exceed 10% of the total of all
reserves and liabilities of the general account (as determined under PTCE 95-60)
as of the date of the acquisition of the bonds.
An opinion of counsel or certification will not be required with
respect to the purchase of bonds registered with the DTC. Any purchaser of a DTC
registered bond will be deemed to have represented by the purchase that either
(a) the purchaser is not a Plan and is not purchasing the bonds on behalf of, or
with Plan Assets of, any Plan or (b) the purchase of any such bond by or on
behalf of, or with Plan Assets of, any Plan is permissible under applicable law,
will not result in any non-exempt prohibited transaction under ERISA or Section
4975 of the Code and will not subject the company, the trustee or the master
servicer to any obligation in addition to those undertaken in the related
Agreement.
TAX EXEMPT INVESTORS
A Plan that is exempt from federal income taxation pursuant to Section
501 of the Code nonetheless will be subject to federal income taxation to the
extent that its income is "unrelated business taxable income" within the meaning
of Section 512 of the Code.
CONSULTATION WITH COUNSEL
There can be no assurance that the Exemptions or any other DOL
exemption will apply with respect to any particular Plan that acquires the bonds
or, even if all the conditions specified therein were satisfied, that any such
exemption would apply to transactions involving the trust fund. Prospective Plan
investors should consult with their legal counsel concerning the impact of ERISA
and the Code and the potential consequences to their specific circumstances
prior to making an investment in the bonds. Neither the company, the trustees,
the master servicer nor any of their respective affiliates will make any
representation to the effect that the bonds satisfy all legal requirements with
respect to the investment therein by Plans generally or any particular Plan or
to the effect that the bonds are an appropriate investment for Plans generally
or any particular Plan.
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BEFORE PURCHASING A BOND, A FIDUCIARY OF A PLAN OR OTHER PLAN ASSET
INVESTOR SHOULD ITSELF CONFIRM THAT (A) ALL THE SPECIFIC AND GENERAL CONDITIONS
SET FORTH IN THE EXEMPTION, ONE OF THE CLASS EXEMPTIONS OR SECTION 401(C) OF
ERISA WOULD BE SATISFIED AND (B) IN THE CASE OF A BOND PURCHASED UNDER THE
EXEMPTION, THE BOND CONSTITUTES A "CERTIFICATE" FOR PURPOSES OF THE EXEMPTION.
IN ADDITION TO MAKING ITS OWN DETERMINATION AS TO THE AVAILABILITY OF THE
EXEMPTIVE RELIEF PROVIDED IN THE EXEMPTION, ONE OF THE CLASS EXEMPTIONS OR
SECTION 410(C) OF ERISA, THE PLAN FIDUCIARY SHOULD CONSIDER ITS GENERAL
FIDUCIARY OBLIGATIONS UNDER ERISA IN DETERMINING WHETHER TO PURCHASE THE BONDS
ON BEHALF OF A PLAN.
LEGAL INVESTMENT MATTERS
Each class of bonds offered by this prospectus and by the related
prospectus supplement will be rated at the date of issuance in one of the four
highest rating categories by at least one Rating Agency. If so specified in the
related prospectus supplement, each such class that is rated in one of the two
highest rating categories by at least one Rating Agency will constitute
"mortgage related securities" for purposes of SMMEA, and, as such, will be legal
investments for persons, trusts, corporations, partnerships, associations,
business trusts and business entities (including depository institutions, life
insurance companies and pension funds) created pursuant to or existing under the
laws of the United States or of any State whose authorized investments are
subject to state regulation to the same extent that, under applicable law,
obligations issued by or guaranteed as to principal and interest by the United
States or any agency or instrumentality thereof constitute legal investments for
the entities. Under SMMEA, if a State enacted legislation on or prior to October
3, 1991 specifically limiting the legal investment authority of any such
entities with respect to "mortgage related securities," such securities will
constitute legal investments for entities subject to the legislation only to the
extent provided therein. Some States have enacted legislation which overrides
the preemption provisions of SMMEA. SMMEA provides, however, that in no event
will the enactment of any such legislation affect the validity of any
contractual commitment to purchase, hold or invest in "mortgage related
securities," or require the sale or other disposition of the securities, so long
as the contractual commitment was made or the securities acquired prior to the
enactment of the legislation.
SMMEA also amended the legal investment authority of
federally-chartered depository institutions as follows: federal savings and loan
associations and federal savings banks may invest in, sell or otherwise deal
with "mortgage related securities" without limitation as to the percentage of
their assets represented thereby, federal credit unions may invest in the
securities, and national banks may purchase the securities for their own account
without regard to the limitations generally applicable to investment securities
set forth in 12 U.S.C. 24 (Seventh), subject in each case to such regulations as
the applicable federal regulatory authority may prescribe.
The Federal Financial Institutions Examination Council has issued a
supervisory policy statement applicable to all depository institutions, setting
forth guidelines for and significant restrictions on investments in "high-risk
mortgage securities." The policy statement has been adopted by the Federal
Reserve Board, the Office of the Comptroller of the Currency, the FDIC and the
OTS with an effective date of February 10, 1992. The policy statement generally
indicates that a mortgage derivative product will be deemed to be high risk if
it exhibits greater price volatility than a standard fixed rate thirty-year
mortgage security. According to the policy statement, prior to purchase, a
depository institution will be required 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. Reliance on analysis and documentation obtained from a securities dealer
or other outside party without internal analysis by the institution would be
unacceptable. There can be no assurance as to which classes of offered bonds
will be treated as high-risk under the policy statement.
96
The predecessor to the OTS issued a bulletin, entitled, "Mortgage
Derivative Products and Mortgage Swaps", which is applicable to thrift
institutions regulated by the OTS. The bulletin established guidelines for the
investment by savings institutions in certain "high-risk" mortgage derivative
securities and limitations on the use of the securities by insolvent,
undercapitalized or otherwise "troubled" institutions. According to the
bulletin, such "high-risk" mortgage derivative securities include securities
having specified characteristics, which may include some classes of offered
bonds. In addition, the National Credit Union Administration has issued
regulations governing federal credit union investments which prohibit investment
in specified types of securities, which may include some classes of offered
bonds. Similar policy statements have been issued by regulators having
jurisdiction over other types of depository institutions.
Any class of bonds that is not rated in one of the two highest rating
categories by at least one Rating Agency, and any other class of bonds specified
in the related prospectus supplement, will not constitute "mortgage related
securities" for purposes of SMMEA. Prospective investors in these classes of
bonds, in particular, should consider the matters discussed in the following
paragraph.
There may be other restrictions on the ability of investors either to
purchase some classes of offered bonds or to purchase any class of offered bonds
representing more than a specified percentage of the investors' assets. The
company will make no representations as to the proper characterization of any
class of offered bonds for legal investment or other purposes, or as to the
ability of particular investors to purchase any class of bonds under applicable
legal investment restrictions. These uncertainties may adversely affect the
liquidity of any class of bonds. Accordingly, all investors whose investment
activities are subject to legal investment laws and regulations, regulatory
capital requirements or review by regulatory authorities should consult with
their own legal advisors in determining whether and to what extent the offered
bonds of any class thereof constitute legal investments or are subject to
investment, capital or other restrictions, and, if applicable, whether SMMEA has
been overridden in any jurisdiction relevant to the investor.
USE OF PROCEEDS
Substantially all of the net proceeds to be received from the sale of
bonds will be applied by the company to finance the purchase of, or to repay
short-term loans incurred to finance the purchase of, the mortgage loans and/or
mortgage securities in the respective mortgage pools and to pay other expenses.
The company expects that it will make additional sales of bonds similar to the
offered bonds from time to time, but the timing and amount of any such
additional offerings will be dependent upon a number of factors, including the
volume of mortgage loans purchased by the company, prevailing interest rates,
availability of funds and general market conditions.
METHODS OF DISTRIBUTION
The bonds offered by this prospectus and by the related prospectus
supplements will be offered in series through one or more of the methods
described below. The prospectus supplement prepared for each series will
describe the method of offering being utilized for that series and will state
the net proceeds to the company from the sale.
The company intends that offered bonds will be offered through the
following methods from time to time and that offerings may be made concurrently
through more than one of these methods or that an offering of the offered bonds
of a particular series may be made through a combination of two or more of these
methods. The methods are as follows:
97
o By negotiated firm commitment or best efforts underwriting and
public re-offering by underwriters;
o By placements by the company with institutional investors through
dealers; and
o By direct placements by the company with institutional investors.
If underwriters are used in a sale of any offered bonds (other than in
connection with an underwriting on a best efforts basis), the bonds will be
acquired by the underwriters for their own account and may be resold from time
to time in one or more transactions, including negotiated transactions, at fixed
public offering prices or at varying prices to be determined at the time of sale
or at the time of commitment therefor. The underwriters may be broker-dealers
affiliated with the company whose identities and relationships to the company
will be as set forth in the related prospectus supplement. The managing
underwriter or underwriters with respect to the offer and sale of the offered
bonds of a particular series will be set forth on the cover of the prospectus
supplement relating to the series and the members of the underwriting syndicate,
if any, will be named in the prospectus supplement.
In connection with the sale of the offered bonds, underwriters may
receive compensation from the company or from purchasers of the bonds in the
form of discounts, concessions or commissions. Underwriters and dealers
participating in the distribution of the offered bonds may be deemed to be
underwriters in connection with the bonds, and any discounts or commissions
received by them from the company and any profit on the resale of offered bonds
by them may be deemed to be underwriting discounts and commissions under the
Securities Act.
It is anticipated that the underwriting agreement pertaining to the
sale of offered bonds of any series will provide that the obligations of the
underwriters will be subject to conditions precedent, that the underwriters will
be obligated to purchase all such bonds if any are purchased (other than in
connection with an underwriting on a best efforts basis) and that, in limited
circumstances, the company will indemnify the several underwriters and the
underwriters will indemnify the company against specified civil liabilities,
including liabilities under the Securities Act or will contribute to payments
required to be made in respect thereof.
The prospectus supplement with respect to any series offered by
placements through dealers will contain information regarding the nature of the
offering and any agreements to be entered into between the company and
purchasers of offered bonds of the series.
The company anticipates that the bonds offered by this prospectus and
the prospectus supplement will be sold primarily to institutional investors or
sophisticated non-institutional investors. Purchasers of offered bonds,
including dealers, may, depending on the facts and circumstances of the
purchases, be deemed to be "underwriters" within the meaning of the Securities
Act in connection with reoffers and sales by them of the bonds. Holders of
offered bonds should consult with their legal advisors in this regard prior to
any such reoffer or sale.
LEGAL MATTERS
Legal matters, including federal income tax matters, in connection with
the bonds of each series will be passed upon for the company by Thacher Proffitt
& Wood, New York, New York. With respect to each series of bonds, a copy of this
opinion will be filed with the Commission on Form 8-K within 15 days after the
Closing Date.
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FINANCIAL INFORMATION
With respect to each series of bonds, a new trust fund will be formed,
and no trust fund will engage in any business activities or have any assets or
obligations prior to the issuance of the related series of bonds. Accordingly,
no financial statements with respect to any trust fund related to a series of
bonds will be included in this prospectus or in the related prospectus
supplement.
With respect to each series of bonds, where the issuer is a statutory
business trust or a limited liability company, financial statements will be
filed as required by the Exchange Act. Each such issuer will suspend filing the
reports if and when the reports are no longer required under the Exchange Act.
RATINGS
It is a condition to the issuance of any class of offered bonds that
they shall have been rated not lower than investment grade, that is, in one of
the four highest rating categories, by at least one Rating Agency.
Ratings on collateralized asset-backed bonds address the likelihood of
receipt by the holders thereof of all collections on the underlying mortgage
assets to which the holders are entitled. These ratings address the structural,
legal and issuer-related aspects associated with the bonds, the nature of the
underlying mortgage assets and the credit quality of the guarantor, if any.
Ratings on collateralized asset- backed bonds do not represent any assessment of
the likelihood of principal prepayments by borrowers or of the degree by which
the prepayments might differ from those originally anticipated. As a result,
bondholders might suffer a lower than anticipated yield, and, in addition,
holders of stripped interest bonds in extreme cases might fail to recoup their
initial investments.
A bond rating is not a recommendation to buy, sell or hold bonds and
may be subject to revision or withdrawal at any time by the assigning rating
organization.
AVAILABLE INFORMATION
The company 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 company can be
inspected and copied at the public reference facilities maintained by the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, and its Regional
Offices located as follows: Chicago Regional Office, 500 West Madison, 14th
Floor, Chicago, Illinois 60661; New York Regional Office, Seven World Trade
Center, New York, New York 10048. Copies of the material can also be obtained
from the Public Reference Section of the Commission, 450 Fifth Street, N.W.,
Washington, D.C. 20549, at prescribed rates and electronically through the
Commission's Electronic Data Gathering, Analysis and Retrieval system at the
Commission's Web site (http://www.sec.gov). The company does not intend to send
any financial reports to bondholders.
This prospectus does not contain all of the information set forth in
the registration statement (of which this prospectus forms a part) and exhibits
thereto which the company has filed with the Commission under the Securities Act
and to which reference is hereby made.
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REPORTS TO BONDHOLDERS
The master servicer or another designated person will be required to
provide periodic unaudited reports concerning each trust fund to all registered
holders of offered bonds of the related series with respect to each trust fund
as are required under the Exchange Act and the Commission's related rules and
regulations. See "Description of the Bonds--Reports to Bondholders."
INCORPORATION OF INFORMATION BY REFERENCE
There are incorporated in this prospectus and in the related prospectus
supplement by reference all documents and reports filed or caused to be filed by
the company with respect to a trust fund pursuant to Sections 13(a), 13(c), 14
or 15(d) of the Exchange Act, prior to the termination of the offering of the
offered bonds of the related series. The company will provide or cause to be
provided without charge to each person to whom this prospectus is delivered in
connection with the offering of one or more classes of offered bonds, upon
written or oral request of the person, a copy of any or all the reports
incorporated in this prospectus by reference, in each case to the extent the
reports relate to one or more of such classes of the offered bonds, 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 IMH
Assets Corp., 1401 Dove Street, Newport Beach, California 92660, and its
telephone number is (949) 475-3700. The company has determined that its
financial statements will not be material to the offering of any offered bonds.
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GLOSSARY
ACCRUAL BOND -- A bond with respect to which some or all of its
accrued interest will not be distributed but rather will be added to the
principal balance thereof on each distribution date for the period described in
the related prospectus supplement.
AFFILIATED SELLER-- Impac Mortgage Holdings, Inc., the parent of the
company, and their respective affiliates.
AGREEMENT -- An owner trust agreement, servicing agreement or
indenture.
ARM LOAN -- A mortgage loan with an adjustable interest rate.
BANKRUPTCY CODE -- Title 11 of the United States Code, as amended from
time to time.
BANKRUPTCY LOSS -- A Realized Loss attributable to certain actions
which may be taken by a bankruptcy court in connection with a mortgage loan,
including a reduction by a bankruptcy court of the principal balance of or the
mortgage rate on a mortgage loan or an extension of its maturity.
BENEFICIAL OWNER -- A person acquiring an interest in any DTC
Registered Bond.
BENEFIT PLAN INVESTORS -- Plans, as well as any "employee benefit plan"
(as defined in Section 3(3) or ERISA) which is not subject to Title I of ERISA,
such as governmental plans (as defined in Section 3(32) of ERISA) and church
plans (as defined in Section 3(33) of ERISA) which have not made an election
under Section 410(d) of the Code, and any entity whose underlying assets include
Plan Assets by reason of a Plan's investment in the entity.
BUYDOWN ACCOUNT -- With respect to a buydown mortgage loan, the
custodial account where the Buydown Funds are placed.
BUYDOWN FUNDS -- With respect a buydown mortgage loan, the amount
contributed by the seller of the mortgaged property or another source and placed
in the Buydown Account.
BUYDOWN PERIOD -- The period during which funds on a buydown mortgage
loan are made up for from the Buydown Account.
CERCLA -- The federal Comprehensive Environmental Response,
Compensation and Liability Act, as amended.
CLOSING DATE -- With respect to any series of bonds, the date on which
the bonds are issued.
CODE-- The Internal Revenue Code of 1986.
COMMISSION--The Securities and Exchange Commission.
COMMITTEE REPORT -- The Conference Committee Report accompanying the
Tax Reform Act of 1986.
CONSERVATION ACT -- The Asset Conservation, Lender Liability and
Deposit Insurance Act of 1996.
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CONTRACT -- Manufactured housing conditional sales contracts and
installment loan agreements each secured by a Manufactured Home.
COOPERATIVE -- With respect to a cooperative mortgage loan, the
corporation that owns the related apartment building.
CRIME CONTROL ACT--The Comprehensive Crime Control Act of 1984.
DEFAULTED MORTGAGE LOSS -- A Realized Loss other than a Special Hazard
Loss, Extraordinary Loss or other losses resulting from damage to a mortgaged
property, Bankruptcy Loss or Fraud Loss.
DEFERRED INTEREST -- If an adjustment to the mortgage rate on a
mortgage loan has caused the amount of accrued interest on the mortgage loan in
any month to exceed the scheduled monthly payment on the mortgage loan, the
resulting amount of interest that has accrued but is not then payable;
DELETED MORTGAGE LOAN -- A mortgage loan which has been removed from
the related trust fund.
DESIGNATED SELLER TRANSACTION -- A series of bonds where the related
mortgage loans are provided either directly or indirectly to the company by one
or more Sellers identified in the related prospectus supplement.
DETERMINATION DATE -- The close of business on the date on which the
amount of each distribution to bondholders will be determined, which shall be
stated in each prospectus supplement.
DIDMC -- The Depository Institutions Deregulation and Monetary Control
Act of 1980.
DOL--The U.S. Department of Labor.
DOL REGULATIONS-- Regulations by the DOL promulgated at 29
C.F.R.ss.2510.3-101.
DTC REGISTERED BOND -- Any bond initially issued through the book-entry
facilities of the DTC.
DUE PERIOD -- The period between distribution dates.
ELIGIBLE ACCOUNT -- An account maintained with a federal or state
chartered depository institution (i) the short-term obligations of which are
rated by each of the Rating Agencies in its highest rating at the time of any
deposit therein, or (ii) insured by the FDIC (to the limits established by the
FDIC), the uninsured deposits in which account are otherwise secured such that,
as evidenced by an opinion of counsel (obtained by and at the expense of the
person requesting that the account be held pursuant to this clause (ii))
delivered to the trustee prior to the establishment of the account, the
bondholders will have a claim with respect to the funds in the account and a
perfected first priority security interest against any collateral (which shall
be limited to Permitted Instruments) securing the funds that is superior to
claims of any other depositors or general creditors of the depository
institution with which the account is maintained or (iii) a trust account or
accounts maintained with a federal or state chartered depository institution or
trust company with trust powers acting in its fiduciary capacity or (iv) an
account or accounts of a depository institution acceptable to the Rating
Agencies (as evidenced in writing by the Rating Agencies that use of any such
account as the Payment Account will not have an adverse effect on the
then-current ratings assigned to the classes of the bonds then rated by the
Rating Agencies). Eligible Accounts may or may not bear interest.
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EQUITY CERTIFICATES -- With respect to any series of bonds, the
certificate or certificates representing a beneficial ownership interest in the
related issuer.
ERISA -- The Employee Retirement Income Security Act of 1974, as
amended.
ERISA PLANS -- Employee pension and welfare benefit plans subject to
ERISA.
EXCHANGE ACT--The Securities Exchange Act of 1934, as amended.
EXEMPTION--An individual prohibited transactions exemption issued by
the DOL to an underwriter, as amended by PTE 97-34, 62 Fed. Reg. 39021 (July 21,
1997), and PTE 2000-58, 65 Fed. Reg. 67765 (November 13, 2000).
EXEMPTION RATING AGENCY--Standard & Poor's, a division of The
McGraw-Hill Companies, Inc., Moody's Investors Service, Inc., or Fitch, Inc.
EXTRAORDINARY LOSS -- Any Realized Loss occasioned by war, civil
insurrection, certain governmental actions, nuclear reaction and certain other
risks.
FRAUD LOSS -- A Realized Loss incurred on a defaulted mortgage loan as
to which there was fraud in the origination of the mortgage loan.
FTC RULE -- The so-called "Holder-in-Due-Course" Rule of the Federal
Trade Commission.
GARN-ST GERMAIN ACT -- The Garn-St Germain Depository Institutions Act
of 1982.
GLOBAL BONDS -- The globally offered bonds of the classes specified in
the related prospectus supplement.
HIGH LTV LOANS -- Mortgage loans with loan-to-value ratios in excess of
80% and as high as 150% and which are not be insured by a Primary Insurance
Policy.
HOUSING ACT--The National Housing Act of 1934, as amended.
INDEX -- With respect to an ARM Loan, the related index, which will be
specified in the related prospectus supplement and may include one of the
following indexes: (1) the weekly average yield on U.S. Treasury securities
adjusted to a constant maturity of either six months or one year, (2) the weekly
auction average investment yield of U.S. Treasury bills of six months, (3) the
daily Bank Prime Loan rate made available by the Federal Reserve Board, (4) the
cost of funds of member institutions for the Federal Home Loan Bank of San
Francisco, (5) the interbank offered rates for U.S. dollar deposits in the
London market, each calculated as of a date prior to each scheduled interest
rate adjustment date which will be specified in the related prospectus
supplement or (6) any other index described in the related prospectus
supplement.
INSURANCE PROCEEDS -- Proceeds received under any hazard, title,
primary mortgage, FHA or other insurance policy that provides coverage with
respect to a particular mortgaged property or the related mortgage loan (other
than proceeds applied to the restoration of the property or released to the
related borrower in accordance with the customary servicing practices of the
master servicer (or, if applicable, a special servicer) and/or the terms and
conditions of the related mortgage.
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INTERMEDIARY -- An institution that is not a participant in the DTC but
clears through or maintains a custodial relationship with a participant.
IRS--The Internal Revenue Service.
ISSUER -- The Delaware business trust or other trust, created pursuant
to the owner trust agreement, that issues the bonds.
LIQUIDATION PROCEEDS -- (1) All amounts, other than Insurance Proceeds
received and retained in connection with the liquidation of defaulted mortgage
loans or property acquired in respect thereof, by foreclosure or otherwise,
together with the net operating income (less reasonable reserves for future
expenses) derived from the operation of any mortgaged properties acquired by the
trust fund through foreclosure or otherwise and (2) all proceeds of any mortgage
loan or mortgage security purchased (or, in the case of a substitution, amounts
representing a principal adjustment) by the master servicer, the company, a
Seller or any other person pursuant to the terms of the related servicing
agreement as described under "The Mortgage Pools--Representations by Sellers,"
"Servicing of Mortgage Loans--Realization Upon and Sale of Defaulted Mortgage
Loans," "--Assignment of Trust Fund Assets" above and "The
Agreements--Termination."
LOAN-TO-VALUE RATIO -- With respect to any mortgage loan, the ratio of
the original outstanding principal amount of the mortgage loan and, with respect
to any second lien mortgage loan, the outstanding principal amount of any
related first lien as of the date of origination of such mortgage loan, to (i)
the appraised value of the related mortgaged property at origination with
respect to a refinanced mortgage loan, and (ii) the lesser of the appraised
value of the related mortgaged property at origination or the purchase price of
the related mortgaged property with respect to all other mortgage loans.
MANUFACTURED HOME -- Manufactured homes within the meaning of 42 United
States Code, Section 5402(6), which defines a "manufactured home" as "a
structure, transportable in one or more sections, which in the traveling mode,
is eight body feet or more in width or forty body feet or more in length, or,
when erected on site, is three hundred twenty or more square feet, and which is
built on a permanent chassis and designed to be used as a dwelling with or
without a permanent foundation when connected to the required utilities, and
includes the plumbing, heating, air conditioning, and electrical systems
contained therein; except that the term shall include any structure which meets
all the requirements of this paragraph except the size requirements and with
respect to which the manufacturer voluntarily files a certification required by
the Secretary of Housing and Urban Development and complies with the standards
established under this chapter."
NET MORTGAGE RATE -- With respect to a mortgage loan, the mortgage rate
net of the per annum rate or rates applicable to the calculation of servicing
and administrative fees and any retained interest of the company.
NONRECOVERABLE ADVANCE -- An advance which, in the good faith judgment
of the master servicer, will not be recoverable from recoveries on the related
mortgage loan or another specifically identified source.
NOTE MARGIN -- With respect to an ARM Loan, the fixed percentage set
forth in the related mortgage note, which when added to the related Index,
provides the mortgage rate for the ARM Loan.
OID -- Original issue discount, within the meaning of the OID
Regulations.
104
OID REGULATIONS -- The rules governing original issue discount that are
set forth in Sections 1271- 1273 and 1275 of the Code and in the related
Treasury regulations.
OTS-- The Office of Thrift Supervision.
PARTIES IN INTEREST -- With respect to a Plan, persons who have
specified relationships to the Plans, either "Parties in Interest" within the
meaning of ERISA or "Disqualified Persons" within the meaning of the Code.
PAYMENT ACCOUNT -- One or more separate accounts for the collection of
payments on the related mortgage loans and/or mortgage securities constituting
the related trust fund.
PERCENTAGE INTEREST -- With respect to a bond of a particular class,
the percentage obtained by dividing the initial principal balance or notional
amount of the bond by the aggregate initial amount or notional balance of all
the bonds of the class.
PERMITTED INVESTMENTS -- United States government securities and other
investment grade obligations specified in the related servicing agreement and
indenture.
PLAN ASSETS -- "Plan assets" of a Plan within the meaning of the DOL
Regulations.
PLANS--ERISA Plans and Tax Favored Plans.
PREPAYMENT ASSUMPTION -- With respect to a bond, the prepayment
assumption used in pricing the initial offering of that bond.
PREPAYMENT INTEREST SHORTFALL -- With respect to any mortgage loan with
a prepayment in part or in full the excess, if any, of interest accrued and
otherwise payable on the related mortgage loan over the interest charged to the
borrower (net of servicing and administrative fees and any retained interest of
the company).
PRIMARY INSURANCE COVERED LOSS -- With respect to a mortgage loan
covered by a Primary Insurance Policy, the amount of the related loss covered
pursuant to the terms of the Primary Insurance Policy, which will generally
consist of the unpaid principal amount of the mortgage loan and accrued and
unpaid interest on the mortgage loan and reimbursement of specific expenses,
less (1) rents or other payments collected or received by the insured (other
than the proceeds of hazard insurance) that are derived from the related
mortgaged property, (2) hazard insurance proceeds in excess of the amount
required to restore the related mortgaged property and which have not been
applied to the payment of the mortgage loan, (3) amounts expended but not
approved by the primary insurer, (4) claim payments previously made on the
mortgage loan and (5) unpaid premiums and other specific amounts.
PRIMARY INSURANCE POLICY -- A primary mortgage guaranty insurance
policy.
PRIMARY INSURER--An issuer of a Primary Insurance Policy.
PTCE--Prohibited Transaction Class Exemption.
QUALIFIED SUBSTITUTE MORTGAGE LOAN -- A mortgage loan substituted for a
Deleted Mortgage Loan, meeting the requirements described under "The Mortgage
Pools-- Representations by Sellers" in this prospectus.
105
RATING AGENCY -- A "nationally recognized statistical rating
organization" within the meaning of Section 3(a)(41) of the Exchange Act.
REALIZED LOSS -- Any loss on a mortgage loan attributable to the
mortgagor's failure to make any payment of principal or interest as required
under the mortgage note.
RECORD DATE -- The close of business on the last business day of the
month preceding the month in which the applicable distribution date occurs.
RELIEF ACT -- The Soldiers' and Sailors' Civil Relief Act of 1940, as
amended.
REO MORTGAGE LOAN -- A mortgage loan where title to the related
mortgaged property has been obtained by the trustee or to its nominee on behalf
of bondholders of the related series.
RESTRICTED GROUP -- The group consisting of the Underwriter, the
company, the master servicer, the special servicer, any subservicer and any
obligor with respect to assets included in the trust fund constituting more than
5% of the aggregate unamortized principal balance of the assets in the trust
fund as of the date of initial issuance of the bonds.
RICO--The Racketeer Influenced and Corrupt Organizations statute.
SECURITIES ACT -- The Securities Act of 1933, as amended.
SELLER -- The seller of the mortgage loans or mortgage securities
included in a trust fund to the company with respect a series of bonds, who
shall be an Affiliated Seller or an Unaffiliated Seller.
SINGLE FAMILY PROPERTY -- An attached or detached one-family dwelling
unit, two- to four- family dwelling unit, condominium, townhouse, row house,
individual unit in a planned-unit development and other individual dwelling
units.
SMMEA--The Secondary Mortgage Market Enhancement Act of 1984.
SPECIAL HAZARD LOSS -- (1) losses due to direct physical damage to a
mortgaged property other than any loss of a type covered by a hazard insurance
policy or a flood insurance policy, if applicable, and (2) losses from partial
damage caused by reason of the application of the co-insurance clauses contained
in hazard insurance policies.
STRIP BOND -- A bond which will be entitled to (1) principal
distributions, with disproportionate, nominal or no interest distributions or
(2) interest distributions, with disproportionate, nominal or no principal
distributions.
TAX FAVORED PLANS -- Tax-qualified retirement plans described in
Section 401(a) of the Code and on individual retirement accounts described in
Section 408 of the Code.
TITLE V -- Title V of the Depository Institutions Deregulation and
Monetary Control Act of 1980, enacted in March 1980.
TITLE VIII -- Title VIII of the Garn-St Germain Act.
106
UNAFFILIATED SELLERS -- Banks, savings and loan associations, mortgage
bankers, mortgage brokers, investment banking firms, the Resolution Trust
Corporation, the FDIC and other mortgage loan originators or sellers not
affiliated with the company.
UNITED STATES PERSON -- A citizen or resident of the United States, a
corporation or partnership (including an entity treated as a corporation or
partnership for federal income tax purposes) created or organized in, or under
the laws of, the United States or any state thereof or the District of Columbia
(except, in the case of a partnership, to the extent provided in regulations),
or an estate whose income is subject to United States federal income tax
regardless of its source, 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 United States persons have the authority to control all substantial
decisions of the trust. To the extent prescribed in regulations by the Secretary
of the Treasury, which have not yet been issued, a trust which was in existence
on August 20, 1996 (other than a trust treated as owned by the grantor under
subpart E of part I of subchapter J of chapter 1 of the Code), and which was
treated as a United States person on August 20, 1996 may elect to continue to be
treated as a United States person notwithstanding the previous sentence.
VALUE -- With respect to a mortgaged property securing a single family,
multifamily, commercial or mixed-use loan, the lesser of (x) the appraised value
determined in an appraisal obtained at origination of the mortgage loan, if any,
or, if the related mortgaged property has been appraised subsequent to
origination, the value determined in the subsequent appraisal and (y) the sales
price for the related mortgaged property (except in circumstances in which there
has been a subsequent appraisal). However, in the case of refinanced, modified
or converted single family, multifamily, commercial or mixed-use loans, the
"Value" of the related mortgaged property will be equal to the lesser of (x) the
appraised value of the related mortgaged property determined at origination or
in an appraisal, if any, obtained at the time of refinancing, modification or
conversion and (y) the sales price of the related mortgaged property or, if the
mortgage loan is not a rate and term refinance mortgage loan and if the
mortgaged property was owned for a relatively short period of time prior to
refinancing, modification or conversion, the sum of the sales price of the
related mortgaged property plus the added value of any improvements. With
respect to a new Manufactured Home, the "Value" is no greater than the sum of a
fixed percentage of the list price of the unit actually billed by the
manufacturer to the dealer (exclusive of freight to the dealer site), including
"accessories" identified in the invoice, plus the actual cost of any accessories
purchased from the dealer, a delivery and set-up allowance, depending on the
size of the unit, and the cost of state and local taxes, filing fees and up to
three years prepaid hazard insurance premiums. With respect to a used
Manufactured Home, the "Value" is the least of the sale price, the appraised
value, and the National Automobile Dealer's Association book value plus prepaid
taxes and hazard insurance premiums. The appraised value of a Manufactured Home
is based upon the age and condition of the manufactured housing unit and the
quality and condition of the mobile home park in which it is situated, if
applicable.
107
IMH ASSETS CORP.
COMPANY
$397,000,000
IMPAC CMB TRUST SERIES 2001-3
COLLATERALIZED ASSET-BACKED BONDS, SERIES 2001-3
PROSPECTUS SUPPLEMENT
COUNTRYWIDE SECURITIES CORPORATION JPMORGAN
UNDERWRITERS
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 BONDS OFFERED HEREBY 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 bonds offered hereby and with respect to their
unsold allotments or subscriptions. In addition, all dealers selling the bonds,
whether or not participating in this offering, may be required to deliver a
prospectus supplement and prospectus until 90 days after the date hereof.