-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Pb2aAFfDJEaTbYETM5lhwGa0VBSgXMs+4rWO8qLnFZt9nC8aOVwTpujuN3ZKilwk R/bqq1uP/RcR/sKcCLDlxg== 0000950134-04-006963.txt : 20040507 0000950134-04-006963.hdr.sgml : 20040507 20040507162022 ACCESSION NUMBER: 0000950134-04-006963 CONFORMED SUBMISSION TYPE: S-3 PUBLIC DOCUMENT COUNT: 5 REFERENCES 429: 333-112334 FILED AS OF DATE: 20040507 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SEQUOIA MORTGAGE FUNDING CORP CENTRAL INDEX KEY: 0001033146 STANDARD INDUSTRIAL CLASSIFICATION: ASSET-BACKED SECURITIES [6189] IRS NUMBER: 911771827 STATE OF INCORPORATION: MD FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-3 SEC ACT: 1933 Act SEC FILE NUMBER: 333-115296 FILM NUMBER: 04789451 BUSINESS ADDRESS: STREET 1: 591 REDWOOD HWY STREET 2: STE 3120 CITY: MILL VALLEY STATE: CA ZIP: 94941 BUSINESS PHONE: 4153811765 MAIL ADDRESS: STREET 1: 591 REDWOOD HIGHWAY STREET 2: STE 3120 CITY: MILL VALLEY STATE: CA ZIP: 94941 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SEQUOIA RESIDENTIAL FUNDING INC CENTRAL INDEX KEY: 0001176320 STANDARD INDUSTRIAL CLASSIFICATION: ASSET-BACKED SECURITIES [6189] IRS NUMBER: 352170972 FILING VALUES: FORM TYPE: S-3 SEC ACT: 1933 Act SEC FILE NUMBER: 333-115296-01 FILM NUMBER: 04789450 BUSINESS ADDRESS: STREET 1: 591 REDWOOD HWY STREET 2: SUITE 3160 CITY: MILL VALLEY STATE: CA ZIP: 94941 BUSINESS PHONE: 4153897373 MAIL ADDRESS: STREET 1: 591 REDWOOD HWY STREET 2: SUITE 3160 CITY: MILL VALLEY STATE: CA ZIP: 94941 S-3 1 f98626sv3.txt FORM S-3 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 7, 2004 REGISTRATION NO. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM S-3 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ------------------------ SEQUOIA MORTGAGE FUNDING CORPORATION SEQUOIA RESIDENTIAL FUNDING, INC. (EXACT NAME OF CO-REGISTRANT AS SPECIFIED IN ITS (EXACT NAME OF CO-REGISTRANT AS SPECIFIED IN ITS CHARTER) CHARTER)
DELAWARE 91-1771827 DELAWARE 35-2170972 (STATE OF INCORPORATION) (I.R.S. EMPLOYER (STATE OF INCORPORATION) (I.R.S. EMPLOYER IDENTIFICATION NUMBER) IDENTIFICATION NUMBER)
------------------------ ONE BELVEDERE PLACE MILL VALLEY, CALIFORNIA 94941 (415) 389-7373 (ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF CO-REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES) ------------------------ GEORGE E. BULL III ONE BELVEDERE PLACE, SUITE 300 MILL VALLEY, CALIFORNIA 94941 (415) 389-7373 (NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE OF AGENT FOR SERVICE) ------------------------ COPIES TO: PHILLIP R. POLLOCK, ESQ. TOBIN & TOBIN 500 SANSOME STREET, 8TH FLOOR SAN FRANCISCO, CALIFORNIA 94111 (415) 433-1400 ------------------------ APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC: From time to time after the effective date of this Registration Statement as determined by market conditions. ------------------------ If the only securities being registered on this form are being offered pursuant to dividend or interest reinvestment plans, please check the following box. [ ] If any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, other than securities offered only in connection with dividend or interest reinvestment plans, check the following box: [X] If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. [ ] CALCULATION OF REGISTRATION FEE
- --------------------------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------------------------- PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT TO BE AGGREGATE PRICE PER AGGREGATE OFFERING AMOUNT OF TITLE OF SECURITIES BEING REGISTERED REGISTERED UNIT PRICE REGISTRATION FEE(1) - --------------------------------------------------------------------------------------------------------------------------------- Asset Backed Securities..................... $1,146,300,000 100% $1,146,300,000 $145,236 - --------------------------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------------------------
(1) In accordance with rule 429 under the Securities Act of 1933, the Prospectus included herein is a combined prospectus, which also relates to Co-registrants' Registration Statement on Form S-3, File No. 333-112334. The amount of securities remaining eligible to be sold under the prior Registration Statement ($4,705,994,200) shall be carried forward to this Registration Statement. The filing fee related to the amount being carried forward was paid with the prior Registration Statement. ------------------------ THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE SECURITIES ACT OF 1933, OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a), MAY DETERMINE. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- PROSPECTUS SEQUOIA MORTGAGE FUNDING CORPORATION OR SEQUOIA RESIDENTIAL FUNDING, INC. (DEPOSITOR) $5,852,294,200 (AGGREGATE AMOUNT) ASSET-BACKED SECURITIES (ISSUABLE IN SERIES) THE TRUSTS PLEASE CAREFULLY CONSIDER OUR DISCUSSION OF SOME OF THE RISKS OF Each trust will be established to hold the assets INVESTING IN THE SECURITIES UNDER transferred to it by the depositor, either Sequoia "RISK FACTORS" BEGINNING ON PAGE 8. Mortgage Funding Corporation or Sequoia Residential Funding, Inc. The assets of each trust will be THE SECURITIES WILL REPRESENT specified in the prospectus supplement and may consist OBLIGATIONS OF OR INTERESTS IN THE of: RELATED TRUST ONLY AND DO NOT REPRESENT AN INTEREST IN OR - fixed rate mortgage loans secured by senior and OBLIGATION OF EITHER SEQUOIA junior liens on one- to four-family residential MORTGAGE FUNDING CORPORATION OR properties; SEQUOIA RESIDENTIAL FUNDING, INC., AS THE DEPOSITOR, OR ANY OF THEIR - adjustable rate mortgage loans secured by senior and AFFILIATES. junior liens on one- to four-family residential properties; - mortgage pass-through securities issued or guaranteed by Ginnie Mae, Fannie Mae or Freddie Mac; - private mortgage-backed securities; and - other assets described in the prospectus supplement.
THE SECURITIES The depositor, either Sequoia Mortgage Funding Corporation or Sequoia Residential Funding, Inc., will sell the securities pursuant to a prospectus supplement. The securities will be grouped into one or more series, each having its own distinct designation. Each series will be issued in one or more classes and each class will evidence beneficial ownership of a specified portion of future payments on the assets in the trust that the series relates to. A prospectus supplement for a series will specify all of the terms of the series and of each of the classes in the series. OFFERS OF SECURITIES The securities may be offered through several different methods, including offerings through underwriters. ------------------------ THE SEC AND STATE SECURITIES REGULATORS HAVE NOT APPROVED OR DISAPPROVED THESE SECURITIES OR DETERMINED IF THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. May , 2004 TABLE OF CONTENTS Summary of Prospectus................................ 4 Risk Factors......................................... 8 The Depositor........................................ 13 The Trust............................................ 13 Use of Proceeds...................................... 28 Loan Program......................................... 28 Description of the Securities........................ 31 Credit Enhancement................................... 46 Yield and Prepayment Considerations.................. 53 The Agreements....................................... 56 Certain Legal Aspects of the Loans................... 73 Federal Income Tax Consequences...................... 84 State Tax Considerations............................. 103 ERISA Considerations................................. 104 Legal Investment..................................... 110 Method of Distribution............................... 112 Legal Matters........................................ 113 Financial Information................................ 113 Available Information................................ 113 Incorporation of Certain Documents by Reference...... 114 Rating............................................... 114 Index of Defined Terms............................... 116
2 IMPORTANT NOTICE ABOUT INFORMATION IN THIS PROSPECTUS AND EACH ACCOMPANYING PROSPECTUS SUPPLEMENT Information about each series of securities is contained in two separate documents: - this prospectus, which provides general information, some of which may not apply to a particular series; and - the accompanying prospectus supplement for a particular series, which describes the specific terms of the securities of that series. The prospectus supplement will contain information about a particular series that supplements the information contained in this prospectus, and you should rely on that supplementary information in the prospectus supplement. IF THE TERMS OF YOUR SERIES OF SECURITIES AND ANY OTHER INFORMATION CONTAINED HEREIN VARY BETWEEN THIS PROSPECTUS AND THE ACCOMPANYING PROSPECTUS SUPPLEMENT, YOU SHOULD RELY ON THE INFORMATION IN THE ACCOMPANYING PROSPECTUS SUPPLEMENT. We have not authorized anyone to provide you with information that is different from that contained in this prospectus and the accompanying prospectus supplement. You can find a listing of the pages on which many of the terms used in this prospectus are defined under "Index of Defined Terms" beginning on page 114 of this prospectus. 3 SUMMARY OF PROSPECTUS - - This summary highlights material information from this prospectus and does not contain all of the information that you need to consider in making your investment decision. To understand all of the terms of the offering of the securities, carefully read this entire prospectus and the accompanying prospectus supplement. - - This summary provides an overview of the structural elements, calculations, cash flows and other information to aid your understanding and is qualified by the full description of these calculations, cash flows and other information in this prospectus and the accompanying prospectus supplement. - - There are material risks associated with an investment in the securities. You should read the section entitled "Risk Factors" beginning on page 8 of this prospectus and in the accompanying prospectus supplement, and consider the risk factors described in those sections, before making a decision to invest in the securities. TRUST The issuer for a particular series of securities will be a trust formed by the depositor. DEPOSITOR For any series of securities, either Sequoia Mortgage Funding Corporation, a Delaware corporation, or Sequoia Residential Funding, Inc., a Delaware corporation, as identified in the prospectus supplement. Each depositor's principal offices are located at One Belvedere Place, Mill Valley, California 94941 and the telephone number is (415) 389-7373. SERVICER For any series of securities, the servicer named in the related prospectus supplement. While we refer to a single servicer in this prospectus, for a particular series of securities there may be more than one servicer, as set forth in the prospectus supplement, as well as a master servicer to supervise the performance of each servicer under the related servicing agreement. If specified in the related prospectus supplement, the depositor may appoint a special servicer for the series of securities. TRUSTEE For any series of securities, the trustee named in the prospectus supplement. In addition, if the trust issues bonds pursuant to a separate indenture, the trust and the indenture will be administered by separate independent trustees. In that case, the trust will be administered by an owner trustee and the indenture will be administered by an indenture trustee, in each case as named in the prospectus supplement. THE SECURITIES Each class or series of securities will be either: - certificates representing interests in the assets of the trust related to a certain series; or - bonds which are secured by the pledge of the trust assets related to a certain series. 4 Each class or series of securities may have a different interest rate, which may be a fixed or floating interest rate. The prospectus supplement will specify the interest rate for each class or series of securities, or the initial interest rate and the method for determining subsequent changes to the interest rate. A series may include one or more classes which: - are stripped of regular interest payments and entitled only to principal distributions, with disproportionate, nominal or no interest distributions; - are stripped of regular principal payments and entitled only to interest distributions, with disproportionate, nominal or no principal distributions; - have different terms including different interest rates and different timing, sequential order or priority of payments, amount of principal or interest or both; - will not distribute accrued interest but rather will add the accrued interest to the note principal balance, or nominal balance, in the manner described in the related prospectus supplement; - are senior or subordinate to one or more other classes of securities in respect of distributions of principal and interest and allocations of losses on receivables; or - have a feature entitling the class to a portion of or no principal distributions for an initial period and then all or a different portion of the principal distributions during subsequent periods. A series of securities may provide that distributions of principal or interest or both on any class may be made: - upon the occurrence of specified events; - in accordance with a schedule or formula; or - on the basis of collections from designated portions of the related trust assets. TRUST ASSETS As specified in the prospectus supplement, the trust assets may consist of: - fixed rate mortgage loans secured by senior and junior liens on one-to four-family residential properties; - adjustable rate mortgage loans secured by senior and junior liens on one- to four-family residential properties; - mortgage pass-through securities issued or guaranteed by Ginnie Mae, Fannie Mae or Freddie Mac; - private mortgage-backed securities; - closed-end and/or revolving home equity loans or certain balances thereof secured by senior and junior liens on one- to four-family residential properties; and - other assets as described in detail elsewhere in the prospectus supplement. If the prospectus supplement specifies, the trustee may acquire additional trust assets during a specified pre-funding period from monies in a pre-funding account. 5 PAYMENT DATE As described in the prospectus supplement, the securities will pay principal and/or interest on specified dates. Payment dates will occur monthly, quarterly, or semi-annually. RECORD DATE The prospectus supplement will describe a date preceding the payment date, as of which the trustee or its paying agent will fix the identity of securityholders. Securityholders whose identities are fixed on this date will receive payments on the next succeeding payment date. COLLECTION PERIOD A period preceding each payment date -- for example, in the case of monthly-pay securities, the calendar month preceding the month in which a payment date occurs. As the prospectus supplement will more fully describe, the servicer will remit collections received in respect of a collection period to the related trustee prior to the related payment date. CREDIT ENHANCEMENT As described in the prospectus supplement, credit enhancement for the trust assets or any class of securities may include any one or more of the following: - the subordination of one or more classes of the securities of such series; - a limited financial guaranty policy issued by an entity named in the prospectus supplement; - the establishment of one or more reserve accounts; - the use of a cross-collateralization feature; - use of a mortgage pool insurance policy; - excess spread, - over-collateralization; - letter of credit; - guaranteed investment contract; - primary mortgage insurance, - other pledged assets, - corporate guarantees, - surety bond; - special hazard insurance policy; - bankruptcy bond; - FHA insurance or VA guarantee; - any other method of credit enhancement contemplated in this prospectus and described in the prospectus supplement; and - any combination of the foregoing. REGISTRATION OF SECURITIES The trust may issue the securities as global securities registered in the name of Cede & Co. as nominee of the Depository Trust Company, or another nominee. In this case, securityholders will not receive definitive securities representing their interests except in limited circumstances described in the prospectus supplement. OPTIONAL TERMINATION As described in this prospectus and the prospectus supplement, the servicer, the depositor, or if the prospectus supplement specifies, other entities, may, at their respective options, cause the early 6 retirement or redemption of some or all of a series of securities. MANDATORY TERMINATION As described in this prospectus and the related prospectus supplement, the trustee, the servicer, or if the related prospectus supplement specifies, other entities, may be required to retire early all or any portion of a series of securities. An indenture may require these parties to solicit competitive bids for the purchase of the trust property or otherwise. FEDERAL INCOME TAX CONSEQUENCES The securities of each series generally will be structured, for federal income tax purposes, as one of the following: - regular interests or residual interests in a trust treated as a real estate mortgage investment conduit or REMIC under Sections 860A through 860G of the Internal Revenue Code, or - indebtedness issued by a real estate investment trust or its taxable subsidiary. You should consult your own tax advisor concerning your investment. ERISA CONSIDERATIONS A fiduciary of a pension, profit sharing or other employee benefit plan may wish to review with its legal advisors whether the purchase, holding or disposition of securities could give rise to a prohibited transaction under ERISA, or the Internal Revenue Code, and whether an exemption from the prohibited transaction rules is available. RATINGS Each class of securities offered by a prospectus supplement will initially be rated in one of the four highest rating categories of at least one nationally recognized statistical rating agency. The ratings are not a recommendation to purchase, hold or sell the securities and do not address the market price or suitability of the securities for a particular investor. The ratings generally address the likelihood of timely payment of interest and the ultimate payment of principal on the securities by the stated maturity date. The ratings do not generally address the rate of prepayments that may be experienced on the trust assets or the effect on the rate of prepayments on the return of principal to securityholders. LEGAL INVESTMENT So long as any class of securities is rated in one of the two highest ratings categories by at least one nationally recognized statistical rating agency, such class of securities will generally constitute "mortgage related securities" under the Secondary Mortgage Market Enhancement Act of 1984. There are other restrictions on the ability of certain types of investors to purchase the securities that prospective investors should consider. 7 RISK FACTORS INVESTORS SHOULD CONSIDER THE FOLLOWING FACTORS IN CONNECTION WITH THE PURCHASE OF SECURITIES. YOU SHOULD ALSO CONSIDER THE RISK FACTORS DESCRIBED IN THE PROSPECTUS SUPPLEMENT. ABILITY TO RESELL SECURITIES MAY BE LIMITED No market for any of the securities will exist before they are issued. We cannot assure you that a secondary market will develop, or if it does develop, that it will continue. Consequently, you may not be able to sell your securities readily or at prices that will enable you to realize your desired yield. The market values of the securities are likely to fluctuate; these fluctuations may be significant and could result in significant losses to you. The secondary market for asset-backed securities has experienced periods of illiquidity and can be expected to do so in the future. Illiquidity can have a severely adverse effect on the prices of securities that are especially sensitive to prepayment, credit, or interest rate risk, or that have been structured to meet the investment requirements of limited categories of investors. LIMITED SOURCE OF PAYMENTS -- NO RECOURSE TO DEPOSITOR, SELLERS, SERVICER OR TRUSTEE The assets of the trust are the sole source of distributions for the securities. The securities do not represent an interest in or obligation of the depositor, any seller, the servicer, the trustee or any of their affiliates, except for the limited obligations of each seller with respect to certain breaches of its representations and warranties and of the servicer with respect to its servicing obligations. Neither the securities nor the trust assets will be guaranteed by or insured by any governmental agency or instrumentality, the depositor, any seller, the servicer, the trustee or any of their affiliates, unless so specified in the supplement. Consequently, if payments on the trust assets are insufficient to make all payments required on the certificates you may incur a loss on your investment. CREDIT ENHANCEMENT MAY NOT BE SUFFICIENT TO PROTECT YOU FROM LOSSES Credit enhancement is intended to reduce the effect of delinquent payments or loan losses on those classes of securities that have the benefit of the credit enhancement. However, the amount of any credit enhancement may decline or be depleted before the securities are paid in full. As a result, securityholders may suffer losses. In addition, credit enhancement may not cover all potential sources of loss, such as a loss resulting from fraud or negligence by a loan originator or other party. 8 PREPAYMENTS ARE UNPREDICTABLE AND AFFECT YIELD The rate of principal distributions and yield to maturity on the securities will be directly related to the rate of principal payments on the trust assets. For example, the rate of principal payments on the loans will be affected by the following: - the amortization schedules of the loans; - the rate of principal prepayments (including partial prepayments and prepayments resulting from refinancing) by borrowers; - liquidations or repurchases of defaulted loans by the servicer; - repurchases of loans by the seller as a result of defective documentation or breaches of representations and warranties; and - the mandatory or optional purchase by the servicer or other entity with such rights of all of the loans or some or all of the securities in connection with an optional redemption of securities or termination of the trust. The rate of principal payments on loans is influenced by a variety of economic, geographic, social and other factors. For example, if interest rates for similar loans fall below the interest rates on the loans in the trust, the rate of prepayment would generally be expected to increase. Conversely, if interest rates on similar loans rise above the interest rates on the loans, the rate of prepayment would generally be expected to decrease. We cannot predict the rate at which borrowers will repay their loans. Please consider the following: - If you are purchasing a security at a discount, in particular, a principal-only security, your yield may be lower than expected if principal payments on the loans occur at a slower rate than you expected; - If you are purchasing a security at a premium, in particular, an interest-only security, your yield may be lower than expected if principal payments on the loans occur at a faster rate than you expected and you could lose your initial investment; and - The earlier a payment of principal occurs, the greater the impact on your yield. For example, if you purchase a security at a premium, although the average rate of principal payments is consistent with your expectations, if the rate of principal payments occurs initially at a rate higher than expected, which would adversely impact your yield, a subsequent reduction in the rate of principal payments will not offset any adverse yield effect. DECLINE IN PROPERTY VALUES MAY INCREASE LOAN LOSSES Because your securities represent an interest in loans or are secured by loans, your investment may be affected by a decline in property values. If the outstanding balance of a loan and any secondary financing on the underlying property is greater than the value of the property, there is an increased risk of delinquency, default, foreclosure and loss. A 9 decline in property values could extinguish the value of a junior lien holder's interest in a property. Losses on such loans that are not otherwise covered by the credit enhancement described in the prospectus supplement will be borne by the holder of one or more classes of securities. DELAYS IN LIQUIDATION MAY ADVERSELY AFFECT YOU Substantial delays may occur before defaulted loans are liquidated and the proceeds forwarded to investors. Property foreclosure actions are regulated by state statutes and rules and are subject to many of the delays and expenses that characterize lawsuits if defenses or counterclaims are raised. As a result, foreclosure actions can sometimes take several years to complete and the liquidation proceeds may not cover the defaulted loan amount. In particular, because the costs of liquidation do not vary based on the loan amount, the risk of insufficient liquidation proceeds is greater with small loans. Some states prohibit a mortgage lender from obtaining a judgment against the borrower for amounts not covered by property proceeds if the property is sold outside of a judicial proceeding. In addition, 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 servicer to liquidate the property, which could result in a delay in payments to you. JUNIOR LIEN PRIORITY COULD RESULT IN PAYMENT DELAYS AND LOSSES Loans may be secured by mortgages and deeds of trust that are junior in priority. Junior liens receive proceeds from a sale of the related property only after the senior liens have been paid. If the proceeds remaining after the senior liens have been paid are insufficient to satisfy the loans, then: - there may be a delay in payments to securityholders while a deficiency judgment against the borrower is sought; and - securityholders may incur a loss if a deficiency judgment cannot be obtained or is not realized upon. LOANS UNDERWRITTEN TO STANDARDS BELOW "A" QUALITY MAY RESULT IN UNEXPECTED LOSSES Loans supporting a series of securities may be comprised of mortgage loans underwritten according to standards below "A" quality (e.g., Alt-A, A minus or subprime). Such loans may be illiquid and present greater credit and other risks than conforming mortgage loans. In addition, such mortgage loans may lack standardized terms and may be secured by properties which are unique and more difficult to value than typical residential properties. Loans may have been underwritten primarily on the basis of loan-to-value ratios or favorable credit factors rather than on the borrower's credit standing or income ratios. Accordingly, the potential loss experience on non "A" quality mortgage loans supporting a series of securities may be more difficult to evaluate compared to the experience for "A" quality or other more standardized types of residential and mixed-use properties. Actual losses incurred on such lower quality 10 mortgage loans may exceed levels of credit enhancement thought to be sufficient to protect securityholders from risk of loss. STATE AND FEDERAL LAWS MAY LIMIT ABILITY TO COLLECT ON LOANS Applicable federal and state laws regulate interest rates and other charges and require certain disclosures. In addition, other 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. Depending on the provisions of the applicable law and the specific facts involved, violations may limit the ability to collect all or part of the principal of or interest on the mortgage loans. In some cases, the borrower may be entitled to a refund of amounts previously paid and could subject the trust to damages and administrative enforcement. COSTS FOR CLEANING CONTAMINATED PROPERTY MAY RESULT IN LOSSES Under certain state and federal laws, a contaminated property may give rise to a lien on the property to assure the costs of cleanup. In addition these laws may impose liability for cleanup costs on the lender if the lender was involved in the operations of the borrower, even if the environmental damage was caused by a prior owner. Any lien or costs attached to a contaminated property could result in a loss to securityholders. RATING OF THE SECURITIES DOES NOT ASSURE PAYMENT It will be a condition to the issuance of the securities offered hereby that they be rated in one of the four highest rating categories by each rating agency identified in the prospectus supplement. The ratings of the securities will be based on, among other things, the adequacy of the value of the trust assets and any credit enhancement. The rating should not be deemed a recommendation to purchase, hold or sell the securities, particularly since the ratings do not address market price or suitability for an investor. There is no assurance that the rating assigned to a security will remain in effect over the life of that security, as the rating may be lowered or withdrawn. CONSEQUENCES OF OWNING BOOK-ENTRY SECURITIES LIMIT ON LIQUIDITY OF SECURITIES. Issuance of the securities in book-entry form may reduce their liquidity in the secondary trading market because investors may be unwilling to purchase securities for which they cannot obtain physical certificates. LIMIT ON ABILITY TO TRANSFER OR PLEDGE. Since transactions in the book-entry securities can be effected only through the Depository Trust Company ("DTC"), participating organizations, indirect participants and certain banks, your ability to transfer or pledge a book-entry security to persons or entities that do not participate in the DTC system or otherwise to take actions in respect of such securities, may be limited due to lack of a physical certificate. DELAYS IN DISTRIBUTIONS. You may experience some delay in the receipt of distributions on book-entry securities because the distributions will be forwarded by the trustee to DTC for DTC to credit the accounts of its participants which will thereafter 11 credit them to your account either directly or indirectly through indirect participants, as applicable. PAYMENTS TO AND RIGHTS OF INVESTORS ADVERSELY AFFECTED BY INSOLVENCY OF SELLERS OR SERVICER Each seller and the depositor will treat the transfer of the loans from the seller to the depositor as a sale for tax accounting purposes. The depositor and the trust will treat the transfer of the loans from the depositor to the trust as a sale for tax accounting purposes. If these characterizations are correct, then if the seller were to become bankrupt, the loans would not be part of the seller's bankruptcy estate and would not be available to the seller's creditors. On the other hand, if the seller becomes bankrupt, its bankruptcy trustee or one of its creditors may argue that the transfer of the loans is a pledge of the loans as security for a borrowing rather than a sale. Such an attempt, even if unsuccessful, could result in delays in payments to securityholders. In the event of a bankruptcy of the servicer, the bankruptcy trustee or receiver may have the power to prevent the trustee or the securityholders from appointing a successor servicer, which could result in a delay in payments to securityholders. TRUST ASSETS MAY NOT BE SUFFICIENT TO PAY SECURITIES There is no assurance that the market value of the trust assets at any time will equal the principal amount of the securities. In addition, under any situation in which the trust assets are required to be sold, the proceeds generally will be paid to cover administrative costs before being paid to you. The net proceeds may be insufficient to pay the principal and interest on the securities. CONCENTRATION OF LOANS COULD ADVERSELY AFFECT YOUR INVESTMENT Loans may be secured by properties that are concentrated in particular geographic areas, as specified in the prospectus supplement. Consequently, losses and prepayments on the loans and the resulting payments on the securities may be affected significantly by changes in the housing markets and the regional economies in these areas and by the occurrence of natural disasters in these areas, such as earthquakes, hurricanes, tornadoes, tidal waves, mud slides, fires and floods. PRE-FUNDING ACCOUNTS MAY RESULT IN REINVESTMENT RISK TO INVESTORS Amounts remaining in any pre-funding account at the end of the related funding period will be distributed as prepayment of principal to investors on the distribution date immediately following the end of the funding period in the manner specified in the related prospectus supplement. Investors will bear any reinvestment risk resulting from such prepayment. THE ADDITION OF SUBSEQUENT MORTGAGE COLLATERAL TO PRE-FUNDING ACCOUNTS DURING THE FUNDING PERIOD MAY ADVERSELY AFFECT THE PERFORMANCE OF THE SECURITIES Although subsequent mortgage collateral must satisfy the characteristics described in the related prospectus supplement, subsequent mortgage collateral may have different 12 characteristics, including, without limitation, a more recent origination date than the initial mortgage collateral. As a result, the addition of subsequent mortgage collateral to the pre-funding account may adversely affect the performance of the related securities. OWNERS OF ORIGINAL ISSUE DISCOUNT SECURITIES SHOULD CONSIDER FEDERAL INCOME TAX CONSEQUENCES An investor owning a security issued with original issue discount will be required to include original issue discount in ordinary gross income for federal income tax purposes as it accrues, in advance of receipt of the cash attributable to such income. Accrued but unpaid interest on accrual securities will be treated as original issue discount for this federal income tax purpose. THE DEPOSITOR The prospectus supplement will identify whether the depositor is Sequoia Mortgage Funding Corporation or Sequoia Residential Funding, Inc. Sequoia Mortgage Funding Corporation is a Delaware corporation organized on January 31, 1997 and Sequoia Residential Funding, Inc., is a Delaware corporation organized on September 1, 1999, in each case for the limited purpose of acquiring, owning and transferring trust assets and selling interests therein or bonds secured thereby. Sequoia Mortgage Funding Corporation is a qualified REIT subsidiary of Redwood Trust, Inc. Sequoia Residential Funding, Inc. is a subsidiary of RWT Holdings, Inc. RWT Holdings, Inc. is a taxable subsidiary of Redwood Trust, Inc. Redwood Trust, Inc. is a publicly owned real estate investment trust and is listed on the New York Stock Exchange under the symbol "RWT". Each depositor maintains its principal office at One Belvedere Place, Mill Valley, California 94941. The telephone number is (415) 389-7373. Neither the depositor nor any of the depositor's affiliates will insure or guarantee distributions on the securities of any series. THE TRUST GENERAL Either Sequoia Mortgage Funding Corporation or Sequoia Residential Funding, Inc., the depositor, will establish a trust for each series of mortgage-backed securities and convey to the related trustee certain assets, consisting of one or more pools of loans as specified in the prospectus supplement. Each trust will be created as of the first day of the month in which the securities are issued or another date which will be specified in the prospectus supplement (the "cut-off date"). All references in this prospectus to "pool," "certificates," "bonds," "securities," or "securityholders," should be deemed to apply to one specific series, trust and prospectus supplement, unless otherwise noted. The certificates of a series will represent interests in the assets of the trust related to that series and the notes of a series will be secured by the pledge of the trust assets related to that series. The trust assets for each series will be held by the trustee for the benefit of the related securityholders. The securities will be entitled to payment from the 13 assets of the trust or other assets pledged for the benefit of the securityholders, as specified in the prospectus supplement, and will not be entitled to payments in respect of the assets of any other trust established by the depositor. The trust assets will be acquired by the depositor, either directly or through affiliates, from one or more sellers which may be affiliates of the depositor, and conveyed without recourse by the depositor to the trust. Each seller will have originated or acquired the loans as described in the prospectus supplement. Loans acquired by the depositor will have been originated in accordance with the underwriting criteria described under "Loan Program -- Underwriting Standards" or as otherwise described in the prospectus supplement. The depositor will cause the trust assets to be assigned or pledged to the trustee named in the prospectus supplement for the benefit of the holders of the securities. For a fee, the servicer named in the prospectus supplement will service the trust assets, either directly or through other servicing institutions, or subservicers, pursuant to a pooling and servicing agreement among the depositor, the servicer, the trustee and other entities named in the prospectus supplement in the case of a series consisting of certificates, or pursuant to a servicing agreement among the depositor, the servicer, the trust, the trustee and other entities named in the prospectus supplement in the case of a series consisting of bonds. With respect to loans serviced by the servicer through a subservicer, the servicer will remain liable for its servicing obligations under the related agreement as if the servicer were servicing such loans. As used in this prospectus, "Agreement" means, with respect to a series consisting of certificates, the pooling and servicing agreement, and, with respect to a series consisting of bonds, the trust agreement, the indenture and the servicing agreement, or, in either case, such other agreements containing comparable provisions as set forth in the prospectus supplement as the context requires. With respect to each trust, prior to the initial offering of the securities, the trust will have no assets or liabilities. No trust is expected to engage in any activities other than acquiring, managing and holding the trust assets and other assets specified in the prospectus supplement and the proceeds thereof, issuing securities and making payments and distributions thereon and certain related activities. No trust is expected to have any source of capital other than its assets and any related credit enhancement. Generally, the only obligations of the depositor will be to obtain certain representations and warranties from the sellers and to assign them to the trustee. See "The Agreements -- Assignment of the Trust Assets." The obligations of the servicer with respect to the loans will consist principally of its contractual servicing obligations under the related Agreement (including its obligation to enforce the obligations of the subservicers or sellers, or both, as more fully described in this prospectus under "Loan Program -- Representations by Sellers; Repurchases" and "The Agreements -- Subservicing by Sellers" and "-- Assignment of the Trust Assets") and its obligation, if any, to make certain cash advances in the event of delinquencies in payments on or with respect to the loans in the amounts described in this prospectus under "Description of the Securities -- Advances." The obligations of the servicer to make advances may be 14 subject to limitations, to the extent provided in this prospectus and in the prospectus supplement. The following is a brief description of the assets expected to be included in the trust. If specific information respecting the trust assets is not known at the time the securities are offered, more general information of the nature described below will be provided in the prospectus supplement, and specific information will be set forth in a report on Form 8-K to be filed with the SEC within fifteen days after the initial issuance of the securities. A copy of the Agreements with respect to each series of securities will be available for inspection at the corporate trust office of the trustee. A schedule of the loans relating to each series will be attached to the Agreement delivered to the trustee. THE LOANS The loans included in a trust will be mortgage loans or home equity loans secured by one-to-four-family residential properties. The loans may be either first or junior lien loans and may be either closed-end loans or revolving credit line loans. As described in the prospectus supplement, the loans may be underwritten to "A" quality standards or to standards below "A" quality (e.g., Alt-A, A minus or subprime). The loans will have monthly payments due on the first day of each month or on such other day of the month specified in the prospectus supplement. The payment terms of the loans to be included in a trust will be described in the prospectus supplement and may include any of the following features (or combination thereof): - Interest may be payable at a fixed rate, a rate adjustable from time to time in relation to an index, a rate that is fixed for a period of time or under certain circumstances and is followed by an adjustable rate, a rate that otherwise varies from time to time, a rate that is convertible from an adjustable rate to a fixed rate, or a rate that is convertible from one index to another, in each case as specified in the prospectus supplement. Changes to an adjustable rate may be subject to periodic limitations, maximum rates, minimum rates or a combination of such limitations. Accrued interest may be deferred and added to the principal of a loan for such periods and under such circumstances as may be specified in the prospectus supplement. - Principal may be payable on a level debt service basis to fully amortize the loan over its term, may be calculated on the basis of an assumed amortization schedule that is significantly longer than the original term to maturity or on an interest rate that is different from the loan rate or may not be amortized during all or a portion of the original term. Certain loans may provide for monthly payments of interest but no payments of principal for either the first five or ten years or any other period specified after origination. Certain loans may require payment of all or a substantial portion of the principal upon maturity, commonly referred to as a "balloon payment". Principal may include interest that has been deferred and added to the principal balance of the loan. - Monthly payments of principal and interest may be fixed for the life of the loan, may increase over a specified period of time or may change from period to period. 15 Loans may include limits on periodic increases or decreases in the amount of monthly payments and may include maximum or minimum amounts of monthly payments. - Prepayments of principal may be subject to a prepayment fee, which may be fixed for the life of the loan or may change over time. Certain loans may permit prepayments after expiration of certain periods, commonly referred to as "lockout periods". Other loans may permit prepayments without payment of a fee unless the prepayment occurs during specified time periods. The loans may include "due on sale" clauses which permit the mortgagee to demand payment of the entire loan in connection with the sale or certain transfers of the related property. Other loans may be assumable by persons meeting the then applicable standards set forth in the underlying loan documents. A trust may contain buydown loans. A buydown loan includes provisions whereby a third party partially subsidizes the monthly payments of the borrower on the related loan during the early years of repayment under the loan, the partial subsidy being made from a buydown fund contributed by the third party at the time of origination of the loan. A buydown fund will be in an amount equal either to the discounted value or full aggregate amount of future payment subsidies. The underlying assumption of a buydown plan is that the income of the borrower will increase during the buydown period as a result of normal increases in compensation and inflation, so that the borrower will be able personally to make the full loan payments at the end of the buydown period without the continued assistance of the partial subsidy. To the extent that this assumption as to increased income is not fulfilled, the possibility of default on a buydown loan is increased. The prospectus supplement will contain information with respect to any buydown loan concerning limitations on the interest rate paid by the borrower initially, on annual increases in the interest rate and on the length of the buydown period. The real property that secures repayment of the loans is referred to in this prospectus as the mortgaged properties. In the case of home equity loans, such liens generally will be subordinated to one or more senior liens on the related mortgaged properties as described in the prospectus supplement. Loans will be secured by mortgages or deeds of trust or other similar security instruments creating a lien on a mortgaged property. Some liens will be subordinated to one or more senior liens on the related mortgaged properties as described in the prospectus supplement. The properties relating to loans will consist of detached or semi-detached one- to four-family dwelling units, townhouses, rowhouses, individual condominium units, manufactured homes, individual units in planned unit developments, and certain other dwelling units. Such properties may include vacation and second homes, investment properties and dwellings situated on leasehold estates. The loans may include cooperative apartment loans secured by security interests in shares issued by private, nonprofit, cooperative housing corporations and in the related proprietary lease or occupancy agreements granting exclusive rights to occupy specific dwelling units in the cooperatives' building. In the case of leasehold interests, the term of the leasehold will exceed the scheduled maturity of the loan by at least five years, unless otherwise specified in the prospectus supplement. 16 The properties may be located in any one of the fifty states, the District of Columbia, Guam, Puerto Rico or any other territory of the United States. Loans with certain loan-to-value ratios and/or certain principal balances may be covered wholly or partially by primary mortgage guaranty insurance policies. The existence, extent and duration of any such coverage will be described in the prospectus supplement. Certain loans, in addition to being secured by real property, may be secured by a security interest in a limited amount of additional collateral owned by the borrower or a third-party guarantor. Such additional collateral may no longer be required when the principal balance of such additional collateral mortgage loan is reduced to a predetermined amount set forth in the related pledge agreement or guaranty agreement, as applicable, or when the loan-to-value ratio for such additional collateral mortgage loan is reduced to the applicable loan-to-value ratio for such additional collateral mortgage loan by virtue of an increase in the appraised value of the mortgaged property as determined by the related servicer. HOME EQUITY LOANS As more fully described in the prospectus supplement, interest on each revolving credit line loan, excluding introduction rates offered from time to time during promotional periods, is computed and payable monthly on the average daily outstanding principal balance of such loan. Principal amounts on a revolving credit line loan may be drawn down (up to a maximum amount as set forth in the prospectus supplement) or repaid under each revolving credit line loan from time to time, but may be subject to a minimum periodic payment. As specified in the prospectus supplement, amounts borrowed under a revolving credit line loan after the related Cut-off Date may also be transferred to the trust and comprise part of the trust assets. The full amount of a closed-end loan is advanced at the origination of the loan and generally is repayable in equal (or substantially equal) installments so that the loan either is fully amortized at its stated maturity or, if the loan is a balloon loan, requires the payment of all or a substantial portion of the principal upon maturity. As more fully described in the prospectus supplement, interest on each closed-end loan is calculated on the basis of the outstanding principal balance of such loan multiplied by the related loan rate thereon and further multiplied by either a fraction, the numerator of which is the number of days in the period elapsed since the preceding payment of interest was made and the denominator of which is the number of days in the annual period for which interest accrues on such loan, or a fraction which is 30 over 360. Except to the extent provided in the prospectus supplement, the original terms to stated maturity of closed-end loans generally will not exceed 360 months. Under certain circumstances, under either a revolving credit line loan or a closed-end loan, a borrower may choose an interest only payment option and is obligated to pay only the amount of interest which accrues on the loan during the billing cycle. An interest only payment option may be available for a specified period before the borrower 17 must begin paying at least the minimum monthly payment of a specified percentage of the average outstanding balance of the loan. Each prospectus supplement will contain information to the extent then specifically known to the depositor, with respect to the loans contained in the pool, generally including: - the aggregate outstanding principal balance and the average outstanding principal balance of the loans as of the applicable cut-off date; - the type of property securing the loan (e.g., single family residences, individual units in condominium apartment buildings, two- to four-family dwelling units, other real property or home improvements); - the original terms to maturity of the loans; - the largest principal balance of any of the loans; - the smallest principal balance of any of the loans; - the earliest origination date and latest maturity date of any of the loans; - the loan-to-value ratios or combined loan-to-value ratios, as applicable, of the loans; - the loan rates or annual percentage rates or range of loan rates or annual percentage rates borne by the loans; - the maximum and minimum per annum loan rates; and - the geographical location of real property related to the loans. If specific information regarding the loans is not known to the depositor at the time the related securities are initially offered, more general information of the nature described above will be provided in the prospectus supplement, and specific information will be set forth in a report filed on Form 8-K to be filed with the SEC within 15 days of initial issuance of the securities. The loan-to-value ratio of a loan at any given time is the fraction, expressed as a percentage, the numerator of which is the principal balance of the loan and the denominator of which is the collateral value of the property. The combined loan-to-value ratio of a loan at any given time is the ratio, expressed as a percentage, of (i) the sum of (a) the principal balance of the loan and (b) the outstanding principal balance of any senior mortgage loan(s) to (ii) the collateral value of the property. The effective loan-to-value ratio of a loan at any given time is the fraction, expressed as a percentage, the numerator of which is the principal balance of the loan, less the amount secured by additional collateral, if any, and the denominator of which is the collateral value of the property. The "collateral value" of a property, other than with respect to certain loans the proceeds of which were used to refinance an existing mortgage loan (each, a "refinance loan"), is the lesser of (a) the appraised value determined in an appraisal obtained at origination of such loan and (b) the sales price for the property if the proceeds of the 18 loan are used to purchase the related property. In the case of a refinance loan, the collateral value of the related property is the appraised value of the property as determined by an appraisal obtained at the time of refinancing. No assurance can be given that collateral values of the properties have remained or will remain at the levels at which they are originally calculated. If the residential real estate market should experience an overall decline in property values such that the sum of the outstanding principal balances of the loans and any primary or secondary financing on the properties, as applicable, in a particular pool become equal to or greater than the value of the properties, the actual rates of delinquencies, foreclosures and losses experienced with respect to that pool could be higher than those now generally experienced in the mortgage lending industry. In addition, adverse economic conditions and other factors (which may or may not affect real property values) may affect the timely payment by borrowers of scheduled payments of principal and interest on the loans and, accordingly, the actual rates of delinquencies, foreclosures and losses with respect to any pool. To the extent that such losses are not covered by subordination provisions or alternative arrangements, such losses will be borne by the securityholders of the affected series to the extent that the credit enhancement provisions relating to the series do not protect the securityholders from such losses. AGENCY SECURITIES GINNIE MAE. Ginnie Mae, formerly the Government National Mortgage Association, is a wholly-owned corporate instrumentality of the United States within the Department of Housing and Urban Development. Section 306(g) of Title II of the National Housing Act of 1934, as amended, authorizes Ginnie Mae to guarantee the timely payment of the principal of and interest on certificates which represent an interest in a pool of FHA loans, which are mortgage loans insured by the FHA under the National Housing Act or under Title V of the Housing Act of 1949, or VA loans, which are mortgage loans partially guaranteed by the VA under the Servicemen's Readjustment Act of 1944, as amended, or Chapter 37 of Title 38 of the United States Code. Section 306(g) of the National Housing Act provides that "the full faith and credit of the United States is pledged to the payment of all amounts which may be required to be paid under any guaranty under this subsection." In order to meet its obligations under any such guarantee, Ginnie Mae may, under Section 306(d) of the National Housing Act, borrow from the United States Treasury in an unlimited amount which is at any time sufficient to enable Ginnie Mae to perform its obligations under its guarantee. GINNIE MAE CERTIFICATES. Each Ginnie Mae certificate held in a trust fund will be a "fully modified pass-through" mortgage-backed certificate issued and serviced by a Ginnie Mae issuer that is a mortgage banking company or other financial concern approved by Ginnie Mae or approved by Fannie Mae as a seller-servicer of FHA loans and/or VA loans. The Ginnie Mae certificates may be either Ginnie Mae I certificates issued under the Ginnie Mae I program or Ginnie Mae II certificates issued under the Ginnie Mae II program. The mortgage loans underlying the Ginnie Mae certificates will consist of FHA loans and/or VA loans. Each such mortgage is secured by a one- to 19 four-family or multifamily residential property. Ginnie Mae will approve the issuance of each Ginnie Mae certificate in accordance with a guaranty agreement between Ginnie Mae and the Ginnie Mae issuer. Pursuant to its guaranty agreement, a Ginnie Mae issuer will be required to advance its own funds in order to make timely payments of all amounts due on each Ginnie Mae certificate, even if the payments received by the Ginnie Mae issuer on the underlying FHA loans or VA loans are less than the amounts due on the related Ginnie Mae certificate. The full and timely payment of principal of and interest on each Ginnie Mae certificate will be guaranteed by Ginnie Mae, which obligation is backed by the full faith and credit of the United States. Each Ginnie Mae certificate will have an original maturity of not more than 30 years, but may have original maturities of substantially less than 30 years. Each Ginnie Mae certificate will be based on and backed by a pool of FHA loans or VA loans secured by one- to four-family residential properties and will provide for the payment by or on behalf of the Ginnie Mae issuer to the registered holder of the Ginnie Mae certificate scheduled monthly payments of principal and interest equal to the registered holder's proportionate interest in the aggregate amount of the monthly principal and interest payment on each FHA Loan or VA Loan underlying the Ginnie Mae certificate, less the applicable servicing and guarantee fee which together equal the difference between the interest on the FHA loan or VA loan and the pass-through rate on the Ginnie Mae certificate. In addition, each payment will include proportionate pass-through payments of any prepayments of principal on the FHA loans or VA loans underlying the Ginnie Mae certificate and liquidation proceeds in the event of a foreclosure or other disposition of any such FHA loans or VA loans. If a Ginnie Mae issuer is unable to make the payments on a Ginnie Mae certificate as they become due, it must promptly notify Ginnie Mae and request Ginnie Mae to make the payments. Upon notification and request, Ginnie Mae will make payments directly to the registered holder of the Ginnie Mae certificate. In the event no payment is made by a Ginnie Mae issuer and the Ginnie Mae issuer fails to notify and request Ginnie Mae to make the payment, the holder of the Ginnie Mae certificate will have recourse only against Ginnie Mae to obtain payment. The trustee or its nominee, as registered holder of the Ginnie Mae certificates held in a trust fund, will have the right to proceed directly against Ginnie Mae under the terms of the guaranty agreements relating to those Ginnie Mae certificates for any amounts that are not paid when due. All mortgage loans underlying a particular Ginnie Mae I certificate must have the same interest rate (except for pools of mortgage loans secured by manufactured homes) over the term of the loan. The interest rate on a Ginnie Mae I certificate will equal the interest rate on the mortgage loans included in the pool of mortgage loans underlying the Ginnie Mae I certificate, less one-half percentage point per annum of the unpaid principal balance of the mortgage loans. Mortgage loans underlying a particular Ginnie Mae II certificate may have per annum interest rates that vary from one another by up to one percentage point. The interest rate on each Ginnie Mae II certificate will be between one-half percentage point and one and one-half percentage points lower than the highest interest rate on the 20 mortgage loans included in the pool of mortgage loans underlying the Ginnie Mae II certificate (except for pools of mortgage loans secured by manufactured homes). Regular monthly installment payments on each Ginnie Mae certificate held in a trust fund will be comprised of interest due as specified on the Ginnie Mae certificate plus the scheduled principal payments on the FHA loans or VA loans underlying the Ginnie Mae certificate due on the first day of the month in which the scheduled monthly installments on the Ginnie Mae certificate are due. Regular monthly installments on each Ginnie Mae certificate are required to be paid to the trustee as registered holder by the 15th day of each month in the case of a Ginnie Mae I certificate, and are required to be mailed to the trustee by the 20th day of each month in the case of a Ginnie Mae II certificate. Any principal prepayments on any FHA loans or VA loans underlying a Ginnie Mae certificate held in a trust fund or any other early recovery of principal on such loan will be passed through to the trustee as the registered holder of the Ginnie Mae certificate. Ginnie Mae certificates may be backed by graduated payment mortgage loans or by "buydown" mortgage loans for which funds will have been provided (and deposited into escrow accounts) for application to the payment of a portion of the borrowers' monthly payments during the early years of such mortgage loans. Payments due the registered holders of Ginnie Mae certificates backed by pools containing "buydown" mortgage loans will be computed in the same manner as payments derived from other Ginnie Mae certificates and will include amounts to be collected from both the borrower and the regulated escrow account. The graduated payment mortgage loans will provide for graduated interest payments that, during the early years of such mortgage loans, will be less than the amount of stated interest on such mortgage loans. The interest not so paid will be added to the principal of the graduated payment mortgage loans and, together with interest thereon, will be paid in subsequent years. The obligations of Ginnie Mae and of a Ginnie Mae issuer will be the same irrespective of whether the Ginnie Mae certificates are backed by graduated payment mortgage loans or "buydown" mortgage loans. No statistics comparable to the FHA's prepayment experience on level payment, non-"buydown" mortgage loans are available in respect of graduated payment or "buydown" mortgages. Ginnie Mae certificates related to a series of certificates may be held in book-entry form. If specified in a prospectus supplement, Ginnie Mae certificates may be backed by multifamily mortgage loans having the characteristics specified in the prospectus supplement. FREDDIE MAC. Freddie Mac, formerly the Federal Home Loan Mortgage Corporation, is a shareholder-owned, government sponsored enterprise created pursuant to Title III of the Emergency Home Finance Act of 1970, as amended. Freddie Mac was established primarily for the purpose of increasing the availability of mortgage credit for the financing of urgently needed housing. It seeks to provide an enhanced degree of liquidity for residential mortgage investments primarily by assisting in the development of secondary markets for conventional mortgages. The principal activity of Freddie Mac currently consists of the purchase of first lien conventional mortgage loans, or 21 participation interests in the mortgage loans, and the sale of the mortgage loans or participations so purchased in the form of mortgage securities, primarily Freddie Mac certificates. Freddie Mac is confined to purchasing, so far as practicable, mortgage loans that it deems to be of such quality, type and class as to meet generally the purchase standards imposed by private institutional mortgage investors. FREDDIE MAC CERTIFICATES. Each Freddie Mac certificate represents an undivided interest in a pool of mortgage loans that may consist of first lien conventional loans, FHA loans or VA loans. Freddie Mac certificates are sold under the terms of a mortgage participation certificate agreement. A Freddie Mac certificate may be issued under either Freddie Mac's Cash Program or its Guarantor Program. Mortgage loans underlying the Freddie Mac certificates held by a trust fund will consist of mortgage loans with original terms to maturity of from ten to 40 years. Each such mortgage loan must meet the applicable standards set forth in the legislation that established Freddie Mac. The pool of loans backing a Freddie Mac certificate may include whole loans, participation interests in whole loans and undivided interests in whole loans and/or participations comprising another Freddie Mac pool. Under the Guarantor Program, however, the pool of loans backing a Freddie Mac certificate may include only whole loans or participation interests in whole loans. Freddie Mac guarantees to each registered holder of a Freddie Mac certificate the timely payment of interest on the underlying mortgage loans to the extent of the applicable certificate rate on the registered holder's pro rata share of the unpaid principal balance outstanding on the underlying mortgage loans represented by that Freddie Mac certificate, whether or not received. Freddie Mac also guarantees to each registered holder of a Freddie Mac certificate that the holder will collect all principal on the underlying mortgage loans, without any offset or deduction, to the extent of such holder's pro rata share thereof, but does not, except if and to the extent specified in the related prospectus supplement for a series of certificates, guarantee the timely payment of scheduled principal. Under Freddie Mac's Gold PC Program, Freddie Mac guarantees the timely payment of principal based on the difference between the pool factor, published in the month preceding the month of distribution, and the pool factor published in such month of distribution. Pursuant to its guarantees, Freddie Mac indemnifies holders of Freddie Mac certificates against any diminution in principal by reason of charges for property repairs, maintenance and foreclosure. Freddie Mac may remit the amount due on account of its guaranty of collection of principal at any time after default on an underlying mortgage loan, but not later than (i) 30 days following foreclosure sale, (ii) 30 days following payment of the claim by any mortgage insurer or (iii) 30 days following the expiration of any right of redemption, whichever occurs later, but in any event no later than one year after demand has been made upon the mortgagor for accelerated payment of principal. In taking actions regarding the collection of principal after default on the mortgage loans underlying Freddie Mac certificates, including the timing of demand for acceleration, Freddie Mac reserves the right to exercise its judgment with respect to the mortgage loans in the same manner as for mortgage loans which it has purchased but not sold. The length of time necessary for Freddie Mac to determine that a mortgage loan should be accelerated varies with the 22 particular circumstances of each mortgagor, and Freddie Mac has not adopted standards which require that the demand be made within any specified period. Freddie Mac certificates are not guaranteed by the United States or by any Federal Home Loan Bank and do not constitute debts or obligations of the United States or any Federal Home Loan Bank. The obligations of Freddie Mac under its guarantee are obligations solely of Freddie Mac and are not backed by, or entitled to, the full faith and credit of the United States. If Freddie Mac were unable to satisfy such obligations, distributions to holders of Freddie Mac certificates would consist solely of payments and other recoveries on the underlying mortgage loans and, accordingly, monthly distributions to holders of Freddie Mac certificates would be affected by delinquent payments and defaults on such mortgage loans. Registered holders of Freddie Mac certificates are entitled to receive their monthly pro rata share of all principal payments on the underlying mortgage loans received by Freddie Mac, including any scheduled principal payments, full and partial repayments of principal and principal received by Freddie Mac by virtue of condemnation, insurance, liquidation or foreclosure, and repurchases of the mortgage loans by Freddie Mac or the seller thereof. Freddie Mac is required to remit each registered Freddie Mac Certificateholder's pro rata share of principal payments on the underlying mortgage loans, interest at the Freddie Mac pass-through rate and any other sums such as prepayment fees, within 60 days of the date on which those payments are deemed to have been received by Freddie Mac. Under Freddie Mac's Cash Program, there is no limitation on the amount by which interest rates on the mortgage loans underlying a Freddie Mac certificate may exceed the pass-through rate on the Freddie Mac certificate. Under this program, Freddie Mac purchases groups of whole mortgage loans from sellers at specified percentages of their unpaid principal balances, adjusted for accrued or prepaid interest, which, when applied to the interest rate of the mortgage loans and participations purchased, results in the yield (expressed as a percentage) required by Freddie Mac. The required yield, which includes a minimum servicing fee retained by the servicer, is calculated using the outstanding principal balance. The range of interest rates on the mortgage loans and participations in a particular Freddie Mac pool under the Cash Program will vary since mortgage loans and participations are purchased and assigned to a Freddie Mac pool based upon their yield to Freddie Mac rather than on the interest rate on the underlying mortgage loans. Under Freddie Mac's Guarantor Program, the pass-through rate on a Freddie Mac certificate is established based upon the lowest interest rate on the underlying mortgage loans, minus a minimum servicing fee and the amount of Freddie Mac's management and guaranty income as agreed upon between the related seller and Freddie Mac. Freddie Mac certificates duly presented for registration of ownership on or before the last business day of a month are registered effective as of the first day of the month. The first remittance to a registered holder of a Freddie Mac certificate will be distributed so as to be received normally by the 15th day of the second month following the month in which the purchaser becomes a registered holder of Freddie Mac certificates. 23 Thereafter, such remittance will be distributed monthly to the registered holder so as to be received normally by the 15th day of each month. The Federal Reserve Bank of New York maintains book-entry accounts with respect to Freddie Mac certificates sold by Freddie Mac, and makes payments of principal and interest each month to the registered Freddie Mac certificateholders in accordance with the holders' instructions. FANNIE MAE. Fannie Mae, formerly the Federal National Mortgage Association, is a federally chartered and privately owned corporation organized and existing under the Federal National Mortgage Association Charter Act, as amended. Fannie Mae was originally established in 1938 as a United States government agency to provide supplemental liquidity to the mortgage market and was transformed into a stockholder-owned and privately-managed corporation by legislation enacted in 1968. Fannie Mae provides funds to the mortgage market primarily by purchasing mortgage loans from lenders, thereby replenishing their funds for additional lending. Fannie Mae acquires funds to purchase mortgage loans from many capital market investors that may not ordinarily invest in mortgages, thereby expanding the total amount of funds available for housing. Operating nationwide Fannie Mae helps to redistribute mortgage funds from capital-surplus to capital-short areas. FANNIE MAE CERTIFICATES. Fannie Mae certificates are Guaranteed Mortgage Pass-Through Certificates representing fractional undivided interests in a pool of mortgage loans formed by Fannie Mae. Each mortgage loan must meet the applicable standards of the Fannie Mae purchase program. Mortgage loans comprising a pool are either provided by Fannie Mae from its own portfolio or purchased pursuant to the criteria of the Fannie Mae purchase program. Mortgage loans underlying Fannie Mae certificates held by a trust fund will consist of conventional mortgage loans, FHA loans or VA loans. Original maturities of substantially all of the conventional, level payment mortgage loans underlying a Fannie Mae certificate are expected to be from eight to 15 years or from 20 to 40 years. The original maturities of substantially all of the fixed rate level payment FHA loans or VA loans are expected to be 30 years. Mortgage loans underlying a Fannie Mae certificate may have annual interest rates that vary by as much as two percentage points from one another. The rate of interest payable on a Fannie Mae certificate is equal to the lowest interest rate of any mortgage loan in the related pool, less a specified minimum annual percentage representing servicing compensation and Fannie Mae's guaranty fee. Under a regular servicing option pursuant to which the mortgagee or each other servicer assumes the entire risk of foreclosure losses, the annual interest rates on the mortgage loans underlying a Fannie Mae certificate will be between 25 basis points and 250 basis points greater than is its annual pass-through rate. Under a special servicing option pursuant to which Fannie Mae assumes the entire risk for foreclosure losses, the annual interest rates on the mortgage loans underlying a Fannie Mae certificate will generally be between 30 basis points and 255 basis points greater than the annual Fannie Mae certificate pass-through rate. If specified in the related prospectus supplement, Fannie Mae certificates may be backed by adjustable rate mortgages. 24 Fannie Mae guarantees to each registered holder of a Fannie Mae certificate that it will distribute amounts representing the holder's proportionate share of scheduled principal and interest payments at the applicable pass-through rate provided for by the Fannie Mae certificate on the underlying mortgage loans, whether or not received, and the holder's proportionate share of the full principal amount of any foreclosed or other finally liquidated mortgage loan, whether or not such principal amount is actually recovered. The obligations of Fannie Mae under its guarantees are obligations solely of Fannie Mae and are not backed by, or entitled to, the full faith and credit of the United States. Although the Secretary of the Treasury of the United States has discretionary authority to lend Fannie Mae up to $2.25 billion outstanding at any time, neither the United States nor any of its agencies or instrumentalities is obligated to finance Fannie Mae's operations or to assist Fannie Mae in any other manner. If Fannie Mae were unable to satisfy its obligations, distributions to holders of Fannie Mae certificates would consist solely of payments and other recoveries on the underlying mortgage loans and, accordingly, monthly distributions to holders of Fannie Mae certificates would be affected by delinquent payments and defaults on such mortgage loans. Fannie Mae certificates evidencing interests in pools of mortgage loans formed on or after May 1, 1985 (other than Fannie Mae certificates backed by pools containing graduated payment mortgage loans or mortgage loans secured by multifamily projects) are available in book-entry form only. Distributions of principal and interest on each Fannie Mae certificate will be made by Fannie Mae on the 25th day of each month to the persons in whose name the Fannie Mae certificate is entered in the books of the Federal Reserve Banks (or registered on the Fannie Mae certificate register in the case of fully registered Fannie Mae certificates) as of the close of business on the last day of the preceding month. With respect to Fannie Mae certificates issued in book-entry form, distributions will be made by wire and, with respect to fully registered Fannie Mae certificates, distributions will be made by check. STRIPPED MORTGAGE-BACKED SECURITIES. Agency securities may consist of one or more stripped mortgage-backed securities as described in this prospectus and in the related prospectus supplement. Each agency security of this type will represent an undivided interest in all or part of the principal distributions -- but not the interest distributions, or the interest distributions -- but not the principal distributions, or in some specified portion of the principal and interest distributions on certain Freddie Mac, Fannie Mae or Ginnie Mae certificates. The underlying securities will be held under a trust agreement by Freddie Mac, Fannie Mae or Ginnie Mae, each as trustee, or by another trustee named in the related prospectus supplement. Freddie Mac, Fannie Mae or Ginnie Mae will guaranty each stripped agency security to the same extent as such entity guarantees the underlying securities backing the stripped agency security, unless otherwise specified in the related prospectus supplement. OTHER AGENCY SECURITIES. If specified in the related prospectus supplement, a trust fund may include other mortgage pass-through certificates issued or guaranteed by Freddie Mac, Fannie Mae or Ginnie Mae. The characteristics of any such mortgage pass-through certificates will be described in the related prospectus supplement. If 25 specified in the related prospectus supplement, a combination of different types of agency securities may be held in a trust fund. PRIVATE MORTGAGE-BACKED SECURITIES GENERAL. Private mortgage-backed securities may consist of - pass-through certificates or participation certificates evidencing an undivided interest in a pool of single family loans, home equity loans, multifamily loans, manufactured housing contracts or home improvement contracts, - collateralized mortgage obligations secured by single family loans, home equity loans, multifamily loans, manufactured housing contracts or home improvement contracts, or - other private mortgage-backed securities. Private mortgage-backed securities may include stripped mortgage-backed securities representing an undivided interest in all or a part of the principal distributions -- but not the interest distributions, or the interest distributions -- but not the principal distributions, or in some specified portion of the principal and interest distributions on certain mortgage loans. The private mortgage-backed securities will have been issued pursuant to a pooling and servicing agreement, an indenture or similar agreement. Unless otherwise specified in the related prospectus supplement, the seller/servicer of the underlying loans will have entered into a private mortgage-backed securities Agreement with a trustee under that agreement. The trustee or its agent, or a custodian, will possess the mortgage loans underlying the private mortgage-backed securities. The loans underlying the private mortgage-backed securities will be serviced by a servicer directly or by one or more subservicers which may be subject to the supervision of the servicer. Unless otherwise specified in the related prospectus supplement, the private mortgage- backed securities servicer will be a Fannie Mae- or Freddie Mac-approved servicer and, if FHA loans underlie the private mortgage-backed securities, approved by HUD as an FHA mortgagee. The private mortgage-backed securities issuer will be a financial institution or other entity engaged generally in the business of mortgage lending, a public agency or instrumentality of a state, local or federal government, or a limited purpose corporation organized for the purpose of, among other things, establishing trusts and acquiring and selling housing loans to trusts and selling beneficial interests in trusts. If specified in the related prospectus supplement, the issuer may be an affiliate of the depositor. The obligations of the PLS issuer will generally be limited to certain representations and warranties with respect to the assets it conveys to the related trust. Unless otherwise specified in the related prospectus supplement, the PLS issuer will not have guaranteed any of the assets conveyed to the related trust or any of the private mortgage-backed securities issued under the PLS agreement. Additionally, although the loans underlying the private mortgage-backed securities may be guaranteed by an agency or instrumentality of the United States, the private mortgage-backed securities themselves will not be so guaranteed, unless the related prospectus supplement specifies otherwise. 26 Distributions of principal and interest will be made on the private mortgage-backed securities on the dates specified in the related prospectus supplement. The private mortgage-backed securities may be entitled to receive nominal or no principal distributions or nominal or no interest distributions. Principal and interest distributions will be made on the private mortgage-backed securities by the trustee or the servicer. The issuer or the servicer may have the right to repurchase assets underlying the private mortgage-backed securities after a particular date or under other circumstances specified in the related prospectus supplement. UNDERLYING LOANS. The loans underlying the private mortgage-backed securities may consist of fixed rate, level payment, fully amortizing loans or graduated payment mortgage loans, buydown loans, adjustable rate mortgage loans, or loans having balloon or other special payment features. The loans may be secured by one- to four-family residential property, small mixed-use property, five- to eight-family residential property, multifamily property, manufactured homes or by an assignment of the proprietary lease or occupancy agreement relating to a specific dwelling within a cooperative and the related shares issued by the cooperative. CREDIT SUPPORT RELATING TO PRIVATE MORTGAGE-BACKED SECURITIES. Credit support in the form of reserve funds, subordination of other private mortgage-backed securities issued under the private mortgage-backed securities agreement, letters of credit, surety bonds, insurance policies or other types of credit support may be provided with respect to the loans underlying the private mortgage-backed securities or with respect to the private mortgage-backed securities themselves. ADDITIONAL INFORMATION. If the trust fund for a series of securities includes private mortgage-backed securities, the related prospectus supplement will generally specify - the aggregate approximate principal amount and type of private mortgage-backed securities to be included in the trust fund, - the maximum original term-to-stated maturity of the private mortgage-backed securities, - the weighted average term-to-stated maturity of the private mortgage-backed securities, - the pass-through or certificate rate of the private mortgage-backed securities, - the weighted average pass-through of interest rate of the private mortgage-backed securities, - the issuer, the servicer (if other than the issuer) and the trustee, - certain characteristics of any credit support such as reserve funds, insurance policies, surety bonds, letters of credit or guaranties relating to the loans underlying the private mortgage-backed securities themselves, - the terms on which the loans underlying the private mortgage-backed securities may, or are required to, be purchased prior to their stated maturity or the stated maturity of the private mortgage-backed securities, and 27 - the terms on which mortgage loans may be substituted for those originally underlying the private mortgage-backed securities. In addition, the related prospectus supplement will provide information about the loans which comprise the underlying assets of the private mortgage-backed securities, generally including - the payment features of the mortgage loans, - the approximate aggregate principal balance, if known, of underlying loans insured or guaranteed by a governmental entity, - the servicing fee or range of servicing fees with respect to the loans, and - the minimum and maximum stated maturities of the underlying loans at origination. SUBSTITUTION OF TRUST ASSETS Substitution of trust assets may be permitted in the event of breaches of representations and warranties with respect to certain trust assets or in the event the documentation with respect to any trust asset is determined by the trustee to be incomplete or as further specified in the prospectus supplement. The period during which such substitution will be permitted generally will be indicated in the prospectus supplement. USE OF PROCEEDS The net proceeds to be received from the sale of the securities will be applied by the depositor to the purchase of trust assets or will be used by the depositor for general corporate purposes. The depositor expects to sell securities in series from time to time, but the timing and amount of offerings of securities will depend on a number of factors, including the volume of trust assets acquired by the depositor, prevailing interest rates, availability of funds and general market conditions. LOAN PROGRAM The loans will have been purchased by the depositor, either directly or through affiliates, from sellers. Unless otherwise specified in the prospectus supplement, the loans acquired by the depositor will have been originated in accordance with the underwriting criteria described below. UNDERWRITING STANDARDS Each seller will represent and warrant that all loans originated and/or sold by it to the depositor will have been underwritten in accordance with standards described in the prospectus supplement. Underwriting standards are applied by or on behalf of a lender to evaluate the borrower's credit standing and repayment ability, and the value and adequacy of the related property as collateral. In general, a prospective borrower applying for a mortgage loan is required to fill out a detailed application designed to provide to the underwriting 28 officer pertinent credit information. As part of the description of the borrower's financial condition, the borrower generally is required to provide a current list of assets and liabilities and a statement of income and expenses, as well as an authorization to apply for a credit report which summarizes the borrower's credit history with local merchants and lenders and any record of bankruptcy or other significant public records. In most cases, an employment verification is obtained from an independent source (typically the borrower's employer), which verification reports the length of employment with that organization, the borrower's current salary and whether it is expected that the borrower will continue such employment in the future. If a prospective borrower is self-employed, the borrower may be required to submit copies of signed tax returns. The borrower may also be required to authorize verification of deposits at financial institutions where the borrower has demand or savings accounts. In determining the adequacy of the property as collateral, an appraisal will generally be made of each property considered for financing. The appraiser is required to inspect the property and verify that it is in good repair and that construction, if new, has been completed. The appraisal is based on the market value of comparable homes, the estimated rental income (if considered applicable by the appraiser) and the cost of replacing the home. Once all applicable employment, credit and property information is received, a determination generally is made as to whether the prospective borrower has sufficient monthly income available: - to meet the borrower's monthly obligations on the proposed mortgage loan (generally determined on the basis of the monthly payments due in the year of origination) and other expenses related to the property (such as property taxes and hazard insurance), and - to meet monthly housing expenses and other financial obligations and monthly living expenses. The underwriting standards applied by a seller, particularly with respect to the level of loan documentation and the borrower's income and credit history, may be varied in appropriate cases where factors such as low combined loan-to-value ratios or other favorable credit aspects exist. If specified in the prospectus supplement, a portion of the loans in the pool may have been originated under a limited documentation program. Under a limited documentation program, more emphasis is placed on the value and adequacy of the property as collateral and other assets of the borrower than on credit underwriting. Under a limited documentation program, certain credit underwriting documentation concerning income or income verification and/or employment verification is waived. The prospectus supplement will indicate the types of limited documentation programs pursuant to which the loans were originated and the underwriting standards applicable to such limited documentation programs. In the case of a loan secured by a leasehold interest in real property, the title to which is held by a third party lessor, the seller will represent and warrant, among other 29 things, that the remaining term of the lease and any sublease is at least five years longer than the remaining term on the related mortgage note. Certain of the types of loans that may be included in a trust may involve additional uncertainties not present in traditional types of loans. For example, certain of such loans may provide for escalating or variable payments by the borrower. These types of loans are underwritten on the basis of a judgment that the borrowers have the ability to make the monthly payments required initially. In some instances, however, a borrower's income may not be sufficient to permit continued loan payments as such payments increase. These types of loans may also be underwritten primarily upon the basis of combined loan-to-value ratios or other favorable credit factors. QUALIFICATIONS OF SELLERS Each seller must be an institution experienced in originating and servicing loans of the type contained in the pool in accordance with accepted practices and prudent guidelines, and must maintain satisfactory facilities to originate and service those loans. Each seller must be a seller/servicer approved by either Fannie Mae or Freddie Mac. Each seller must be a mortgagee approved by the FHA or an institution the deposit accounts of which are insured by the Federal Deposit Insurance Corporation. QUALITY CONTROL A quality control program has been developed to monitor the quality of loan underwriting at the time of acquisition and on an ongoing basis. All loans purchased will be subject to this quality control program. A legal document review of each loan acquired will be conducted to verify the accuracy and completeness of the information contained in the mortgage notes, security instruments and other pertinent documents in the file. A sample of loans to be acquired, selected by focusing on those loans with higher risk characteristics, will normally be submitted to a third party nationally recognized underwriting review firm for a compliance check of underwriting and review of income, asset and appraisal information. REPRESENTATIONS BY SELLERS; REPURCHASES Each seller will have made representations and warranties in respect of the loans sold by such seller and evidenced by all, or a part, of a series of securities. Such representations and warranties may include, among other things: - that title insurance (or in the case of properties located in areas where such policies are generally not available, an attorney's certificate of title) and any required hazard insurance policy were effective at origination of each loan and that each policy (or certificate of title as applicable) remained in effect on the date of purchase of the loan from the seller by or on behalf of the depositor; - that the seller had good title to each such loan and such loan was subject to no offsets, defenses, counterclaims or rights of rescission except to the extent that any buydown agreement may forgive certain indebtedness of a borrower; 30 - that each loan constituted a valid lien on, or a perfected security interest with respect to, the property (subject only to permissible liens disclosed, if applicable, title insurance exceptions, if applicable, and certain other exceptions described in the Agreement) and that the property was free from damage and was in acceptable condition; - that there were no delinquent tax or assessment liens against the property; - that no required payment on a loan was delinquent more than the number of days specified in the prospectus supplement; and - that each loan was made in compliance with, and is enforceable under, all applicable state and federal laws and regulations in all material respects. The servicer or the trustee will promptly notify the relevant seller of any breach of any representation or warranty made by it in respect of a loan which materially and adversely affects the interests of the securityholders in such loan. Unless otherwise specified in the prospectus supplement, if such seller cannot cure such breach within the time period specified in the prospectus supplement following notice from the servicer or the trustee, as the case may be, then such seller will be obligated to repurchase such loan from the trust at a purchase price equal to 100% of the unpaid principal balance thereof as of the date of the repurchase plus accrued interest thereon to the first day of the month following the month of repurchase at the loan rate (less any advances or amount payable as related servicing compensation if the seller is the servicer) and may elect to substitute for such loan a replacement loan that satisfies the criteria specified in the prospectus supplement. If a REMIC election is being made with respect to a trust, the servicer, the trustee or a holder of the related residual certificate generally will be obligated to pay any prohibited transaction tax which may arise in connection with any such repurchase or substitution and the trustee must have received a satisfactory opinion of counsel that any such substitution will not cause the trust to lose its status as a REMIC or otherwise subject the trust to a prohibited transaction tax. This repurchase or substitution obligation will constitute the sole remedy available to holders of securities or the trustee for a breach of representation by a seller. Neither the depositor nor the servicer will be obligated to purchase or substitute a loan if a seller defaults on its obligation to do so, and no assurance can be given that sellers will carry out their respective repurchase or substitution obligations with respect to loans. DESCRIPTION OF THE SECURITIES Each series of securities issued in the form of certificates will be issued pursuant to either a pooling and servicing agreement or a trust agreement among the depositor, the servicer and the trustee or pursuant to agreements containing comparable provisions, as described in the prospectus supplement. A form of pooling and servicing agreement and trust agreement have been filed as an exhibit to the registration statement of which this prospectus forms a part. Each series of securities issued in the form of bonds will be 31 issued pursuant to an indenture between the related trust and the entity named in the prospectus supplement as trustee or pursuant to agreements containing comparable provisions, as described in the prospectus supplement, and the related loans will be serviced by the servicer pursuant to a servicing agreement. A form of indenture and servicing agreement has been filed as an exhibit to the registration statement of which this prospectus forms a part. A series of securities may consist of both bonds and certificates. The provisions of each Agreement will vary depending upon the nature of the securities to be issued thereunder and the nature of the trust. The following are descriptions of the material provisions which may appear in each Agreement. The descriptions are subject to, and are qualified in their entirety by reference to, all of the provisions of the specific Agreement applicable to series of securities. The depositor will provide a copy of the Agreement (without exhibits) relating to any series without charge upon written request of a holder of record of a security of such series addressed to the depositor, One Belvedere Place, Mill Valley, California 94941, Attention: Secretary. GENERAL Unless otherwise described in the prospectus supplement, the securities of each series: - will be issued in book-entry or fully registered form, in the authorized denominations specified in the prospectus supplement; - will, in the case of certificates, evidence specified beneficial ownership interests in the assets of the trust; - will, in the case of bonds, be secured by the assets of the trust; and - will not be entitled to payments in respect of the assets included in any other trust established by the depositor. Unless otherwise specified in the prospectus supplement, the securities will not represent obligations of the depositor or any affiliate of the depositor. Certain of the loans may be guaranteed or insured as set forth in the prospectus supplement. Each trust will consist of, to the extent provided in the related Agreement: - the trust assets subject to the related Agreement, including all payments of interest and principal received with respect to the loans after the cut-off date; - such assets as from time to time are required to be deposited in the related Collection Account; - property which secured a loan and which is acquired on behalf of the securityholders by foreclosure or deed in lieu of foreclosure; and - any insurance policies or other forms of credit enhancement required to be maintained pursuant to the related Agreement. If so specified in the prospectus supplement, a trust may also include one or more of the following: reinvestment income on payments received on the trust assets, a reserve 32 account, a mortgage pool insurance policy, a special hazard insurance policy, a bankruptcy bond, one or more letters of credit, a surety bond, guaranties, a demand note or similar instruments. Each series of securities will be issued in one or more classes. Each class of certificates of a series will evidence beneficial ownership of a specified percentage (which may be 0%) or portion of future interest payments and a specified percentage (which may be 0%) or portion of future principal payments on, and each class of notes of a series will be secured by, the related trust assets. A series of securities may include one or more classes that are senior in right to payment to one or more other classes of securities of such series. Certain series or classes of securities may be covered by insurance policies, surety bonds or other forms of credit enhancement, in each case as described in the prospectus supplement. One or more classes of securities of a series may be entitled to receive distributions of principal, interest or any combination thereof. Distributions on one or more classes of a series of securities may be made prior to one or more other classes, after the occurrence of specified events, in accordance with a schedule or formula or on the basis of collections from designated portions of the related trust assets, in each case as specified in the prospectus supplement. The timing and amounts of such distributions may vary among classes or over time as specified in the prospectus supplement. Distributions of principal and interest (or, where applicable, of principal only or interest only) on the related securities will be made by the trustee or the payment agent on each payment date in proportion to the percentages described in the prospectus supplement. Payment dates will occur either monthly, quarterly, semi-annually or at other specified intervals and will occur on the dates as are described in the prospectus supplement. Distributions will be made to the persons in whose names the securities are registered at the close of business on the record date relating to payment date. Distributions will be made in the manner described in the prospectus supplement to the persons entitled thereto at the address appearing in the register maintained for securityholders; provided, however, that, unless otherwise provided in the prospectus supplement, the final distribution in retirement of the securities will be made only upon presentation and surrender of the securities at the office or agency of the trustee or other person specified in the notice to securityholders of such final distribution. The securities will be freely transferable and exchangeable at the corporate trust office of the trustee specified in the prospectus supplement. No service charge will be made for any registration of exchange or transfer of securities of any series, but the trustee may require payment of a sum sufficient to cover any related tax or other governmental charge. The sale or transfer of certain classes of securities to employee benefit plans and retirement arrangements that are subject to the provisions of Title I of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), or Section 4975 of the Internal Revenue Code of 1986, as amended (the "Code"), may be restricted. The prospectus supplement for each series of securities will describe any such restrictions. 33 As to each series, an election may be made to treat the related trust or designated portions thereof as one or more REMICs as defined in the Code. The prospectus supplement will specify whether a REMIC election is to be made. Alternatively, the Agreement for a series of securities may provide that a REMIC election may be made at the discretion of the depositor or the servicer and may only be made if certain conditions are satisfied. As to any such series, the terms and provisions applicable to the making of a REMIC election will be set forth in the prospectus supplement. If such an election is made with respect to a series of securities, one of the classes will be designated as evidencing the sole class of residual interests in the REMIC. All other classes of securities in such a series will constitute regular interests in the REMIC. As to each series of securities with respect to which a REMIC election is to be made; the servicer, the trustee and/or a holder of the residual certificate will be obligated to take all actions required in order to comply with applicable laws and regulations. DISTRIBUTIONS ON SECURITIES GENERAL. In general, the method of determining the amount of distributions on a particular series of securities will depend on the type of credit support, if any, that is used with respect to such series. Set forth below are descriptions of various methods that may be used to determine the amount of distributions on the securities of a particular series. The prospectus supplement for each series of securities will describe the method to be used in determining the amount of distributions on the securities of that series. Distributions allocable to principal and interest on the securities will be made by the trustee out of, and only to the extent of, funds in the related collection account, including any funds transferred from any reserve account. As between securities of different classes and as between distributions of principal (and, if applicable, between distributions of principal prepayments and scheduled payments of principal) and interest, distributions made on any payment date will be applied as specified in the prospectus supplement. The prospectus supplement will also describe the method for allocating distributions among securities of a particular class. AVAILABLE FUNDS. All distributions on the securities of each series on each payment date will be made from the available funds described below, in accordance with the terms described in the prospectus supplement and specified in the Agreement. Available funds for each payment date will generally equal the amount on deposit in the related Collection Account on such payment date (net of related fees and expenses payable by the related trust) other than amounts to be held therein for distribution on future payment dates. DISTRIBUTIONS OF INTEREST. Interest will accrue on the aggregate principal balance of the securities (or, in the case of securities entitled only to distributions allocable to interest, the aggregate notional amount) of each class of securities (the "class security balance") entitled to interest 34 from the date, at the pass-through rate or interest rate, as applicable, and for the periods specified in the related prospectus supplement. The pass-through rate or interest rate applicable to each class of securities will be specified in the related prospectus supplement as either a fixed rate or adjustable rate. Other than with respect to a class of securities that provides for interest that accrues but is not currently payable ("accrual securities"), to the extent funds are available for the payment of interest on a class of securities, interest accrued during each specified period on that class of securities entitled to interest will be distributable on the payment dates specified in the prospectus supplement until the aggregate class security balance of those securities has been distributed in full or, in the case of securities entitled only to distributions allocable to interest, until the aggregate notional amount of those securities is reduced to zero or for the period of time designated in the prospectus supplement. Except in the case of the accrual securities, the original class security balance of each security will equal the aggregate distributions allocable to principal to which such security is entitled. Distributions allocable to interest on each security that is not entitled to distributions allocable to principal will be calculated based on the notional amount of such security. The notional amount of a security will not evidence an interest in or entitlement to distributions allocable to principal but will be used solely for convenience in expressing the calculation of interest and for certain other purposes. Interest payable on the securities of a series on a payment date will include all interest accrued during the period specified in the prospectus supplement. In the event interest accrues over a period ending two or more days prior to a payment date, the effective yield to securityholders will be reduced from the yield that would otherwise be obtainable if interest payable on the security were to accrue through the day immediately preceding such payment date, and the effective yield (at par) to securityholders will be less than the indicated coupon rate. With respect to any class of accrual securities, as specified in the prospectus supplement, any interest that has accrued but is not paid on a given payment date may be added to the aggregate class security balance of such class of securities on that payment date and thereafter may itself accrue interest as part of the aggregate class security balance. Distributions of interest on any class of accrual securities will commence only after the occurrence of the events specified in such prospectus supplement. Prior to the occurrence of those specified events, the beneficial ownership interest in the trust or the principal balance, as applicable, of such class of accrual securities, as reflected in the aggregate class security balance of such class of accrual securities, will increase on each payment date by the amount of interest that accrued on that class of accrual securities during the preceding interest accrual period. DISTRIBUTIONS OF PRINCIPAL. The prospectus supplement will specify the method by which the amount of principal to be distributed on the securities on each payment date will be calculated and the manner in which such amount will be allocated among the classes of securities entitled to distributions of principal. The aggregate class security balance of any class of securities entitled to distributions of principal generally will equal the aggregate original 35 class security balance specified in the related prospectus supplement for that class, reduced by all distributions allocable to principal previously made to the holders of that class of securities and by any allocations of realized losses to that class, and, in the case of accrual securities, increased by all interest accrued but not then distributable on such accrual securities, as specified in the prospectus supplement. The aggregate class security balance for adjustable rate securities may also be subject to the effects of negative amortization. If so provided in the prospectus supplement, one or more classes of securities will be entitled to receive all or a disproportionate percentage of the principal prepayments made with respect to a payment date in the percentages and under the circumstances or for the periods specified in that prospectus supplement. This allocation of principal prepayments to that class or those classes of securities will have the effect of accelerating the amortization of those securities while increasing the interests evidenced by one or more other classes of securities issued by the related trust. Increasing the interests of the other classes of securities relative to that of certain securities is intended to preserve the availability of the subordination provided by those other classes of securities. UNSCHEDULED DISTRIBUTIONS. If specified in the prospectus supplement, the securities will be subject to receipt of distributions before the next scheduled payment date under the circumstances and in the manner described below and in such prospectus supplement. If applicable, the trustee will be required to make these unscheduled distributions on the day and in the amount specified in the prospectus supplement if, due to substantial payments of principal (including principal prepayments, redemptions of securities or termination of the trust) on the trust assets, the trustee or the servicer determines that the funds available or anticipated to be available from the collection account and, if applicable, any reserve account, on the next scheduled payment date may be insufficient to make required distributions on the securities on that payment date. Unless otherwise specified in the prospectus supplement, the amount of any such unscheduled distribution that is allocable to principal will not exceed the amount that would otherwise have been required to be distributed as principal on the securities on the next payment date. Unless otherwise specified in the prospectus supplement, the unscheduled distributions will include interest at the applicable pass-through rate, if any, or interest rate, if any, on the portion of the unscheduled distribution that is allocable to principal for the period and to the date specified in the prospectus supplement. ADVANCES To the extent provided in the prospectus supplement, the servicer will be required to advance on or before each payment date (from its own funds, funds advanced by subservicers or funds held in the collection account for future distributions to the holders of securities of the related series) an amount equal to the aggregate of payments of interest and/or principal that were delinquent on the related determination date (as specified in the prospectus supplement) and were not advanced by any subservicer, 36 subject to the servicer's determination that such advances may be recoverable out of late payments by borrowers, liquidation proceeds, insurance proceeds or otherwise. In making advances, the servicer will endeavor to maintain a regular flow of scheduled interest and principal payments to securityholders, rather than to guarantee or insure against losses. If advances are made by the servicer from cash being held for future distribution to securityholders, the servicer will replace the funds advanced on or before any future payment date to the extent that funds in the applicable collection account on that payment date would be less than the amount required to be available for distributions to securityholders on that date. Any funds advanced with respect to a given loan will be reimbursable to the servicer out of recoveries on that loan (which recoveries will include late payments made by the related borrower, any related insurance proceeds, liquidation proceeds or proceeds of any loan purchased by the depositor, a subservicer or a seller pursuant to the related Agreement). Advances by the servicer (and any advances by a subservicer) also will be reimbursable to the servicer (or subservicer) from cash otherwise distributable to securityholders (including the holders of senior securities) to the extent that the servicer determines that any advances previously made are not ultimately recoverable from recoveries on the related loans. To the extent provided in the prospectus supplement, the servicer also will be obligated to make advances in respect of certain taxes and insurance premiums not paid by borrowers on a timely basis, but only to the extent those advances would be recoverable out of insurance proceeds, liquidation proceeds or otherwise. These advances are reimbursable to the servicer to the extent permitted by the related Agreement. The obligations of the servicer to make advances may be supported by a cash advance reserve account, a surety bond or other arrangement of the type described in this prospectus under "Credit Enhancement," and in each case as described in the prospectus supplement. To the extent provided in the prospectus supplement, the servicer will be required to advance all funds required for draws by borrowers under revolving lines of credit. If specified in the prospectus supplement, in the event the servicer or a subservicer fails to make a required advance, the trustee, in its capacity as successor servicer, will be obligated to make the advance. If the trustee makes this type of advance, it will be entitled to reimbursement to the same extent and in the same manner that the servicer or a subservicer would have been entitled to reimbursement if it had made the advance. COMPENSATING INTEREST Payments may be received on loans in the trust which represent either a principal prepayment in full or a principal payment which is in excess of the scheduled monthly payment and which is not intended to cure a delinquency. If specified in the prospectus supplement, the servicer will be required to remit to the trustee with respect to each of these types of payments during any due period an amount equal to either (1) the excess, if any, of (a) 30 days' interest on the principal balance of the related loan at the loan rate net of the per annum rate at which the servicer's servicing fee accrues, over (b) the amount of interest actually received on the loan during the related due period, net of the 37 servicer's servicing fee or (2) such other amount as described in the prospectus supplement. This amount remitted to the trustee by the servicer will be limited to amounts otherwise payable to the servicer as servicing compensation. REPORTS TO SECURITYHOLDERS Prior to or concurrently with each distribution on a payment date, the servicer or the trustee will furnish to each securityholder of record of the related series a statement setting forth, to the extent applicable to such series of securities, among other things: - the amount of the distribution made on that payment date that is allocable to principal, separately identifying the aggregate amount of any principal prepayments and, if specified in the prospectus supplement, any applicable prepayment penalties included therein; - the amount of the distribution made on that payment date that is allocable to interest; - the amount of any advance made during the related due period; - the aggregate amount (a) otherwise allocable to the subordinated securityholders on that payment date, and (b) withdrawn from the reserve account, if any, that is included in the amounts distributed to the senior securityholders; - the outstanding principal balance or notional amount, as applicable, of each class of the related series after giving effect to all distributions of principal on that payment date; - the percentage or amount of principal payments on the loans (excluding prepayments), if any, which each class will be entitled to receive on the related payment date; - the percentage or amount of principal prepayments on the loans, if any, which each such class will be entitled to receive on the related payment date; - the amount of the servicing compensation retained or withdrawn from the collection account by the servicer, and the amount of additional servicing compensation received by the servicer attributable to penalties, fees, excess liquidation proceeds and other similar charges and items; - the number and aggregate principal balances of loans which are: - not in foreclosure but are delinquent (A) 31 to 60 days, (B) 61 to 90 days and (C) 91 or more days, as of the close of business on the last day of the calendar month preceding that payment date; and - in foreclosure and are delinquent (A) 31 to 60 days, (B) 61 to 90 days and (C) 91 or more days, as of the close of business on the last day of the calendar month preceding that payment date; - the remaining principal balance of any loan secured by real estate acquired through foreclosure or grant of a deed in lieu of foreclosure and held as of the last day of the calendar month preceding that payment date; 38 - the pass-through rate or interest rate, as applicable, if adjusted from the date of the last statement, of any such class expected to be applicable to the next distribution to such class; - if applicable, the amount remaining in any reserve account at the close of business on that payment date; - the pass-through rate or interest rate, as applicable, as of the day prior to the immediately preceding payment date; and - any amounts remaining under letters of credit, pool insurance policies or other forms of credit enhancement after distributions made on that payment date. The report to securityholders for any series of securities may include additional or other information of a similar nature to that specified above. In addition, within a reasonable period of time after the end of each calendar year, the servicer or the trustee will mail to each securityholder of record at any time during that calendar year a report of information as may be deemed necessary or desirable for securityholders to prepare their tax returns. CATEGORIES OF CLASSES OF SECURITIES The securities of any series may be comprised of one or more classes. These classes generally fall into different categories. The following chart identifies and generally defines certain of the more typical categories of security classes. The prospectus supplement for a series of securities may identify the classes which comprise that series by reference to the following categories.
CATEGORIES OF CLASSES DEFINITION PRINCIPAL TYPES Accretion Directed........................ A class that receives principal payments that are funded from collections that would have otherwise funded interest payments on the accreted interest from specified accrual classes. An accretion directed class also may receive principal payments from principal paid on the trust assets. Component Securities...................... A class consisting of "components." The components of a class of component securities may have different principal and/or interest payment characteristics but together constitute a single class. Each component of a class of component securities may be identified as falling into one or more of the categories in this chart.
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CATEGORIES OF CLASSES DEFINITION Notional Amount Securities................ A class having no principal balance and bearing interest on the related notional amount. The notional amount is used for purposes of the determination of interest distributions. Planned Principal Class or PACs........... A class that is designed to receive principal payments using a predetermined principal balance schedule derived by assuming two constant prepayment rates for the trust assets. These two rates are the endpoints for the "structuring range" for the planned principal class. The planned principal classes in any series of securities may be subdivided into different categories (e.g., primary planned principal classes, secondary planned principal classes and so forth) having different effective structuring ranges and different principal payment priorities. The structuring range for the secondary planned principal class of a series of securities will be narrower than that for the primary planned principal class of such series. Scheduled Principal Class................. A class that is designated to receive principal payments using a predetermined principal balance schedule but is not designated as a planned principal class or targeted principal class. In many cases, the schedule is derived by assuming two constant prepayment rates for the trust assets. Theses two rates are the endpoints for the "structuring range" for the scheduled principal class. Sequential Pay............................ Classes that receive principal payments in a prescribed sequence, that do not have predetermined principal balance schedules and that receive payments of principal, when amounts are available to make payments of principal, continuously from the first payment date on which they receive principal until they are retired. A single class that receives principal payments before or after all other classes in the same series of securities may be identified as a sequential pay class.
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CATEGORIES OF CLASSES DEFINITION Strip..................................... A class that receives a constant proportion, or "strip," of the principal payments on the trust assets. The constant proportion of such principal payments may or may not vary for each trust asset included in the trust and will be calculated in the manner described in the prospectus supplement. These classes may also receive payments of interest. Support Class (or companion class)........ A class that receives principal payments on any payment date only if scheduled payments have been made on specified planned principal classes, targeted principal classes and/or scheduled principal classes. Targeted Principal Class.................. A class that is designated to receive principal payments using a predetermined principal balance schedule derived by assuming a single constant prepayment rate for the trust assets. INTEREST TYPES Accrual................................... A class that adds accrued interest otherwise distributable on the class to the principal balance of the class on each applicable payment date. The accretion may continue until some specified event has occurred or until the class is retired. Fixed Rate................................ A class with a pass-through rate or interest rate that is fixed throughout the life of the class. Floating Rate............................. A class with an interest rate that resets periodically based upon a designated index and that varies directly with changes in that index. Inverse Floating Rate..................... A class with an interest rate that resets periodically based upon a designated index and that varies inversely with changes in such index.
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CATEGORIES OF CLASSES DEFINITION Interest Only or IO....................... A class that receives some or all of the interest payments made on the trust assets and little or no principal. Interest only certificates have either a nominal principal balance or a notional amount. A nominal principal balance represents actual principal that will be paid on the class. It is referred to as nominal since it is extremely small compared to other classes. A notional amount is an amount used as a reference to calculate the amount of interest due on an interest only security but is never actually paid out as principal on the class. Partial Accrual........................... A class that adds a portion of the amount of accrued interest thereon to the principal balance of the class on each applicable payment date, with the remainder of the accrued interest to be distributed currently as interest on the class on each applicable payment date. The accretion of designated amounts of the interest may continue until a specified event has occurred or until the class is retired. Principal Only or PO...................... A class that does not bear interest and is entitled to receive only distributions in respect of principal. Variable Rate............................. A class with a pass-through rate of interest rate that resets periodically and is calculated by reference to the rate or rates of interest applicable to specified assets or instruments (e.g., the loan rates borne by the loans in the trust).
BOOK-ENTRY REGISTRATION OF SECURITIES As described in the prospectus supplement, if not issued in fully registered form, each class of securities will be registered as book-entry securities. Persons acquiring beneficial ownership interests in the securities, or "beneficial owners," will hold their securities through DTC in the United States, or Clearstream Banking, societe anonyme (formerly Cedelbank), commonly known as Clearstream, Luxembourg, or the Euroclear system, in Europe. Clearstream, Luxembourg and Euroclear will hold omnibus positions for Clearstream, Luxembourg participants and Euroclear participants, respectively, through customers' securities accounts in Clearstream, Luxembourg's and Euroclear's names on the books of their respective depositaries. The depositaries will hold these positions in customers' collection accounts in the depositaries names on DTC's books. The prospectus supplement will state if the securities will be in physical rather than book-entry form. 42 DTC is a limited purpose trust company organized under the laws of the State of New York, a member of the Federal Reserve System, a clearing corporation within the meaning of the Uniform Commercial Code and a clearing agency registered under Section 17A of the Securities Exchange Act. DTC was created to hold securities for its participants and facilitate the clearance and settlement of securities transactions between its participants through electronic book-entry changes in their accounts, eliminating the need for physical movement of certificates. DTC's participants include securities brokers and dealers, banks, trust companies and clearing corporations and may include other organizations. Indirect access to the DTC system also is available to indirect participants such as brokers, dealers, banks and trust companies that clear through or maintain a custodial relationship with a DTC participant, either directly or indirectly. Transfers between DTC participants will occur according to DTC rules. Transfers between Clearstream, Luxembourg participants and Euroclear participants will occur according to their applicable rules and operating procedures. Cross-market transfers between persons holding directly or indirectly through DTC, on the one hand, and directly or indirectly through Clearstream, Luxembourg participants or Euroclear participants, on the other, will be effected in DTC according to DTC rules on behalf of the relevant European international clearing system by its depositary; however, those cross-market transactions will require the counterparty to deliver instructions to the relevant European international clearing system according to the counterparty rules and procedures and within its established deadlines (European time). The relevant European international clearing system will, if the transaction meets its settlement requirements, deliver instructions to its depositary to take action to effect final settlement on its behalf by delivering or receiving securities in DTC, and making or receiving payment according to normal procedures for same-day funds settlement applicable to DTC. Clearstream, Luxembourg participants and Euroclear participants may not deliver instructions directly to the depositaries. Because of time-zone differences, credits of securities in Clearstream, Luxembourg or Euroclear resulting from a transaction with a DTC participant will be made during the subsequent securities settlement processing, dated the business day following the DTC settlement date, and the credits or any transactions in the securities settled during the processing will be reported to the relevant Clearstream, Luxembourg participant or Euroclear participant on that business day. Cash received in Clearstream, Luxembourg or Euroclear resulting from sales or securities by or through a Clearstream, Luxembourg participant or a Euroclear participant to a DTC participant will be received with value on the DTC settlement date but will be available in the relevant Clearstream, Luxembourg or Euroclear cash account only as of the business day following settlement in DTC. Clearstream, Luxembourg was incorporated in 1970 as Cedel S.A., a company with limited liability under Luxembourg law (a societe anonyme). Cedel S.A. subsequently changed its name to Cedelbank. On January 10, 2000, Cedelbank's parent company, Cedel International, societe anonyme, merged its clearing, settlement and custody business with that of Deutsche Borse Clearing AG. 43 Clearstream, Luxembourg holds securities for its customers and facilitates the clearance and settlement of securities transactions between Clearstream, Luxembourg customers through electronic book-entry changes in accounts of Clearstream, Luxembourg customers, thereby eliminating the need for physical movement of certificates. Transactions may be settled by Clearstream, Luxembourg in any of 36 currencies, including U.S. dollars. Clearstream, Luxembourg provides, among other things, services for safekeeping, administration, clearance and settlement of internationally traded securities and securities lending and borrowing. Clearstream, Luxembourg also deals with domestic securities markets in over 30 countries through established depository and custodial relationships. Clearstream, Luxembourg is registered as a bank in Luxembourg, and as such is subject to regulation by the Commission de Surveillance du Secteur Financier which supervises Luxembourg banks. Clearstream, Luxembourg's customers are world-wide financial institutions including underwriters, securities brokers and dealers, banks, trust companies and clearing corporations. Clearstream, Luxembourg's U.S. customers are limited to securities brokers and dealers, and banks. Currently, Clearstream, Luxembourg has approximately 2,000 customers located in over 80 countries, including all major European countries, Canada, and the United States. Indirect access to Clearstream, Luxembourg is available to other institutions that clear through or maintain a custodial relationship with an account holder of Clearstream, Luxembourg. Clearstream, Luxembourg has established an electronic bridge with Morgan Guaranty Trust Company of New York as the operator of the Euroclear System in Brussels to facilitate settlement of trades between Clearstream, Luxembourg and Euroclear." Euroclear was created in 1968 to hold securities for participants of Euroclear and to clear and settle transactions between Euroclear participants through simultaneous electronic book-entry delivery against payment, thereby eliminating both the need for physical movement of securities and any risk from lack of simultaneous transfers of securities and cash. Transactions may now be settled in any of 37 currencies, including United States dollars. Euroclear includes various other services, including securities lending and borrowing and interfaces with domestic markets in several countries generally similar to the arrangements for cross-market transfers with DTC described above. Euroclear is operated by the Brussels, Belgium office of Morgan Guaranty Trust Company of New York, under contract with Euroclear Clearance Systems S.C., a Belgian cooperative corporation. All operations are conducted by the Euroclear operator, and all Euroclear securities clearance accounts and Euroclear cash accounts are accounts with the Euroclear operator, not Euroclear Clearance. Euroclear Clearance establishes policy for Euroclear on behalf of Euroclear participants. Euroclear participants include banks (including central banks), securities brokers and dealers, and other professional financial intermediaries. Indirect access to Euroclear is also available to other firms that clear through or maintain a custodial relationship with a Euroclear participant, either directly or indirectly. The Euroclear operator is the Belgian branch of a New York banking corporation which is a member bank of the Federal Reserve System. As such, it is regulated and 44 examined by the Board of Governors of the Federal Reserve System and the New York State Banking Department, as well as the Belgian Banking Commission. Securities clearance accounts and cash accounts with the Euroclear operator are governed by the Terms and Conditions Governing Use of Euroclear and the related operating procedures of the Euroclear system and applicable Belgian law. The Terms and Conditions govern transfers of securities and cash within Euroclear, withdrawals of securities and cash from Euroclear, and receipts of payments with respect to securities in Euroclear. All securities in Euroclear are held on a fungible basis without attribution of specific securities to specific securities clearance accounts. The Euroclear operator acts under the Terms and Conditions only on behalf of Euroclear participants, and has no record of or relationship with persons holding through Euroclear participants. Under a book-entry format, securityholders that are not DTC participants or indirect participants but desire to purchase, sell or otherwise transfer ownership of securities registered in the name of Cede, as nominee of DTC, may do so only through participants and indirect participants. In addition, these securityholders will receive all distributions of principal of and interest on the securities from the trustee through DTC and its participants. Securityholders may receive payments after the payment date because DTC will forward these payments to its participants, which thereafter will be required to forward these payments to indirect participants or securityholders. Unless and until physical securities are issued, it is anticipated that the only securityholder will be Cede, as nominee of DTC, and that the beneficial holders of securities will not be recognized by the trustee as securityholders under the Agreements. Securityholders which are not DTC participants will only be permitted to exercise their rights under the Agreements through DTC or through its participants. Under the rules, regulations and procedures creating and affecting DTC and its operations, DTC is required to make book-entry transfers among its participants and is required to receive and transmit payments of principal of and interest on the securities. DTC's participants and indirect participants are required to make book-entry transfers and receive and transmit payments on behalf of their respective securityholders. Accordingly, although securityholders will not possess physical securities, the rules provide a mechanism by which securityholders will receive distributions and will be able to transfer their interests. Unless and until physical securities are issued, securityholders who are not DTC participants may transfer ownership of securities only through DTC participants by instructing those participants to transfer securities, through DTC for the account of the purchasers of the securities, which account is maintained with their respective participants. Under DTC's rules and in accordance with DTC's normal procedures, transfers of ownership of securities will be executed through DTC and the accounts of the respective participants at DTC will be debited and credited. Similarly, the respective participants will make debits or credits, as the case may be, on their records on behalf of the selling and purchasing securityholders. Because DTC can only act on behalf of its participants, who in turn act on behalf of indirect participants and some banks, the ability of a securityholder to pledge securities 45 to persons or entities that do not participate in the DTC system, or otherwise take actions in respect of the securities may be limited due to the lack of a physical certificate for the securities. DTC advises that it will take any action permitted to be taken by a securityholder under the Agreements only at the direction of one or more of its participants to whose account the securities are credited. Additionally, DTC advises that it will take actions only at the direction of and on behalf of its participants whose holdings include current principal amounts of outstanding securities that satisfy the minimum percentage established in the Agreements. DTC may take conflicting actions if directed by its participants. Any securities initially registered in the name of Cede, as nominee of DTC, will be issued in fully registered, certificated form to securityholders or their nominees, rather than to DTC or its nominee only under the events specified in the Agreements and described in the prospectus supplement. Upon the occurrence of any of the events specified in this prospectus or in the Agreements and the prospectus supplement, DTC will be required to notify its participants of the availability through DTC of physical certificates. Upon surrender by DTC of the securities and receipt of instruction for re- registration, the trustee will issue the securities in the form of physical certificates, and thereafter the trustee will recognize the holders of the physical certificates as securityholders. Thereafter, payments of principal of and interest on the securities will be made by the trustee directly to securityholders in accordance with the procedures set forth in the Agreements. The final distribution of any security whether physical certificates or securities registered in the name of Cede, however, will be made only upon presentation and surrender of the securities on the final payment date at the office or agency specified in the notice of final payment to securityholders. None of the depositor, the servicer, any finance subsidiary, or the trustee will have any liability for any actions taken by DTC or its nominee or Cedel or Euroclear, including, without limitation, actions for any aspect of the records relating to or payments made on account of the securities held by Cede, as nominee for DTC, or for maintaining, supervising or reviewing any records relating to the securities. CREDIT ENHANCEMENT GENERAL Credit enhancement may be provided with respect to one or more classes of a series of securities or with respect to the related trust assets. Credit enhancement may be in the form of: - the subordination of one or more classes of the securities of such series; - a limited financial guaranty policy issued by an entity named in the prospectus supplement; - the establishment of one or more reserve accounts; 46 - the use of a cross-collateralization feature; - use of a mortgage pool insurance policy; - excess spread, - over-collateralization; - letter of credit; - guaranteed investment contract; - primary mortgage insurance, - other pledged assets, - corporate guarantees, - surety bond; - special hazard insurance policy; - bankruptcy bond; - FHA insurance or VA guarantee; - another method of credit enhancement contemplated in this prospectus and described in the prospectus supplement; and - any combination of the foregoing. Unless otherwise specified in the prospectus supplement, credit enhancement will not provide protection against all risks of loss and will not guarantee repayment of the entire principal balance of the securities and interest on the securities. If losses occur which exceed the amount covered by credit enhancement or which are not covered by the credit enhancement, securityholders will bear their allocable share of any deficiencies. If specified in the prospectus supplement, the coverage provided by one or more of the forms of credit enhancement described in this prospectus may apply concurrently to two or more separate trusts. If applicable, the prospectus supplement will identify the trusts to which such credit enhancement relates and the manner of determining the amount of coverage provided to those trusts by the credit enhancement and of the application of that coverage to the related trusts. SUBORDINATION If specified in the prospectus supplement, protection afforded to holders of one or more classes of securities of a series may be made by means of a subordination feature. This protection may be accomplished by providing a preferential right to holders of senior securities in a series to receive distributions in respect of scheduled principal, principal prepayments, interest or any combination thereof that otherwise would have been payable to holders of subordinate securities in that series, under the circumstances and to the extent specified in the prospectus supplement. Subordination protection may also be afforded to the holders of senior securities by reducing the ownership interest (if 47 applicable) of the related subordinate securities, which protection may or may not be in conjunction with the protection described in the immediately preceding sentence. Finally, protection may be afforded to the holders of senior securities by application of a subordination feature in another manner as described in the prospectus supplement. If a subordination feature is present with respect to a given series, delays in receipt of scheduled payments on the loans and losses on defaulted loans may be borne first by the various classes of subordinate securities and only thereafter by the various classes of senior securities, in each case under the circumstances and subject to the limitations specified in the prospectus supplement. The aggregate distributions in respect of delinquent payments on the loans over the lives of the securities or at any time, the aggregate losses in respect of defaulted loans which must be borne by the subordinate securities by virtue of subordination and the amount of the distributions otherwise distributable to the subordinate securityholders that will be distributable to senior securityholders on any payment date all may be limited as specified in the prospectus supplement. If aggregate distributions in respect of delinquent payments on the loans or aggregate losses in respect of the related loans were to exceed the amount specified in the prospectus supplement, then holders of senior securities would experience losses. As specified in the prospectus supplement, all or any portion of distributions otherwise payable to holders of subordinate securities on any payment date may instead be deposited into one or more reserve accounts established with the trustee or distributed to holders of senior securities. The prospectus supplement will describe whether deposits are made into a reserve account on each payment date, only during specified periods, only until the balance in the related reserve account has reached a specified amount, only to replenish amounts in the related reserve account following payments from the reserve account to holders of senior securities or otherwise. Amounts on deposit in a reserve account may be released to the holders of certain classes of securities at the times and under the circumstances specified in the prospectus supplement. If specified in the prospectus supplement, various classes of senior securities and subordinate securities may themselves be subordinate in their right to receive certain distributions to other classes of senior and subordinate securities, respectively, through a cross-collateralization mechanism or otherwise. As between classes of senior securities and as between classes of subordinate securities, distributions may be allocated among the classes: - in the order of their scheduled final payment dates; - in accordance with a schedule or formula; - in relation to the occurrence of events; or - otherwise, as specified in the prospectus supplement. As between classes of subordinate securities, payments to holders of senior securities on account of delinquencies or losses and payments to any reserve account will be allocated as specified in the prospectus supplement. 48 INSURANCE POLICIES, SURETY BONDS AND GUARANTIES If provided in the prospectus supplement, deficiencies in amounts otherwise payable on the securities or certain classes of securities will be covered by insurance policies and/or surety bonds provided by one or more insurance companies or sureties. These instruments may cover, with respect to one or more classes of securities, timely distributions of interest and/or full distributions of principal on the basis of a schedule of principal distributions set forth in or determined in the manner specified in the prospectus supplement. In addition, if specified in the prospectus supplement, a trust may also include a bankruptcy bond, a special hazard insurance policy, a demand note or other insurance or guaranties for the purpose of: - maintaining timely payments or providing additional protection against losses on the assets included in such trust; - paying administrative expenses; or - establishing a minimum reinvestment rate on the payments made in respect of those assets or principal payment rate on those assets. These arrangements may include agreements under which securityholders are entitled to receive amounts deposited in various accounts held by the trustee upon the terms specified in the prospectus supplement. A copy of any of these types of instruments for a series will be filed with the SEC as an exhibit to a Current Report on Form 8-K to be filed with the Commission within 15 days of issuance of the securities. CROSS SUPPORT If specified in the prospectus supplement, separate groups of assets included in a trust may be evidenced by or secure only specified classes of the related series of securities. If this is the case, credit support may be provided by a cross support feature. This cross support feature would require that cashflow received with respect to a particular group of assets first be distributed as payments on the class of securities specifically related to those assets, but after the necessary payments with respect to that class were made, remaining cashflow from those assets would be available to make payments on one or more other classes issued by the same trust. The prospectus supplement for a series of securities which includes a cross support feature will describe the manner and conditions for applying this cross support feature. RESERVE ACCOUNTS If specified in the prospectus supplement, credit support with respect to a series of securities will be provided by the establishment and maintenance with the related trustee, in trust, of one or more reserve accounts for the series. The prospectus supplement will specify whether or not any reserve accounts so established will be included in the trust for such series. 49 Amounts deposited in the reserve account for a series will be specified in the prospectus supplement and may include: - cash, United States Treasury securities, instruments evidencing ownership of principal or interest payments thereon, letters of credit, demand notes, certificates of deposit or a combination of the foregoing in an aggregate amount specified in the prospectus supplement; or - amounts generated by the trust assets deposited from time to time to which the subordinate securityholders, if any, would otherwise be entitled. Any amounts on deposit in the reserve account and the proceeds of any other instrument deposited therein upon maturity will be held in cash or will be invested in investments consisting of United States government securities and other high-quality investments ("permitted investments"). Any instrument deposited in a reserve account will name the trustee, in its capacity as trustee for securityholders, or such other entity as is specified in the prospectus supplement, as beneficiary and will be issued by an entity acceptable to each rating agency that rates the securities. Additional information with respect to instruments deposited in the reserve accounts will be set forth in the prospectus supplement. Any amounts on deposit in the reserve accounts and payments on instruments deposited therein will be available for withdrawal from the reserve account for distribution to the holders of securities of the related series for the purposes, in the manner and at the times specified in the prospectus supplement. POOL INSURANCE POLICIES If specified in the prospectus supplement, a separate pool insurance policy will be obtained for the pool and issued by the credit enhancer named in the prospectus supplement. Each pool insurance policy will, subject to the limitations described below, cover loss by reason of default in payment on loans in the pool in an amount equal to a percentage specified in the prospectus supplement of the aggregate principal balance of those loans on the cut-off date. As more fully described below, the servicer will present claims under the pool insurance policy to the credit enhancer on behalf of itself, the trustee and the holders of the securities of the related series. The pool insurance policies, however, are not blanket policies against loss, since claims thereunder may only be made respecting particular defaulted loans and only upon satisfaction of certain conditions precedent described below. The pool insurance policies generally will not cover losses due to a failure to pay or denial of a claim under a primary mortgage insurance policy. The pool insurance policies generally will provide that no claims may be validly presented unless: - any required primary mortgage insurance policy is in effect for the defaulted loan and a claim thereunder has been submitted and settled; - hazard insurance on the related property has been kept in force and real estate taxes and other protection and preservation expenses have been paid; 50 - if there has been physical loss or damage to the property, it has been restored to its physical condition (reasonable wear and tear excepted) at the time of issuance of the policy; and - the insured has acquired good-and merchantable title to the property free and clear of liens except certain permitted encumbrances. Upon satisfaction of these conditions, the credit enhancer will have the option either: - to purchase the property securing the defaulted loan at a price equal to the principal balance thereof plus accrued and unpaid interest at the loan rate to the date of such purchase and certain expenses incurred by the servicer on behalf of the trustee and securityholders, net of certain amounts paid or assumed to have been paid under the related primary mortgage insurance policy; or - to pay the amount by which the sum of the principal balance of the defaulted loan plus accrued and unpaid interest at the loan rate to the date of payment of the claim and the aforementioned expenses exceeds the proceeds received from an approved sale of the property, net of certain amounts paid or assumed to have been paid under the related primary mortgage insurance policy. If any property securing a defaulted loan is damaged and proceeds, if any, from the related hazard insurance policy or the applicable special hazard insurance policy are insufficient to restore the damaged property to a condition sufficient to permit recovery under the pool insurance policy, the servicer will not be required to expend its own funds to restore the damaged property unless it determines that (a) such a restoration will increase the proceeds to securityholders on liquidation of the loan after reimbursement of the servicer for its expenses and (b) those expenses it incurs will be recoverable by it through proceeds of the sale of the property or proceeds of the related pool insurance policy or any related primary mortgage insurance policy. Like many primary insurance policies, the pool insurance policies may not insure against loss sustained by reason of default arising from, among other things: - fraud or negligence in the origination or servicing of a loan, including misrepresentation by the borrower, the originator or persons involved in the origination of the loan; - failure to construct a property in accordance with plans and specifications or - losses arising from special hazards, such as earthquakes, floods, mudslides or vandalism. A failure of coverage attributable to one of these events might result in a breach of the related seller's representations regarding the loan and might give rise to an obligation on the part of the seller to repurchase the defaulted loan if it is unable to cure the breach. Many primary mortgage policies do not cover, and no pool insurance policy will cover, a claim in respect of a defaulted loan if the servicer of the loan was not approved by the applicable insurer either at the time of default or thereafter. 51 The amount of coverage available under each pool insurance policy generally will be reduced over the life of the related securities by the positive difference, if any, between the aggregate dollar amount of claims paid under the pool insurance policy minus the aggregate of the net amounts realized by the credit enhancer upon disposition of the related foreclosed properties. The amount of claims paid will include certain expenses incurred by the servicer as well as accrued interest on delinquent loans to the date of payment of the claim or another date set forth in the prospectus supplement. Accordingly, if aggregate net claims paid under any pool insurance policy reach the original policy limit, coverage under that pool insurance policy will be exhausted and any further losses will be borne by the related securityholders. OVER-COLLATERALIZATION Over-collateralization exists when the principal balance of the loans supporting a class or classes of securities exceeds the principal balance of the class or classes of securities themselves. If provided for in the prospectus supplement, a portion of the interest payment received on the loans during a due period may be paid to the securityholders on the related payment date as an additional distribution of principal on a certain class or classes of securities. This payment of interest as principal would accelerate the rate of payment of principal on the class or classes of securities relative to the principal balance of the loans in the related trust and thereby create or increase over-collateralization. LETTER OF CREDIT The letter of credit, if any, with respect to a series of securities will be issued by the bank or financial institution specified in the prospectus supplement. Under the letter of credit, the issuing bank will be obligated to honor drawings thereunder in an aggregate fixed dollar amount, net of unreimbursed payments thereunder, equal to the percentage specified in the prospectus supplement of the aggregate principal balance of the loans on the related cut-off date or of one or more classes of securities. If specified in the prospectus supplement, the letter of credit may permit drawings in the event of losses not covered by insurance policies or other credit support, such as losses arising from damage not covered by standard hazard insurance policies, losses resulting from the bankruptcy of a borrower and the application of certain provisions of the federal Bankruptcy Code, or losses resulting from denial of insurance coverage due to misrepresentations in connection with the origination of a loan. The amount available under the letter of credit will, in all cases, be reduced to the extent of the unreimbursed payments thereunder. The obligations of the issuing Bank under the letter of credit for each series of securities will expire at the earlier of the date specified in the prospectus supplement or the termination of the trust. A copy of the letter of credit for a series, if any, will be filed with the SEC as an exhibit to a Current Report on Form 8-K to be filed within 15 days of issuance of the securities of the related series. 52 OTHER INSURANCE, GUARANTIES, LETTERS OF CREDIT AND SIMILAR INSTRUMENTS OR AGREEMENTS If specified in the prospectus supplement, a trust may also include insurance, guaranties, letters of credit or similar arrangements for the purpose of: - maintaining timely payments or providing additional protection against losses on the assets included in the trust; - paying administrative expenses; or - establishing a minimum reinvestment rate on the payments made in respect of those assets or principal payment rate on those assets. These arrangements may include agreements under which securityholders are entitled to receive amounts deposited in various accounts held by the trustee upon the terms specified in the prospectus supplement. YIELD AND PREPAYMENT CONSIDERATIONS The yields to maturity and weighted average lives of the securities will be affected primarily by the amount and timing of principal payments received on or in respect of the trust assets. The original terms to maturity of the loans in a given pool will vary depending upon the type of loans included therein. Each prospectus supplement will contain information with respect to the type and maturities of the loans in the related pool. The prospectus supplement will specify the circumstances, if any, under which the related loans will be subject to prepayment penalties. The prepayment experience on the loans in a pool will affect the weighted average life of the securities. The rate of prepayments with respect to conventional mortgage loans has fluctuated significantly in recent years. In general, if prevailing rates fall significantly below the loan rates borne by the loans, such loans are more likely to be subject to higher prepayment rates than if prevailing interest rates remain at or above such loan rates. Conversely, if prevailing interest rates rise appreciably above the loan rates borne by the loans, such loans are more likely to experience a lower prepayment rate than if prevailing rates remain at or below such loan rates. However, there can be no assurance that such will be the case. The rate of prepayment on the loans cannot be predicted. Home equity loans have been originated in significant volume only during the past few years and the depositor is not aware of any publicly available studies or statistics on the rate of prepayment of such loans. Generally, home equity loans are not viewed by borrowers as permanent financing. Accordingly, such loans may experience a higher rate of prepayment than traditional first mortgage loans. On the other hand, because home equity loans such as the revolving credit line loans generally are not fully amortizing, the absence of voluntary borrower prepayments could cause rates of principal payments lower than, or similar to, those of 53 traditional fully-amortizing first mortgage loans. The prepayment experience of the trust may be affected by a wide variety of factors, including: - general economic conditions; - prevailing interest rate levels; - availability of alternative financing; - homeowner mobility; - for junior liens, the amounts of, and interest rates on, the underlying senior mortgage loans; and - the use of first mortgage loans as long-term financing for home purchase and subordinate mortgage loans as shorter-term financing for a variety of purposes, including home improvement, education expenses and purchases of consumer durables such as automobiles. In addition, any future limitations on the right of borrowers to deduct interest payments on home equity loans for federal income tax purposes may further increase the rate of prepayments of the loans. The yield to an investor who purchases securities in the secondary market at a price other than par will vary from the anticipated yield if the rate of prepayment on the loans is actually different than the rate anticipated by the investor at the time the securities were purchased. Collections on home equity loans may vary because, among other things, borrowers may: - make payments during any month as low as the minimum monthly payment for that month or, during the interest-only period for certain revolving credit line loans and, in more limited circumstances, closed-end loans, with respect to which an interest-only payment option has been selected, the interest and the fees and charges for such month; - make payments as high as the entire outstanding principal balance plus accrued interest and the fees and charges thereon; - fail to make the required periodic payments; or - vary payments month to month due to seasonal purchasing and other personal payment habits. When a full prepayment is made on a loan, the borrower is charged interest on the principal amount of the prepaid loan not for the entire month in which the prepayment is made, but only for the number of days in the month actually elapsed up to the date of the prepayment. The effect of prepayments in full will be to reduce the amount of interest passed through or paid in the following month to securityholders because interest on the principal amount of any prepaid loan will generally be paid only to the date of prepayment. Partial prepayments in a given month may be applied to the outstanding principal balances of the prepaid loans on the first day of the month of receipt or the 54 month following receipt. In the latter case, partial prepayments will not reduce the amount of interest passed through or paid in the month in which the partial prepayment was made. Generally, neither full nor partial prepayments will be passed through or paid to securityholders until the month following receipt. Even assuming that the properties provide adequate security for the loans, substantial delays could be encountered in connection with the liquidation of defaulted loans, which would give rise to corresponding delays in the receipt by securityholders of the proceeds of a liquidation. An action to foreclose on a property securing a loan is regulated by state statutes and rules and is subject to many of the delays and expenses of other lawsuits if defenses or counterclaims are interposed, sometimes requiring several years to complete. Furthermore, in some states an action to obtain a deficiency judgment is not permitted following a nonjudicial sale of a property. In the event of a default by a borrower, these restrictions among other things, may impede the ability of the servicer to foreclose on or sell the property or to obtain liquidation proceeds sufficient to repay all amounts due on the related loan. In addition, the servicer will be entitled to deduct from related liquidation proceeds all expenses reasonably incurred in attempting to recover amounts due and not yet repaid on defaulted loans, including payments to senior lienholders, legal fees and costs of legal action, real estate taxes and maintenance and preservation expenses. Liquidation expenses with respect to defaulted mortgage loans generally do not vary directly with the outstanding principal balance of the mortgage loan being liquidated. Therefore, assuming that a servicer took the same steps in realizing upon a defaulted mortgage loan having a small outstanding principal balance as it would in the case of a defaulted mortgage loan having a large outstanding principal balance, the amount realized after expenses of liquidation would be smaller as a percentage of the outstanding principal balance for the former mortgage loan as opposed to the latter. If the rate at which interest is passed through or paid to the holders of securities of a series is calculated on a loan-by-loan basis, disproportionate principal prepayments among loans with different loan rates will affect the yield on such securities. In most cases, the effective yield to securityholders will be lower than the yield otherwise produced by the applicable pass-through rate or interest rate and purchase price, because while interest will accrue on each loan from the first day of the month (unless otherwise specified in the prospectus supplement), the distribution of such interest will not be made earlier than the month following the month of accrual. Under certain circumstances, the servicer, the depositor, the holders of the residual interests in a REMIC or any person specified in the prospectus supplement may be obligated to or may have the option to purchase either the assets of a trust or some or all of the securities and thereby effect earlier retirement or redemption of the related series of securities. The relative contribution of the various factors affecting prepayment may vary from time to time. There can be no assurance as to the rate of payment of principal of the trust assets at any time or over the lives of the securities. 55 The prospectus supplement will discuss in greater detail the effect of the rate and timing of principal payments (including prepayments), delinquencies and losses on the yield, weighted average lives and maturities of the securities. THE AGREEMENTS Set forth below is a description of the material provisions of the Agreements which are not described elsewhere in this prospectus. The description is subject to, and qualified in its entirety by reference to, the provisions of each Agreement. Where particular provisions or terms used in the Agreements are referred to, such provisions or terms are as specified in the Agreements. As specified in the related prospectus supplement, certain of the rights of securityholders described below may be exercised by the credit enhancer for the related series of securities without the consent of the securityholders and certain rights of securityholders may not be exercised without the written consent of the credit enhancer. ASSIGNMENT OF THE TRUST ASSETS ASSIGNMENT OF THE LOANS. At the time of issuance of the securities, the depositor will cause the loans to be assigned or pledged to the trustee for the benefit of the securityholders, without recourse, together with all principal and interest received by or on behalf of the depositor on or with respect to such loans after the cut-off date, other than principal and interest due on or before the cut-off date and other than any amounts specified in the prospectus supplement. Concurrently with this sale, the trustee will deliver the securities to the depositor in exchange for the loans. Each loan will be identified in a schedule appearing as an exhibit to the related Agreement. Such schedule will include information as to the outstanding principal balance of each loan after application of payments due on or before the cut-off date, as well as information regarding the loan rate or annual percentage rate, the maturity of the loan, the loan-to-value ratios, combined loan-to-value ratios or effective loan-to-value ratios, as applicable, at origination and certain other information. Unless otherwise specified in the prospectus supplement, the related Agreement will require that, within the time period specified therein, the depositor will also deliver or cause to be delivered to the trustee or, if so indicated in the prospectus supplement, a separate custodian appointed by the trustee pursuant to a custodial agreement, as to each mortgage loan or home equity loan, among other things: - the mortgage note or credit line agreement endorsed without recourse in blank or to the order of the trustee; - the mortgage, deed of trust or similar instrument with evidence of recording indicated thereon, except that in the case of any mortgage not returned form the public recording office, the depositor will deliver or cause to be delivered a copy of such mortgage together with a certificate that the original of the mortgage was delivered to such recording office; 56 - an assignment of the mortgage to the trustee, which assignment will be in recordable form in the case of a mortgage assignment; and - all other security documents, including those relating to any senior interests in the property, that are specified in the prospectus supplement or the related Agreement. If specified in the prospectus supplement, the depositor will promptly cause the assignments of the loans to be recorded in the appropriate public office for real property records. If specified in the prospectus supplement, some or all of the loan documents may not be delivered to the trustee until after the occurrence of certain events specified in the prospectus supplement. In lieu of delivering the mortgage or deed of trust and an assignment of the mortgage to the trustee, for any loans registered on the MERS(R) System the depositor will cause the trustee to be recorded as the beneficial owner of the loans pursuant to the MERS rules for electronically tracking changes in ownership rights. The trustee or the appointed custodian will review the loan documents within the time period specified in the prospectus supplement after receipt thereof to ascertain that all required documents have been properly executed and received, and the trustee will hold the loan documents in trust for the benefit of the related securityholders. Unless otherwise specified in the prospectus supplement, if any loan document is found to be missing or defective in any material respect, the trustee or the custodian, as appropriate, will notify the servicer and the depositor, and the servicer will notify the related seller. If the related seller cannot cure the omission or defect within the time period specified in the prospectus supplement after receipt of notice from the servicer, the seller will be obligated to either purchase the related loan from the trust at the purchase price or, if so specified in the prospectus supplement, remove such loan from the trust and substitute in its place one or more other loans that meets certain requirements as set forth in the prospectus supplement. There can be no assurance that a seller will fulfill this purchase or substitution obligation. Unless otherwise specified in the prospectus supplement, this obligation to cure, purchase or substitute constitutes the sole remedy available to the securityholders or the trustee for omission of, or a material defect in, a loan document. Notwithstanding the foregoing provisions, with respect to a trust for which a REMIC election is to be made, no purchase or substitution of a loan will be made if the purchase or substitution would result in a prohibited transaction tax under the Code. NO RECOURSE TO SELLERS; DEPOSITOR OR SERVICER. As described above under "-- Assignment of the Loans," the depositor will cause the loans comprising the trust to be assigned or pledged to the trustee, without recourse. However, each seller will be obligated to repurchase or substitute for any loan as to which certain representations and warranties are breached or for failure to deliver certain documents relating to the loans as described in this prospectus under "Assignment of the Loans" and "Loan Program -- Representations by Sellers; Repurchases." These obligations to purchase or substitute constitute the sole remedy available to the securityholders or the trustee for a breach of any such representation or warranty or failure to deliver a constituent document. 57 PAYMENTS ON LOANS; DEPOSITS TO COLLECTION ACCOUNT The servicer will establish and maintain or cause to be established and maintained with respect to the each trust a separate account or accounts for the collection of payments on the trust assets in the trust (the "collection account"). The prospectus supplement may provide for other requirements for the collection account, but if it does not, then the collection account must be either: - maintained with a depository institution the short-term debt obligations of which (or, in the case of a depository institution that is the principal subsidiary of a holding company, the short-term debt obligations of such holding company) are rated in one of the two highest short-term rating categories by the rating agency that rated one or more classes of the related series of securities; - an account or accounts the deposits in which are fully insured by the FDIC; - an account or accounts the deposits in which are insured by the FDIC to the limits established by the FDIC and the uninsured deposits in which are otherwise secured such that, as evidenced by an opinion of counsel, securityholders have a claim with respect to the funds in such account or accounts, or a perfected first-priority security interest against any collateral securing those funds, that is superior to the claims of any other depositors or general creditors of the depository institution with which such account or accounts are maintained; or - an account or accounts otherwise acceptable to the rating agency. The collateral eligible to secure amounts in the collection account is limited to permitted investments. A collection account may be maintained as an interest bearing account or the funds held therein may be invested pending each succeeding payment date in Permitted Investments. The servicer, the trustee or any other entity described in the prospectus supplement may be entitled to receive interest or other income earned on funds in the collection account as additional compensation and will be obligated to deposit in the collection account the amount of any loss when realized. The collection account may be maintained with the servicer or with a depository institution that is an affiliate of the servicer, provided it meets the standards set forth above. The servicer or trustee will deposit or cause to be deposited in the collection account for each trust, to the extent applicable and unless otherwise specified in the prospectus supplement and provided in the related Agreement, the following payments and collections received or advances made by or on behalf of it subsequent to the cut-off date (other than certain payments due on or before the cut-off date and any excluded amounts): - all payments on account of principal and interest (which may be net of the applicable servicing compensation), including principal prepayments and, if specified in the prospectus supplement, any applicable prepayment penalties, on the loans; - all net insurance proceeds, less any incurred and unreimbursed advances made by the servicer, of the hazard insurance policies and any primary mortgage insurance policies, to the extent such proceeds are not applied to the restoration of the 58 property or released to the mortgagor in accordance with the servicer's normal servicing procedures; - all proceeds received in connection with the liquidation of defaulted loans, less any expenses of liquidation and any unreimbursed advances made by the servicer with respect to the liquidated loans; - any net proceeds received on a monthly basis with respect to any properties acquired on behalf of the securityholders by foreclosure or deed in lieu of foreclosure; - all advances as described in this prospectus under "Description of the Securities -- Advances"; - all proceeds of any loan or property in respect thereof repurchased by any seller as described under "Loan Program -- Representations by Sellers; Repurchases" or "-- Assignment of Trust Assets" above and all proceeds of any loan repurchased as described under "-- Termination; Optional Termination" below; - all payments required to be deposited in the collection account with respect to any deductible clause in any blanket insurance policy described under "-- Hazard Insurance" below; - any amount required to be deposited by the servicer in connection with losses realized on investments for the benefit of the servicer of funds held in the collection account and, to the extent specified in the prospectus supplement, any payments required to be made by the servicer in connection with prepayment interest shortfalls; and - all other amounts required to be deposited in the collection account pursuant to the related agreement. The servicer or the depositor, as applicable, may from time to time direct the institution that maintains the collection account to withdraw funds from the collection account for the following purposes: - to transfer funds for the trustee for distribution of payments due on the securities and other purposes set forth in the prospectus supplement; - to pay to the servicer the purchase price of any additional balances transferred to the trustee resulting from draws under revolving lines of credit as set forth in the prospectus supplement; - to pay to the servicer the servicing fees described in the prospectus supplement and, as additional servicing compensation, earnings on or investment income with respect to funds in the collection account credited thereto; - to reimburse the servicer for advances made with respect to a loan, but only from amounts received that represent late payments of principal on, late payments of interest on, insurance proceeds received with respect to or liquidation proceeds received with respect to the same loan; - to reimburse the servicer for any advances previously made which the servicer has determined to be nonrecoverable; 59 - to reimburse the servicer from insurance proceeds for expenses incurred by the servicer and covered by insurance policies; - to reimburse the servicer for unpaid servicing fees and unreimbursed out-of-pocket costs and expenses incurred by the servicer in the performance of its servicing obligations, such right of reimbursement being limited to amounts received representing late recoveries of the payments for which the original advances were made; - to pay to the servicer, with respect to each loan or property acquired in respect thereof that has been purchased by the servicer pursuant to the Agreement, all amounts received thereon and not taken into account in determining the principal balance of that repurchased loan, - to reimburse the servicer or the depositor for expenses incurred and reimbursable pursuant to the Agreement; - to pay or reimburse the trustee or any other party as provided in the prospectus supplement; - to withdraw any amount deposited in the collection account that was not required to be deposited therein; and - to clear and terminate the collection account upon termination of the Agreement. In addition, unless otherwise specified in the prospectus supplement, on or prior to the business day immediately preceding each payment date, the servicer shall withdraw from the collection account the amount of available funds, to the extent on deposit, for deposit in an account maintained by the trustee. The applicable Agreement may require the servicer to establish and maintain one or more escrow accounts into which mortgagors deposit amounts sufficient to pay taxes, assessments, hazard insurance premiums or comparable items. Withdrawals from the escrow accounts maintained for mortgagors may be made to effect timely payment of taxes, assessments and hazard insurance premiums or comparable items, to reimburse the servicer out of related assessments for maintaining hazard insurance, to refund to mortgagors amounts determined to be overages, to remit to mortgagors, if required, interest earned, if any, on balances in any of the escrow accounts, to repair or otherwise protect the property and to clear and terminate any of the escrow accounts. The servicer will be solely responsible for administration of the escrow accounts and will be expected to make advances to such accounts when a deficiency exists therein. PRE-FUNDING ACCOUNT If provided in the prospectus supplement, the servicer will establish and maintain, in the name of the trustee on behalf of the securityholders, a pre-funding account into which the depositor will deposit cash or other assets on the closing date. The pre-funding account will be maintained with the trustee. The deposit will not exceed 50% of the initial aggregate principal amount of the securities. The cash on deposit in the pre-funding account will be used by the trustee to purchase additional loans for the trust from the depositor from time to time during the funding period. Monies on deposit in the prefunding account will not be available to 60 cover losses on or in respect of the loans. The funding period for a trust will begin on the closing date and will end on the date specified in the prospectus supplement, which will not be later than one year after the closing date. Monies on deposit in the pre-funding account may be invested in permitted investments as specified in the related Agreement. Earnings on investment of funds in the pre-funding account will be applied as specified in the prospectus supplement and losses will be charged against the funds on deposit in the pre-funding account. Any amounts remaining the pre-funding account at the end of the funding period will be distributed to securityholders as a prepayment of principal, in the manner and priority specified in the prospectus supplement. In addition, if provided in the prospectus supplement, on the related closing date the depositor will make a deposit to a capitalized interest account, which will be maintained by the trustee. The funds on deposit in the capitalized interest account will be used solely to cover shortfalls in interest that may arise as a result of utilization of the pre-funding account. Monies on deposit in the capitalized interest account will not be available to cover losses on or in respect of the loans. To the extent that the entire amount on deposit in the capitalized interest account has not been used to cover shortfalls in interest by the end of the funding period, any remaining amounts will be paid to the depositor. SUBSERVICING BY SELLERS The servicer may enter into subservicing agreements with any servicing entity which will act as the subservicer for the loans, which subservicing agreements will not contain any terms inconsistent with the related Agreement. While each subservicing agreement will be a contract solely between the servicer and the subservicer, the Agreement pursuant to which a series of securities is issued will provide that, if for any reason the servicer for that series of securities is no longer the servicer of the loans, the trustee or any successor servicer must recognize the subservicer's rights and obligations under the related subservicing agreement. Notwithstanding any subservicing arrangement, unless otherwise provided in the prospectus supplement, the servicer will remain liable for its servicing duties and obligations under the servicing agreement as if the servicer alone were servicing the loans. COLLECTION PROCEDURES The servicer, directly or through one or more subservicers, will make reasonable efforts to collect all payments called for under the loans and will, consistent with each Agreement and any pool insurance policy, primary mortgage insurance policy, FHA insurance, VA guaranty, bankruptcy bond or alternative arrangements, follow those collection procedures that are customary with respect to loans that are comparable to the loans. Consistent with the above, the servicer may, in its discretion: - waive any prepayment charge, assumption fee, late payment or other charge in connection with a loan; and - to the extent not inconsistent with the rules applicable to REMIC, and with the coverage of an individual loan by a pool insurance policy, primary mortgage insurance policy, FHA insurance, VA guaranty, bankruptcy bond or alternative arrangements, if applicable, suspend or reduce regular monthly payment on the 61 loan for a period of up to six months, or arrange with the related borrower a schedule for the liquidation of delinquencies. The servicer's obligation, if any, to make or cause to be made advances on a loan will remain during any period of this type of arrangement. Under the Agreement, the servicer will be required to enforce due-on-sale clauses with respect to any loans to the extent contemplated by the terms of those loans and permitted by applicable law. Where an assumption of, or substitution of liability with respect to, a loan is required by law, upon receipt of assurance that the primary mortgage insurance policy covering such loan will not be affected, the servicer may permit the assumption of a loan, pursuant to which the original borrower would remain liable on the related loan note, or a substitution of liability with respect to the loan, pursuant to which the new borrower would be substituted for the original borrower as being liable on the loan note. Any fees collected for entering into an assumption or substitution of liability agreement may be retained by the servicer as additional servicing compensation. In connection with any assumption or substitution, generally neither the loan rate borne by the related loan note nor its payment terms may be changed. HAZARD INSURANCE Except as otherwise specified in the prospectus supplement, the servicer will require the mortgagor or obligor on each loan to maintain a hazard insurance policy providing coverage against loss by fire and other hazards which are covered under the standard extended coverage endorsement customary for the type of property in the state in which such property is located. This hazard insurance coverage will be in an amount that is at least equal to the lesser of: - the maximum insurable value of the improvements securing the loan from time to time; and - either the combined principal balance owing on the loan and any mortgage loan senior to such loan or an amount such that the proceeds of the policy shall be sufficient to prevent the mortgagor or obligor and/or the lender from becoming a co-insurer, whichever is greater. All amounts collected by the servicer under any hazard policy (except for amounts to be applied to the restoration or repair of the property or released to the mortgagor or obligor in accordance with the servicer's normal servicing procedures) will be deposited in the related collection account. In the event that the servicer maintains a blanket policy insuring against hazard losses on all the loans comprising part of a trust, it will conclusively be deemed to have satisfied its obligation relating to the maintenance of hazard insurance. If the blanket policy relating to a trust contains a deductible clause, the servicer will be required to deposit from its own funds into the collection account an amount equal to the amount which would have been deposited therein but for the deductible clause. 62 In general, the standard form of fire and extended coverage policy covers physical damage to or destruction of the improvements securing a loan by fire, lightning, explosion, smoke, windstorm and hail, riot, strike and civil commotion, subject to the conditions and exclusions listed in each policy. Although the policies relating to the loans may have been underwritten by different insurers under different state laws in accordance with different applicable forms and therefore may not contain identical terms and conditions, the basic terms of these types of policies are dictated by respective state laws, and most hazard policies typically do not cover (among other things) any physical damage resulting from the following: - war; - revolution; - governmental actions; - floods and other water-related causes; - earth movement, including earthquakes, landslides and mud flows; - nuclear reactions; - wet or dry rot; - vermin, rodents, insects or domestic animals; or - theft and, in certain cases, vandalism. The foregoing list is merely indicative of certain kinds of uninsured risks and is not intended to be all inclusive. If, however, any mortgaged property at the time of origination of the related loan is located in an area identified by the Flood Emergency Management Agency as having special flood hazards and flood insurance has been made available, the servicer will cause to be maintained with a generally acceptable insurance carrier a flood insurance policy in accordance with mortgage servicing industry practice. Any flood insurance policy so maintained will provide coverage in an amount at least equal to the lesser of the principal balance of the loan and the minimum amount required under the terms of coverage to compensate for any damage or loss on a replacement cost basis. The amount of coverage provided will not be greater than the maximum amount of flood insurance available for the related mortgaged property under either the regular or emergency programs of the National Flood Insurance Program. The hazard insurance policies covering properties securing the loans typically contain a 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 insured property in order to recover the full amount of any partial loss. If the insured's coverage falls below this specified percentage, then the insurer's liability in the event of partial loss will not exceed the larger of (a) the replacement costs of the improvements less physical depreciation and (b) such proportion of the loss as the amount of insurance carried bears to the specified percentage of the full replacement cost of the improvements. Since the amount of hazard insurance the servicer may cause to be maintained on the 63 improvements securing a loan declines as the principal balances owing on the loan itself decrease, and since improved real estate generally has appreciated in value over time in the past, the effect of this requirement in the event of partial loss may be that hazard insurance proceeds will be insufficient to restore fully the damaged property. PRIMARY MORTGAGE INSURANCE The servicer will maintain or cause to be maintained, as the case may be and as permitted by law, in full force and effect, to the extent specified in the prospectus supplement, a primary mortgage insurance policy with regard to each loan for which that coverage is required. Unless required by law, the servicer will not cancel or refuse to renew any primary mortgage insurance policy in effect at the time of the initial issuance of a series of securities that is required to be kept in force under the applicable Agreement unless the replacement primary mortgage insurance policy for the cancelled or nonrenewed policy is maintained with an insurer whose claims-paying ability is sufficient to maintain the current rating of the classes of securities of that series that have been rated. Although the terms and conditions of primary mortgage insurance vary, the amount of a claim for benefits under a primary mortgage insurance policy covering a mortgage loan will consist of the insured percentage of the unpaid principal amount of the covered loan and accrued and unpaid interest on the loan and reimbursement of certain expenses, less: - all rents or other payments collected or received by the insured (other than the proceeds of hazard insurance) that are derived from or in any way related to the property; - hazard insurance proceeds in excess of the amount required to restore the property and which have not been applied to the payment of the loan; - amounts expended but not approved by the insurer of the related primary mortgage insurance policy; - claim payments previously made by the insurer; and - unpaid premiums. Primary mortgage insurance policies reimburse certain losses sustained by reason of default in payments by borrowers. Primary mortgage insurance policies will not insure against, and exclude from coverage, losses sustained by reason of a default arising from or involving certain matters, including: - fraud or negligence in origination or servicing of the loans, including misrepresentation by the originator, mortgagor (or obligor) or other persons involved in the origination of the loan; - failure to construct the property subject to the loan in accordance with specified plans; 64 - physical damage to the property; and - the related subservicer not being approved as a servicer by the insurer. Evidence of each primary mortgage insurance policy will be provided to the trustee simultaneously with the transfer to the trustee of the loan. The servicer, on behalf of itself, the trustee and the securityholders, is required to present claims to the insurer under any primary mortgage insurance policy and to take reasonable steps that are necessary to permit recovery thereunder with respect to defaulted loans. Amounts collected by the servicer on behalf of the servicer, the trustee and the securityholders shall be deposited in the related collection account for distribution as set forth above. CLAIMS UNDER INSURANCE POLICIES AND OTHER REALIZATION UPON DEFAULTED LOANS The servicer or subservicers, on behalf of the trustee and securityholders, will present claims to the insurer under any applicable insurance policies. If the property securing a defaulted loan is damaged and proceeds, if any, from the related hazard insurance policy are insufficient to restore the damaged property, the servicer is not required to expend its own funds to restore the damaged property unless it determines (a) that such restoration will increase the proceeds to securityholders on liquidation of the loan after reimbursement of the servicer for its expenses and (b) that the expenditure will be recoverable by it from related insurance proceeds or liquidation proceeds. If recovery on a defaulted loan under any insurance policy is not available, or if the defaulted loan is not covered by an insurance policy, the servicer will be obligated to follow or cause to be followed those normal practices and procedures that it deems necessary or advisable to realize upon the defaulted loan. If the net proceeds after reimbursable expenses of any liquidation of the property securing the defaulted loan are less than the principal balance of the loan plus interest accrued thereon that is payable to securityholders, the trust will realize a loss in the amount of that difference plus the aggregate of expenses incurred by the servicer in connection with the liquidation proceedings and which are reimbursable under the Agreement. The proceeds from any liquidation of a loan will be applied in the following order of priority: - first, to reimburse the servicer for any unreimbursed expenses incurred by it to restore the related property and any unreimbursed servicing compensation payable to the servicer with respect to the loan; - second, to reimburse the servicer for any unreimbursed advances with respect to the loan; - third, to accrued and unpaid interest (to the extent no advance has been made for that amount) on the loan; and - fourth, as a recovery of principal of the loan. 65 SERVICING AND OTHER COMPENSATION AND PAYMENT OF EXPENSES The servicer's primary compensation for its activities as servicer will come from the payment to it, with respect to each interest payment on a loan, of the amount specified in the prospectus supplement. As principal payments are made on the loans, the portion of each monthly payment which represents interest will decline, and thus servicing compensation to the servicer will decrease as the loans amortize. Prepayments and liquidations of loans prior to maturity will also cause servicing compensation to the servicer to decrease. Subservicers, if any, will be entitled to a monthly servicing fee as described in the prospectus supplement in compensation for their servicing duties. In addition, the servicer or subservicer will retain all prepayment charges, assumption fees and late payment charges, to the extent collected from borrowers, and any benefit that may accrue as a result of the investment of funds in the applicable collection account (unless otherwise specified in the prospectus supplement). The servicer will pay or cause to be paid certain ongoing expenses associated with each trust and incurred by it in connection with its responsibilities under the related Agreement, including, without limitation, and only if specified in the prospectus supplement, payment of any fee or other amount payable in respect of any credit enhancement arrangements, the trustee, any custodian appointed by the trustee, the certificate registrar and any paying agent, and payment of expenses incurred in enforcing the obligations of subservicers and sellers. The servicer will be entitled to reimbursement of expenses incurred in enforcing the obligations of subservicers and sellers under certain limited circumstances. EVIDENCE AS TO COMPLIANCE Each Agreement will provide that the servicer at its expense shall cause a firm of independent public accountants to furnish a report annually to the trustee. Each annual report will state that the firm has performed certain procedures specified in the related Agreement and that the review has disclosed no items of noncompliance with the provisions of the Agreement which, in the opinion of the firm, are material, except for any items of noncompliance that are forth in such report. Each Agreement will also provide for delivery to the trustee, on or before a specified date in each year, of an annual statement signed by an officer of the servicer to the effect that the servicer has fulfilled its obligations under the Agreement throughout the preceding year. CERTAIN MATTERS REGARDING THE SERVICER AND THE DEPOSITOR The servicer under each pooling and servicing agreement or servicing agreement, as applicable, will be named in the prospectus supplement. The entity serving as servicer may have normal business relationships with the depositor or the depositor's affiliates. Each Agreement will provide that the servicer may not resign from its obligations and duties under the Agreement except upon (a) appointment of a successor servicer and receipt by the trustee of a letter from the applicable rating agency or rating agencies that the servicer's resignation and the successor servicer's appointment will not result in 66 a downgrade of the securities or (b) a determination that its performance of its duties thereunder is no longer permissible under applicable law. The servicer may, however, be removed from its obligations and duties as set forth in the Agreement. No resignation by the servicer will become effective until the trustee or a successor servicer has assumed the servicer's obligations and duties under the Agreement. Each Agreement generally will further provide that neither the servicer, the depositor nor any director, officer, employee, or agent of the servicer or the depositor (each, an "indemnified party") will be under any liability to the related trust or securityholders for taking any action or for refraining from taking any action in good faith pursuant to the Agreement, or for errors in judgment; provided, however, that neither the servicer, the depositor nor any such person will be protected against any liability which would otherwise be imposed by reason of willful misfeasance, bad faith or gross negligence in the performance of duties thereunder or by reason of reckless disregard of obligations and duties thereunder. Each Agreement generally will further provide that each indemnified party will be entitled to indemnification by the related trust and will be held harmless against any loss, liability or expense incurred in connection with any legal action relating to the Agreement or the securities for the related series, other than any loss, liability or expense related to any specific loan or loans (except any loss, liability or expense otherwise reimbursable pursuant to the Agreement) and any loss, liability or expense incurred by reason of willful misfeasance, bad faith or gross negligence in the performance of that indemnified party's duties thereunder or by reason of reckless disregard by that indemnified party of obligations and duties thereunder. In addition, each Agreement generally will provide that neither the servicer nor the depositor will be under any obligation to appear in, prosecute or defend any legal action which is not incidental to its respective responsibilities under the Agreement and which in its opinion may involve it in any expense or liability. The servicer or the depositor may, however, in its discretion undertake any action which it may deem necessary or desirable with respect to the Agreement and the rights and duties of the parties thereto and the interests of the securityholders thereunder. In that event, the legal expenses and costs of the action and any liability resulting therefrom will be expenses, costs and liabilities of the trust, and the servicer or the depositor, as the case may be, will be entitled to be reimbursed for those costs and liabilities out of funds which would otherwise be distributed to securityholders. Except as otherwise specified in the prospectus supplement, any person into which the servicer may be merged or consolidated, or any person resulting from any merger or consolidation to which the servicer is a party, or any person succeeding to the business of the servicer, will be the successor of the servicer under each Agreement, provided that that person is qualified to sell mortgage loans to, and service mortgage loans on behalf of, Fannie Mae or Freddie Mac. Furthermore, the merger, consolidation or succession may not adversely affect the then current rating or ratings of the class or classes of securities of the related series that have been rated. 67 EVENTS OF DEFAULT; RIGHTS UPON EVENT OF DEFAULT POOLING AND SERVICING AGREEMENT; SERVICING AGREEMENT. Events of default under each Agreement will be specified in the prospectus supplement and may include: - any failure by the servicer to make an Advance which continues unremedied for one business day; - any failure by the servicer to make or cause to be made any other required payment pursuant to the Agreement which continues unremedied for one business day after written notice of such failure to the servicer in the manner specified in the Agreement; - any failure by the servicer duly to observe or perform in any material respect any of its other covenants or agreements in the Agreement which continues unremedied for sixty days after written notice of the failure to the servicer in the manner specified in the Agreement; and - certain events of insolvency, readjustment of debt, marshalling of assets and liabilities or similar proceedings and certain actions by or on behalf of the servicer indicating its insolvency, reorganization or inability to pay its obligations. Unless otherwise provided in the prospectus supplement, so long as an event of default under an Agreement remains unremedied, the trustee may, and at the direction of holders of securities evidencing not less than 25% of the aggregate voting rights of such series and under such other circumstances as may be specified in such Agreement, the trustee shall terminate all of the rights and obligations of the servicer under the Agreement relating to such trust and in and to the related trust assets, whereupon the trustee will succeed to all of the responsibilities, duties and liabilities of the servicer under the Agreement, including, if specified in the prospectus supplement, the obligation to make advances, and will be entitled to similar compensation arrangements. In the event that the trustee is unwilling or unable to act as successor to the servicer, it may appoint, or petition a court of competent jurisdiction for the appointment of, a housing and home finance institution which is a Fannie Mae or Freddie Mac approved servicer with a net worth of a least $15,000,000 to act as successor to the servicer under the Agreement. Pending the appointment of a successor servicer, the trustee is obligated to act in such capacity. The trustee and any such successor may agree upon the servicing compensation to be paid, which in no event may be greater than the compensation payable to the servicer under the Agreement. Unless otherwise provided in the prospectus supplement, no securityholder, solely by virtue of the securityholder's status as a securityholder, will have any right under any Agreement to institute any proceeding with respect to that Agreement, unless the securityholder previously has given to the trustee written notice of default and unless the holders of securities evidencing not less than 25% of the aggregate voting rights for the related series have made written request upon the trustee to institute such proceeding in its own name as trustee thereunder and have offered to the trustee reasonable indemnity, the trustee for 60 days has neglected or refused to institute any such proceeding, and all other conditions precedent for the initiation of suit as described in the Agreement have 68 been met. However, the trustee is under no obligation to exercise any of the trusts or powers vested in it by the Agreement for any series or to make any investigation of matters arising thereunder or to institute, conduct or defend any litigation thereunder or in relation thereto at the request, order or direction of any securityholders, unless those securityholders have offered and provided to the trustee reasonable security or indemnity against the costs, expenses and liabilities which may be incurred therein or thereby. INDENTURE. Except as otherwise specified in the prospectus supplement, events of default or rapid amortization events under the indenture for each series of notes include: - a default in the payment of any principal of or interest on any bond as specified in the prospectus supplement; - failure to perform in any material respect any other covenant of the depositor or the trust in the indenture which continues for a period of thirty (30) days after notice thereof is given in accordance with the procedures described in the prospectus supplement; - certain events of bankruptcy, insolvency, receivership or liquidation of the depositor or the trust; or - any other event of default provided with respect to bonds of that series including, but not limited to, certain defaults on the part of the trust, if any, of a credit enhancement instrument supporting such notes. If an event of default with respect to the notes of any series at the time outstanding occurs and is continuing, either the trustee or the holders of a majority of the then aggregate outstanding amount of the bonds of that series or the credit enhancer of that series, if any, may declare the principal amount (or, if the bonds have an interest rate of 0%, that portion of the principal amount as may be specified in the terms of that series, as provided in the prospectus supplement) of all the bonds of that series to be due and payable immediately. This declaration may, under certain circumstances, be rescinded and annulled by the holders of more than 50% of the aggregate voting rights of the bonds of the related series. Rapid amortization events will trigger an accelerated rate of payment of principal on the bonds, as described in the related prospectus supplement. If, following an event of default with respect to any series of bonds, the bonds of that series have been declared to be due and payable and the prospectus supplement and applicable Agreement so provide, the trustee may, in its discretion, notwithstanding the acceleration of the bonds, elect to maintain possession of the collateral securing the bonds of that series and to continue to apply distributions 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 that series as they would have become due if there had not been such a declaration. In addition, unless otherwise specified in the prospectus supplement, the trustee may not sell or otherwise liquidate the collateral securing the bonds of a series following an event of default or a rapid amortization event, unless: - the holders of 100% of the aggregate voting rights of the bonds of such series consent to the sale; 69 - 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 - the trustee determines that the collateral would not be sufficient on an ongoing basis to make all payments on the bonds as those 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 aggregate voting rights of the bonds of that series. In the event that the trustee liquidates the collateral in connection with an event of default or a rapid amortization event, the indenture provides that the trustee will have a prior lien on the proceeds of that liquidation for unpaid fees and expenses. As a result, upon the occurrence of an event of default or rapid amortization event, the amount available for distribution to the bondholders could 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 an event of default or rapid amortization event. Except as otherwise specified in the prospectus supplement, in the event the principal of the bonds of a series is declared due and payable, as described above, the holders of any 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 which is unamortized. Subject to the provisions of the indenture relating to the duties of the trustee, in case an event of default or a rapid amortization event shall occur and be continuing with respect to a series of bonds, the trustee shall be under no obligation to exercise any of the rights or powers under the indenture at the request or direction of any of the holders of bonds of the series, unless those holders offer to the trustee security or indemnity satisfactory to it against the costs, expenses and liabilities which might be incurred by it in complying with their request or direction. Subject to these provisions for indemnification and certain limitations contained in the indenture, the holders of a majority of the then aggregate outstanding amount of the bonds of a series shall have the right to direct the time, method and place of conducting any proceeding for any remedy available to the trustee or exercising any trust or power conferred on the trustee with respect to the bonds of the series, and the holders of a majority of the then aggregate outstanding amount of the notes of the series may, in certain cases, waive any default with respect thereto, except a default in the payment of principal or interest or a default in respect of a covenant or provision of the indenture that cannot be modified without the waiver or consent of all the holders of the outstanding bonds of the series affected thereby. 70 AMENDMENT Except as otherwise specified in the prospectus supplement, each Agreement may be amended by the depositor, the servicer, the trustee and, if applicable, the credit enhancer, without the consent of any of the securityholders: - to cure any ambiguity; - to correct a defective provision or correct or supplement any provision therein which may be inconsistent with any other provision therein; - to make any other revisions with respect to matters or questions arising under the Agreement which are not inconsistent with the provisions thereof; or - to comply with any requirements imposed by the Code or any regulation thereunder; provided, however, that no such amendments (except those pursuant to this clause) will adversely affect in any material respect the interests of any securityholder. An amendment will be deemed not to adversely affect in any material respect the interests of the securityholders if the trustee receives a letter from each rating agency requested to rate the class or classes of securities of such series stating that the proposed amendment will not result in the downgrading or withdrawal of the respective ratings then assigned to the related securities. Each Agreement may also be amended by the depositor, the servicer, the trustee and, if applicable, the credit enhancer with consent of holders of securities of such series evidencing not less than 66 2/3% of the aggregate voting rights of each class affected thereby for the purpose of adding any provisions to or changing in any manner or eliminating any of the provisions of the Agreement or of modifying in any manner the rights of the holders of the related securities; provided, however, that no such amendment may (a) reduce in any manner the amount of, or delay the timing of, payments received on loans which are required to be distributed on any security without the consent of the holder of such security, or (b) with respect to any series of securities, reduce the aforesaid percentage of securities of any class the holders of which are required to consent to any such amendment without the consent of the holders of all securities of such class covered by such Agreement then outstanding. If a REMIC election is made with respect to a trust, the trustee will not be entitled to consent to an amendment to the related Agreement without having first received an opinion of counsel to the effect that the proposed amendment will not cause such trust to fail to qualify as a REMIC. TERMINATION; OPTIONAL TERMINATION POOLING AND SERVICING AGREEMENT; TRUST AGREEMENT. Unless otherwise specified in the related Agreement, the obligations created by each pooling and servicing agreement and trust agreement for each series of securities will terminate upon the payment to the 71 related securityholders of all amounts held in the collection account or by the servicer and required to be paid to them pursuant to the Agreement following the later of: (a) the final payment of or other liquidation of the last of the trust assets subject thereto or the disposition of all property acquired upon foreclosure of any such trust assets remaining in the trust; and (b) the purchase by the servicer or, if REMIC treatment has been elected and if specified in the prospectus supplement, by the holder of the residual interest or any other party specified to have such rights (see "Federal Income Tax Consequences" below), from the related trust of all of the remaining trust assets and all property acquired in respect of the related trust assets. Unless otherwise specified by the prospectus supplement, any purchase of trust assets and property acquired in respect of trust assets evidenced by a series of securities will be made at the option of the servicer, such other person or, if applicable, the holder of the REMIC residual interest, at a price specified in the prospectus supplement. The exercise of this right will effect early retirement of the securities of that series, but the right of the servicer, such other person or, if applicable, the holder of the REMIC residual interest, to so purchase is subject to the principal balance of the related trust assets being less than the percentage specified in the prospectus supplement of the aggregate principal balance of the trust assets at the Cut-Off Date for the series. The foregoing is subject to the provision that if a REMIC election is made with respect to a trust, any repurchase pursuant to clause (b) above will be made only in connection with a "qualified liquidation" of the REMIC within the meaning of Section 860F(g)(4) of the Code. INDENTURE. The indenture will be discharged with respect to a series of bonds, except with respect to certain continuing rights specified in the indenture, upon the delivery to the trustee for cancellation of all the bonds of the related series or, with certain limitations, upon deposit with the trustee of funds sufficient for the payment in full of all of the bonds of that series. In addition to this type of discharge with certain limitations, the indenture will provide that, if so specified with respect to the bonds of any series, the related trust will be discharged from any and all obligations in respect of the bonds of the related series (except for certain obligations relating to temporary bonds and exchange of bonds, to register the transfer of or exchange bonds of such series, to replace stolen, lost or mutilated bonds of such series, to maintain paying agencies and to hold monies for payment in trust) upon the deposit with the trustee, in trust, of money and/or direct obligations of or obligations guaranteed by the United States of America which through the payment of interest and principal in respect thereof in accordance with their terms will provide money in an amount sufficient to pay the principal of and each installment of interest on the bonds of the series on the last scheduled payment date for the notes and any installment of interest on the bonds in accordance with the terms of the indenture and the bonds of that series. In the event of any defeasance and discharge of bonds of the series, holders of bonds of the series would be able to look only to that 72 money and/or those direct obligations for payment of principal and interest, if any, on their bonds until maturity. THE TRUSTEE The trustee under each Agreement will be named in the prospectus supplement. The commercial bank, savings and loan association or trust company serving as trustee may have banking and other relationships with the depositor, the servicer and any of their respective affiliates. CERTAIN LEGAL ASPECTS OF THE LOANS The following discussion contains summaries, which are general in nature, of certain legal matters relating to the loans. Because these legal aspects are governed primarily by applicable state law and because the applicable state laws may differ substantially from state to state, the descriptions do not, except as expressly provided below, reflect the laws of any particular state, nor do they encompass the laws of all states in which the security for the loans is situated. The descriptions are qualified in their entirety by reference to the applicable federal laws and the appropriate laws of the states in which loans may be originated. GENERAL DEEDS OF TRUST AND MORTGAGES. The loans for a series may be secured by deeds of trust, mortgages, security deeds or deeds to secure debt, depending upon the prevailing practice in the state in which the property subject to the loan is located. Deeds of trust are used almost exclusively in California instead of mortgages. A mortgage creates a lien upon the real property encumbered by the mortgage, which lien is generally not prior to the lien for real estate taxes and assessments. Priority between mortgages depends on their terms and generally on the order of recording with a state or county office. There are two parties to a mortgage, the mortgagor, who is the borrower and owner of the mortgaged property, and the mortgagee, who is the lender. Under the mortgage instrument, the mortgagor delivers to the mortgagee a note or bond and the mortgage. Although a deed of trust is similar to a mortgage, a deed of trust formally has three parties, the borrower-property owner called the trustor (similar to a mortgagor), a lender (similar to a mortgagee) called the beneficiary, and a third-party grantee called the trustee. Under a deed of trust, the borrower grants the property, irrevocably until the debt is paid, in trust, generally with a power of sale, to the trustee to secure payment of the obligation. A security deed and a deed to secure debt are special types of deeds which indicate on their face that they are granted to secure an underlying debt. By executing a security deed or deed to secure debt, the grantor conveys title to, as opposed to merely creating a lien upon, the subject property to the grantee until such time as the underlying debt is repaid. The trustee's authority under a deed of trust, the mortgagee's authority under a mortgage and the grantee's authority under a security deed or deed to secure debt are governed by law and, with respect to some deeds of trust, the directions of the beneficiary. 73 COOPERATIVE LOANS. Some of the loans may be cooperative loans. A cooperative is owned by tenant-stockholders, who, through ownership of stock, shares or membership certificates in the corporation, receive proprietary leases or occupancy agreements which confer exclusive rights to occupy specific units. The cooperative owns the real property and the specific units and is responsible for management of the property. An ownership interest in a cooperative and the accompanying rights are financed through a cooperative share loan evidenced by a promissory note and secured by a security interest in the occupancy agreement or proprietary lease and in the related cooperative shares. FORECLOSURE/REPOSSESSION DEED OF TRUST. Foreclosure of a deed of trust is generally accomplished by a non-judicial sale under a specific provision in the deed of trust which authorizes the trustee to sell the property at public auction upon any default by the borrower under the terms of the note or deed of trust. In certain states, these foreclosures also may be accomplished by judicial action in the manner provided for foreclosure of mortgages. In addition to any notice requirements contained in a deed of trust, in some states, including California, the trustee must record a notice of default and send a copy to the borrower-trustor, to any person who has recorded a request for a copy of any notice of default and notice of sale, to any successor in interest to the borrower-trustor, to the beneficiary of any junior deed of trust and to certain other persons. In some states, including California, the borrower-trustor has the right to reinstate the loan at any time following default until shortly before the trustee's sale. In general, the borrower, or any other person having a junior encumbrance on the real estate, may, during a statutorily prescribed reinstatement period, cure a monetary default by paying the entire amount in arrears plus other designated costs and expenses incurred in enforcing the obligation. Generally, state law controls the amount of foreclosure expenses and costs, including attorney's fees, which may be recovered by a lender. After the reinstatement period has expired without the default having been cured, the borrower or junior lienholder no longer has the right to reinstate the loan and must pay the loan in full to prevent the scheduled foreclosure sale. If the deed of trust is not reinstated within any applicable cure period, a notice of sale must be posted in a public place and, in most states, including California, published for a specific period of time in one or more newspapers. In addition, some state laws require that a copy of the notice of sale be posted on the property and sent to all parties having an interest of record in the real property. In California, the entire process from recording a notice of default to a non-judicial sale usually takes four to five months. MORTGAGES. Foreclosure of a mortgage is generally accomplished by judicial action. The action is initiated by the service of legal pleadings upon all parties having an interest in the 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 parties. When the mortgagee's right to foreclosure is contested, the legal proceedings necessary to resolve the issue can be time consuming. After the completion of a judicial foreclosure proceeding, the court generally issues a judgment of foreclosure and appoints a referee or other court officer to conduct the sale of the 74 property. In some states, mortgages may also be foreclosed by advertisement, pursuant to a power of sale provided in the mortgage. Although foreclosure sales are typically public sales, frequently no third party purchaser bids in excess of the lender's lien because of the difficulty of determining the exact status of title to the property, the possible deterioration of the property during the foreclosure proceedings and a requirement that the purchaser pay for the property in cash or by cashier's check. Thus the foreclosing lender often purchases the property from the trustee or referee for an amount equal to the principal amount outstanding under the loan, accrued and unpaid interest and the expenses of foreclosure in which event the mortgagor's debt will be extinguished or the lender may purchase for a lesser amount in order to preserve its right against a borrower to seek a deficiency judgment in states where deficiency judgments are available. Thereafter, subject to the right of the borrower in some states to remain in possession during the redemption period, the lender will assume the burden of ownership, including obtaining hazard insurance and making repairs at its own expense as are necessary to render the property suitable for sale. The lender will commonly obtain the services of a real estate broker and pay the broker's commission in connection with the sale of the property. Depending upon market conditions, the ultimate proceeds of the sale of the property may not equal the lender's investment in the property. Any loss may be reduced by the receipt of any mortgage guaranty insurance proceeds. Courts have imposed general equitable principles upon foreclosure, which are generally designed to mitigate the legal consequences to the borrower of the borrower's defaults under the loan documents. Examples of judicial remedies that have been fashioned include judicial requirements that the lender undertake affirmative and expensive actions to determine the causes of the borrower's default and the likelihood that the borrower will be able to reinstate the loan. In some cases, courts have eliminated the right of a lender to realize upon its security if the default under the security agreement is not monetary, such as the borrower's failure to maintain the property adequately or the borrower's execution of secondary financing affecting the property. Finally, some courts have been faced with the issue of whether federal or state constitutional provisions reflecting due process concerns for fair notice require that borrowers under deeds of trust receive notice longer than that prescribed by statue. 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 does not involve sufficient state action to afford constitutional protection to the borrower. When the beneficiary under a junior mortgage or deed of trust cures the default and reinstates or redeems by paying the full amount of the senior mortgage or deed of trust, the amount paid by the beneficiary to cure or redeem becomes a part of the indebtedness secured by the junior mortgage or deed of trust. COOPERATIVE LOANS. The cooperative shares owned by the tenant-stockholder and pledged to the lender are, in almost all cases, subject to restrictions on transfer as set forth in the cooperative's certificate of incorporation and bylaws, as well as the proprietary lease or occupancy agreement, and may be cancelled by the cooperative for 75 failure by the tenant-stockholder to pay rent or other obligations or charges owed by such tenant-stockholder, including mechanics' liens against the cooperative apartment building incurred by such tenant-stockholder. The proprietary lease or occupancy agreement generally permits the cooperative to terminate such lease or agreement in the event an obligor fails to make payments or defaults in the performance of covenants required thereunder. Typically, the lender and the cooperative enter into a recognition agreement which establishes the rights and obligations of both parties in the event of a default by the tenant-stockholder on its obligations under the proprietary lease or occupancy agreement. A default by the tenant-stockholder under the proprietary lease or occupancy agreement will usually constitute a default under the security agreement between the lender and the tenant-stockholder. The recognition agreement generally provides that, in the event that the tenant-stockholder has defaulted under the proprietary lease or occupancy agreement, the cooperative will take no action to terminate such lease or agreement until the lender has been provided with an opportunity to cure the default. The recognition agreement typically provides that if the proprietary lease or occupancy agreement is terminated, the cooperative will recognize the lender's lien against proceeds from the sale of the cooperative apartment, subject, however, to the cooperative's right to sums due under such proprietary lease or occupancy agreement. The total amount owed to the cooperative by the tenant-stockholder, which the lender generally cannot restrict and does not monitor, could reduce the value of the collateral below the outstanding principal balance of the cooperative loan and accrued and unpaid interest thereon. Recognition agreements also provide that in the event of a foreclosure on a cooperative loan, the lender must obtain the approval or consent of the cooperative as required by the proprietary lease before transferring the cooperative shares or assigning the proprietary lease. Generally, the lender is not limited in any rights it may have to dispossess the tenant-stockholders. In some states, foreclosure on the cooperative shares is accomplished by a sale in accordance with the provisions of Article 9 of the Uniform Commercial Code and the security agreement relating to those shares. Article 9 requires that a sale be conducted in a "commercially reasonable" manner. Whether a foreclosure sale has been conducted in a "commercially reasonable" manner will depend on the facts in each case. In determining commercial reasonableness, a court will look to the notice given the debtor and the method, manner, time, place and terms of the foreclosure. Generally, a sale conducted according to the usual practice of banks selling similar collateral will be considered reasonably conducted. Article 9 also provides that the proceeds of the sale will be applied first to pay the costs and expenses of the sale and then to satisfy the indebtedness secured by the lender's security interest. The recognition agreement, however, generally provides that the lender's right to reimbursement is subject to the right of the cooperative to receive sums due under the proprietary lease or occupancy agreement. If there are proceeds remaining, the lender must account to the tenant-stockholder for the surplus. Conversely, if a portion of the indebtedness remains unpaid, the tenant-stockholder is generally 76 responsible for the deficiency. Please refer to the discussion under the heading "Anti-Deficiency Legislation; Bankruptcy Laws; Tax Liens" below. In the case of foreclosure on a building which was converted from a rental building to a building owned by a cooperative under a non-eviction plan, some states require that a purchaser at a foreclosure sale take the property subject to rent control and rent stabilization laws which apply to certain tenants who elected to remain in the building but who did not purchase shares in the cooperative when the building was so converted. ENVIRONMENTAL RISKS Real property pledged as security to a lender may be subject to environmental risks. Such risks, among other things, could substantially impair a borrower's ability to repay a loan, result in substantial diminution in the value of the property pledged as collateral to secure the loan and/or give rise to liability which could exceed the value of such property or the principal balance of the related loan. Under the laws of certain states, contamination of a property may give rise to a lien on the property to assure the payment of the costs of clean-up. In several states this type of lien has priority over the lien of an existing mortgage against the related property. In addition, under the federal Comprehensive Environmental Response, Compensation and Liability Act of 1980 ("CERCLA"), the United States Environmental Protection Agency ("EPA") may impose a lien on property where the EPA has incurred clean-up costs. However, a CERCLA lien is subordinate to pre-existing, perfected security interests. Under the laws of some states, and under CERCLA, it is conceivable that a secured lender may be held liable as an owner or operator for the costs of addressing releases or threatened releases of hazardous substances at a mortgaged property and related costs, even though the environmental damage or threat was caused by a prior or current owner or operator or another third party. CERCLA imposes liability for these costs on any and all responsible parties, including owners or operators. However, CERCLA excludes from the definition of "owner or operator" a secured creditor who, without participating in the management of a facility or property, holds indicia of ownership primarily to protect its security interest (the "secured creditor exclusion"). Thus, if a lender's activities begin to encroach on the actual management of a contaminated facility or property, the lender may incur liability as an owner or operator under CERCLA. Similarly, if a lender forecloses and takes title to a contaminated facility or property, the lender may incur CERCLA liability in various circumstances, including, but not limited to, when it holds the facility or property as an investment (including leasing the facility or property to a third party), or fails to market the property in a timely fashion. If a lender is or becomes liable, it may be entitled to bring an action for contribution against any other responsible parties, including a previous owner or operator, who created the environmental hazard, but those persons or entities may be bankrupt or otherwise judgment-proof. The costs associated with environmental cleanup and the diminution in value of contaminated property and related liabilities or losses may be 77 substantial. It is conceivable that the costs arising from the circumstances set forth above would result in a loss to securityholders. CERCLA does not apply to petroleum products, and the secured creditor exclusion does not govern liability for cleanup costs under federal laws other than CERCLA, in particular Subtitle I of the federal Resource Conservation and Recovery Act ("RCRA"), which regulates underground petroleum storage tanks (except heating oil tanks). The EPA has adopted a lender liability rule for underground storage tanks under Subtitle I of RCRA. Under that rule, a holder of a security interest in an underground storage tank or real property containing an underground storage tank is not considered an operator of the underground storage tank as long as the holder does not exercise decisionmaking control over the borrower's enterprise, participate in the management or control of decisionmaking relating to the operation of a tank, as long as petroleum is not added to, stored in or dispensed from the tank, or as long as holder does not deviate from certain other requirements specified in the rule. In addition, under the Asset Conservation, Lender Liability and Deposit Insurance Protection Act of 1996, similar protections to those accorded to lenders under CERCLA are also accorded to holders of security interests in underground tanks. It should be noted, however, that liability for cleanup of contamination may be governed by state law, which may not provide for any specific protection for secured creditors. Whether actions taken by a lender would constitute participation in the management of a mortgaged property, or the business of a borrower, so as to render the secured creditor exemption unavailable to a lender has been a matter of judicial interpretation of the statutory language, and court decisions have been inconsistent. In 1990, the Court of Appeals for the Eleventh Circuit suggested that the mere capacity of the lender to influence a borrower's decisions regarding disposal of hazardous substances was sufficient participation in the management of the borrower's business to deny the protection of the secured creditor exemption to the lender, regardless of whether lender actually exercised such influence. This ambiguity appears to have been resolved by the enactment of the Asset Conservation, Lender Liability and Deposit Insurance Protection Act of 1996. The legislation provides that in order to be deemed to have participated in the management of a mortgaged property, a lender must actually participate in the operational affairs of the property or the borrower. The legislation also provides that participation in the management of the property does not include "merely having the capacity to influence, or unexercised right to control" operations. Rather, a lender will lose the protection of the secured creditor exclusion 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 secured property. As noted above, the secured creditor exclusion does not govern liability for cleanup costs except under the federal laws discussed above. In addition, certain other environmental conditions may be required to be addressed under other federal, state or local laws or in order to improve the marketability of a property. Therefore, under certain circumstances, including but not limited to after foreclosure, a lender may incur costs under applicable laws or in order to improve the marketability of a property in 78 connection with environmental conditions associated with that property, such as the presence or release of regulated materials in underground storage tanks, asbestos-containing material, lead paint or radon gas. If a lender is or becomes liable, it can bring an action for contribution against any other "responsible parties" including a previous owner or operator, who created the environmental hazard, but those persons or entities may be bankrupt or otherwise judgment-proof. It is conceivable that the costs arising from such circumstances would result in a loss to securityholders. Except as otherwise specified in the prospectus supplement, at the time the loans were originated, no environmental assessments or very limited environmental assessments of the properties were conducted. RIGHTS OF REDEMPTION In some states, after sale pursuant to a deed of trust or foreclosure of a mortgage, the borrower and foreclosed junior lienors are given a statutory period in which to redeem the property from the foreclosure sale. In certain other states, including California, this right of redemption applies only to sales following judicial foreclosure, and not to sales pursuant to a non-judicial power of sale. In most states where the right of redemption is available, statutory redemption may occur upon payment of the foreclosure purchase price, accrued interest and taxes. In other states, redemption may be authorized if the former borrower pays only a portion of the sums due. The effect of a statutory right of redemption is to diminish the ability of the lender to sell the foreclosed property. The exercise of a right of redemption would defeat the title of any purchaser from the lender subsequent to foreclosure or sale under a deed of trust. Consequently, the practical effect of the redemption right is to force the lender to retain the property and pay the expenses of ownership until the redemption period has run. In some states, there is no right to redeem property after a trustee's sale under a deed of trust. ANTI-DEFICIENCY LEGISLATION; BANKRUPTCY LAWS; TAX LIENS Certain states have imposed statutory and judicial restrictions that limit the remedies of a beneficiary under a deed of trust or a mortgagee under a mortgage. In some states, including California, statutes and case law limit the right of the beneficiary or mortgagee to obtain a deficiency judgment against borrowers financing the purchase of their residence or following sale under a deed of trust or certain other foreclosure proceedings. A deficiency judgment is a personal judgment against the borrower equal in most cases to the difference between the amount due to the lender and the fair market value of the real property at the time of the foreclosure sale. As a result of these prohibitions, it is anticipated that in most instances the servicer will utilize the non- judicial foreclosure remedy and will not seek deficiency judgments against defaulting borrowers. 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 certain other states, the lender has the option of bringing a personal action against the borrower on the debt without first exhausting that security; however, in some of these states, the lender, 79 following judgment on such 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, when applicable, is that lenders will usually proceed first against the security rather than bringing a personal action against the borrower. In some states, exceptions to the anti-deficiency statutes are provided for in certain instances where the value of the lender's security has been impaired by acts or omissions of the borrower, for example, in the event of waste of the property. Finally, other statutory provisions limit any deficiency judgment against the former borrower following a foreclosure sale to the excess of the outstanding debt over the fair market value of the property at the time of the public sale. The purpose of these statutes is generally to prevent a beneficiary or a mortgagee from obtaining a large deficiency judgment against the former borrower as a result of low or no bids at the foreclosure sale. In addition to anti-deficiency and related legislation, numerous other federal and state statutory provisions, including the federal bankruptcy laws, and state laws affording relief to debtors, may interfere with or affect the ability of the secured mortgage lender to realize upon its security. For example, in a proceeding under the federal Bankruptcy Code, a lender may not foreclose on a mortgaged property without the permission of the bankruptcy court. The rehabilitation plan proposed by the debtor may provide, if the mortgaged property is not the debtor's principal residence and the court determines that the value of the mortgaged property is less than the principal balance of the mortgage loan, for the reduction of the secured indebtedness to the value of the mortgaged property as of the date of the commencement of the bankruptcy, rendering the lender a general unsecured creditor for the difference, and also may reduce the monthly payments due under such mortgage loan, change the rate of interest and alter the mortgage loan repayment schedule. The effect of any proceedings under the federal Bankruptcy Code, including, but not limited to, any automatic stay, could result in delays in receiving payments on the loans underlying a series of securities and possible reductions in the aggregate amount of payments. The federal tax laws provide priority to certain tax liens over the lien of a mortgage or secured party. DUE-ON-SALE CLAUSES Each conventional loan generally will contain a due-on-sale clause which will generally provide that if the mortgagor or obligor sells, transfers or conveys the property, the loan or contract may be accelerated by the mortgagee or secured party. Court decisions and legislative actions have placed substantial restrictions on the right of lenders to enforce these clauses in many states. For instance, the California Supreme Court in August 1978 held that due-on-sale clauses were generally unenforceable. However, the Garn-St. Germain Depository Institutions Act of 1982 (the "Garn-St. Germain Act"), subject to certain exceptions, preempts state constitutional, statutory and case law prohibiting the enforcement of due-on-sale clauses. As a result, due-on-sale clauses are generally enforceable except in those states whose legislatures exercised their authority to regulate the enforceability of the clauses with respect to mortgage loans that 80 were (a) originated or assumed during the "window period" under the Garn-St. Germain Act which ended in all cases not later than October 15, 1982, and (b) originated by lenders other than national banks, federal savings institutions and federal credit unions. Freddie Mac has taken the position in its published mortgage servicing standards that, out of a total of eleven "window period states," five states (Arizona, Michigan, Minnesota, New Mexico and Utah) have enacted statutes extending, on various terms and for varying periods, the prohibition on enforcement of due-on-sale clauses with respect to certain categories of window period loans. Also, the Garn-St. Germain Act does "encourage" lenders to permit assumption of loans at the original rate of interest or at some other rate less than the average of the original rate and the market rate. As to loans secured by an owner-occupied residence, the Garn-St. Germain Act sets forth nine specific instances in which a mortgagee covered by the Garn-St. Germain Act may not exercise its rights under a due-on-sale clause, notwithstanding the fact that a transfer of the property may have occurred. The inability to enforce a due-on-sale clause may result in transfer of the related property to an uncreditworthy person, which could increase the likelihood of default or may result in a mortgage bearing an interest rate below the current market rate being assumed by a new home buyer, which may affect the average life of the loans and the number of loans which may extend to maturity. In addition, under federal bankruptcy law, due-on-sale clauses may not be enforceable in bankruptcy proceedings and may, under certain circumstances, be eliminated in any modified mortgage resulting from such bankruptcy proceeding. ENFORCEABILITY OF PREPAYMENT AND LATE PAYMENT FEES Forms of notes, mortgages and deeds of trust used by lenders may contain provisions obligating the borrower to pay a late charge if payments are not timely made, and in some circumstances may provide for prepayment fees or penalties if the obligation is paid prior to maturity. In certain states, there are or may be specific limitations upon the late charges which a lender may collect from a borrower for delinquent payments. Certain states also limit the amounts that a lender may collect from a borrower as an additional charge if the loan is prepaid. Under certain state laws, prepayment charges may not be imposed after a certain period of time following the origination of mortgage loans with respect to prepayments on loans secured by liens encumbering owner-occupied residential properties. The absence of such a restraint on prepayment, particularly with respect to fixed rate loans having higher loan rates, may increase the likelihood of refinancing or other early retirement of the related loans or contracts. Late charges and prepayment fees are typically retained by servicers as additional servicing compensation. APPLICABILITY OF USURY LAWS Title V of the Depository Institutions Deregulation and Monetary Control Act of 1980, enacted in March 1980 ("Title V") provides that state usury limitations shall not apply to certain types of residential first mortgage loans originated by certain lenders after March 31, 1980. The Office of Thrift Supervision, as successor to the Federal Home Loan Bank Board, is authorized to issue rules and regulations and to publish interpretations governing implementation of Title V. Title V authorized the states to 81 reimpose interest rate limits by adopting, before April 1, 1983, a law or constitutional provision which expressly rejects application of the federal law. Fifteen states adopted such a law prior to the April 1, 1983 deadline. In addition, even where Title V was not so rejected, any state is authorized by the law to adopt a provision limiting discount points or other charges on mortgage loans covered by Title V. Certain states have taken action to reimpose interest rate limits and/or to limit discount points or other charges. SERVICEMEMBERS CIVIL RELIEF ACT Generally, under the terms of the Servicemembers Civil Relief Act formerly known as the Soldiers' and Sailors' Relief Act of 1940, (the "Relief Act"), a borrower who enters military service after the origination of his or her loan (including a borrower who is a member of the National Guard or is in reserve status at the time of the origination of the loan and is later called to active duty) may not be charged interest above an annual rate of 6% during the period of his or her active duty status, unless a court orders otherwise upon application of the lender. It is possible that this interest rate limitation could have an effect, for an indeterminate period of time, on the ability of the servicer to collect full amounts of interest on certain of the loans. Unless otherwise provided in the prospectus supplement, any shortfall in interest collections resulting from the application of the Relief Act could result in losses to securityholders. The Relief Act also imposes limitations which would impair the ability of the servicer to foreclose on an affected loan during the borrower's period of active duty status. Moreover, the Relief Act permits the extension of a loan's maturity and the re-adjustment of its payment schedule beyond the completion of military service. Thus, in the event that a loan that is affected by the Relief Act goes into default, there may be delays and losses occasioned by the inability to realize upon the property in a timely fashion. JUNIOR MORTGAGES; RIGHTS OF SENIOR MORTGAGEES To the extent that the loans comprising the trust for a series are secured by mortgages which are junior to other mortgages held by other lenders or institutional investors, the rights of the trust (and therefore the securityholders), as mortgagee under any such junior mortgage, are subordinate to those of any mortgagee under any senior mortgage. The senior mortgagee has the right to receive hazard insurance and condemnation proceeds and to cause the property securing the loan to be sold upon default of the mortgagor, thereby extinguishing the junior mortgagee's lien unless the junior mortgagee asserts its subordinate interest in the property in foreclosure litigation and, possibly, satisfies the defaulted senior mortgage. A junior mortgagee may satisfy a defaulted senior loan in full and, in some states, may cure a default and bring the senior loan current, in either event adding the amounts expended to the balance due on the junior loan. In most states, absent a provision in the mortgage or deed of trust, no notice of default is required to be given to a junior mortgagee. The standard form of the mortgage used by most institutional lenders confers on the mortgagee the right both to receive all proceeds collected under any hazard insurance policy and all awards made in connection with condemnation proceedings, and to apply 82 those proceeds and awards to any indebtedness secured by the mortgage, in whatever 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 a senior mortgage 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 mortgage. Proceeds in excess of the amount of senior mortgage indebtedness, in most cases, may be applied to the indebtedness of a junior mortgage. Another provision sometimes found in the form of the mortgage or deed of trust used by institutional lenders obligates the mortgagor to pay before delinquency all taxes and assessments on the property and, when due, all encumbrances, charges and liens on the property which appear prior to the mortgage or deed of trust, to provide and maintain fire insurance on the property, to maintain and repair the property and not to commit or permit any waste 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 is given the right under certain mortgages to perform the obligation itself, at its election, with the mortgagor reimbursing the mortgagee for any sums expended by the mortgagee on behalf of the mortgagor. All sums so expended by the mortgagee become part of the indebtedness secured by the mortgage. The form of credit line trust deed or mortgage generally used by most institutional lenders which make revolving credit line loans typically contains a future advance clause, which provides, in essence, that additional amounts advanced to or on behalf of the borrower by the beneficiary or lender are to be secured by the deed of trust or mortgage. Any amounts so advanced after the Cut-off Date with respect to any mortgage will be included in the trust. The priority of the lien securing any advance made under a future advance clause may depend in most states on whether the deed of trust or mortgage is called and recorded as a credit line deed of trust or mortgage. If the beneficiary or lender advances additional amounts, the advance is entitled to receive the same priority as amounts initially advanced under the trust deed or mortgage, notwithstanding the fact that there may be junior trust deeds or mortgages and other liens which intervene between the date of recording of the trust deed or mortgage and the date of the future advance, and notwithstanding that the beneficiary or lender had actual knowledge of the intervening junior trust deeds or mortgages and other liens at the time of the advance. In most states, the trust deed or mortgage lien securing mortgage loans of the type which includes home equity credit lines applies retroactively to the date of the original recording of the trust deed or mortgage, provided that the total amount of advances under the home equity credit line does not exceed the maximum specified principal amount of the recorded trust deed or mortgage, except as to advances made after receipt by the lender of a written notice of lien from a judgment lien creditor of the trustor. 83 CONSUMER PROTECTION LAWS Numerous federal and state consumer protection laws impose substantive requirements upon mortgage lenders in connection with the originating, servicing and enforcing of loans secured by single family properties. These laws include the federal Truth-in-Lending Act and Regulation Z promulgated thereunder, Real Estate Settlement Procedures Act and Regulation B promulgated thereunder, Equal Credit Opportunity Act, Fair Credit Billing Act, Fair Credit Reporting Act and related statutes and regulations. In particular, Regulation Z requires certain disclosures to borrowers regarding the terms of the loans; the Equal Credit Opportunity Act and Regulation B promulgated thereunder prohibit discrimination in the extension of credit on the basis of age, race, color, sex, religion, marital status, national origin, receipt of public assistance or the exercise of any right under the Consumer Credit Protection Act; and the Fair Credit Reporting Act regulates the use and reporting of information related to the borrower's credit experience. Certain provisions of these laws impose specific statutory liabilities upon lenders who fail to comply therewith. In addition, violations of such laws may limit the ability of the servicer to collect all or part of the principal of or interest on the loans and could subject the sellers and in some cases their assignees to damages and administrative enforcement. FEDERAL INCOME TAX CONSEQUENCES The following discussion summarizes the anticipated material federal income tax consequences of the purchase, ownership and disposition of the securities, as based on the advice of Chapman and Cutler LLP, special tax counsel to the Issuer. This summary is based on the Internal Revenue Code of 1986, as amended (the "Code"), regulations (including the REMIC regulations promulgated by the Treasury Department (the "REMIC Regulations")), rulings and decisions in effect as of the date of this prospectus, all of which are subject to change. This summary does not address federal income tax consequences applicable to all categories of investors, some of which (such as banks and insurance companies) may be subject to special rules. In addition, the summary is limited to investors who will hold the securities as "capital assets" (generally, property held for investment) as defined in section 1221 of the Code. Investors should consult their own tax advisors in determining the federal, state, local and any other tax consequences to them of the purchase, ownership and disposition of the securities. As applied to any particular class or series of securities, the summary is subject to further discussion or change as provided in the related prospectus supplement. OVERVIEW The federal income tax consequences applicable with respect to a specific series of securities will vary depending on whether an election is made to treat the trust estate relating to such series of securities as a real estate mortgage investment conduit ("REMIC") under Code. The prospectus supplement for each series of securities will specify whether a REMIC election will be made with respect to such series. Securities of any series that is not the subject of a REMIC election ("non-REMIC securities") 84 are intended to be classified as indebtedness of the Issuer for federal income tax purposes. NON-REMIC SECURITIES General. If a REMIC election is not made, Chapman and Cutler LLP will deliver its opinion that, although no regulations, published rulings or judicial decisions exist that specifically discuss the characterization for federal income tax purposes of securities with terms substantially the same as the non-REMIC securities, in its opinion such securities will be treated for federal income tax purposes as indebtedness of the Issuer and not as an ownership interest in the collateral or an equity interest in the Issuer. Status as Real Property Loans. Because, in such counsel's opinion, the non-REMIC securities will be treated as indebtedness of the Issuer for federal income tax purposes, (i) such securities held by a thrift institution taxed as a domestic building and loan association will not constitute "loans . . . secured by an interest in real property" within the meaning of Code section 7701(a)(19)(C)(v), (ii) interest on non-REMIC securities held by a real estate investment trust will not be treated as "interest on obligations secured by mortgages on real property or on interests in real property" within the meaning of Code section 856(c)(3)(B), and non-REMIC securities will not constitute "real estate assets" or "government securities" within the meaning of Code section 856(c)(4)(A), and (iii) non-REMIC securities held by a regulated investment company will not constitute "government securities" within the meaning of Code section 851(b)(4)(A)(i). Interest on Non-REMIC Securities. Except as described below with respect to original issue discount, market discount or premium, interest paid or accrued on non-REMIC securities generally will be treated as ordinary income to the holder, and will be includible in income in accordance with such holder's regular method of accounting. Original Issue Discount. All accrual securities will be, and some or all of the other securities may be, issued with "original issue discount" within the meaning of Code section 1273(a). Holders of any class of securities having original issue discount must generally include original issue discount in ordinary gross income for federal income tax purposes as it accrues, in accordance with the constant yield method, in advance of receipt of the cash attributable to such income. When required by the Code and/or applicable regulations, the Issuer will indicate on the face of each security issued by it information concerning the application of the original issue discount rules to such security and certain other information that may be required. The Issuer will report annually to the Internal Revenue Service (the "IRS") and to holders of record of such securities information with respect to the original issue discount accruing on such securities during the reporting period. Rules governing original issue discount are set forth in Code sections 1271 through 1273, 1275 and 1281 through 1283 and in regulations issued thereunder (the "OID Regulations"). The Code or the OID Regulations either do not address, or are subject to varying interpretations with respect to, several issues relevant to obligations, such as the securities, that are subject to prepayment. Therefore, there is some uncertainty as to the 85 manner in which the original issue discount rules of the Code will be applied to the securities. Original Issue Discount Defined. In general, each security will be treated as a single installment obligation for purposes of determining the original issue discount includible in a securityholder's income. The amount of original issue discount on such a security is the excess of the stated redemption price at maturity of the security over its issue price. The issue price of a security is the initial offering price to the public at which a substantial amount of the securities of that class are first sold to the public (excluding bond houses, brokers, underwriters or wholesalers), generally as set forth on the cover page of the prospectus supplement for a series of securities. If less than a substantial amount of a particular class of securities is sold for cash on or prior to the date of the their initial issuance, the issue price for such class will likely be treated as equal to its fair market value on the closing date. The portion of the initial offering price which consists of payment for interest accrued on the securities prior to the closing date generally may, at the option of the initial securityholders, be subtracted from the issue price of the securities and treated as an offset to interest received on the first payment date. The stated redemption price at maturity of a security is equal to the total of all payments to be made on the security other than "qualified stated interest payments." "Qualified stated interest payments" are payments on the securities which are paid at least annually and are based on either a fixed rate or a "qualified variable rate." Under the OID Regulations, interest is treated as payable at a "qualified variable rate" and not as contingent interest if, generally, (i) such interest is unconditionally payable at least annually, (ii) the issue price of the security does not exceed the total noncontingent principal payments and (iii) interest is based on a "qualified floating rate," an "objective rate," or a combination of "qualified floating rates" that do not operate in a manner that significantly accelerates or defers interest payments on such security. Generally, the stated redemption price at maturity of a security (other than an accrual security or a payment lag security, as defined below) is its stated principal amount; the stated redemption price at maturity of an accrual security is the sum of all payments (regardless of how denominated) scheduled to be received on such security under the Tax Prepayment Assumption (as defined below). Any payment denominated as interest that does not constitute a qualified stated interest payment is generally referred to as a "contingent interest payment." The related prospectus supplement will discuss whether the payments on a security denominated as interest are qualified stated interest payments and the treatment for federal income tax purposes of any contingent interest payments. De Minimis Original Issue Discount. Notwithstanding the general definition of original issue discount above, any original issue discount with respect to a security will be considered to be zero if such discount is less than 0.25% of the stated redemption price at maturity of the security multiplied by its weighted average life (a "de minimis" amount). The weighted average life of a security for this purpose is the sum of the following amounts (computed for each payment included in the stated redemption price at maturity of the security): (i) the number of complete years (rounded down for partial years) from the closing date until the date on which each such payment is scheduled to 86 be made under the Tax Prepayment Assumption, multiplied by(ii) a fraction, the numerator of which is the amount of the payment, and the denominator of which is the security's stated redemption price at maturity. Securityholders generally must report de minimis original issue discount pro rata as principal payments are received, and such income will be capital gain if the security is held as a capital asset. However, accrual method holders may elect to accrue all interest on a security, including de minimis original issue discount and market discount and as adjusted by any premium, under a constant yield method. Accrual of Original Issue Discount. The Code requires that the amount and rate of accrual of original issue discount be calculated based on a reasonable assumed prepayment rate for the mortgage loans, the mortgage loans underlying any mortgaged-backed securities and/or other mortgage collateral securing the securities (the "Tax Prepayment Assumption") and prescribes a method for adjusting the amount and rate of accrual of such discount if actual prepayment rates exceed the Tax Prepayment Assumption. However, if such mortgage loans prepay at a rate slower than the Tax Prepayment Assumption, no deduction for original issue discount previously accrued, based on the Tax Prepayment Assumption, is allowed. The Tax Prepayment Assumption is required to be determined in the manner prescribed by regulations that have not yet been issued. It is anticipated that the regulations will require that the Tax Prepayment Assumption be the prepayment assumption that is used in determining the initial offering price of such securities. The related prospectus supplement for each series of securities will specify the Tax Prepayment Assumption determined by the Issuer for the purposes of determining the amount and rate of accrual of original issue discount. No representation is made that the mortgage collateral will prepay at the Tax Prepayment Assumption or at any other rate. Generally, a securityholder must include in gross income the sum of the "daily portions," as determined below, of the original issue discount that accrues on a security for each day the securityholder holds that security, including the purchase date but excluding the disposition date. In the case of an original holder of a security, a calculation will be made of the portion of the original issue discount that accrues during each successive period (or shorter period from date of original issue) (an "accrual period") that ends on the day in the calendar year corresponding to each of the payment dates on the securities (or the date prior to each such date). This will be done, in the case of each full accrual period, by: (1) adding (A) the present value at the end of the accrual period of all remaining payments to be received on the securities, computed taking into account (i) the yield to maturity of the security at the issue date, (ii) events (including actual prepayments) that have occurred prior to the end of the accrual period, and (iii) the Tax Prepayment Assumption, and (B) any payments received during such accrual period, other than payments of qualified stated interest, and (2) subtracting from that total the "adjusted issue price" of the securities at the beginning of such accrual period. 87 The adjusted issue price of a security at the beginning of the initial accrual period is its issue price; the adjusted issue price of a security at the beginning of a subsequent accrual period is the adjusted issue price at the beginning of the immediately preceding accrual period plus the amount of original issue discount allocable to such accrual period and reduced by the amount of any payment other than a payment of qualified stated interest made at the end of or during such accrual period. The original issue discount accrued during such accrual period will then be divided by the number of days in the period to determine the daily portion of original issue discount for each day in the period. With respect to an initial accrual period shorter than a full accrual period, the daily portions of original issue discount must be determined according to any reasonable method, provided that such method is consistent with the method used to determine yield on the securities. With respect to any security that is a variable rate debt instrument, the sum of the daily portions of original issue discount that is includible in the holder's gross income is determined under the same principles described above, with the following modifications: the yield to maturity on the securities should be calculated as if the interest index remained at its value as of the issue date of such securities. Because the proper method of adjusting accruals of original issue discount on a variable rate debt instrument as a result of prepayments is uncertain, holders of such instruments should consult their own tax advisors regarding the appropriate treatment of such securities for federal income tax purposes. Subsequent Purchasers of Securities with Original Issue Discount. A subsequent purchaser of an accrual security or any other security issued with original issue discount who purchases the security at a cost less than the remaining stated redemption price at maturity, will also be required to include in gross income for all days during his or her taxable year on which such security is held, the sum of the daily portions of original issue discount on the security. In computing the daily portions of original issue discount with respect to a security for such a subsequent purchaser, however, the daily portion for any day shall be reduced by the amount that would be the daily portion for such day (computed in accordance with the rules set forth above) multiplied by a fraction, the numerator of which is the amount, if any, by which the price paid by such holder for the security exceeds its adjusted issue price (the "acquisition premium"), and the denominator of which is the amount by which the remaining stated redemption price at maturity exceeds the adjusted issue price. Premium. A holder who purchases a security at a cost greater than its stated redemption price at maturity generally will be considered to have purchased the security at a premium, which it may elect to amortize as an offset to interest income on such security (and not as a separate deduction item) on a constant yield method. Although no regulations addressing the computation of premium accrual on securities similar to the securities have been issued, the legislative history of the Tax Reform Act of 1986 indicates that premium is to be accrued in the same manner as market discount. Accordingly, it appears that the accrual of premium on a class of securities of a series will be calculated using the prepayment assumption used in pricing such class. If a holder makes an election to amortize premium on a security, such election will apply to 88 all taxable debt instruments (including all REMIC regular interests and all pass-through certificates representing ownership interests in a trust holding debt obligations) held by the holder at the beginning of the taxable year in which the election is made, and to all taxable debt instruments acquired thereafter by such holder, and will be irrevocable without the consent of the Internal Revenue Service. Purchasers who pay a premium for the securities should consult their tax advisers regarding the election to amortize premium and the method to be employed. Market Discount. The securities are subject to the market discount provisions of Code sections 1276 through 1278. These rules provide that if a subsequent holder of a security purchases it at a market discount, some or all of any principal payment or of any gain recognized upon the disposition of the security will be taxable as ordinary interest income. Market discount on a security means the excess, if any, of (1) the sum of its issue price and the aggregate amount of original issue discount includible in the gross income of all holders of the security prior to the acquisition by the subsequent holder (presumably adjusted to reflect prior principal payments), over (2) the price paid by the holder for the security. Market discount on a security will be considered to be zero if such discount is less than .25% of the stated redemption price at maturity of such security multiplied by its weighted average life, which presumably would be calculated in a manner similar to weighted average life (described above), taking into account distributions (including prepayments) prior to the date of acquisition of such security by the subsequent purchaser. If market discount on a security is treated as zero under this rule, the actual amount of such discount must be allocated to the remaining principal distributions on such security and when each such distribution is made, gain equal to the discount allocated to such distribution will be recognized. Any principal payment (whether a scheduled payment or a prepayment) or any gain on the disposition of a market discount security is to be treated as ordinary income to the extent that it does not exceed the accrued market discount at the time of such payment or disposition. The amount of accrued market discount for purposes of determining the tax treatment of subsequent principal payments or dispositions of the securities is to be reduced by the amount so treated as ordinary income. The Tax Reform Act of 1986 grants authority to the U.S. Treasury to issue regulations providing for the computation of accrued market discount on debt instruments, the principal of which is payable in more than one installment. Until such time as regulations are issued by the U.S. Treasury, certain rules described in the legislative history accompanying the Tax Reform Act of 1986 will apply. Under those rules, the holder of a market discount security may elect to accrue market discount either on the basis of a constant interest rate or using one of the following methods. For securities issued with original issue discount, the amount of market discount that accrues during a period is equal to the product of (i) the total remaining market discount, multiplied by (ii) a fraction, the numerator of which is the original issue discount accruing during the period and the denominator of which is the total remaining original issue discount at the beginning of the period. For securities issued without original issue discount, the amount of market discount that accrues during a period is equal to the product of (i) the total remaining market discount, multiplied by (ii) a fraction, the 89 numerator of which is the amount of stated interest paid during the accrual period and the denominator of which is the total amount of stated interest remaining to be paid at the beginning of the period. For purposes of calculating market discount under any of the above methods in the case of instruments (such as the securities) that provide for payments that may be accelerated by reason of prepayments of other obligations securing such instruments, the same prepayment assumption applicable to calculating the accrual of original issue discount shall apply. Regulations are to provide similar rules for computing the accrual of amortizable security premium on instruments payable in more than one principal installment. As an alternative to the inclusion of market discount in income on the foregoing basis, the holder may elect to include such market discount in income currently as it accrues on all market discount instruments acquired by such holder in that taxable year or thereafter. In addition, accrual method holders may elect to accrue all interest on a security, including de minimis original issue discount and market discount and as adjusted by any premium, under a constant yield method. A subsequent holder of a security who acquired the security at a market discount also may be required to defer, until the maturity date of the security or the earlier disposition of the security in a taxable transaction, the deduction of a portion of the amount of interest that the holder paid or accrued during the taxable year on indebtedness incurred or maintained to purchase or carry the security in excess of the aggregate amount of interest (including original issue discount) includible in his or her gross income for the taxable year with respect to such security. The amount of such net interest expense deferred in a taxable year may not exceed the amount of market discount accrued on the security for the days during the taxable year on which the subsequent holder held the security, and the amount of such deferred deduction to be taken into account in the taxable year in which the security is disposed of in a transaction in which gain or loss is not recognized in whole or in part is limited to the amount of gain recognized on the disposition. This deferral rule does not apply to a holder that elects to include market discount in income currently as it accrues on all market discount instruments acquired by such holder in that taxable year or thereafter. Because the regulations described above with respect to market discounts and premiums have not been issued, it is impossible to predict what effect those regulations might have on the tax treatment of a security purchased at a discount or premium in the secondary market. Election to Treat All Interest as Original Issue Discount. The OID Regulations permit a holder of a security to elect to accrue all interest, discount (including de minimis market or original issue discount) and premium in income as interest, based on a constant yield method for securities acquired on or after April 4, 1994. If such an election were to be made with respect to a security with market discount, the holder of the security would be deemed to have made an election to include in income currently market discount with respect to all other debt instruments having market discount that such holder of the securities acquires during the year of the election or thereafter. Similarly, a holder of a security that makes this election for a security that is acquired at a premium will be deemed to have made an election to amortize security premium with respect to all debt instruments having amortizable security premium that such holder 90 owns or acquires. The election to accrue interest, discount and premium on a constant yield method with respect to a security is irrevocable. Sale or Redemption. If a security is sold, exchanged, redeemed or retired, the seller will recognize gain or loss equal to the difference between the amount realized on the sale and the seller's adjusted basis in the security. Such adjusted basis generally will equal the cost of the security to the seller, increased by any original issue discount and market discount included in the seller's gross income with respect to the security and reduced by payments, other than payments of qualified stated interest, previously received by the seller and by any amortized premium. If a securityholder is a bank, thrift or similar institution described in section 582(c) of the Code, gain or loss realized on the sale or exchange of a security will be taxable as ordinary income or loss. Any such gain or loss recognized by any other seller generally will be capital gain or loss provided that the security is held by the seller as a "capital asset" (generally, property held for investment) within the meaning of Code section 1221. Such gain or loss will be long-term gain or loss if the security is held as a capital asset for more than one year. Long-term capital gains of non-corporate taxpayers are subject to reduced maximum rates while short-term capital gains are taxable at ordinary rates. The use of capital losses is subject to limitations. REMIC SECURITIES General. If a REMIC election is made with respect to a series of securities, Chapman and Cutler LLP will deliver an opinion generally to the effect that, under existing law, assuming timely filing of a REMIC election and ongoing compliance with all provisions of the related Agreements, all or a portion of the trust estate securing such series of securities will qualify as a REMIC for federal income tax purposes. The securities in such series will be designated either as one or more "regular interests" in a REMIC, which generally are treated as debt for federal income tax purposes, or as "residual interests" in a REMIC, which generally are not treated as debt for such purposes but rather as representing rights and responsibilities with respect to the taxable income or loss of the related REMIC. The prospectus supplement for such series will indicate which classes of securities are being designated as regular interests ("regular interest securities") and which class is being designated as the residual interest ("residual interest securities"). Tiered REMIC Structures. For certain series of securities, two separate elections may be made to treat designated portions of the related trust estate as REMICs (referred to as the "Upper Tier REMIC" and the "Lower Tier REMIC" respectively) for federal income tax purposes. Upon the issuance of any such series of securities, Chapman and Cutler LLP will deliver its opinion generally to the effect that, under existing law, assuming timely filing of applicable REMIC elections and ongoing compliance with all provisions of the related Agreements, the Upper Tier REMIC and the Lower Tier REMIC will each qualify as a REMIC for federal income tax purposes. In certain cases, a single residual interest security may represent the residual interest in both the Upper Tier REMIC and the Lower Tier REMIC. In such case, the discussion 91 of residual interest securities set forth below should be interpreted as applying to each residual interest separately. Status as Real Property Loans. Except to the extent otherwise provided in the related prospectus supplement: (i) REMIC securities held by a "domestic building and loan association" will constitute assets described in Code section 7701(a)(19)(C)(xi); (ii) REMIC securities held by a "real estate investment trust" ("REIT") will constitute "real estate assets" within the meaning of Code section 856(c)(4)(A) and interest on such securities will be considered "interest on obligations secured by mortgages on real property" within the meaning of Code section 856(c)(3)(B); and (iii) regular interest securities held by a "financial assets securitization investment trust" ("FASIT") will qualify for treatment as "permitted assets" within the meaning of Code section 860L(c)(1)(G) and as "qualified mortgages" within the meaning of Code section 860G(a)(3) of if held by another REMIC. REMIC securities held by REITs or regulated investment companies will not constitute "government securities" within the meaning of Code section 856(c)(5)(A) or 851(b)(4)(A)(ii), respectively. REMIC securities held by certain financial institutions will constitute "evidences of indebtedness" within the meaning of Code section 582(c)(1). In the case of items (i), (ii) and (iii) above, if less than 95% of the REMIC's assets are assets qualifying under any of the foregoing Code sections, the REMIC securities will be qualifying assets only to the extent that the REMIC's assets are qualifying assets. If a series of securities employs a multi-tier REMIC structure, both the Upper Tier REMIC and the Lower Tier REMIC will be treated as a single REMIC for purposes of determining the extent to which the related REMIC securities and the income thereon will be treated as such assets and income. TAXATION OF REGULAR INTEREST SECURITIES. General. Except as otherwise stated in this discussion, regular interest securities will be treated for federal income tax purposes as debt instruments issued by the REMIC and not as ownership interests in the REMIC or its assets. Holders of regular interest securities that otherwise report income under a cash method of accounting will be required to report income with respect to regular interest securities under an accrual method. Original Issue Discount. Certain classes of regular interest securities may be issued with original issue discount within the meaning of section 1273(a) of the Code. The rules governing original issue discount with respect to a regular interest security are described above under "Non-REMIC Securities -- Original Issue Discount." Holders of regular interest securities should be aware, however, that the OID Regulations do not adequately address certain issues relevant to prepayable securities, such as the regular interest securities. In view of the complexities and current uncertainties as to the manner of inclusion in income of original issue discount on regular interest securities, each investor should consult his own tax advisor to determine the appropriate amount and method of inclusion in income of original issue discount on such regular interest securities for federal income tax purposes. 92 Although unclear at present, the depositor intends to treat interest on a regular interest security that is a weighted average of the net interest rates on mortgage loans as qualified stated interest. In such case, the weighted average rate used to compute the initial pass-through rate on the regular interest securities will be deemed to be the index in effect through the life of the regular interest securities. It is possible, however, that the IRS may treat some or all of the interest on regular interest securities with a weighted average rate as taxable under the rules relating to obligations providing for contingent payments. Such treatment may effect the timing of income accruals on such regular interest securities. Market Discount. A subsequent purchaser of a regular interest security may also be subject to the market discount provisions of Code sections 1276 through 1278. These rules are described above under "Non-REMIC Securities -- Market Discount." Premium. The rules governing "premium" apply equally to regular interest securities (see above "Non-REMIC Securities -- Premium"). Effects of Defaults and Delinquencies. Certain series of securities may contain one or more classes of subordinated securities, and in the event there are defaults or delinquencies on the mortgage assets, amounts that would otherwise be distributed on the subordinated securities may instead be distributed on the senior securities. Subordinated securityholders nevertheless will be required to report income with respect to such securities under an accrual method without giving effect to delays and reductions in distributions on such subordinated securities attributable to defaults and delinquencies on the mortgage assets, except to the extent that it can be established that such amounts are uncollectible. As a result, the amount of income reported by a subordinated securityholder in any period could significantly exceed the amount of cash distributed to such holder in that period. The holder will eventually be allowed a loss (or will be allowed to report a lesser amount of income) to the extent that the aggregate amount of distributions on the subordinated security is reduced as a result of defaults and delinquencies on the mortgage assets. Treatment of Realized Losses. Although not entirely clear, it appears that holders of securities that are corporations should in general be allowed to deduct as an ordinary loss any loss sustained during the taxable year on account of any such securities becoming wholly or partially worthless, and that, in general, holders of securities that are not corporations should be allowed to deduct as a short-term capital loss any loss sustained during the taxable year on account of any such securities becoming wholly worthless. Although the matter is not entirely clear, non-corporate holders of securities may be allowed a bad debt deduction at such time that the principal balance of any such security is reduced to reflect realized losses resulting from any liquidated mortgage assets. The Internal Revenue Service, however, could take the position that non- corporate holders will be allowed a bad debt deduction to reflect realized losses only after all mortgage assets remaining in the related trust fund have been liquidated or the securities of the related series have been otherwise retired. Potential investors and holders of the securities are urged to consult their own tax advisors regarding the appropriate timing, amount and character of any loss sustained with respect to such 93 securities, including any loss resulting from the failure to recover previously accrued interest or discount income. Special loss rules are applicable to banks and thrift institutions, including rules regarding reserves for bad debts. Such taxpayers are advised to consult their tax advisors regarding the treatment of losses on securities. Sale or Exchange. If a regular interest security is sold, exchanged, redeemed or retired, the holder will recognize gain or loss equal to the difference between the amount realized on such disposition and the adjusted basis in the regular interest security. Similarly, a holder who receives a payment denominated as principal with respect to a regular interest security will recognize gain equal to the excess of the amount of such payment over his adjusted basis in the regular interest security. A holder that receives a final payment that is less than the holder's adjusted basis in a regular interest security will generally recognize a loss. The adjusted basis of a regular interest security generally will equal the cost of the regular interest security to the holder, increased by any original issue discount or market discount previously included in the holder's gross income with respect to the regular interest security, and reduced by payments (other than payments of qualified stated interest) previously received by the holder on the regular interest security and by any amortized premium. Except as note above with respect to market discount and except as noted below, any such gain or loss on a regular interest security generally will be capital gain or loss. Such gain or loss will be long-term gain or loss if the regular interest security is held as a capital asset for more than one year. Long-term capital gains of non-corporate taxpayers are subject to reduced maximum rates while short-term capital gains are taxable at ordinary rates. The use of capital losses is subject to limitations. If the holder of a regular interest security is a bank, a mutual savings bank, a thrift, or a similar institution described in section 582 of the Code, any gain or loss on the sale or exchange of the regular interest security will be treated as ordinary income or loss. In the case of other types of holders, gain from the disposition of a regular interest security that otherwise would be capital gain will be treated as ordinary income to the extent that the amount actually includible in income with respect to the regular interest security by the holder during his holding period is less than the amount that would have been includible in income if the yield on that regular interest security during the holding period had been 110% of a specified U.S. Treasury borrowing rate as of the date that the holder acquired the regular interest security. Although the relevant legislative history indicates that the portion of the gain from disposition of a regular interest security that will be recharacterized as ordinary income is limited to the amount of original issue discount (if any) on the regular interest security that was not previously includible in income, the applicable Code provision contains no such limitation. TAXATION OF HOLDERS OF RESIDUAL INTEREST SECURITIES. The REMIC will not be subject to Federal income tax except with respect to income from prohibited transactions and certain other transactions. See "-- Prohibited Transactions and Contributions Tax" below. Instead, the original holder of a security representing a residual interest (a "residual interest security") will report on its federal 94 income tax return, as ordinary income, the "daily portion" of the taxable income or net loss of the REMIC for each day during the taxable year on which such holder held the residual interest security. The daily portion is determined by allocating to each day in any calendar quarter its ratable portion of the taxable income or net loss of the REMIC for such quarter, and by allocating that amount among the holders (on such day) of the residual interest securities in proportion to their respective holdings on such day. The taxable income of the REMIC will be determined under an accrual method and will be taxable to the holders of residual interest securities without regard to the timing or amounts of cash distributions by the REMIC. Ordinary income derived from residual interest securities will be "portfolio income" for purposes of the taxation of taxpayers subject to the limitations on the deductibility of "passive losses." As residual interests, the residual interest securities will be subject to tax rules, described below, that differ from those that would apply if the residual interest securities were treated for federal income tax purposes as direct ownership interests in the mortgage assets or as debt instruments issued by the REMIC. The holder of a residual interest security may be required to include taxable income from the residual interest security in excess of the cash distributed. The reporting of taxable income without corresponding distributions could occur, for example, in certain REMIC issues in which the loans held by the REMIC were issued or acquired at a discount, since mortgage prepayments cause recognition of discount income, while the corresponding portion of the prepayment could be used in whole or in part to make principal payments on REMIC Regular Interests issued without any discount or at an insubstantial discount (if this occurs, it is likely that cash distributions will exceed taxable income in later years). Taxable income may also be greater in earlier years of certain REMIC issues as a result of the fact that interest expense deductions, as a percentage of outstanding principal on REMIC regular interest securities, will typically increase over time as lower yielding securities are paid, whereas interest income with respect to loans will generally remain constant over time as a percentage of loan principal. In any event, because the holder of a residual interest security is taxed on the net income of the REMIC, the taxable income derived from a residual interest security in a given taxable year will not be equal to the taxable income associated with investment in a corporate security or stripped instrument having similar cash flow characteristics and pretax yield. Therefore, the after-tax yield on the residual interest security may be less than that of such a security or instrument. A subsequent residual interest securityholder also will report on its federal income tax return amounts representing a daily share of the taxable income of the REMIC for each day that such residual interest securityholder owns such residual interest security. Those daily amounts generally would equal the amounts that would have been reported for the same days by an original residual interest securityholder, as described above. The legislative history to the Code provisions governing this matter indicates that certain adjustments may be appropriate to reduce (or increase) the income of a subsequent holder of a residual interest security that purchased such residual interest security at a 95 price greater than (or less than) the adjusted basis such residual interest security would have in the hands of an original residual interest securityholder. See "-- Sale or Exchange" below. It is not clear, however, whether such adjustments will in fact be permitted or required and, if so, how they would be made. The REMIC Regulations do not provide for any such adjustments. Limitation on Losses. The REMIC will have a net loss for any calendar quarter in which its deductions exceed its gross income. The amount of the REMIC's net loss that a holder may take into account currently is limited to the holder's adjusted basis at the end of the calendar quarter in which such loss arises. A holder's basis in a residual interest security will initially equal such holder's purchase price, and will subsequently be increased by the amount of the REMIC's taxable income allocated to the holder, and decreased (but not below zero) by the amount of distributions made and the amount of the REMIC's net loss allocated to the holder. Any disallowed loss may be carried forward indefinitely, but may be used only to offset income of the REMIC generated by the same REMIC. The ability of holders of residual interest securities to deduct net losses may be subject to additional limitations under the Code, as to which such holders should consult their tax advisers. Distributions. Distributions on a residual interest security (whether at their scheduled times or as a result of prepayments) will generally not result in any additional taxable income or loss to a holder of a residual interest security. If the amount of such payment exceeds a holder's adjusted basis in the residual interest security, however, the holder will recognize gain (treated as gain from the sale of the residual interest security) to the extent of such excess. Sale or Exchange. A holder of a residual interest security will recognize gain or loss on the sale or exchange of a residual interest security equal to the difference, if any, between the amount realized and such holder's adjusted basis in the residual interest security at the time of such sale or exchange. In general, any such gain or loss will be capital gain or loss provided the residual interest security is held as a capital asset. However, residual interest securities will be "evidences of indebtedness" within the meaning of Code Section 582(c)(1), so that gain or loss recognized from sale of a residual interest security by a bank or thrift institution to which such section applies would be ordinary income or loss. Any loss upon disposition of a residual interest security may be disallowed if the selling holder acquires any residual interest in a REMIC or similar mortgage pool within six months before or after such disposition. In that event, any loss will increase such regular interest securityholder's adjusted basis in the newly acquired interest. Excess Inclusions. The excess inclusion portion of a REMIC's income is generally equal to the excess, if any, of (a) REMIC taxable income for the quarterly period allocable to a residual interest security, over (b) the daily accruals for such quarterly period. For this purpose, daily accruals are determined by allocating to each day in the calendar quarter its ratable portion of the "adjusted issue price" of the residual interest security at the beginning of such quarterly period and 120% of the long term applicable federal rate in effect on the date the residual interest security is issued. The adjusted 96 issue price of a residual interest at the beginning of each calendar quarter will equal its issue price (calculated in a manner analogous to the determination of the issue price of a Regular Interest), increased by the aggregate of the daily accruals for prior calendar quarters, and decreased (but not below zero) by the amount of loss allocated to a holder and the amount of distributions made on the residual interest security before the beginning of the quarter. The long-term federal rate, which is announced monthly by the Treasury Department, is an interest rate that is based on the average market yield of outstanding marketable obligations of the United States government having remaining maturities in excess of nine years. The portion of the REMIC taxable income of a holder of a residual interest security consisting of "excess inclusion" income will be subject to federal income tax in all events and may not be offset by unrelated deductions or losses, including net operating losses, on such holder's federal income tax return. Further, if the holder of a residual interest security is an organization subject to the tax on unrelated business income imposed by Code section 511, such holder's excess inclusion income will be treated as unrelated business taxable income of such holder. If a residual interest security is owned by a foreign person, excess inclusion income is subject to tax at a rate of 30% which may not be reduced by treaty, is not eligible for treatment as "portfolio interest" and is subject to certain additional limitations. The Small Business Job Protection Act of 1996 has eliminated the special rule permitting section 593 institutions ("thrift institutions") to use net operating losses and other allowable deductions to offset their excess inclusion income from REMIC residual securities that have "significant value" within the meaning of the REMIC Regulations, effective for taxable years beginning after December 31, 1995, except with respect to residual securities continuously held by a thrift institution since November 1, 1995. In the case of any residual interest securities held by a real estate investment trust, the Code provides that under regulations to be issued the aggregate excess inclusions with respect to such residual interest securities, reduced (but not below zero) by the real estate investment trust taxable income (within the meaning of Code Section 857(b)(2), excluding any net capital gain), will be allocated among the shareholders of such trust in proportion to the dividends received by such shareholders from such trust, and any amount so allocated will be treated as an excess inclusion with respect to a residual interest security as if held directly by such shareholder. Regulated investment companies, common trust funds and certain cooperatives are subject to similar rules. No such regulations have been issued to date and it is unclear how this provision would be applied in practice. In addition, the Small Business Job Protection Act of 1996 provides three rules for determining the effect of excess inclusions on the alternative minimum taxable income of a residual holder. First, alternative minimum taxable income for such residual holder is determined without regard to the special rule that taxable income cannot be less than excess inclusions. Second, a residual holder's alternative minimum taxable income for a tax year cannot be less than excess inclusions for the year. Third, the amount of any alternative minimum tax net operating loss deductions must be computed without regard to any excess inclusions. 97 Restrictions on Ownership and Transfer of Residual Interest Securities. As a condition to qualification as a REMIC, reasonable arrangements must be made to prevent the ownership of a residual interest security by any "disqualified organization." Disqualified organizations include the United States, any State or political subdivision thereof, any foreign government, any international organization, or any agency or instrumentality of any of the foregoing, a rural electric or telephone cooperative described in section 1381(a)(2)(C) of the Code, or any entity exempt from the tax imposed by sections 1-1399 of the Code, if such entity is not subject to tax on its unrelated business income. Accordingly, the applicable Pooling and Servicing Agreement will prohibit disqualified organizations from owning a residual interest security. In addition, no transfer of a residual interest security will be permitted unless the proposed transferee shall have furnished to the Trustee an affidavit representing and warranting that it is neither a Disqualified Organization nor an agent or nominee acting on behalf of a Disqualified Organization. If a residual interest security is transferred to a Disqualified Organization (in violation of the restrictions set forth above), a substantial tax will be imposed on the transferor of such residual interest security at the time of the transfer. In addition, if a Disqualified Organization holds an interest in a pass-through entity (including, among others, a partnership, trust, real estate investment trust, regulated investment company, or any person holding as nominee), that owns a residual interest security, the pass-through entity will be required to pay an annual tax on its allocable share of the excess inclusion income of the REMIC. The pass-through entity otherwise liable for the tax, for any period during which the disqualified organization is the record holder of an interest in such entity, will be relieved of liability for the tax if such record holder furnishes to such entity an affidavit that such record holder is not a disqualified organization and, for such period, the pass-through entity does not have actual knowledge that the affidavit is false. Except as may be provided in Treasury regulations not yet issued, any person holding an interest in a pass-through entity as a nominee for another will, with respect to such interest, be treated as a pass-through entity. Under the Taxpayer Relief Act of 1997, large partnerships (generally with 250 or more partners) will be taxable on excess inclusion income as if all partners were disqualified organizations. Under the REMIC Regulations, if a residual interest security is a "noneconomic residual interest," as described below, such transfer of a residual interest security to a United States person will be disregarded for all Federal tax purposes unless no significant purpose of the transfer was to impede the assessment or collection of tax. A residual interest security is a "noneconomic residual interest" unless at the time of the transfer (i) the present value of the expected future distributions on the residual interest security at least equals the product of the present value of the anticipated excess inclusions and the highest rate of tax for the year in which the transfer occurs, and (ii) the transferor reasonably expects that the transferee will receive distributions from the REMIC at or after the time at which the taxes accrue on the anticipated excess inclusions in an amount sufficient to satisfy the accrued taxes. A significant purpose to impede the assessment or collection of tax exists if the transferor, at the time of the transfer, either knew or should have known that the transferee would be unwilling or unable to pay taxes 98 due on its share of the taxable income of the REMIC. Under final regulations issued by the Treasury Department on July 19, 2002, a transferor is presumed not to have such knowledge if (i) the transferor conducted a reasonable investigation of the financial condition of the transferee, (ii) the transferee acknowledges to the transferor that the residual interest security may generate tax liabilities in excess of the cash flow and the transferee represents that it intends to pay such taxes associated with the residual interest security as they become due, (iii) the transferee represents that it will not cause income from the residual interest security to be attributable to a foreign permanent establishment or fixed base of the transferee or another U.S. taxpayer and (iv) the transfer satisfies either an "asset test" or "formula test." The "asset test" requires that the transfer be to certain domestic taxable corporations with large amounts of gross and net assets where an agreement is made that all future transfers will be to taxable domestic corporations in transactions that qualify for the aforementioned "safe harbor." The asset test is not satisfied if the facts and circumstances known to the transferor reasonably indicate that the taxes associated with the residual interest security will not be paid. Meanwhile, the "formula test" requires that the present value of the anticipated tax liabilities associated with holding the residual interest does not exceed the sum of (i) the present value of any consideration given to the transferee to acquire the interest, (ii) the present value of the expected future distributions on the interest, and (iii) the present value of any anticipated tax savings associated with holding the interest as the REMIC generates losses. If a transfer of a "noneconomic residual security" is disregarded, the transferor would continue to be treated as the owner of the residual interest security and would continue to be subject to tax on its allocable portion of the net income of the REMIC. Foreign Investors. The REMIC Regulations provide that the transfer of a residual interest security that has a "tax avoidance potential" to a "foreign person" will be disregarded for federal income tax purposes. This rule appears to apply to a transferee who is not a U.S. Person unless such transferee's income in respect of the residual interest security is effectively connected with the conduct of a United Sates trade or business. A residual interest security is deemed to have a tax avoidance potential unless, at the time of transfer, the transferor reasonably expect that the REMIC will distribute to the transferee amounts that will equal at least 30 percent of each excess inclusion, and that such amounts will be distributed at or after the time the excess inclusion accrues and not later than the end of the calendar year following the year of accrual. If the non-U.S. Person transfers the residual interest security to a U.S. Person, the transfer will be disregarded, and the foreign transferor will continue to be treated as the owner, if the transfer has the effect of allowing the transferor to avoid tax on accrued excess inclusions. The Agreements will provide that no residual interest security may be transferred to a non-U.S. Person. In addition, no transfer of a residual interest security will be permitted unless the proposed transferee shall have furnished to the Trustee an affidavit representing and warranting that it is not a Non-U.S. Person. The Agreements provide that any attempted transfer or pledge in violation of the transfer restrictions shall be absolutely null and void and shall vest no rights in any purported transferee. Investors in residual interest securities are advised to consult their 99 own tax advisors with respect to transfers of the residual interest securities and, in addition, pass-through entities are advised to consult their own tax advisors with respect to any tax which may be imposed on a pass-through entity. Mark to Market Rules. Prospective purchasers of a residual interest security should be aware that such a security acquired after January 3, 1995 cannot be marked-to-market. Administrative Matters. The REMIC's books must be maintained on a calendar year basis and the REMIC must file an annual federal income tax return. The REMIC will also be subject to the procedural and administrative rules of the Code applicable to partnerships, including the determination of any adjustments to, among other things, items of REMIC income, gain, loss, deduction, or credit, by the IRS in a unified administrative proceeding. TAXATION OF THE REMIC General. Although a REMIC is a separate entity for federal income tax purposes, a REMIC is not generally subject to entity-level tax. Rather, the taxable income or net loss of a REMIC is taken into account by the holders of residual interests. As described above, the regular interests are generally taxable as debt of the REMIC. Qualification as a REMIC. The trust estate or one or more designated pools of the assets of the trust estate may elect to be treated under the Code as a REMIC in which the regular interest securities and residual interest securities will constitute the "regular interests" and "residual interests," respectively, if a REMIC election is in effect and certain tests concerning (i) the composition of the REMIC's assets and (ii) the nature of the holders' interests in the REMIC are met on a continuing basis. A loss of REMIC status could have a number of consequences for holders. If, as the result of REMIC disqualification, the trust estate were treated as an association taxable as a corporation, distributions on the security could be recharacterized in part as dividends from a non-includible corporation and in part as returns of capital. Alternatively, distributions on a regular interest security could continue to be treated as comprised of interest and principal notwithstanding REMIC disqualification, in which case a cash-basis holder might not be required to continue to recognize interest and market discount with respect to the security on a accrual basis. Under the first alternative, a loss of REMIC status would, and under the second alternative, a loss of REMIC status could cause the securities and the associated distributions not to be qualified assets and income for the various purposes of domestic building and loan associations, FASITs and REITs described under "REMIC Securities -- Status as Real Property Loans" above, although such a loss would not affect the status of the securities as "government securities" for REITs. The securities should continue to qualify as "government securities" for regulated investment companies, regardless of whether REMIC status is lost. Calculation of REMIC Income. The taxable income or net loss of a REMIC is determined under an accrual method of accounting and in the same manner as in the case of an individual, with certain adjustments. In general, the taxable income or net loss will be the difference between (i) the gross income produced by the REMIC's assets, 100 including stated interest and any original issue discount or market discount on loans and other assets, and (ii) deductions, including stated interest and original issue discount accrued on regular interest securities, amortization of any premium with respect to loans, and servicing fees and other expenses of the REMIC. A holder of a residual interest security that is an individual or a "pass-through interest holder" (including certain pass-through entities, but not including real estate investment trusts) will be unable to deduct servicing fees payable on the loans or other administrative expenses of the REMIC for a given taxable year, to the extent that such expenses, when aggregated with such holder's other miscellaneous itemized deductions for that year, do not exceed two percent of such holder's adjusted gross income. For purposes of computing its taxable income or net loss, the REMIC should have an initial aggregate tax basis in its assets equal to the aggregate fair market value of the regular interests and the residual interests on the Startup Day (generally, the day that the interests are issued). That aggregate basis will be allocated among the assets of the REMIC in proportion to their respective fair market values. The original issue discount provisions of the Code apply to loans of individuals originated on or after March 2, 1984, and the market discount provisions apply to loans originated after July 18, 1984. Subject to possible application of the de minimis rules, the method of accrual by the REMIC of original issue discount income on such loans will be equivalent to the method under which securityholders accrue original issue discount (i.e., under the constant yield method taking into account the Prepayment Assumption). The REMIC will deduct original issue discount on the regular interest securities in the same manner that the holders of the regular interest securities include such discount in income, but without regard to the de minimis rules. See "Taxation of Regular Interest Securities" above. However, a REMIC that acquires loans at a market discount must include such market discount in income currently, as it accrues, on a constant interest basis. To the extent that the REMIC's basis allocable to loans that it holds exceeds their principal amounts, the resulting premium, if attributable to mortgages originated after September 27, 1985, will be amortized over the life of the loans (taking into account the Prepayment Assumption) on a constant yield method. Although the law is somewhat unclear regarding recovery of premium attributable to loans originated on or before such date, it is possible that such premium may be recovered in proportion to payments of loan principal. Prohibited Transactions and Contributions Tax. The REMIC will be subject to a 100% tax on any net income derived from a "prohibited transaction." For this purpose, net income will be calculated without taking into account any losses from prohibited transactions or any deductions attributable to any prohibited transaction that resulted in a loss. In general, prohibited transactions include: (i) subject to limited exceptions, the sale or other disposition of any qualified mortgage transferred to the REMIC; (ii) subject to limited exceptions, the sale or other disposition of a cash flow investment; (iii) the receipt of any income from assets not permitted to be held by the REMIC pursuant to the Code; or (iv) the receipt of any fees or other compensation for services 101 rendered by the REMIC. It is anticipated that a REMIC will not engage in any prohibited transactions in which it would recognize a material amount of net income. In addition, subject to a number of exceptions, a tax is imposed at the rate of 100% on amounts contributed to a REMIC after the close of the three-month period beginning on the Startup Day. The holders of residual interest securities will generally be responsible for the payment of any such taxes imposed on the REMIC. To the extent not paid by such holders or otherwise, however, such taxes will be paid out of the trust fund and will be allocated pro rata to all outstanding classes of securities of such REMIC. WITHHOLDING WITH RESPECT TO CERTAIN FOREIGN INVESTORS Interest paid to or accrued by a beneficial owner of a security who is a not a U.S. Person (a "foreign person") generally will be considered portfolio interest and generally will not be subject to United States federal income tax and withholding tax, provided the interest is not effectively connected with the conduct of a trade or business within the United States by the foreign person and the foreign person (i) is not actually or constructively a 10 percent shareholder of the depositor or its affiliates or a controlled foreign corporation with respect to which the depositor or its affiliates is a related person (all within the meaning of the Code) and (ii) provides the Indenture Trustee or other person who is otherwise required to withhold U.S. tax with respect to the securities (the "withholding agent") with an appropriate statement on Form W-8BEN (Certificate of Foreign Status of Beneficial Owner for United States Tax Withholding). If a security is held through a securities clearing organization or certain other financial institutions, the organization or institution may provide the relevant signed statement to the withholding agent; in that case, however, the signed statement must be accompanied by a Form W-8BEN provided by the foreign person that owns the security. If the information shown on Form W-8BEN changes, a new Form W-8BEN must be filed. If interest on the securities is not portfolio interest, then it will be subject to United States federal income and withholding tax at a rate of 30 percent, unless reduced or eliminated pursuant to an applicable tax treaty. Under recently issued Treasury regulations, a payment to a foreign partnership is treated, with some exceptions, as a payment directly to the partners, so that the partners are required to provide any required certifications. Foreign persons that intend to hold a security through a partnership or other pass-through entity should consult their own tax advisors regarding the application of those Treasury regulations to an investment in a security. Any capital gain realized on the sale, redemption, retirement or other taxable disposition of a security by a foreign person will be exempt from United States federal income and withholding tax, provided that (i) such gain is not effectively connected with the conduct of a trade or business in the United States by the foreign person and (ii) in the case of a foreign person who is an individual, the foreign person is not present in the United States for 183 days or more in the taxable year. For purposes of this discussion, the term "U.S. Person" means (i) a citizen or resident of the United States; (ii) a corporation (or entity treated as a corporation for 102 tax purposes) created or organized in the United States or under the laws of the United States or of any state including the District of Columbia; (iii) a partnership (or entity treated as a partnership for tax purposes) organized in the United States or under the laws of the United States or of any state including the District of Columbia (unless provided otherwise by future Treasury regulations); (iv) an estate whose income is includible in gross income for United States income tax purposes regardless of its source; or (v) a trust, if a court within the United States is able to exercise primary supervision over the administration of the trust and one or more U.S. Persons have authority to control all substantial decisions of the trust. Notwithstanding the last clause of the preceding sentence, to the extent provided in Treasury regulations, certain trusts that were in existence on August 20, 1996, that were treated as U.S. Persons prior to such date and that elect to continue to be treated as U.S. Persons also will be U.S. Persons. BACKUP WITHHOLDING Under federal income tax law, a securityholder, beneficial owner, financial intermediary or other recipient of a payment on behalf of a beneficial owner may be subject to "backup withholding" under certain circumstances. Backup withholding may apply to such person who is a United States person if such person, among other things, (i) fails to furnish his social security number or other taxpayer identification number, (ii) furnishes an incorrect taxpayer identification number, (iii) fails to report properly interest and dividends, or (iv) under certain circumstances, fails to provide a certified statement, signed under penalties of perjury, that the taxpayer identification number provided is correct and that such person is not subject to backup withholding. Backup withholding may apply, under certain circumstances, to a securityholder who is a Non-U.S. Person if the securityholder fails to provide securities broker with a Foreign Person Certification. Backup withholding applies to "reportable payments," which include interest payments and principal payments to the extent of accrued original issue discount, as well as distributions of proceeds from the sale of regular interest securities or residual interest securities. The backup withholding rate is generally the fourth lowest rate of income tax as in effect from time to time. Backup withholding, however, does not apply to payments on a security made to certain exempt recipients, such as tax-exempt organizations, and to certain Non-U.S. Persons. Securityholders should consult their tax advisors for additional information concerning the potential application of backup withholding to payments received by them with respect to a security. DUE TO THE COMPLEXITY OF THE FEDERAL INCOME TAX RULES APPLICABLE TO SECURITYHOLDERS AND THE CONSIDERABLE UNCERTAINTY THAT EXISTS WITH RESPECT TO MANY ASPECTS OF THOSE RULES, POTENTIAL INVESTORS ARE URGED TO CONSULT THEIR OWN TAX ADVISORS REGARDING THE TAX TREATMENT OF THE ACQUISITION, OWNERSHIP, AND DISPOSITION OF THE SECURITIES. STATE TAX CONSIDERATIONS In addition to the federal income tax consequences described above, potential investors should consider the state income tax consequences of the acquisition, ownership, and disposition of the securities. State income tax law may differ substantially from the corresponding federal law, and this discussion does not purport to describe any 103 aspect of the income tax laws of any state. Therefore, potential investors should consult their own tax advisors with respect to the various state tax consequences of an investment in the securities. ERISA CONSIDERATIONS The following describes certain considerations under ERISA and Section 4975 of the Code, which apply only to securities of a series that are not divided into subclasses. If securities are divided into subclasses, the prospectus supplement will contain information concerning considerations relating to ERISA and the Code that are applicable to such securities. ERISA and Section 4975 of the Code impose requirements on employee benefit plans (and on certain other retirement plans and arrangements, including individual retirement accounts and annuities and certain Keogh plans, and on collective investment funds and separate accounts in which such plans, accounts or arrangements are invested) (collectively "Plans") subject to ERISA or to Section 4975 of the Code and on persons who are fiduciaries with respect to such Plans. Generally, ERISA applies to investments made by Plans. Among other things, ERISA requires that the assets of Plans be held in trust and that the trustee, or other duly authorized fiduciary, have exclusive authority and discretion to manage and control the assets of such Plans. ERISA also imposes certain duties on persons who are fiduciaries of Plans. Under ERISA, any person who exercises any discretionary authority or control respecting the management or disposition of the assets of a Plan is considered to be a fiduciary of such Plan (subject to certain exceptions not here relevant). Certain employee benefit plans, such as governmental plans (as defined in Section 3(32) of ERISA) and, if no election has been made under Section 410(d) of the Code, church plans (as defined in Section 3(33) of ERISA), are not subject to ERISA requirements. Accordingly, assets of such plans may be invested in securities without regard to the ERISA considerations described above and below, subject to the provisions of applicable state 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. In addition to the imposition of general fiduciary standards of investment prudence and diversification, ERISA prohibits a broad range of transactions involving Plan assets and persons ("Parties in Interest") having certain specified relationships to a Plan and imposes additional prohibitions where Parties in Interest are fiduciaries with respect to such Plan. Certain Parties in Interest that participate in a prohibited transaction may be subject to excise taxes imposed pursuant to Section 4975 of the Code, or a penalty imposed pursuant to Section 502(i) of ERISA, unless a statutory, regulatory or administrative exemption is available. On November 13, 1986, the United States Department of Labor (the "DOL") issued final regulations concerning the definition of what constitutes the assets of a Plan. Under this regulation, the underlying assets and properties of corporations, partnerships, trusts and certain other entities in which a Plan acquires an "equity" interest could be 104 deemed for purposes of ERISA and Section 4975 of the Code to be assets of the investing Plan in certain circumstances unless certain exceptions apply. Under the Plan Asset Regulation, the term "equity" interest is defined as any interest in an entity other than an instrument that is treated as indebtedness under "applicable local law" and which has no "substantial equity features." If the securities of a series consist of notes that are not treated as equity interests in the issuing trust for purposes of the Plan Asset Regulation, a Plan's investment in such notes would not cause the trust assets to be deemed Plan assets. However, the depositor, the servicer, the trustee and the underwriter may be the depositor of or investment advisor with respect to one or more Plans. Because such parties may receive certain benefits in connection with the sale of the notes, the purchase of notes using Plan assets over which any such parties (or any affiliates thereof) has investment authority might be deemed to be a violation of the prohibited transaction rules of ERISA and the Code for which no exemption may be available. Accordingly, notes may not be purchased using the assets of any Plan if the depositor, the servicer, the trustee, the underwriter or any of their affiliates (a) has investment or administrative discretion with respect to such Plan assets; (b) has authority or responsibility to give, or regularly gives, investment advice with respect to such Plan assets for a fee and pursuant to an agreement of understanding that such advice (i) will serve as a primary basis for investment decisions with respect to such Plan assets and (ii) will be based on the particular investment needs for such Plan; or (c) is an employer maintaining or contributing to such Plan. In addition, the issuing trust or an affiliate might be considered or might become a Party in Interest with respect to a Plan. Also, any holder of certificates issued by the trust, because of its activities or the activities of its respective affiliates, may be deemed to be a Party in Interest with respect to certain Plans, including but not limited to Plans depositored by such holder. In either case, the acquisition or holding of notes by or on behalf of such a Plan could be considered to give rise to a prohibited transaction within the meaning of ERISA and the Code, unless it is subject to one or more exemptions such as: - Prohibited Transaction Class Exemption ("PTCE") 84-14, which exempts certain transactions effected on behalf of a Plan by a "qualified professional asset manager"; - PTCE 90-1, which exempts certain transactions involving insurance company pooled separate accounts; - PTCE 91-38, which exempts certain transactions involving bank collective investment funds; - PTCE 95-60, which exempts certain transactions involving insurance company general accounts; or - PTCE 96-23, which exempts certain transactions effected on behalf of a Plan by certain "in-house asset managers." 105 The prospectus supplement for a series of securities may require that Plans investment in notes represent that the relevant conditions for exemptive relief under at least one of the foregoing exemptions have been satisfied. The Plan Asset Regulation provides that, generally, the assets of an entity in which a Plan invests will not be deemed for purposes of ERISA to be assets of such Plan if the equity interest acquired by the investing Plan is a publicly-offered security, or if equity participation by benefit plan investors is not significant. In general, a publicly-offered security, as defined in the Plan Asset Regulation, is a security that is widely held, freely transferable and registered under the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Equity participation in an entity by benefit plan investors is not significant if, after the most recent acquisition of an equity interest in the entity, less than 25% of the value of each class of equity interest in the entity is held by "benefit plan investors," which include benefit plans described in ERISA or under Section 4975 of the Code, whether or not they are subject to ERISA, as well as entities whose underlying assets include assets of a Plan by reason of a Plan's investment in the entity. If no exception under the Plan Asset Regulation applies and if a Plan (or a person investing Plan assets, such as an insurance company general account) acquires an equity interest in a trust established for a series of securities, then the trust assets would be considered to be assets of the Plan. Because the loans held by the trust may be deemed Plan assets of each Plan that purchases equity securities, an investment in the securities by a Plan might be a prohibited transaction under Sections 406 and 407 of ERISA and subject to an excise tax under Section 4975 of the Code and may cause transactions undertaken in the course of operating the trust to constitute prohibited transactions, unless a statutory or administrative exemption applies. The DOL has issued PTCE 83-1, which exempts from ERISA's prohibited transaction rules certain transactions relating to the operation of residential mortgage pool investment trusts and the purchase, sale and holding of "mortgage pool pass-through certificates" in the initial issuance of such certificates. If the general conditions (discussed below) of PTEC 83-1 are satisfied, investments by a Plan in certificates that provide for pass-through payments of principal and interest and represent beneficial undivided fractional interests in a fixed investment pool consisting solely of interest-bearing obligations secured by first or second mortgages or deeds of trust on single-family residential property, property acquired in foreclosure and undistributed cash ("single family securities") will be exempt from the prohibitions of Sections 406(a) and 407 of ERISA (relating generally to transactions with Parties in Interest who are not fiduciaries) if the Plan purchases the single family securities at no more than fair market value and will be exempt from the prohibitions of ERISA Sections 406(b)(1) and (2) (relating generally to transactions with fiduciaries) if, in addition, the purchase is approved by an independent fiduciary, no sales commission is paid to the pool depositor, the Plan does not purchase more than 25% of all single family securities, and at least 50% of all single family securities are purchased by persons independent of the pool depositor or pool trustee. PTCE 83-1 does not provide an exemption for transactions involving subordinate securities. 106 The discussion in this and the next succeeding paragraph applies only to single family securities. PTCE 83-1 sets forth three general conditions which must be satisfied for any transaction to be eligible for exemption: - the maintenance of a system of insurance or other protection for the pooled mortgage loans and property securing such loans, and for indemnifying certificateholders against reductions in pass-through payments due to property damage or defaults in loan payments in an amount not less than the greater of one percent of the aggregate principal balance of all covered pooled mortgage loans or the principal balance of the largest covered pooled mortgage loan; - the existence of a pool trustee who is not an affiliate of the pool depositor; and - a limitation on the amount of the payment retained by the pool depositor, together with other funds inuring to its benefit, to not more than adequate consideration for selling the mortgage loans plus reasonable compensation for services provided by the pool depositor to the pool. The depositor believes that the first general condition referred to above will be satisfied with respect to the certificates issued without a subordination feature, or the senior certificates only in a series issued with a subordination feature, provided that the subordination and reserve account, subordination by shifting of interests, the pool insurance or other form of credit enhancement described under "Credit Enhancement" in this prospectus (such subordination, pool insurance or other form of credit enhancement being the system of insurance or other protection referred to above) with respect to a series of certificates is maintained in an amount not less than the greater of one percent of the aggregate principal balance of the loans or the principal balance of the largest loan. See "Description of the Securities" in this prospectus. In the absence of a ruling that the system of insurance or other protection with respect to a series of certificates satisfies the first general condition referred to above, there can be no assurance that these features will be so viewed by the DOL. The trustee will not be affiliated with the depositor. Each Plan fiduciary who is responsible for making the investment decisions whether to purchase or commit to purchase and to hold single family securities must make its own determination as to whether the first and third general conditions, and the specific conditions described briefly in the preceding paragraphs, of PTCE 83-1 have been satisfied, or as to the availability of any other prohibited transaction exemptions. Each Plan fiduciary should also determine whether, under the general fiduciary standards of investment prudence and diversification, an investment in the certificates is appropriate for the Plan, taking into account the overall investment policy of the Plan and the composition of the Plan's investment portfolio. The DOL has issued to various underwriters individual prohibited transaction exemptions which generally exempt from the application of certain prohibited transaction provisions of ERISA and the Code transactions with respect to the initial purchase, the 107 holding and the subsequent resale by Plans of securities issued by the investment pools whose assets consist of: - certain types of secured receivables, secured loans and other secured obligations, including home equity loans, obligations secured by shares issued by a cooperative housing association, and obligations that bear interest or are purchased at a discount and which are secured by single-family residential real property and/or multi-family residential real property (including obligations secured by leasehold interests on residential real property); - property securing a permitted obligation; - undistributed cash, cash credited to a "pre-funding account" or a "capitalized interest account", and certain temporary investments made therewith; and - certain types of credit support arrangements, including yield supplement agreements and interest-rate swaps that meet certain requirements set forth in exemptions. The securities covered by the underwriter exemptions include certificates representing a beneficial ownership interest in the assets of a trust (including a grantor trust, owner trust or REMIC) and which entitle the holder to payments of principal, interest and/or other payments made with respect to the assets of such trust. Among the conditions that must be satisfied for the underwriter exemptions to apply are the following: - the plan must acquire the securities on terms, including the security price, that are at least as favorable to the plan as they would be in an arm's-length transaction with an unrelated party; - the securities must not be subordinated to any other class of securities issued by the same issuer, unless the securities are issued in a "designated transaction"; - at the time of acquisition, the securities acquired by the plan must have received a rating in one of the three (or, in the case of designated transactions, four) highest generic rating categories from Standard and Poor's Rating Services, Moody's Investors Service, Inc. or Fitch Ratings, each referred to herein as a "rating agency"; - the trustee must not be an affiliate of any other member of the "restricted group"; - the sum of all payments made to and retained by the underwriter must not total more than reasonable compensation for underwriting the securities, the sum of all payments made to and retained by the issuer's depositor for assigning the obligations to the issuer must not total more than the fair market value of the obligations, and the sum of all payments made to and retained by any servicer must not total more than reasonable compensation and expense reimbursement for its services; - the plan must be an "accredited investor" as defined in Rule 501(a)(1) of Regulation D of the commission under the Securities Act of 1933; and 108 - in the event that all of the obligations used to fund the issuer have not been transferred to the issuer on the closing date, additional obligations having an aggregate value equal to no more than 25% of the total principal amount of the securities being offered may be transferred to the issuer under a pre-funding feature within ninety days or three months following the closing date. The issuer must also meet the following requirements: - the assets of the issuer must consist solely of assets of the type that have been included in other investment pools; - securities evidencing interests in other investment pools must have been rated in one of the three (or in the case of designated transactions, four) highest rating categories by a rating agency for at least one year prior to the plan's acquisition of securities; and - investors other than plans must have purchased securities evidencing interests in the other investment pools for at least one year prior to the plan's acquisition of securities. For purposes of the underwriter exemptions, the term "designated transaction" includes any securitization transaction in which the assets of the issuer consist solely of home equity loans, obligations secured by shares issued by a cooperative housing association and/or obligations that bear interest or are purchased at a discount and which are secured by single-family residential real property and/or multi-family residential real property (including obligations secured by leasehold interests on residential real property). Such home equity loans and residential mortgage loans may be less than fully secured, provided that: - the securities acquired by a plan in the designated transaction are not subordinated to any other class of securities issued by the same issuer; - at the time of acquisition, the securities acquired by the plan must have received a rating in one of the two highest generic rating categories from a rating agency; and - the obligations must be secured by collateral whose fair market value on the closing date of the designated transaction is at least equal to 80% of the sum of (i) the outstanding principal balance due under the obligation and (ii) the outstanding principal balance of any other obligations of higher priority (whether or not held by the issuer) which are secured by the same collateral. The underwriter exemptions also provide relief from various self-dealing/conflict of interest prohibited transactions that may occur when a plan fiduciary causes a plan to acquire securities of an issuer and the fiduciary, or its affiliate, is an obligor with respect to obligations or receivables contained in the issuer; provided that, among other requirements: - in the case of an acquisition in connection with the initial issuance of the securities, at least fifty percent of each class of securities in which plans have invested is acquired by persons independent of the restricted group and at least 109 fifty percent of the aggregate interest in the issuer is acquired by persons independent of the restricted group; - the fiduciary, or its affiliate, is an obligor with respect to five percent or less of the fair market value of the obligations or receivables contained in the issuer; - the plan's investment in each class of securities does not exceed twenty-five percent of all of the securities of that class outstanding at the time of acquisition; and - immediately after the plan acquires the securities, no more than twenty-five percent of the plan's assets for which the person is a fiduciary are invested in certificates representing an interest in one or more trusts containing assets sold or serviced by the same entity. The underwriter exemptions do not apply to plans depositored by a member of the restricted group, which includes the depositor, the servicer (and any subservicer), the trustee, the underwriter, any obligor with respect to obligations or receivables included in the issuer constituting more than five percent of the aggregate unamortized principal balance of the issuer's assets, any insurer, the counterparty to any interest-rate swap entered into by the issuer and any affiliate of these parties. Prohibited transaction exemption 2000-58 amended the underwriter exemptions and extended the relief available thereunder to transactions involving the initial purchase, the holding and the subsequent resale by plans of securities denominated as debt that are issued by, and are obligations of, investment pools whose assets are held in trust. The same conditions described above relating to certificates must also be met with respect to notes. In addition, prior to the issuance of the notes, the issuer must receive a legal opinion to the effect that the noteholders will have a perfected security interest in the issuer's assets. As with certificates, exemptive relief would not be available for plans depositored by a member of the restricted group. The prospectus supplement will provide further information that plans should consider before purchasing the securities. Any plan fiduciary that proposes to cause a plan to purchase securities is encouraged to consult with its counsel concerning the impact of ERISA and the Code, the applicability of PTE 83-1, the availability and applicability of any underwriter exemption or any other exemptions from the prohibited transaction provisions of ERISA and the Code and the potential consequences in their specific circumstances, before making the investment. Moreover, each plan fiduciary should determine whether under the general fiduciary standards of investment prudence and diversification an investment in the securities is appropriate for the plan, taking into account the overall investment policy of the plan and composition of the plan's investment portfolio. LEGAL INVESTMENT The prospectus supplement for each series of securities will specify which, if any, of the classes of securities offered thereby constitute "mortgage related securities" for purposes of the Secondary Mortgage Market Enhancement Act of 1984 ("SMMEA"). 110 Classes of securities that qualify as mortgage related securities will be legal investments for persons, trusts, corporations, partnerships, associations, business trusts, and business entities (including depository institutions, life insurance companies and pension funds) created pursuant to or existing under the laws of the United States or of any state (including the District of Columbia and Puerto Rico) whose authorized investments are subject to state regulations to the same extent as, under applicable law, obligations issued by or guaranteed as to principal and interest by the United States or any such entities. Under SMMEA, if a state enacted legislation prior to October 4, 1991 specifically limiting the legal investment authority of any of these entities with respect to mortgage related securities, securities will constitute legal investments for entities subject to such legislation only to the extent provided therein. Approximately twenty-one states adopted such legislation prior to the October 4, 1991 deadline. SMMEA provides, however, that in no event will the enactment of this type of legislation affect the validity of any contractual commitment to purchase, hold or invest in securities, or require the sale or other disposition of securities, so long as such contractually commitment was made or such securities were 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 in securities without limitations as to the percentage of their assets represented thereby, federal credit unions may invest in mortgage related securities, and national banks may purchase 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 authority may prescribe. In this connection, federal credit unions should review the National Credit Union Administration ("NCUA") Letter to Credit Unions No. 96, as modified by NCUA Letter to Credit Unions No. 108, which includes guidelines to assist federal credit unions in making investment decisions for mortgage related securities and the NCUA's regulation "Investment and Deposit Activities" (12C.F.R. Part 703), which sets forth certain restrictions on investments by federal credit unions in mortgage related securities (in each case whether or not the class of securities under consideration for purchase constituted a mortgage related security). All depository institutions considering an investment in the securities (whether or not the class of securities under consideration for purchase constitutes a mortgage related security) should review the Federal Financial Institutions Examination Council's Supervisory Policy Statement on the Securities Activities (to the extent adopted by their respective regulators) setting forth, in relevant part, certain securities trading and sales practices deemed unsuitable for an institution's investment portfolio, and guidelines for (and restrictions on) investing in mortgage derivative products, including mortgage related securities which are "high-risk mortgage securities" as defined in the Policy Statement. According to the Policy Statement, high-risk mortgage securities include securities not entitled to distributions allocated to principal or interest and subordinate securities. Under the Policy Statement, it is the responsibility of each depository institution to determine, prior to purchase (and at stated intervals thereafter), whether a particular mortgage derivative product is a high-risk mortgage security, and whether the 111 purchase (or retention) of such a product would be consistent with the Policy Statement. The foregoing does not take into consideration the applicability of statutes, rules, regulations, orders, guidelines or agreements generally governing investments made by a particular investor, including, but not limited to, "prudent investor" provisions which may restrict or prohibit investment in securities which are not "interest bearing" or "income paying." There may be other restrictions on the ability of certain investors, including depository institutions, either to purchase securities or to purchase securities representing more than a specified percentage of the investor's assets. Investors should consult their own legal advisors in determining whether and to what extent the securities constitute legal investments for them. METHOD OF DISTRIBUTION The securities are being offered hereby in series from time to time (each series evidencing or relating to a separate trust) through any of the following methods: - by negotiated firm commitment underwriting and public reoffering by underwriters; - by agency placements through one or more placement agents primarily with institutional investors and dealers; and - by placement directly by the depositor with institutional investors. A prospectus supplement will be prepared for each series which will describe the method of offering being used for that series and will set forth: - the identity of any underwriters thereof; - either the price at which such series is being offered, the nature and amount of any underwriting discounts or additional compensation to the underwriters and the proceeds of the offering to the depositor or the method by which the price at which the underwriters will sell the securities will be determined; - information regarding the nature of the underwriters' obligations; - any material relationship between the depositor and any underwriter; and - where appropriate, information regarding any discounts or concessions to be allowed or reallowed to dealers or others and any arrangements to stabilize the market for the securities so offered. In firm commitment underwritten offerings, the underwriters will be obligated to purchase all of the securities of the related series if any of those securities are purchased. Securities may be acquired by the underwriters for their own accounts and may be resold from time to time in one or more transactions, including negotiated transactions, at a fixed public offering price or at varying prices determined at the time of sale. 112 Underwriters and agents may be entitled under agreements entered into with the depositor to indemnification by the depositor against certain civil liabilities, including liabilities under the securities Act of 1933, as amended, or to contribution with respect to payments which such underwriters or agents may be required to make in respect thereof. Redwood Trust, Inc. or other affiliates of the depositor may purchase securities and pledge them to secure indebtedness or, together with its pledgees, donees, transferees or other successors in interest, sell the securities, from time to time, either directly or indirectly through one or more underwriters, underwriting syndicates or designated agents. If a series is offered other than through underwriters, the prospectus supplement relating to that series will contain information regarding the nature of the offering and any agreements to be entered into between the depositor and purchasers of securities of that series. LEGAL MATTERS The validity of the securities will be passed upon for the depositor by Tobin & Tobin, a professional corporation, San Francisco, California. Certain federal income tax consequences with respect to the securities will be passed upon for the depositor by Chapman and Cutler LLP, San Francisco, California. FINANCIAL INFORMATION A new trust will be formed with respect to each series of securities and no trust will engage in any business activities or have any assets or obligations prior to the issuance of the related series of securities. Accordingly, no financial statements with respect to any trust will be included in this prospectus or in the prospectus supplement. AVAILABLE INFORMATION The depositor has filed with the SEC a registration statement under the Securities Act of 1933, as amended, with respect to the securities. This prospectus, which forms a part of the registration statement, and the supplement relating to each series of securities contain information set forth in the registration statement pursuant to the rules and regulations of the SEC. For further information, reference is made to such registration statement and the exhibits thereto, which may be inspected and copied at the facilities maintained by the SEC at its Public Reference Section, 450 Fifth Street, N.W., Washington, D.C. 20549, and at its regional offices located as follows: Chicago Regional Office, New York Regional Office 500 West Madison Street, Suite 1400 233 Broadway Chicago, Illinois 60661 New York, New York 10279
Please call the SEC at 1-800-732-0330 for further information on the public reference rooms. The SEC maintains a website at http://www.sec.gov that contains 113 reports, proxy and information statements and other information regarding registrants including the depositor, that file electronically with the SEC. INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE The SEC allows us to incorporate by reference some of the information filed with it, which means that important information can be disclosed by referring to those documents. Any statement contained in a document incorporated or deemed to be incorporated by reference in this prospectus shall be deemed to be modified or superseded for all purposes of this prospectus to the extent that a statement contained in this prospectus (or in the accompanying supplement) or in any other subsequently filed document which also is or is deemed to be incorporated by reference modifies or replaces such statement. Any such statement so modified or superseded shall not be deemed, except as modified or superseded, to constitute a part of this prospectus. Neither the depositor nor the servicer for any series intends to file with the SEC periodic reports with respect to the related trust following completion of the reporting period required by Rule 15d-1 or Regulation 15D under the Exchange Act. All documents filed by or on behalf of the trust referred to in the accompanying prospectus supplement with the SEC pursuant to Section 13(a), 13(c), 14 or 15(d) of the Exchange Act on or after the date of that prospectus supplement and prior to the termination of any offering of the securities issued by the trust shall be deemed to be incorporated by reference in this prospectus and to be a part of this prospectus from the date of the filing of those documents. The trust will provide without charge to each person to whom this prospectus is delivered, on the written or oral request of such person, a copy of any or all of the documents referred to above that have been or may be incorporated by reference in this prospectus (not including exhibits to the information that is incorporated by reference unless such exhibits are specifically incorporated by reference into the information that this prospectus incorporates). Requests for these documents should be directed to the corporate trust office of the trustee specified in the accompanying prospectus supplement. RATING It is a condition to the issuance of the securities of each series offered hereby and by the supplement that they shall be rated in one of the four highest rating categories by the nationally recognized statistical rating agency or agencies specified in the prospectus supplement. Ratings on asset-backed securities address the likelihood of receipt by securityholders of all distributions on the trust assets. These ratings address the structural, legal and issuer-related aspects associated with such securities, the nature of the trust assets and the credit quality of the credit enhancer or guarantor, if any. Ratings on asset-backed securities do not represent any assessment of the likelihood of principal prepayments by mortgagors or of the degree by which actual prepayments might differ from those originally anticipated. As a result, securityholders might suffer a lower than 114 anticipated yield, and, in addition, holders of stripped securities in extreme cases might fail to recoup their underlying investments. A security rating is not a recommendation to buy, sell or hold securities and may be subject to revision or withdrawal at any time by the assigning rating organization. Further, security ratings do not address the effect of prepayments on the yield anticipated by the investor. Each security rating should be evaluated independently of any other security rating. 115 INDEX OF DEFINED TERMS
accrual securities.......................................... 35 accrued period.............................................. 87 acquisition premium......................................... 88 adjusted issue price........................................ 87, 96 Agreement................................................... 14 backup withholding.......................................... 103 balloon payment............................................. 15 beneficial owners........................................... 42 buydown..................................................... 21 capital asset............................................... 84 CERCLA...................................................... 77 class security balance...................................... 34 Code........................................................ 33, 84 collateral value............................................ 18 collection account.......................................... 58 components.................................................. 39 contingent interest payment................................. 86 cut-off date................................................ 13 daily portions.............................................. 87 disqualified organization................................... 98 DOL......................................................... 104 DTC......................................................... 11 due on sale................................................. 16 EPA......................................................... 77 ERISA....................................................... 33 evidences of indebtedness................................... 92, 96 Exchange Act................................................ 106 FASIT....................................................... 92 FHA loans................................................... 19 Garn-St. Germain Act........................................ 80 government securities....................................... 85, 92 indemnified party........................................... 67 IRS......................................................... 85 lockout periods............................................. 16 Lower Tier REMIC............................................ 91 mortgage related securities................................. 7, 110 NCUA........................................................ 111 noneconomic residual interest............................... 98 non-REMIC Securities........................................ 84 OID Regulations............................................. 85
116
Parties in Interest......................................... 104 passive losses.............................................. 95 permitted assets............................................ 92 permitted investments....................................... 50 Plans....................................................... 104 Policy Statement............................................ 111 portfolio income............................................ 95 PTCE........................................................ 105 qualified mortgages......................................... 92 RCRA........................................................ 78 refinance loan.............................................. 18 regular interest securities................................. 91 REIT........................................................ 92 Relief Act.................................................. 82 REMIC....................................................... 84 REMIC Regulations........................................... 84 residual interest securities................................ 94 secured creditor exclusion.................................. 77 single family securities.................................... 106 SMMEA....................................................... 110 strip....................................................... 41 structuring range........................................... 40 Tax Prepayment Assumption................................... 87 thrift institutions......................................... 97 Title V..................................................... 81 Upper Tier REMIC............................................ 91 US person................................................... 102 VA loans.................................................... 19 withholding agent........................................... 102
117 THE INFORMATION IN THIS PROSPECTUS SUPPLEMENT IS NOT COMPLETE AND MAY BE CHANGED. WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS SUPPLEMENT IS NOT AN OFFER TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED. PROSPECTUS SUPPLEMENT (TO PROSPECTUS DATED , 2004) $ [LOGO] SEQUOIA MORTGAGE TRUST BOND ISSUER [LOGO] [ ] DEPOSITOR Consider carefully the risk COLLATERALIZED MORTGAGE BONDS factors beginning on page S-7 of $ CLASS A-1 BONDS this prospectus supplement and on $ CLASS B-1 BONDS page 8 of the prospectus. THE TRUST WILL ISSUE: - One class of Senior Class A-1 Bonds; and The bonds are redeemable only - One class of Subordinated Class B-1 Bonds. under circumstances described in THE BONDS: this prospectus supplement. - Will be collateralized by primarily year [fixed adjustable] rate, mortgage loans secured by first liens on one- to four-family The bonds represent obligations of residential properties; the trust only and do not - Pay the holders of senior bonds payments of interest and principal from represent an interest in or the collateral pledged to secure the Bonds and the bond insurance obligation of the trustee, the policy; depositor or any of their - Pay the holders of subordinated bonds payments of interest and affiliates. principal solely from the collateral pledged to secure the bonds; and - Pay all holders of bonds the amounts of principal and interest due This prospectus supplement may be thereon on the th day of each month, or if such day is not a used to offer and sell bonds only business day, the next succeeding business day, commencing on if accompanied by the prospectus. , 200 .
The senior bonds will be unconditionally and irrevocably guaranteed as to payment of insured payments, as defined in this prospectus supplement, pursuant to the terms of the financial guaranty insurance policy to be issued: [INSURER LOGO] Bonds of each series will be characterized for federal income tax purposes as debt instruments. NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED THESE SECURITIES OR DETERMINED IF THIS PROSPECTUS SUPPLEMENT IS ACCURATE OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. TABLE OF CONTENTS
PAGE ---- Important Notice about the Information Presented in this Prospectus Supplement and the Accompanying Prospectus..... S-3 Where You can Find More Information......................... S-3 Summary..................................................... S-4 Risk Factors................................................ S-7 The Issuer.................................................. S-7 Description of the Bonds.................................... S-8 Credit Enhancement.......................................... S-19 Security for the Bonds...................................... S-19 Servicing of the Mortgage Loans............................. S-27 Use of Proceeds............................................. S-30 Federal Income Tax Consequences............................. S-30 ERISA Matters............................................... S-30 Method of Distribution...................................... S-31 Legal Matters............................................... S-31 Ratings..................................................... S-32 Index of Defined Terms...................................... S-33
S-2 IMPORTANT NOTICE ABOUT THE INFORMATION PRESENTED IN THIS PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS We tell you about the bonds in two separate documents that progressively provide more detail: (1) the accompanying prospectus, which provides general information, some of which may not apply to your series of bonds, and (2) this prospectus supplement, which describes the specific terms of your series of bonds and may be different from the information in the prospectus. IF THE TERMS OF YOUR SERIES OF BONDS AND ANY OTHER INFORMATION CONTAINED HEREIN VARY BETWEEN THIS PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS, YOU SHOULD RELY ON THE INFORMATION IN THIS PROSPECTUS SUPPLEMENT. You can find a listing of the pages where capitalized terms used in this prospectus supplement are defined under "Index of Defined Terms" beginning on page S-38 in this prospectus supplement. The underwriter may engage in transactions that stabilize, maintain, or in some way affect the price of the bonds. These types of transactions may include stabilizing the purchase of bonds to cover syndicate short positions and the imposition of penalty bids. For a description of these activities, please read the section entitled "Underwriting" in this prospectus supplement. WHERE YOU CAN FIND MORE INFORMATION Federal securities law requires the filing of certain information with the Securities and Exchange Commission (the "SEC"), including annual, quarterly and special reports, proxy statements and other information. You can read and copy these documents at the public reference facility maintained by the SEC at Judiciary Plaza, 450 Fifth Street, NW, Room 1024, Washington, DC 20549. You can also copy and inspect such reports, proxy statements and other information at the following regional offices of the SEC: New York Regional Office Chicago Regional Office 233 Broadway 500 West Madison Street, Suite 1400 New York, New York 10279 Chicago, Illinois 60661
Please call the SEC at 1-800-SEC-0330 for further information on the public reference rooms. SEC filings are also available to the public on the SEC's web site at http://www.sec.gov. The SEC allows us to "incorporate by reference" the information we file with it, which means that we can disclose important information to you by referring you to those documents. The information that we incorporate by reference is considered to be part of this prospectus supplement, and later information that we file with the SEC will automatically update and supersede this information. This prospectus supplement and the accompanying prospectus are part of a registration statement filed by the Depositor with the SEC (Registration No. ). You may request a free copy of any of the above filings by writing or calling: [DEPOSITOR] ONE BELVEDERE PLACE, SUITE MILL VALLEY, CA 94941 (415) 389-7373 You should rely only on the information provided in this prospectus supplement or the accompanying prospectus or incorporated by reference herein. We have not authorized anyone else to provide you with different information. You should not assume that the information in this prospectus supplement or the accompanying prospectus is accurate as of any date other than the date on the cover page of this prospectus supplement or the accompanying prospectus or that the information incorporated by reference herein is accurate as of any date other than the date stated therein. S-3 SUMMARY This summary highlights selected information from this prospectus supplement and does not contain all the information that you need to consider in making your investment decision. Please read this entire prospectus supplement and the accompanying prospectus carefully for additional information about the Offered Bonds. OFFERED BONDS Sequoia Mortgage Trust , collateralized mortgage bonds, Class A-1 and Class B-1 are the bonds being offered in this prospectus supplement. SECURITIES OTHER THAN THE OFFERED BONDS In addition to the bonds, the investor certificate will be issued but will not be offered by this prospectus supplement. The investor certificate will provide limited credit support for the bonds as described in this prospectus supplement. DESIGNATIONS Senior bonds -- Class A-1 Bonds Subordinated bonds -- Class B-1 Bonds Offered Bonds -- the senior bonds and the subordinated bonds Book-entry bonds -- all classes of bonds
BOND ISSUER The bond issuer, Sequoia Mortgage Trust , is a statutory business trust established under the laws of the State of Delaware by the deposit trust agreement, as defined in this prospectus supplement, for the sole purpose of issuing the bonds and the investor certificate. The depositor settlor and sole beneficiary of the issuer is [depositor], a Delaware corporation, and [a wholly owned subsidiary of RWT Holdings Inc.,] a wholly owned subsidiary of Redwood Trust, Inc., a Maryland corporation. Redwood Trust will be the manager of the issuer pursuant to a management agreement entered into with the issuer. None of the depositor, Redwood Trust or the bond trustee has guaranteed or is otherwise obligated with respect to payment of the bonds, and no other person or entity other than the issuer is obligated to pay the bonds. BOND TRUSTEE , a banking corporation organized under the laws of . OWNER TRUSTEE , a banking corporation organized under the laws of the state of Delaware. MASTER SERVICING AGREEMENT The mortgage loans will be serviced pursuant to a master servicing agreement dated as of 1, 200 , among the issuer, the bond trustee and the master servicer. MASTER SERVICER will act as master servicer for the mortgage loans. DEPOSIT TRUST AGREEMENT The issuer will be established and the investor certificate will be issued pursuant to a deposit trust agreement dated as of , 200 , among the depositor and the owner trustee. INDENTURE The bonds and the investor certificate will be issued pursuant to an indenture dated as of , 200 , among the issuer and the bond trustee. CUT-OFF DATE , 200 CLOSING DATE On or about , 200 S-4 DETERMINATION DATE The th day of each month or, if such day is not a business day, the first business day thereafter. PAYMENT DATE The th day of each month or if such day is not a business day, the next business day thereafter, commencing in 200 . Payments on each payment date will be made to bondholders of record as of the related record date, except that the final payment on the bonds will be made only upon presentment and surrender of the bonds at the corporate trust office of the bond trustee. RECORD DATE The last business day preceding a payment date unless the bonds are no longer book-entry bonds in which case the record date is the last business day of the month preceding the month of a payment date. PRIORITY OF PAYMENTS Payments will be made on each payment date from available funds in the following order of priority: 1. To interest on the senior bonds; 2. To principal of the senior bonds; 3. To interest on the subordinated bonds; 4. To principal of the subordinated bonds; 5. To interest on the investor certificate; 6. To principal of the investor certificate; and 7. To the holder of the investor certificate, all remaining funds. PAYMENTS OF INTEREST To the extent funds are available, each class of bonds will be entitled to receive interest in the amount of the interest payment amount. The interest accrual period for each class of bonds will be the calendar month preceding the month of the respective payment date. PAYMENTS OF PRINCIPAL To the extent funds are available, principal payments in reduction of the class principal amount of each class of bonds will be made on each payment date. STATED MATURITY The stated maturity for each class of bonds is the date determined by the Depositor which is years after the payment date immediately following the last maturity date of any mortgage loan. OPTIONAL REDEMPTION OF THE BONDS The bonds may be redeemed at a redemption price equal to 100% of the unpaid principal amount of such bonds, plus accrued and unpaid interest thereon at the applicable bond interest rate. The bonds are not otherwise subject to redemption or call at the option of the issuer nor are they subject to special redemption. CREDIT ENHANCEMENT - SUBORDINATION The subordinated bonds and the investor certificate will provide credit enhancement for the senior bonds. The investor certificate will provide credit enhancement for the subordinated bonds. The rights of holders of the subordinated bonds and the investor certificate to receive payments with respect to the mortgage loans will be subordinated to such rights of the holders of the senior bonds, and the rights of the holder of the investor certificate will be further subordinated to such rights as the holders of the subordinated bonds. - BOND INSURANCE POLICY will issue a financial guaranty insurance policy pursuant to which it will irrevocably and unconditionally guarantee payment of the insured payment if the bond trustee determines that available funds for a payment date are less than the senior bond interest payment amount and the senior bond principal payment amount. The insurer's claims paying ability is rated by . S-5 ADVANCES The master servicer is obligated to make advances of cash which will be included with mortgage collections, in an amount equal to the delinquent monthly payments due on the immediately preceding monthly payment date. The master servicer is under no obligation to make advances to the extent it determines such advances are not recoverable from future payments or collections on the related mortgage loans or to guarantee or insure against losses. SECURITY FOR THE BONDS The bonds will be secured by collateral consisting of the following: - mortgage loans; - bond account; - distribution account; or - any combination of the above. FEDERAL INCOME TAX CONSEQUENCES The bonds will be treated as debt for federal income tax purposes, and interest, including original issue discount with respect to any class of offered bonds issued with original issue discount, will be taxable to nonexempt bondholders. ERISA CONSIDERATIONS A fiduciary of any employee benefit plan subject to the Employee Retirement Income Security Act of 1974, as amended, or section 4975 of the Internal Revenue Code of 1986, as amended, should carefully review with its legal advisors whether the purchase or holding of Class A Bonds could give rise to a transaction prohibited or not otherwise permissible under applicable law. LEGAL INVESTMENT So long as the Class A Bonds are rated in one of the two highest ratings categories by at least one nationally recognized statistical rating agency, the Class A Bonds will constitute "mortgage related securities" under the Secondary Mortgage Market Enhancement Act of 1984 or SMMEA. BOND RATING It is a condition to the issuance of the Class A Bonds that the Class A Bonds be rated "AAAr" by Standard & Poor's Ratings Services and "Aaa" by Moody's Investors Service, Inc. Standard & Poor's assigns the additional symbol of "r" to highlight classes of securities that Standard & Poor's believes may experience high volatility or high variability in expected returns due to non-credit risks; however, the absence of an "r" symbol should not be taken as an indication that a class will exhibit volatility or variability in total return. 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 agency. A security rating does not address the frequency of prepayments on the mortgage loans or the corresponding effect on yield to investors. USE OF PROCEEDS The issuer intends to distribute all of the net proceeds of the issuance of the bonds to the depositor which will apply such proceeds to the purchase of the mortgage loans. S-6 RISK FACTORS INVESTORS SHOULD CONSIDER THE FOLLOWING FACTORS IN CONNECTION WITH THE PURCHASE OF BONDS. YOU SHOULD ALSO CONSIDER THE RISK FACTORS DESCRIBED IN THE ACCOMPANYING PROSPECTUS. CASH FLOW CONSIDERATIONS AND RISKS The mortgaged property assets of the trust are the sole source of distributions for the bonds. Even if the mortgaged properties provide adequate security for the mortgage loans, you could encounter substantial delays in connection with the liquidation of mortgage loans that are delinquent. This could result in shortfalls in payments on the bonds if the credit enhancement created by the overcollateralization of the bonds is insufficient and if payments under the bond insurance policy were unavailable. Further, liquidation expenses, such as legal fees, real estate taxes and maintenance and preservation expenses, will reduce the security for the related mortgage loans and could thereby reduce the proceeds payable to bondholders. If any of the mortgaged properties fail to provide adequate security for the related mortgage loans, bondholders could experience a loss if the credit enhancement created by the overcollateralization of the bonds has been exhausted and if payments under the bond insurance policy were unavailable. CONCENTRATION OF MORTGAGE LOANS COULD ADVERSELY AFFECT YOUR INVESTMENT Most of the mortgage loans are secured by mortgaged properties located in and . Consequently, losses and prepayments on the mortgage loans and the resultant payments on the bonds may be affected significantly by changes in the housing markets and the regional economies in these areas and by the the occurrence of natural disasters, such as earthquakes, hurricanes, tornadoes, tidal waves, mud slides, fires and floods, in these areas. BANKRUPTCY AND INSOLVENCY RISKS It is believed that the transfer of the initial mortgage loans from the seller to the depositor and the depositor to the bond issuer will each be treated as a sale rather than a secured financing for purposes of state law. Counsel for the seller will render an opinion on the closing date that in the event of the bankruptcy of either the seller or the depositor, the mortgage loans and other assets of the bond issuer would not be considered part of the seller's or depositor's bankruptcy estates and, thus, would not be available to their creditors. On the other hand, a bankruptcy trustee or one of the creditors of the seller or the depositor might challenge this conclusion and argue that the transfer of the pledge mortgage loans should be characterized as a pledge of assets in a secured borrowing rather than as a sale. Such an attempt, even if unsuccessful, might result in delays in payments on the bonds. THE ISSUER The issuer is a statutory business trust established under the laws of the State of Delaware by an amended and restated deposit trust agreement, dated as of , 200 . The issuer was formed for the sole purpose of issuing the bonds and the investor certificate. The depositor is the settlor and sole beneficiary of the issuer and is the owner trustee of the issuer. The depositor is a limited purpose finance corporation the capital stock of which is wholly owned by [ ] Redwood Trust, Inc., a Maryland corporation. Redwood Trust will be the manager of the issuer pursuant to a management agreement entered into with the issuer. None of the depositor, Redwood Trust, or any of their respective affiliates has guaranteed or is otherwise obligated with respect to payment of the bonds and no person or entity other than the issuer is obligated to pay the bonds, except as specifically set forth in this prospectus supplement with regard to the bond insurance policy. The Issuer's assets will consist almost entirely of the mortgages which will be pledged to secure the bonds. If the mortgage loans and other collateral securing the bonds are insufficient for payment of the bonds, it is unlikely that significant other assets of the issuer will be available for payment of the bonds. The amount S-7 of funds available to pay the bonds may be affected by, among other things, realized losses incurred on defaulted mortgage loans. The Indenture prohibits the issuer from incurring any indebtedness other than the bonds, or assuming or guaranteeing the indebtedness of any other person. DESCRIPTION OF THE BONDS GENERAL The Bonds will be issued pursuant to the Indenture. Set forth below are summaries of the specific terms and provisions pursuant to which the Bonds will be issued. The following summaries are subject to, and are qualified in their entirety by reference to, the provisions of the Indenture. When particular provisions or terms used in the Indenture are referred to, the actual provisions (including definitions of terms) are incorporated by reference. The Sequoia Mortgage Trust , Collateralized Mortgage Bonds (the "Bonds"), will consist of the Class A-1 Bonds (the "Senior Bonds") and the Class B-1 Bonds (the "Subordinated Bonds"). The Issuer will also issue the Investor Certificate (the "Investor Certificate") as described herein. The Senior Bonds and the Subordinated Bonds are collectively referred to herein as the "Offered Bonds." Only the Bonds are offered hereby. The Classes of Bonds will have the respective Bond Interest Rates described on the cover hereof. The Investor Certificate will bear interest at the "Certificate Interest Rate" described herein. The "Class Principal Amount" of (a) the Senior Bonds (the "Senior Class Principal Amount") as of any Payment Date is the Original Senior Class Principal Amount reduced by all amounts previously distributed to holders of the Senior Bonds as payments of principal, (b) the Subordinated Bonds (the "Subordinated Class Principal Amount") as of any Payment Date is the lesser of (i) the aggregate of the Stated Principal Balances of the Mortgage Loans, less the Senior Class Principal Amount immediately prior to such date, and (ii) the Original Subordinated Class Principal Amount reduced by all amounts previously distributed to holders of the Subordinated Bonds as payments of principal. The Senior Bonds will have an original Senior Class Principal Amount of $ (the "Original Senior Class Principal Amount") and the Subordinated Bonds will have an original Subordinated Class Principal Amount of $ (the "Original Subordinated Class Principal Amount"). The "Invested Amount" of the Investor Certificate as of any Payment Date is the lesser of (i) the aggregate of the Stated Principal Balances of the Mortgage Loans, less the sum of (x) the Senior Class Principal Amount and (y) the Subordinated Class Principal Amount, in each case immediately prior to such date, and (ii) the Original Invested Amount reduced by all amounts previously distributed to the holder of the Investor Certificate in reduction of the Invested Amount. The Investor Certificate will have an original Invested Amount of approximately $ (the "Original Invested Amount"). BOOK-ENTRY BONDS The Bonds will be book-entry Bonds (each, a Class of "Book-Entry Bonds"). Persons acquiring beneficial ownership interests in the Bonds ("Bond Owners") may elect to hold their Bonds through the Depository Trust Company ("DTC") in the United States, or CEDEL or Euroclear (in Europe) if they are participants of such systems, or indirectly through organizations which are participants in such systems. The Book-Entry Bonds will be issued in one or more certificates which equal the aggregate principal amount of the Bonds and will initially be registered in the name of Cede & Co., the nominee of DTC. CEDEL and Euroclear will hold omnibus positions on behalf of their participants through customers' securities accounts in CEDEL's and Euroclear's names on the books of their respective depositaries which in turn will hold such positions in customers' securities accounts in the depositaries' names on the books of DTC. Citibank, N.A., will act as depositary for CEDEL and The Chase Manhattan Bank will act as depositary for Euroclear (in such capacities, individually the "Relevant Depositary" and collectively the "European Depositaries"). Investors may hold such beneficial interests in the Book-Entry Bonds in minimum denominations representing Class Principal Amounts of $ and in multiples of $1,000 in excess thereof. Except as described below, no person acquiring a Book-Entry Bond (each, a "beneficial owner") will be entitled to receive a physical S-8 certificate representing such Bond (a "Definitive Bond"). Unless and until Definitive Bonds are issued, it is anticipated that the only "Bondholders" of the Bonds will be Cede & Co., as nominee of DTC. Bond Owners will not be Bondholders as that term is used in the Indenture. Bond Owners are only permitted to exercise their rights indirectly through the participating organizations that utilize the services of DTC, including securities brokers and dealers, banks and trust companies and clearing corporations and certain other organizations ("Participants") and DTC. The beneficial owner's ownership of a Book-Entry Bond will be recorded on the records of the brokerage firm, bank, thrift institution or other financial intermediary (each, a "Financial Intermediary") that maintains the beneficial owner's account for such purpose. In turn, the Financial Intermediary's ownership of such Book-Entry Bond will be recorded on the records of DTC (or of a participating firm that acts as agent for the Financial Intermediary, whose interest will in turn be recorded on the records of DTC, if the beneficial owner's Financial Intermediary is not a DTC participant, and on the records of CEDEL or Euroclear, as appropriate). Bond Owners will receive all payments of principal of, and interest on, the Bonds from the Bond Trustee through DTC and DTC participants. While the Bonds are outstanding (except under the circumstances described below), under the rules, regulations and procedures creating and affecting DTC and its operations (the "Rules"), DTC is required to make book-entry transfers among Participants on whose behalf it acts with respect to the Bonds and is required to receive and transmit payments of principal of, and interest on, the Bonds. Participants and indirect participants which have indirect access to the DTC system, such as banks, brokers, dealers and trust companies that clear through or maintain a custodial relationship with a Participant, either directly or indirectly ("Indirect Participants"), with whom Bond Owners have accounts with respect to Bonds are similarly required to make book-entry transfers and receive and transmit such payments on behalf of their respective Bond Owners. Accordingly, although Bond Owners will not possess certificates, the Rules provide a mechanism by which Bond Owners will receive payments and will be able to transfer their interest. Bond Owners will not receive or be entitled to receive certificates representing their respective interests in the Bonds, except under the limited circumstances described below. Unless and until Definitive Bonds are issued, Bond Owners who are not Participants may transfer ownership of Bonds only through Participants and Indirect Participants by instructing such Participants and Indirect Participants to transfer Bonds, by book-entry transfer, through DTC for the account of the purchasers of such Bonds, which account is maintained with their respective Participants. Under the Rules and in accordance with DTC's normal procedures, transfers of ownership of Bonds will be executed through DTC and the accounts of the respective Participants at DTC will be debited and credited. Similarly, the Participants and Indirect Participants will make debits or credits, as the case may be, on their records on behalf of the selling and purchasing Bond Owners. Because of time zone differences, credits of securities received in CEDEL or Euroclear as a result of a transaction with a Participant will be made during subsequent securities settlement processing and dated the business day following the DTC settlement date. Such credits or any transactions in such securities settled during such processing will be reported to the relevant Euroclear or CEDEL Participants on such business day. Cash received in CEDEL or Euroclear as a result of sales of securities by or through a CEDEL Participant (as defined herein) or Euroclear Participant (as defined herein) to a DTC Participant will be received with value on the DTC settlement date but will be available in the relevant CEDEL or Euroclear cash account only as of the business day following settlement in DTC. For information relating to tax documentation procedures relating to the Bonds, see "FEDERAL INCOME TAX CONSEQUENCES -- Withholding with Respect to Certain Foreign Investors" and "-- Backup Withholding" in the prospectus and "GLOBAL CLEARANCE, SETTLEMENT AND TAX DOCUMENTATION PROCEDURES -- Certain U.S. Federal Income Tax Documentation Requirements" in Annex I hereto. Transfers between Participants will occur in accordance with DTC Rules. Transfers between CEDEL Participants and Euroclear Participants will occur in accordance with their respective rules and operating procedures. Cross-market transfers between persons holding directly or indirectly through DTC, on the one hand, and directly or indirectly through CEDEL Participants or Euroclear Participants, on the other, will be effected in DTC in accordance with DTC rules on behalf of the relevant European international clearing system by the S-9 Relevant Depositary; however, such cross-market transactions will require delivery of instructions to the relevant European international clearing system by the counterparty in such system in accordance with its rules and procedures and within its established deadlines (European time). The relevant European international clearing system will, if the transaction meets its settlement requirements, deliver instructions to the Relevant Depositary to take action to effect final settlement on its behalf by delivering or receiving securities in DTC, and making or receiving payment in accordance with normal procedures for same day fund settlement applicable to DTC. CEDEL Participants and Euroclear Participants may not deliver instructions directly to the European Depositaries. DTC, which is a New York-chartered limited purpose trust company, performs services for its participants, some of which (and/or their representatives) own DTC. In accordance with its normal procedures, DTC is expected to record the positions held by each DTC participant in the Book-Entry Bonds, whether held for its own account or as nominee for another person. In general, beneficial ownership of Book-Entry Bonds will be subject to the rules, regulations and procedures governing DTC and DTC participants as in effect from time to time. CEDEL is incorporated under the laws of Luxembourg as a professional depository. CEDEL holds securities for its participating organizations ("CEDEL Participants") and facilitates the clearance and settlement of securities transactions between CEDEL Participants through electronic book-entry changes in accounts of CEDEL Participants, thereby eliminating the need for physical movement of certificates. Transactions may be settled in CEDEL in any of 28 currencies, including United States dollars. CEDEL provides to its CEDEL Participants, among other things, services for safekeeping, administration, clearance and settlement of internationally traded securities and securities lending and borrowing. CEDEL interfaces with domestic markets in several countries. As a professional depository, CEDEL is subject to regulation by the Luxembourg Monetary Institute. CEDEL participants are recognized financial institutions around the world, including underwriters, securities brokers and dealers, banks, trust companies, clearing corporations and certain other organizations. Indirect access to CEDEL is also available to others, such as banks, brokers, dealers and trust companies that clear through or maintain a custodial relationship with a CEDEL Participant, either directly or indirectly. Euroclear was created in 1968 to hold securities for its participants ("Euroclear Participants") and to clear and settle transactions between Euroclear Participants through simultaneous electronic book-entry delivery against payment, thereby eliminating the need for physical movement of certificates and any risk from lack of simultaneous transfers of securities and cash. Transactions may be settled in any of 32 currencies, including United States dollars. Euroclear includes various other services, including securities lending and borrowing and interfaces with domestic markets in several countries generally similar to the arrangements for cross-market transfers with DTC described above. Euroclear is operated by the Brussels, Belgium office of Morgan Guaranty Trust Company of New York ("Morgan" and in such capacity, the "Euroclear Operator"), under contract with Euroclear Clearance Systems S.C., a Belgian cooperative corporation (the "Cooperative"). All operations are conducted by Morgan, and all Euroclear securities clearance accounts and Euroclear cash accounts are accounts with the Euroclear Operator, not the Belgian Cooperative. The Belgian Cooperative establishes policy for Euroclear on behalf of Euroclear Participants. Euroclear Participants include banks (including central banks), securities brokers and dealers and other professional financial intermediaries. Indirect access to Euroclear is also available to other firms that clear through or maintain a custodial relationship with a Euroclear Participant, either directly or indirectly. The Euroclear Operator is the Belgian branch of a New York banking corporation which is a member bank of the Federal Reserve System. As such, it is regulated and examined by the Board of Governors of the Federal Reserve System and the New York State Banking Department, as well as the Belgian Banking Commission. Securities clearance accounts and cash accounts with Morgan are governed by the Terms and Conditions Governing Use of Euroclear and the related Operating Procedures of the Euroclear System and applicable Belgian law (collectively, the "Terms and Conditions"). The Terms and Conditions govern transfers of securities and cash within Euroclear, withdrawals of securities and cash from Euroclear, and receipts of S-10 payments with respect to securities in Euroclear. All securities in Euroclear are held on a fungible basis without attribution of specific certificates to specific securities clearance accounts. The Euroclear Operator acts under the Terms and Conditions only on behalf of Euroclear Participants, and has no record of or relationship with persons holding through Euroclear Participants. Payments on the Book-Entry Bonds will be made on each Distribution Date by the Bond Trustee to DTC. DTC will be responsible for crediting the amount of such payments to the accounts of the applicable DTC participants in accordance with DTC's normal procedures. Each DTC participant will be responsible for disbursing such payments to the beneficial owners of the Book-Entry Bonds that it represents and to each Financial Intermediary for which it acts as agent. Each such Financial Intermediary will be responsible for disbursing funds to the beneficial owners of the Book-Entry Bonds that it represents. Under a book-entry format, beneficial owners of the Book-Entry Bonds may experience some delay in their receipt of payments, since such payments will be forwarded by the Bond Trustee to Cede & Co., as nominee of DTC. Payments with respect to Bonds held through CEDEL or Euroclear will be credited to the cash accounts of CEDEL Participants or Euroclear Participants in accordance with the relevant system's rules and procedures, to the extent received by the Relevant Depositary. Such payments will be subject to tax reporting in accordance with relevant United States tax laws and regulations. See "FEDERAL INCOME TAX CONSEQUENCES -- Withholding with Respect to Certain Foreign Investors" and "-- Backup Withholding" in the prospectus. Because DTC can only act on behalf of Financial Intermediaries, the ability of a beneficial owner to pledge Book-Entry Bonds to persons or entities that do not participate in the depository system, or otherwise take actions in respect of such Book-Entry Bond, may be limited due to the lack of physical certificates for such Book-Entry Bonds. In addition, issuance of the Book-Entry Bonds in book-entry form may reduce the liquidity of such Bonds in the secondary market since certain potential investors may be unwilling to purchase Bonds for which they cannot obtain physical certificates. Monthly and annual reports on the Issuer will be provided to Cede & Co., as nominee of DTC, and may be made available by Cede & Co. to beneficial owners upon request, in accordance with the rules, regulations and procedures creating and affecting DTC or the Relevant Depositary, and to the Financial Intermediaries to whose DTC accounts the Book-Entry Bonds of such beneficial owners are credited. DTC has advised the Issuer and the Bond Trustee that, unless and until Definitive Bonds are issued, DTC will take any action permitted to be taken by the holders of the Book-Entry Bonds under the Indenture only at the direction of one or more Financial Intermediaries to whose DTC accounts the Book-Entry Bonds are credited, to the extent that such actions are taken on behalf of Financial Intermediaries whose holdings include such Book-Entry Bonds. CEDEL or the Euroclear Operator, as the case may be, will take any other action permitted to be taken by a Bondholder under the Indenture on behalf of a CEDEL Participant or Euroclear Participant only in accordance with its relevant rules and procedures and subject to the ability of the Relevant Depositary to effect such actions on its behalf through DTC. DTC may take actions, at the direction of the related Participants, with respect to some Bonds which conflict with actions taken with respect to other Bonds. Definitive Bonds will be issued to beneficial owners of the Book-Entry Bonds, or their nominees rather than to DTC, only if (a) DTC or the Issuer advises the Bond Trustee in writing that DTC is no longer willing, qualified or able to discharge properly its responsibilities as nominee and depositary with respect to the Book-Entry Bonds and the Issuer or the Bond Trustee is unable to locate a qualified successor or (b) the Issuer, at its sole option, elects to terminate a book-entry system through DTC. Upon the occurrence of any of the events described in the immediately preceding paragraph, the Bond Trustee will be required to notify all beneficial owners of the occurrence of such event and the availability through DTC of the Definitive Bonds. Upon surrender by DTC of the global certificate or certificates representing the Book-Entry Bonds and instructions for re-registration, the Bond Trustee will issue Definitive Bonds, and thereafter the Bond Trustee will recognize the holders of such Definitive Bonds as Bondholders under the Indenture. S-11 Although DTC, CEDEL and Euroclear have agreed to the foregoing procedures in order to facilitate transfers of Bonds among participants of DTC, CEDEL and Euroclear, they are under no obligation to perform or continue to perform such procedures and such procedures may be discontinued at any time. None of the Master Servicer, the Company, the Issuer or the Bond Trustee will have any responsibility for any aspect of the records relating to or payments made on account of beneficial ownership interests of the Book-Entry Bonds held by Cede & Co., as nominee of DTC, or for maintaining, supervising or reviewing any records relating to such beneficial ownership interests. PAYMENTS ON MORTGAGE LOANS; ACCOUNTS On or prior to the Closing Date, the Master Servicer will establish and maintain or cause to be established and maintained a separate account or accounts for the collection of payments on the Mortgage Loans (the "Collection Account"). On or prior to the Closing Date, the Bond Trustee will establish an account (the "Distribution Account"), which will be maintained with the Bond Trustee in trust for the benefit of the Bondholders. On or prior to the business day immediately preceding each Payment Date, the Master Servicer will withdraw from the Collection Account the Bond Distribution Amount for such Payment Date, to the extent of Available Funds on deposit therein, and will deposit such amount in the Distribution Account. The "Bond Distribution Amount" for any Payment Date will equal the sum of (i) the Senior Interest Payment Amount, (ii) the Senior Principal Payment Amount, (iii) the Subordinated Interest Payment Amount and (iv) the Subordinated Principal Payment Amount (as each such term is defined herein). Funds credited to the Bond Account or the Distribution Account may be invested at the direction of the Company for the benefit and at the risk of the Company in Permitted Investments, as defined in the Master Servicing Agreement, that are scheduled to mature on or prior to the business day preceding the next Payment Date. PAYMENTS Payments on the Bonds will be made by the Bond Trustee on [the th day of each month], or if such day is not a business day, on the first business day thereafter, commencing in 200 (each, a "Payment Date"), to the persons in whose names such Bonds are registered at the close of business on the last business day of the month preceding the month of such Payment Date (the "Record Date"). Payments on each Payment Date will be made by check mailed to the address of the person entitled thereto as it appears on the applicable bond register or, in the case of a Bondholder who holds 100% of a Class of Bonds or who holds Bonds with an aggregate initial Class Principal Amount of $1,000,000 or more and who has so notified the Bond Trustee in writing in accordance with the Indenture, by wire transfer in immediately available funds to the account of such Bondholder at a bank or other depository institution having appropriate wire transfer facilities; provided, however, that the final payment in retirement of the Bonds will be made only upon presentment and surrender of such Bonds at the Corporate Trust Office of the Bond Trustee. As more fully described herein, payments will be made on each Payment Date from Available Funds in the following order of priority: (i) to interest on the Senior Bonds; (ii) to principal of the Senior Bonds; (iii) to interest on the Subordinated Bonds; (iv) to principal of the Subordinated Bonds; (v) to interest on the Investor Certificate; (vi) to principal of the Investor Certificate; and (vii) to the holder of the Investor Certificate, all remaining Available Funds, subject to certain limitations set forth herein under " -- Principal." "Available Funds" with respect to any Payment Date will be equal to the sum of (i) all scheduled installments of interest (net of the related Expense Fees) and principal due [on the Due Date in the month] in which such Payment Date occurs and received prior to the related Determination Date, together with any Advances in respect thereof; (ii) all proceeds of any primary mortgage guaranty insurance policies and any other insurance policies with respect to the Mortgage Loans, to the extent such proceeds are not applied to the restoration of the related Mortgaged Property or released to the Mortgagor in accordance with the applicable Servicer's or the Master Servicer's normal servicing procedures (collectively, "Insurance Proceeds") and all other cash amounts received and retained in connection with the liquidation of defaulted Mortgage Loans, by foreclosure or otherwise ("Liquidation Proceeds"), during the [month] preceding the month of such Payment Date (in each case, net of unreimbursed expenses incurred in connection with a liquidation or foreclosure and S-12 unreimbursed Advances, if any); (iii) all partial or full prepayments received during the [month] preceding the month of such Payment Date; and (iv) amounts received with respect to such Payment Date as the Substitution Adjustment Amount or purchase price in respect of a Deleted Mortgage Loan or a Mortgage Loan purchased by Redwood Trust [or by the Master Servicer or the Company] as of such Payment Date, reduced by amounts in reimbursement for Advances previously made and other amounts as to which the applicable Servicer or the Master Servicer is entitled to be reimbursed pursuant to the Master Servicing Agreement. On each Payment Date after the Subordinated Class Principal Amount and the Invested Amount have been reduced to zero, the amount, if any, by which the Senior Interest Payment Amount and the Senior Principal Payment Amount exceed the Available Funds, shall be paid by the Insurer to the Senior Bondholders pursuant to the Bond Insurance Policy. INTEREST The Bond Interest Rate for each Class of Bonds for each Payment Date (each, a "Bond Interest Rate") is described on the cover hereof. On each Payment Date, to the extent of funds available therefor, each Class of Bonds and the Investor Certificate will be entitled to receive an amount allocable to interest as described below (as to each such Class or the Investor Certificate, as applicable, the "Interest Payment Amount") with respect to the related Interest Accrual Period. With respect to each Payment Date, the "Interest Accrual Period" for each Class of Bonds and the Investor Certificate will be the [calendar month] preceding the month of such Payment Date. The Interest Payment Amount for the Senior Bonds (the "Senior Interest Payment Amount") will be equal to the sum of (i) interest at the Senior Bond Interest Rate on the Senior Class Principal Amount, and (ii) the sum of the amounts, if any, by which the amount described in clause (i) above on each prior Payment Date exceeded the amount actually distributed as interest on such prior Payment Dates and not subsequently distributed. The Interest Payment Amount for the Subordinated Bonds (the "Subordinated Interest Payment Amount") will be equal to the sum of (i) interest at the Subordinated Bond Interest Rate on the Subordinated Class Principal Amount, (ii) interest at the Subordinated Bond Interest Rate on any Subordinated Principal Carryover Shortfall, (iii) the sum of the amounts, if any, by which the sum of the amounts described in clauses (i) and (ii) above on each prior Payment Date exceeded the amount actually distributed as interest on such prior Payment Dates and not subsequently distributed (the "Subordinated Interest Carryover Shortfall") and (iv) interest at the Subordinated Bond Interest Rate on any Subordinated Interest Carryover Shortfall (to the extent permitted by applicable law). The Interest Payment Amount for the Investor Certificate (the "Certificate Interest Payment Amount") will be equal to interest at the Certificate Interest Rate on the Invested Amount. The Senior Bonds will not be entitled to interest on any Senior Interest Payment Amount not paid when due prior to such time as the Bonds are declared immediately due and payable upon the occurrence of an Event of Default as described herein under "-- Priority of Payments and Allocation of Shortfalls." The Investor Certificate will not be entitled to interest on any Certificate Interest Payment Amount not paid when due. The interest payable on any Payment Date as described above, but not the entitlement thereto, for the Subordinated Bonds, and in the event of a default of the Insurer under the Bond Insurance Policy, the Senior Bonds, will be reduced by their respective proportionate amounts of "Net Interest Shortfalls" for such Payment Date, if any, based on the amount of interest each Class of Bonds would otherwise be entitled to receive on such Payment Date before taking into account any reduction in such amounts resulting from such Net Interest Shortfalls. With respect to any Payment Date, the "Net Interest Shortfall" is equal to the amount by which the sum of (i) the amount of interest which would otherwise have been received with respect to any Mortgage Loan that was the subject of a Relief Act Reduction and (ii) any Prepayment Interest Shortfalls, in each case during the calendar month preceding the month of such Payment Date, exceeds the sum of (i) the Master Servicing Fee for such period and (ii) the amounts otherwise payable on such Payment Date to the holder of the Investor Certificate as described in clauses "fifth", "sixth" and "seventh" under "-- Priority of Payments and Allocation of Shortfalls" below. A "Relief Act Reduction" is a reduction in the amount of monthly interest payment on a Mortgage Loan pursuant to the Servicemembers S-13 Civil Relief Act. A "Prepayment Interest Shortfall" is the amount by which interest paid by a borrower in connection with a prepayment of principal on a Mortgage Loan is less than one month's interest at the related Mortgage Rate on the Stated Principal Balance of such Mortgage Loan. Accrued interest to be paid on any Payment Date will be calculated, in the case of each Class of Bonds and the Investor Certificate, on the basis of the related Class Principal Amount or Invested Amount, as applicable, immediately prior to such Payment Date. Interest will be calculated and payable on the basis of a 360-day year divided into twelve 30-day months. PRINCIPAL GENERAL. All payments and other amounts received in respect of principal of the Mortgage Loans will be allocated among the Senior Bonds, the Subordinated Bonds and the Investor Certificate. SENIOR PRINCIPAL PAYMENT AMOUNT. On each Payment Date, the Available Funds remaining after payment of interest with respect to the Senior Bonds, up to the amount of the Senior Principal Payment Amount for such Payment Date, will be distributed as principal of the Senior Bonds. The "Senior Principal Payment Amount" for any Payment Date will equal the Senior Percentage of the sum of (a) the principal portion of the Scheduled Payment due on each Mortgage Loan [on the related Due Date], (b) the principal portion of the purchase price of each Mortgage Loan that was purchased by Redwood Trust or another person pursuant to the Mortgage Loan Purchase Agreement (as defined herein) [or any optional purchase by the Master Servicer or the Company of a default Mortgage Loan] as of such Payment Date, (c) the Substitution Adjustment Amount in connection with any Deleted Mortgage Loan received with respect to such Payment Date, (d) any Insurance Proceeds or Liquidation Proceeds allocable to recoveries of principal of Mortgage Loans that are not yet Liquidated Mortgage Loans received during the [calendar month] preceding the month of such Payment Date, (e) with respect to each Mortgage Loan that became a Liquidated Mortgage Loan during the [calendar month] preceding the month of such Payment Date, the Stated Principal Balance of such Mortgage Loan, and (f) all partial and full principal prepayments by borrowers received during the [calendar month] preceding the month of such Payment Date. "Stated Principal Balance" means, as to any Mortgage Loan and Due Date, the unpaid principal balance of such Mortgage Loan as of such Due Date, as specified in the amortization schedule at the time relating thereto (before any adjustment to such amortization schedule by reason of any moratorium or similar waiver or grace period), after giving effect to any previous partial principal prepayments and Liquidation Proceeds received and to the payment of principal due on such Due Date and irrespective of any delinquency in payment by the related Mortgagor. The "Pool Principal Balance" with respect to any Payment Date equals the aggregate of the Stated Principal Balances of the Mortgage Loans outstanding on the Due Date in the month preceding the month of such Payment Date. The "Senior Percentage" for any Payment Date is the percentage equivalent of a fraction the numerator of which is the Senior Class Principal Amount immediately prior to such date and the denominator of which is the sum of (i) the Senior Class Principal Amount, (ii) the Subordinated Class Principal Amount and (iii) the Invested Amount, in each case immediately prior to such date. The "Subordinated Percentage" for any Payment Date is the percentage equivalent of a fraction the numerator of which is the Subordinated Class Principal Amount immediately prior to such date and the denominator of which is the sum of (i) the Senior Class Principal Amount, (ii) the Subordinated Class Principal Amount and (iii) the Invested Amount, in each case immediately prior to such date. The "Investor Percentage" for any Payment Date will be calculated as the difference between 100% and the sum of the Senior Percentage and the Subordinated Percentage for such date. SUBORDINATED PRINCIPAL PAYMENT AMOUNT. On each Payment Date, to the extent of Available Funds therefor, the Subordinated Principal Payment Amount for such Payment Date will be distributed as principal of the Subordinated Bonds. The "Subordinated Principal Payment Amount" for any Payment Date will equal the sum of (i) the Subordinated Percentage of the sum of (a) the principal portion of the Scheduled Payment due on each Mortgage Loan [on the related Due Date], (b) the principal portion of the purchase price of each Mortgage Loan that was purchased by Redwood Trust or another person pursuant to the Mortgage Loan S-14 Purchase Agreement [or by the Master Servicer or the Company in connection with any optional purchase by the Master Servicer of a defaulted Mortgage Loan] as of such Payment Date, (c) the Substitution Adjustment Amount in connection with any Deleted Mortgage Loan received with respect to such Payment Date, (d) any Insurance Proceeds or Liquidation Proceeds allocable to recoveries of principal of Mortgage Loans that are not yet Liquidated Mortgage Loans received during the [calendar month] preceding the month of such Payment Date, (e) with respect to each Mortgage Loan that became a Liquidated Mortgage Loan during the [calendar month] preceding the month of such Payment Date, the Stated Principal Balance of such Mortgage Loan and (f) all partial and full principal prepayments by borrowers received during the [calendar month] preceding the month of such Payment Date and (ii) any Subordinated Principal Carryover Shortfall. The "Subordinated Principal Carryover Shortfall" for any Payment Date will equal the excess of (a) the Original Subordinated Class Principal Amount reduced by all amounts previously distributed to holders of the Subordinated Bonds as payments of principal or Subordinated Principal Carryover Shortfall, over (b) the Subordinated Class Principal Amount immediately prior to such date. INVESTED AMOUNT PAYMENT. On each Payment Date, to the extent of Available Funds therefor, the Invested Amount Payment for such Payment Date will be distributed in reduction of the Invested Amount of the Investor Certificate. The "Invested Amount Payment" for any Payment Date will equal the sum of (i) the Investor Percentage of the sum of (a) the principal portion of the Scheduled Payment due on each Mortgage Loan [on the related Due Date], (b) the principal portion of the purchase price of each Mortgage Loan that was purchased by Redwood Trust or another person pursuant to the Mortgage Loan Purchase Agreement (as defined herein) [or any optional purchase by the Master Servicer or the Company of a defaulted Mortgage Loan] as of such Payment Date, (c) the Substitution Adjustment Amount in connection with any Deleted Mortgage Loan received with respect to such Payment Date, (d) any Insurance Proceeds or Liquidation Proceeds allocable to recoveries of principal of Mortgage Loans that are not yet Liquidated Mortgage Loans received during the [calendar month] preceding the month of such Payment Date, and (e) all partial and full principal prepayments by borrowers received during the [calendar month] preceding the month of such Payment Date and (ii) with respect to each Mortgage Loan that became a Liquidated Mortgage Loan during the [calendar month] preceding the month of such Payment Date, the Liquidation Proceeds allocable to principal received with respect to such Mortgage Loan, after application of such amounts pursuant to clause (e) of the definition of Senior Principal Payment Amount and clause (e) of the definition of Subordinated Principal Payment Amount. PRIORITY OF PAYMENTS AND ALLOCATION OF SHORTFALLS Prior to the declaration that the Bonds are due and payable, on any Payment Date Available Funds will be applied in the following order of priority: first, to the Senior Interest Payment Amount; second, to the Senior Principal Payment Amount; third, to the Subordinated Interest Payment Amount; fourth, to the Subordinated Principal Payment Amount; fifth, to the Certificate Interest Payment Amount; sixth, to the Invested Amount Payment; and seventh, to the holder of the Investor Certificate, the balance of any Available Funds remaining in the Bond Account. If a Realized Loss results in the Stated Principal Balances of the Mortgage Loans declining in an amount greater than the sum of (i) the payments of principal on the Senior Bonds, (ii) the payments of principal on the Subordinated Bonds and (iii) the payment in reduction of the Invested Amount, the Senior Percentage, the Subordinated Percentage and the Investor Percentage may shift (as a result of their methods of computation as described above under "-- Principal") such that funds available in the Distribution Account for payments of principal on each future Payment Date may be allocated in a higher ratio to the Senior Bonds S-15 as a result of such shortfall. This shift of the Senior Percentage, the Subordinated Percentage and the Investor Percentage may cause the Senior Bonds to amortize more rapidly, and the Subordinated Bonds and the Investor Certificate to amortize more slowly, than would otherwise have been the case in the absence of such shortfalls. 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 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 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. In addition, an investor in the Bonds should consider the risk that there can be no assurance that investors in the Bonds will be able to reinvest the payments thereon at yields equaling or exceeding the yields on such Bonds. It is possible that yields on any such reinvestments will be lower, and may be significantly lower, than the yields on the Bonds. In general, a "Realized Loss" means, with respect to a Liquidated Mortgage Loan, the amount by which the remaining unpaid principal balance of the related Mortgage Loan exceeds the amount of Liquidation Proceeds applied to the principal balance of the related Mortgage Loan. A "Liquidated Mortgage Loan" is a defaulted Mortgage Loan as to which the Master Servicer has determined that all recoverable liquidation and insurance proceeds have been received. Under the Indenture, an Event of Default will not occur solely due to the occurrence of Shortfalls that affect only the Subordinated Bonds until all the Senior Bonds have been paid in full and then only if Shortfalls on the Subordinated Bonds have not been paid. In addition, an Event of Default by reason of any Shortfalls that affect the Senior Bonds will occur on any Payment Date only when the Pool Principal Balance is less than the principal amount of the Senior Bonds outstanding after application of all available amounts on deposit in the Distribution Account on such Payment Date. Nevertheless, at any time following an Event of Default arising from a Shortfall affecting the Senior Bonds, the holders of outstanding Bonds, whether Senior Bonds or Subordinated Bonds, representing more than 50% in principal amount of all Bonds then outstanding, may declare the Bonds due and payable or take any other action pursuant to the terms of the Indenture. Until the Bonds have been declared due and payable following an Event of Default, the holders of the Subordinated Bonds may not request the Bond Trustee to take any action, other than the application of available funds in the Distribution Account to pay principal and interest as provided herein, and may not otherwise cause any action to be taken to enforce the obligation of the Issuer to pay principal and interest on the Subordinated Bonds. Additionally, prior to the Bonds being declared due and payable following an Event of Default, the Senior Bonds will not accrue interest in any form on the interest component of any Shortfall attributable to the Senior Bonds. Should an Event of Default occur, payments will be allocated on each Payment Date in accordance with the priorities described herein under "-- Principal", which would otherwise be applicable on such Payment Date had an Event of Default not occurred. If Available Funds are insufficient to make payments on the Senior Bonds, Senior Bondholders will be dependent upon the ability of the Insurer to meet its obligations under the Bond Insurance Policy. For any Payment Date, the amount of Available Funds will be dependent in part upon whether any Realized Losses have been incurred on the Mortgage Loans during the most recent Prepayment Period. Realized Losses on the Mortgage Loans will be allocated first to the Investor Certificate, second to the Subordinated Bonds and third, in the event the Insurer defaults on its obligations under the Bond Insurance Policy, to the Senior Bonds. STATED MATURITY The Stated Maturity for each Class of Bonds is the date determined by the Company which is years after the Payment Date immediately following the latest maturity date of any Mortgage Loan. The Stated Maturity of each Class of Bonds is , 20 . STRUCTURING ASSUMPTIONS Unless otherwise specified, the information in the tables in this Prospectus Supplement has been prepared on the basis of the following assumed characteristics of the Mortgage Loans and the following additional S-16 assumptions (collectively, the "Structuring Assumptions"): (i) the Mortgage Loan Pool consists of one Mortgage Loan with the following characteristics:
ORIGINAL TERM REMAINING TERM PRINCIPAL NET MORTGAGE IN MATURITY TO MATURITY BALANCE MORTGAGE RATE RATE (IN MONTHS) (IN MONTHS) ----------------- ------------- ------------ ------------- -------------- $ % %
(ii) the Mortgage Loans prepay at the specified constant Prepayment Assumptions, (iii) no defaults in the payment by Mortgagors of principal of and interest on the Mortgage Loans are experienced, (iv) scheduled payments on the Mortgage Loans are received on the first day of each month commencing in the calendar month following the Closing Date and are computed prior to giving effect to prepayments received on the last day of the prior month, (v) prepayments are allocated as described herein without giving effect to loss and delinquency tests, (vi) there are no Net Interest Shortfalls and prepayments represent prepayments in full of individual Mortgage Loans and are received on the last day of each month, commencing in the calendar month of the Closing Date, (vii) the scheduled monthly payment for each Mortgage Loan has been calculated based on the assumed mortgage loan characteristics described in item (i) above such that each such mortgage loan will amortize in amounts sufficient to repay the principal balance of such assumed mortgage loan by its remaining term to maturity, (viii) the initial Class Principal Amount or Invested Amount, as applicable, of each Class of Bonds and the Investor Certificate, respectively, is as set forth on the cover page hereof and under "SUMMARY -- Securities Other than the Bonds" herein, (ix) interest accrues on each Class of Bonds and the Investor Certificate at the applicable interest rate described on the cover hereof or described herein, (x) payments in respect of the Bonds and the Investor Certificate are received in cash on the th day of each month commencing in the calendar month following the Closing Date, (xi) the closing date of the sale of the Bonds is , 200 , (xii) Redwood Trust is not required to purchase or substitute for any Mortgage Loan and (xiii) [the Master Servicer or the Company does not exercise any option to purchase any Mortgage Loans described herein under "-- Optional Purchase of Defaulted Loans"] and the Issuer does not exercise any option to redeem the Bonds as described herein under "-- Redemption at the Option of the Issuer." While it is assumed that each of the Mortgage Loans prepays at the specified constant Prepayment Assumptions, this is not likely to be the case. Moreover, discrepancies exist between the characteristics of the actual Mortgage Loans which will be delivered to the Bond Trustee and characteristics of the Mortgage Loans assumed in preparing the tables herein. Prepayments of mortgage loans commonly are measured relative to a prepayment standard or model. The model used in this Prospectus Supplement (the "Prepayment Assumption") represents an assumed rate of prepayment each month relevant to the then outstanding principal balance of a pool of mortgage loans. The Prepayment Assumption does not purport to be either an historical description of the prepayment experience of any pool of mortgage loans or a prediction of the anticipated rate of prepayment of any pool of mortgage loans, including the Mortgage Loans. A 100% Prepayment Assumption assumes a Constant Prepayment Rate ("CPR") of % per annum of the then outstanding principal balance of such mortgage loans in the first month of the life of the mortgage loans and an additional % per annum in each month thereafter until the month. Beginning in the month and in each month thereafter during the life of such mortgage loans, a 100% Prepayment Assumption assumes a CPR of % per annum each month. As used in the tables below, a % Prepayment Assumption assumes a prepayment rate equal to % of the Prepayment Assumption. Correspondingly, a % Prepayment Assumption assumes a prepayment rate equal to % of the Prepayment Assumption, and so forth. OPTIONAL PURCHASE OF DEFAULTED LOANS The Master Servicer or the Company may, at its option, purchase from the Issuer any Mortgage Loan which is delinquent in payment by days or more. Any such purchase will be at a price equal to 100% of the Stated Principal Balance of such Mortgage Loan plus accrued interest thereon at the applicable Mortgage Rate from the date through which interest was last paid by the related Mortgagor or advanced to the first day of the month in which such amount is to be distributed. S-17 WEIGHTED AVERAGE LIVES OF THE BONDS The weighted average life of a Bond is determined by (a) multiplying the amount of the reduction, if any, of the Class Principal Amount of such Bond on each Payment Date by the number of years from the date of issuance to such Payment Date, (b) summing the results and (c) dividing the sum by the aggregate amount of the reductions in Class Principal Amount of such Bond referred to in clause (a). For a discussion of the factors which may influence the rate of payments (including prepayments) of the Mortgage Loans, see "RISK FACTORS -- Yield, Prepayment and Maturity Risks" herein and "RISK FACTORS -- Prepayment and Yield Considerations" in the Prospectus. In general, the weighted average lives of the Bonds will be shortened if the level of prepayments of principal of the Mortgage Loans increases. However, the weighted average lives of the Bonds will depend upon a variety of other factors, including the timing of changes in such rate of principal payments and the priority sequence of distributions of principal of the Classes of Bonds. The interaction of the foregoing factors may have different effects on the Senior Bonds and the Subordinated Bonds and the effects on any Class may vary at different times during the life of such Class. Accordingly, no assurance can be given as to the weighted average life of any Class of Bonds. Further, to the extent the prices of the Bonds represent discounts or premiums to their respective original Class Principal Amounts, variability in the weighted average lives of such Classes of Bonds will result in variability in the related yields to maturity. For an example of how the weighted average lives of the Classes of Bonds may be affected at various constant Prepayment Assumptions, see the Decrement Tables below. DECREMENT TABLES The following tables indicate the percentages of the initial Class Principal Amounts of the Classes of Bonds that would be outstanding after each of the dates shown at various constant Prepayment Assumptions and the corresponding weighted average lives of such Classes. The tables have been prepared on the basis of the Structuring Assumptions. It is not likely that (i) all of the Mortgage Loans will have the characteristics assumed, (ii) all of the Mortgage Loans will prepay at the constant Prepayment Assumptions specified in the tables or at any constant Prepayment Assumption or (iii) all of the Mortgage Loans will prepay at the same rate. Moreover, the diverse remaining terms to maturity of the Mortgage Loans could produce slower or faster principal payments than indicated in the tables at the specified constant Prepayment Assumptions, even if the weighted average remaining term to maturity of the Mortgage Loans is consistent with the remaining terms to maturity of the Mortgage Loans specified in the Structuring Assumptions. PERCENT OF INITIAL CLASS PRINCIPAL AMOUNTS OUTSTANDING [DECREMENT TABLES] REDEMPTION AT THE OPTION OF THE ISSUER The Bonds may be redeemed in whole, but not in part, at the Issuer's option, on any Payment Date on or after the earlier of (a) years after the initial issuance of the Bonds and (b) the Payment Date on which the sum of (i) the Senior Class Principal Amount (ii) the Subordinated Class Principal Amount and (iii) the Invested Amount, after giving effect to payments to be made on such Payment Date, is % or less of the aggregate of the Stated Principal Balances of the Mortgage Loans as of the Cut-off Date, at a redemption price equal to 100% of the unpaid principal amount of such Bonds (including, in the case of the Subordinated Bonds, any unpaid Subordinated Principal Carryover Shortfall), plus accrued and unpaid interest at the applicable Bond Interest Rate through the month preceding the month in which such optional redemption date occurs. The Bonds are not otherwise subject to call or redemption at the option of the Issuer nor are they subject to special redemption. S-18 Notice of any redemption to be made at the option of the Issuer must be given by the Issuer to the Bond Trustee not less than 30 days prior to the redemption date and must be mailed by the Issuer or the Bond Trustee to affected Bondholders at least ten days prior to the redemption date. CONTROLLING CLASS UNDER THE INDENTURE For the purposes described in the prospectus under the headings "The Indenture -- Modification of Indenture," "-- Events of Default" and "Rights Upon Event of Default," the "Controlling Class" shall be the Class A-1 Bondholders or, if the Class A-1 Bonds are no longer outstanding, the Class B-1 Bondholders. CREDIT ENHANCEMENT Credit enhancement for the Senior Bonds will be provided by the Subordinated Bonds, by the Investor Certificate and by the Bond Insurance Policy (as defined herein). Credit enhancement for the Subordinated Bonds will be provided by the Investor Certificate. SUBORDINATION The rights of holders of the Subordinated Bonds and the Investor Certificate to receive payments with respect to the Mortgage Loans will be subordinated to such rights of the holders of the Senior Bonds and the rights of the holders of the Investor Certificate will be subordinated to such rights of the holders of the Subordinated Bonds, in each case only to the extent described herein. The subordination of the Subordinated Bonds and the Investor Certificate to the Senior Bonds and the further subordination of the Investor Certificate to the Subordinated Bonds are each intended to increase the likelihood of timely receipt by the holders of Bonds with higher relative payment priority of the maximum amount to which they are entitled on any Payment Date and to provide such holders protection against losses resulting from defaults on Mortgage Loans to the extent described herein. However, the amount of protection afforded the Subordinated Bondholders by subordination of the Investor Certificate may be exhausted and Shortfalls in payments on the Subordinated Bonds could result. Any losses realized on the Mortgage Loans in excess of the protection afforded by the Investor Certificate will result in losses on the Subordinated Bonds. THE BOND INSURANCE POLICY [DESCRIPTION OF THE BOND INSURANCE POLICY] THE INSURER [DESCRIPTION OF THE INSURER] SECURITY FOR THE BONDS GENERAL The Bonds will be secured by assignments to the Bond Trustee of collateral consisting of (i) the Mortgage Loans, (ii) funds on deposit in the Bond Account and the Distribution Account, (iii) the Issuer's rights under the Master Servicing Agreement, (iv) [the Issuer's rights under any Servicing Agreement,] (v) the Issuer's rights under the Mortgage Loan Purchase Agreement (as defined herein), and (vi) the proceeds of all of the foregoing. THE MORTGAGE LOANS The Bonds will be secured by a pool (the "Mortgage Loan Pool") of -year conventional mortgage loans secured by first liens on one- to four-family residential properties (each, a "Mortgaged Property"). None of the Mortgage Loans will be guaranteed by any governmental agency. All of the Mortgage Loans will have been deposited with the Issuer by the Company which, in turn, will have acquired them from Redwood Trust S-19 pursuant to an agreement (the "Mortgage Loan Purchase Agreement") between the Company and Redwood Trust. All of the Mortgage Loans will have been acquired by Redwood Trust in the ordinary course of its business and substantially in accordance with the underwriting criteria specified herein. GENERAL. Under the Mortgage Loan Purchase Agreement, Redwood Trust will make certain representations, warranties and covenants to the Company relating to, among other things, the due execution and enforceability of the Mortgage Loan Purchase Agreement and certain characteristics of the Mortgage Loans and, subject to the limitations described below under "-- Assignment of Mortgage Loans," will be obligated to purchase or substitute a similar mortgage loan for any Mortgage Loan as to which there exists deficient documentation or an uncured material breach of any such representation, warranty or covenant. Under the Deposit Trust Agreement, the Company will assign all of its rights under the Mortgage Loan Purchase Agreement to the Issuer. Under the Indenture, the Issuer will pledge all its right, title and interest in and to such representations, warranties and covenants (including Redwood Trust's purchase obligation) to the Bond Trustee for the benefit of the Bondholders. The Issuer will make no representations or warranties with respect to the Mortgage Loans and will have no obligation to repurchase or substitute Mortgage Loans with deficient documentation or which are otherwise defective. The obligations of Redwood Trust with respect to the Bonds are limited to Redwood Trust's obligation to purchase or substitute Mortgage Loans with deficient documentation or which are otherwise defective under the Mortgage Loan Purchase Agreement. Certain information with respect to the Mortgage Loan Pool is set forth below. Prior to the Closing Date, Mortgage Loans may be removed from the collateral and other Mortgage Loans may be substituted therefor. The Issuer believes that the information set forth herein with respect to the Mortgage Loans as presently constituted is representative of the characteristics of the Mortgage Loans as they will be constituted at the Closing Date, although certain characteristics of the Mortgage Loans in the Mortgage Loan Pool may vary. Unless otherwise indicated, information presented below expressed as a percentage (other than rates of interest) are approximate percentages based on the Stated Principal Balances of the Mortgage Loans as of the Cut-off Date. As of the Cut-off Date, the aggregate of the Stated Principal Balances of the Mortgage Loans is expected to be approximately $ (the "Cut-off Date Pool Principal Balance"). [The Mortgage Loans provide for the amortization of the amount financed over a series of substantially equal monthly payments.] All of the Mortgage Loans provide for payments due on the first day of each month (the "Due Date"). At origination, substantially all of the Mortgage Loans had stated terms to maturity of years. Scheduled monthly payments made by the Mortgagors on the Mortgage Loans ("Scheduled Payments") either earlier or later than the scheduled Due Dates thereof will not affect the amortization schedule or the relative application of such payments to principal and interest. [Mortgagors may prepay their Mortgage Loans at any time without penalty.] Each Mortgage Loan will bear interest at a [fixed][adjustable] Mortgage Rate. [Each Mortgage Loan will bear interest at a Mortgage Rate, subject to annual adjustment on the first day of the month specified in the related Mortgage Note (each such date, an "Adjustment Date"), equal to the sum, rounded to the nearest of one percentage point ( %), of (i) (the "Index") as made available by the and most recently available as of days prior to the Adjustment Date and (ii) a fixed percentage amount specified in the related Mortgage Note (the "Margin") provided, however, that the Mortgage Rate will not increase or decrease by more than percentage points ( %), except for Mortgage Loans, representing approximately % of the Cut-off Date Pool Principal Balance which will not increase or decrease by more than percentage points ( %), on the first Adjustment Date or more than percentage points ( %) on any Adjustment Date thereafter (the "Periodic Rate Cap"). The Index with respect to any Bond Interest Rate and any Payment Date shall be the Index in effect as of the first day of the month preceding the month in which such Payment Date occurs.] [All of the Mortgage Loans provide that over the life of the Mortgage Loan the Mortgage Rate will in no event increase by more than the Mortgage Rate fixed at origination plus a fixed number of percentage points specified in the related Mortgage Note (such rate, the "Maximum Rate"). None of the Mortgage Loans are subject to minimum Mortgage Rates. Effective with the first payment due on a Mortgage Loan after each S-20 related Adjustment Date, the Scheduled Payment will be adjusted to an amount which will pay interest at the adjusted rate and fully amortize the then-outstanding principal balance of the Mortgage Loan over its remaining term. If the Index ceases to be published or is otherwise unavailable, the Master Servicer will select an alternative index based upon comparable information.] Each Mortgage Loan is, by its terms, assumable in connection with a transfer of the related Mortgaged Property if the proposed transferee submits certain information to the Master Servicer required to enable it to evaluate the transferee's ability to repay the Mortgage Loan and if the Master Servicer reasonably determines that the security for the Mortgage Loan would not be impaired by the assumption. See "RISK FACTORS" herein and in the Prospectus. Each Mortgage Loan was originated on or after , 19 . The latest stated maturity date of any Mortgage Loan is , 20 . The earliest stated maturity date of any Mortgage Loan is , 20 . [As of the Cut-off Date, no Mortgage Loan was delinquent more than days.] [None of the Mortgage Loans are subject to buydown agreements.] [No Mortgage Loan provides for deferred interest or negative amortization.] No Mortgage Loan had a Loan-to-Value Ratio at origination of more than %. [Except for Mortgage Loans, representing approximately % of the Cut-off Date Pool Principal Balance,] each Mortgage Loan with a Loan-to-Value Ratio at origination of greater than 80% is covered by a primary mortgage insurance policy (each a "Primary Mortgage Insurance Policy") issued by a mortgage insurance company acceptable to the Federal National Mortgage Association ("FNMA"), the Federal Home Loan Mortgage Corporation ("FHLMC") or any nationally recognized statistical rating organization, which policy provides coverage of a portion of the original principal balance of the related Mortgage Loan equal to the product of the original principal balance thereof and a fraction, the numerator of which is the excess of the original principal balance of the related Mortgage Loan over 75% of the lesser of the appraised value and selling price of the related Mortgage Property and the denominator of which is the original principal balance of the related Mortgage Loan, plus accrued interest thereon and related foreclosure expenses. No such Primary Mortgage Insurance Policy will be required with respect to any such Mortgage Loan after the date on which the related Loan-to-Value Ratio is 80% or less or, based on a new appraisal, the principal balance of such Mortgage Loan represents 80% or less of the new appraised value. See "-- Underwriting Standards" herein. The "Loan-to-Value Ratio" of a Mortgage Loan at any given time is a fraction, expressed as a percentage, the numerator of which is the principal balance of the related Mortgage Loan at the date of determination and the denominator of which is (a) in the case of a purchase, the lesser of the selling price of the Mortgaged Property and its appraised value determined in an appraisal obtained by the originator at origination of such Mortgage Loan, or (b) in the case of a refinance, the appraised value of the Mortgaged Property at the time of such refinance. No assurance can be given that the value of any Mortgaged Property has remained or will remain at the level that existed on the appraisal or sales date. If residential real estate values generally or in a particular geographic area decline, the Loan-to-Value Ratios might not be a reliable indicator of the rates of delinquencies, foreclosures and losses that could occur with respect to such Mortgage Loans. S-21 The following information sets forth in tabular format certain information, as of the Cut-off Date, as to the Mortgage Loans. Other than with respect to rates of interest, percentages (approximate) are stated by Stated Principal Balance of the Mortgage Loans as of the Cut-off Date and have been rounded in order to total 100%.
ORIGINAL LOAN-TO-VALUE RATIOS(1) - ----------------------------------------------------------------------------------------------- AGGREGATE NUMBER OF PRINCIPAL PERCENT OF MORTGAGE BALANCE MORTGAGE ORIGINAL LOAN-TO-VALUE RATIOS(%) LOANS OUTSTANDING POOL - ------------------------------------------------------- --------- ----------- ---------- $ % --- -------- ---- Total............................................. $ % === ======== ====
- --------------- (1) The weighted average original Loan-to-Value Ratio of the Mortgage Loans is expected to be approximately %.
ORIGINAL TERMS TO MATURITY(1) - ----------------------------------------------------------------------------------------------- AGGREGATE NUMBER OF PRINCIPAL PERCENT OF MORTGAGE BALANCE MORTGAGE ORIGINAL TERM TO MATURITY (MONTHS) LOANS OUTSTANDING POOL - ------------------------------------------------------- --------- ----------- ---------- $ % --- -------- ---- Total............................................. $ % === ======== ====
- --------------- (1) As of the Cut-off Date, the weighted average remaining term to maturity of the Mortgage Loans is expected to be approximately months. S-22
CURRENT MORTGAGE LOAN PRINCIPAL BALANCE(1) - ----------------------------------------------------------------------------------------------- AGGREGATE NUMBER OF PRINCIPAL PERCENT OF MORTGAGE BALANCE MORTGAGE RANGE OF CURRENT MORTGAGE LOAN PRINCIPAL BALANCES LOANS OUTSTANDING POOL - ------------------------------------------------------- --------- ----------- ---------- $ % --- -------- ---- Total............................................. $ % === ======== ====
- --------------- (1) As of the Cut-off Date, the average current Mortgage Loans principal balance is expected to be approximately $ .
CURRENT MORTGAGE RATES(1) - ----------------------------------------------------------------------------------------------- AGGREGATE NUMBER OF PRINCIPAL PERCENT OF MORTGAGE BALANCE MORTGAGE CURRENT MORTGAGE RATES(%) LOANS OUTSTANDING POOL - ------------------------------------------------------- --------- ----------- ---------- $ % --- -------- ---- Total............................................. $ % === ======== ====
- --------------- (1) As of the Cut-off Date, the weighted average Mortgage Rate of the Mortgage Loans is expected to be approximately % per annum. S-23
PURPOSE OF MORTGAGE LOANS - ----------------------------------------------------------------------------------------------- AGGREGATE NUMBER OF PRINCIPAL PERCENT OF MORTGAGE BALANCE MORTGAGE LOAN PURPOSE LOANS OUTSTANDING POOL - ------------------------------------------------------- --------- ----------- ---------- Purpose................................................ $ % Refinance (Rate or Term)............................... Refinance (Cash-out)................................... --- -------- ---- Total............................................. $ % === ======== ====
STATE DISTRIBUTION OF MORTGAGED PROPERTIES(1) - ----------------------------------------------------------------------------------------------- AGGREGATE NUMBER OF PRINCIPAL PERCENT OF MORTGAGE BALANCE MORTGAGE STATE LOANS OUTSTANDING POOL - ------------------------------------------------------- --------- ----------- ---------- $ % Other(1)............................................... --- -------- ---- Total............................................. $ % === ======== ====
- --------------- (1) Other includes other states, and the District of Columbia, with under % concentrations individually. No more than approximately % of the Mortgage Loans will be secured by Mortgaged Properties located in any one postal zip code area.
DOCUMENTATION FOR MORTGAGE LOANS - ----------------------------------------------------------------------------------------------- AGGREGATE NUMBER OF PRINCIPAL PERCENT OF MORTGAGE BALANCE MORTGAGE TYPE OF PROGRAM LOANS OUTSTANDING POOL - ------------------------------------------------------- --------- ----------- ---------- Full................................................... $ % Alternative............................................ Reduced................................................ --- -------- ---- Total............................................. $ % === ======== ====
OCCUPANCY TYPES(1) - ----------------------------------------------------------------------------------------------- AGGREGATE NUMBER OF PRINCIPAL PERCENT OF MORTGAGE BALANCE MORTGAGE OCCUPANCY TYPE LOANS OUTSTANDING POOL - ------------------------------------------------------- --------- ----------- ---------- Primary Home........................................... $ % Investor............................................... Second Home............................................ --- -------- ---- Total............................................. $ % === ======== ====
- --------------- (1) Based upon representations of the related Mortgagors at the time of origination. S-24
PROPERTY TYPE - ----------------------------------------------------------------------------------------------- AGGREGATE NUMBER OF PRINCIPAL PERCENT OF MORTGAGE BALANCE MORTGAGE PROPERTY TYPE LOANS OUTSTANDING POOL - ------------------------------------------------------- --------- ----------- ---------- Single Family.......................................... $ % Planned Unit Development Condominium............................................ 2-4 Units.............................................. --- -------- ---- Total............................................. $ % === ======== ====
MAXIMUM MORTGAGE RATES(1) - ----------------------------------------------------------------------------------------------- AGGREGATE NUMBER OF PRINCIPAL PERCENT OF MORTGAGE BALANCE MORTGAGE LIFETIME CAPS(%) LOANS OUTSTANDING POOL - ------------------------------------------------------- --------- ----------- ---------- $ % --- -------- ---- Total............................................. $ % === ======== ====
- --------------- (1) As of the Cut-off Date, the weighted average Lifetime Cap of the Mortgage Loans is expected to be approximately % per annum.
MARGIN(1) - ----------------------------------------------------------------------------------------------- AGGREGATE NUMBER OF PRINCIPAL PERCENT OF MORTGAGE BALANCE MORTGAGE MARGIN LOANS OUTSTANDING POOL - ------------------------------------------------------- --------- ----------- ---------- $ % --- -------- ---- Total............................................. $ % === ======== ====
- --------------- (1) As of the Cut-off Date, the weighted average margin of the Mortgage Loans is expected to be approximately %. S-25
NEXT NOTE RATE ADJUSTMENT DATES(1) - ----------------------------------------------------------------------------------------------- AGGREGATE NUMBER OF PRINCIPAL PERCENT OF MORTGAGE BALANCE MORTGAGE MONTHS LOANS OUTSTANDING POOL - ------------------------------------------------------- --------- ----------- ---------- $ % --- -------- ---- Total............................................. $ % === ======== ====
- --------------- (1) As of the Cut-off Date, the weighted average months to the next Adjustment Date of the Mortgage Loans was approximately months. THE INDEX [DESCRIPTION OF INDEX] ASSIGNMENT OF THE MORTGAGE LOANS Pursuant to the Indenture, the Issuer on the Closing Date will pledge, transfer, assign, set over and otherwise convey without recourse to the Bond Trustee in trust for the benefit of the Bondholders all right, title and interest of the Issuer in and to each Mortgage Loan and all right, title and interest in and to all other assets included in the Collateral, including all principal and interest received on or with respect to the Mortgage Loans, exclusive of principal and interest due on or prior to the Cut-off Date. In connection with such transfer and assignment, the Issuer will deliver or cause to be delivered to the Bond Trustee, or a custodian for the Bond Trustee, among other things, the original promissory note (the "Mortgage Note") (and any modification or amendment thereto) endorsed in blank without recourse, the original instrument creating a first lien on the related Mortgaged Property (the "Mortgage") with evidence of recording indicated thereon, an assignment in recordable form of the Mortgage, the title policy with respect to the related Mortgaged Property and, if applicable, all recorded intervening assignments of the Mortgage and any riders or modifications to such Mortgage Note and Mortgage (except for any such document not returned from the public recording office, which will be delivered to the Bond Trustee as soon as the same is available to the Issuer) (collectively, the "Mortgage File"). [Assignments of the Mortgage Loans to the Bond Trustee (or its nominee) will be recorded in the appropriate public office for real property records, except in states such as California where, in the opinion of counsel, such recording is not required to protect the Bond Trustee's interest in the Mortgage Loans against the claim of any subsequent transferee or any successor to or creditor of the Issuer.] The Bond Trustee will review each Mortgage File within days of the Closing Date (or promptly after the Bond Trustee's receipt of any document permitted to be delivered after the Closing Date) and if any document in a Mortgage File is found to be missing or defective in a material respect and the Issuer does not cure such defect within days of notice thereof from the Bond Trustee (or within such longer period not to exceed days after the Closing Date as provided in the Mortgage Loan Purchase Agreement in the case of missing documents not returned from the public recording office), Redwood Trust will be obligated to purchase the related Mortgage Loan. Rather than purchase the Mortgage Loan as provided above, Redwood S-26 Trust may remove such Mortgage Loan (a "Deleted Mortgage Loan") from the Collateral and substitute in its place another mortgage loan (a "Replacement Mortgage Loan"). Any Replacement Mortgage Loan generally will, on the date of substitution, among other characteristics set forth in the Mortgage Loan Purchase Agreement, (i) have a principal balance, after deduction of all Scheduled Payments due in the month of substitution, not in excess of, and not more than % less than, the Stated Principal Balance of the Deleted Mortgage Loan (the amount of any shortfall to be deposited in the Bond Account by Redwood and held for distribution to the Bondholders on the related Payment Date (a "Substitution Adjustment Amount")), (ii) have a Mortgage Rate not lower than, and not more than % per annum higher than, that of the Deleted Mortgage Loan, (iii) have a Loan-to-Value Ratio not higher than that of the Deleted Mortgage Loan, (iv) have a remaining term to maturity not greater than (and not more than less than) that of the Deleted Mortgage Loan, and (v) comply with all of the representations and warranties set forth in the Mortgage Loan Purchase Agreement as of the date of substitution. This cure, purchase or substitution obligation constitutes the sole remedy available to Bondholders or the Bond Trustee for omission of, or a material defect in, a Mortgage Loan document. UNDERWRITING STANDARDS All of the Mortgage Loans have been purchased by Redwood Trust in the ordinary course of business directly from banks, savings and loan associations, mortgage bankers and other mortgage loan originators (each, an "Originator") or in the secondary market. Redwood Trust approves individual institutions as eligible Originators after an evaluation of certain criteria, including the Originator's mortgage origination and servicing experience and financial stability. Each Originator and/or the entity from which Redwood Trust purchased the Mortgage Loans will represent and warrant that all Mortgage Loans originated and/or sold by it will have been underwritten in accordance with standards consistent with those utilized by mortgage lenders generally during the period of origination. Underwriting standards are applied by or on behalf of a lender to evaluate the borrower's credit standing and repayment ability, and the value and adequacy of the related Mortgaged Property as collateral. In general, a prospective borrower applying for a loan is required to fill out a detailed application designed to provide to the underwriting officer pertinent credit information. As part of the description of the borrower's financial condition, the borrower generally is required to provide a current list of assets and liabilities and a statement of income and expense, as well as an authorization to apply for a credit report which summarizes the borrower's credit history with local merchants and lenders and any record of bankruptcy. In most cases, an employment verification is obtained from an independent source (typically the borrower's employer) which verification reports, among other things, the length of employment with that organization, the current salary, and whether it is expected that the borrower will continue such employment in the future. If a prospective borrower is self-employed, the borrower may be required to submit copies of signed tax returns. The borrower may also be required to authorize verification of deposits at financial institutions where the borrower has demand or savings accounts. SERVICING OF THE MORTGAGE LOANS THE MASTER SERVICER will act as Master Servicer. The principal executive offices of are located at . The Master Servicer will be responsible for servicing the Mortgage Loans in accordance with the terms set forth in the Master Servicing Agreement. The Master Servicer may perform its servicing obligations under the Master Servicing Agreement through one or more servicers (each, a "Servicer"). On or prior to the Closing Date, the Master Servicer may enter into a mortgage servicing agreement (each, a "Servicing Agreement") with each Servicer pursuant to which such Servicer will perform certain servicing functions with respect to the Mortgage Loans. The Master Servicer will administer and supervise the performance of each Servicer, who may in turn be administering and supervising the performance of subservicers of the Mortgage S-27 Loans. Notwithstanding any such servicing arrangements, the Master Servicer will remain liable for its servicing duties and obligations under the Master Servicing Agreement. SERVICING AND COLLECTION PROCEDURES Under the Master Servicing Agreement, the Master Servicer's servicing functions include collection and remittance of principal and interest payments, administration of mortgage escrow accounts, collection of certain insurance claims and, if necessary, foreclosure. On or before the Closing Date, the Master Servicer will establish one or more accounts (the "Collection Account") into which it will remit collections on the Mortgage Loans (net of its related master servicing compensation). For purposes of the Master Servicing Agreement, , as Master Servicer, will be deemed to have received any amounts with respect to the Mortgage Loans that are received by a Servicer regardless of whether such amounts are remitted by the Servicer to the Master Servicer. FORECLOSURE, DELINQUENCY AND LOSS EXPERIENCE The following table summarizes the delinquency, foreclosure and loss experience, respectively, as of December 31, , December 31, and December 31, on approximately $ , $ and $ , respectively, in outstanding principal balance of conventional mortgage loans master serviced by . commenced master servicing conventional mortgage loans during . The delinquency and foreclosure percentages and the loss experience may be affected by the size and relative lack of seasoning of the servicing portfolio because many of such mortgage loans were not outstanding long enough to give rise to some or all of the indicated periods of delinquency. Accordingly, the information should not be considered as a basis for assessing the likelihood, amount or severity of delinquency or losses on the Mortgage Loans, and no assurances can be given that the foreclosure, delinquency and loss experience presented in the table below will be indicative of such experience on the Mortgage Loans in the future:
AS OF AS OF AS OF DECEMBER 31, DECEMBER 31, DECEMBER 31, 199 199 199 ------------ ------------ ------------ Total Number of Conventional Mortgage Loans in Portfolio........................................... Delinquent Mortgage Loans and Pending Foreclosures at Period End (1):..................................... 30-59 days....................................... 60-89............................................ 90 days or more (excluding foreclosures)......... Total Delinquencies.............................. Foreclosures pending Total delinquencies and foreclosures pending........ Net Loss(2)...........................................
- --------------- (1) As a percentage of the total number of loans master serviced. (2) There is no material difference between gross loss and net loss. There can be no assurance that factors beyond the Master Servicer's control, such as national or local economic conditions or downturns in the real estate markets of its lending areas, will not result in increased rates of delinquencies and foreclosure losses in the future. [For example, over the last several years there has been a general deterioration of the real estate market and weakening of the economy in many regions of the of the country, including California. The general deterioration of the real estate market has been reflected in increases in delinquencies of loans secured by real estate, slower absorption rates of real estate into the market and lower sales prices for real estate. The general weakening of the economy has been reflected in decreases in the financial strength of borrowers and decreases in the value of collateral serving as collateral for loans. If the real estate market and economy continue to decline, the Master Servicer may experience an increase in delinquencies on the loans it services and higher net loss on liquidated loans.] S-28 SERVICING COMPENSATION AND PAYMENT OF EXPENSES The Expense Fees with respect to the Mortgage Loans are payable out of the interest payments on each Mortgage Loan. The Expenses Fees will vary from Mortgage Loan to Mortgage Loan. The rate at which the Expense Fees accrue (the "Expense Fee Rate") will range from % to % per annum, in each case of the Stated Principal Balance of the related Mortgage Loan. As of the Cut-off Date, the weighted average Expense Fee Rate equaled approximately %. The Expense Fees consist of (a) master servicing compensation payable to the Master Servicer in respect of its master servicing activities (the "Master Servicing Fee"), and (b) fees payable to the Bond Trustee in respect of its activities as trustee under the Indenture. The Master Servicing Fee will be % per annum of the Stated Principal Balance of each Mortgage Loan. The Master Servicer is obligated to pay certain ongoing expenses associated with the Mortgage Loans and incurred by the Master Servicer in connection with its responsibilities under the Master Servicing Agreement and such amounts will be paid by the Master Servicer out of the Master Servicing Fee. The amount of the Master Servicing Fee is subject to adjustment with respect to prepaid Mortgage Loans, as described herein under "-- Adjustment to Master Servicing Fee and Invested Amount in Connection with Certain Prepaid Mortgage Loans." The Master Servicer will also be entitled to receive late payment fees, assumption fees and other similar charges. The Master Servicer will be entitled to receive all reinvestment income earned on amounts on deposited in the Collection Account and the Distribution Account. The Net Mortgage Rate of a Mortgage Loan is the Mortgage Rate thereof minus the related Expense Fee Rate. ADJUSTMENT TO MASTER SERVICING FEE AND INVESTED AMOUNT IN CONNECTION WITH CERTAIN PREPAID MORTGAGE LOANS When a borrower prepays a Mortgage Loan between Due Dates, the borrower is required to pay interest on the amount prepaid only to the date of prepayment and not thereafter. Principal prepayments by borrowers received during a calendar month will be distributed to Bondholders on the Payment Date in the month following the month of receipt. Pursuant to the Master Servicing Agreement, the Master Servicing Fee for any month may be reduced by an amount with respect to each such prepaid Mortgage Loan sufficient to pay to Bondholders the full amount of interest to which they would be entitled in respect of such Mortgage Loan on the related Payment Date. If shortfalls in interest as a result of prepayments in any month exceed the sum of (i) amount of the Master Servicing Fee for such month and (ii) the amounts otherwise payable on such Payment Date to the holder of the Investor Certificate as described in clauses "fifth", "sixth" and "seventh" under "DESCRIPTION OF THE BONDS -- Priority of Payments and Allocation of Shortfalls" herein, the amount of funds available to be paid to Bondholders in respect of interest on such Payment Date will be reduced by the amount of such excess. See "DESCRIPTION OF THE BONDS -- Interest" herein. ADVANCES Subject to the following limitations, the Master Servicer will be required to advance prior to each Payment Date, from its own funds, funds advanced by the related Servicer or amounts received with respect to the Mortgage Loans that do not constitute Available Funds for such Payment Date, an amount equal to the aggregate of payments of principal of and interest on the Mortgage Loans (net of the Master Servicing Fee and the applicable Servicing Fee with respect to the related Mortgage Loans) which were due on the related Due Date and which were delinquent on the related Determination Date, together with an amount equivalent to interest on each Mortgage Loan as to which the related Mortgaged Property has been acquired by the Bond Trustee through foreclosure or deed-in-lieu of foreclosure ("REO Property") (any such advance, an "Advance"). Advances are intended to maintain a regular flow of scheduled interest and principal payments on the Bonds and the Investor Certificate rather than to guarantee or insure against losses. The Master Servicer is obligated to make Advances with respect to delinquent payments of principal of or interest on each Mortgage Loan to the extent that such Advances are, in its reasonable judgment, recoverable from future payments and collections or insurance payments or proceeds of liquidation of the related Mortgage Loan. If the Master Servicer determines on any Determination Date to make an Advance, such Advance will be included with the payment to Bondholders and the holder of the Investor Certificate on the related Payment Date. Any failure S-29 by the Master Servicer to make an Advance as required under the Master Servicing Agreement with respect to the Bonds and the Investor Certificate will constitute a Servicing Default thereunder, in which case the Bond Trustee or the successor master servicer will be obligated to make any such Advance, in accordance with the terms of the Master Servicing Agreement. Subject to the terms of the Bond Insurance Policy, the Bond Insurance Policy will provide protection to the Senior Bondholders against any shortfall resulting from delinquencies as to which a required Advance is not made as described above or is determined to be nonrecoverable, to the extent such shortfall is not otherwise covered by Available Funds. USE OF PROCEEDS The Issuer intends to distribute all of the net proceeds of the issuance of the Bonds to the Company which will use such proceeds to pay certain indebtedness incurred by Redwood Trust in connection with the acquisition of the Mortgage Loans. FEDERAL INCOME TAX CONSEQUENCES Investors may wish to review the material set forth in this section together with the information in the section "Federal Income Tax Consequences" in the prospectus. Chapman and Cutler LLP has advised us that in its opinion the bonds will be treated as debt for federal income tax purposes and not as an ownership interest in the mortgage collateral, the issuer or a separate association taxable as a corporation. Interest, including original issue discount with respect to any class of bonds issued with original issue discount, will be taxable to non-exempt bondholders. The Tax Prepayment Assumption (as defined in the prospectus under "Federal Income Tax Consequences -- Original Issue Discount") for the purposes of determining the amount and rate of accrual of original issue discount on the Bonds assumes that the Mortgage Loans are prepaid at a rate of % of the Prepayment Assumption. Based upon (i) [the assumed prepayment rate] and (ii) the expected price to the public of each Class of the Bonds as of the date hereof (including interest accrued before the issue date, if any), the Senior Bonds will not be issued with original issue discount and the Subordinated Bonds will be treated as issued with original issue discount. [Although such treatment is not entirely certain, the Issuer intends to treat the Bonds as "Variable Rate Debt Instruments" and the stated interest on the Bonds as "qualified stated interest payments" (as each term is defined in the prospectus under "Federal Income Tax Consequences")]. Notwithstanding the use of in pricing the Bonds, no representation is made that the Mortgage Loans will actually prepay at or at any other rate. The amount of original issue discount and certain other information with respect to each Bond will be set forth on the face of such Bond as required by applicable regulations and as described in the prospectus. The Issuer will not elect to treat the segregated pool of assets securing the Bonds as a real estate mortgage investment conduit ("REMIC") for federal income tax purposes. Chapman and Cutler LLP has further advised us that, in its opinion, the Issuer will not be classified as a taxable mortgage pool. ERISA MATTERS Fiduciaries of employee benefit plans and certain other retirement plans and arrangements, including individual retirement accounts and annuities, Keogh plans, and collective investment funds in which such plans, accounts, annuities or arrangements are invested, that are subject to the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), or corresponding provisions of the Internal Revenue Code of 1986, as amended (the "Code") (any of the foregoing a "Plan"), persons acting on behalf of a Plan, or persons using the assets of a Plan ("Plan Investors"), should carefully review with their legal advisors whether the purchase or holding of the Bonds could give rise to a transaction that is prohibited under ERISA or the Code or cause the Mortgage Loans securing the Bonds to be treated as "plan assets" for purposes of regulations of the Department of Labor set forth in 29 C.F.R. 2510.3-101 (the "Plan Asset Regulations"). Prospective investors should be aware that, although certain exceptions from the application of the prohibited S-30 transaction rules and the Plan Asset Regulations exist, there can be no assurance that any such exception will apply with respect to the acquisition of the Bonds. If the Bonds are treated as equity for purposes of ERISA, the purchaser of the Bonds could be treated as having acquired a direct interest in the Mortgage Loans securing the Bonds. In that event, the purchase, holding, or resale of the Bonds could result in a transaction that is prohibited under ERISA or the Code. Furthermore, regardless of whether the Bonds are treated as equity for purposes of ERISA, the acquisition or holding of the Bonds by or on behalf of a Plan could still be considered to give rise to a prohibited transaction if the Issuer, the Trustee, the Master Servicer, any Servicer or any of their respective Affiliates is or becomes a party in interest or a disqualified person with respect to such Plan. However, one or more alternative exemptions may be available with respect to certain prohibited transaction rules of ERISA that might apply in connection with the initial purchase, holding and resale of the Bonds, depending in part upon the type of Plan fiduciary making the decision to acquire the Bonds and the circumstances under which such decision is made. Those exemptions include, but are not limited to: (i) Prohibited Transaction Class Exemption ("PTCE") 95-60, regarding investments by insurance company general accounts; (ii) PTCE 91-38, regarding investments by bank collective investment funds; (iii) PTCE 90-1, regarding investments by insurance company pooled separate accounts; (iv) PTCE 84-14, regarding transactions negotiated by qualified professional asset managers; or (v) PTCE 96-23, regarding transactions effected by in-house asset managers. Before purchasing the Bonds, a Plan subject to the fiduciary responsibility provisions of ERISA or described in Section 4975(e)(1) (and not exempt under Section 4975(g)) of the Code should consult with its counsel to determine whether the conditions of any exemption would be met. A purchaser of the Bonds should be aware, however, that even if the conditions specified in one or more exemptions are met, the scope of the relief provided by an exemption might not cover all acts that might be construed as prohibited transactions. Although not entirely free from doubt, the Issuer believes that the Bonds will be treated as debt obligations without significant equity features for purposes of the Plan Asset Regulations. Accordingly, a Plan that acquires the Bonds should not be treated as having acquired a direct interest in the assets of the Issuer. However, there can be no complete assurance that the Bonds will be treated as debt obligations without significant equity features for purposes of the Plan Asset Regulations. METHOD OF DISTRIBUTION Subject to the terms and conditions set forth in the Underwriting Agreement between the depositor, Redwood Trust and the Underwriter, the depositor has agreed to cause the Issuer to sell to the Underwriter, and the Underwriter has agreed to purchase from the Issuer, the bonds. Distribution of the Bonds will be made by the Underwriter from time to time in negotiated transactions or otherwise at varying prices to be determined at the time of sale. In connection with the sale of the bonds, the Underwriter may be deemed to have received compensation from the Issuer in the form of underwriting discounts. The Underwriter intends to make a secondary market in the bonds, but has no obligation to do so. There can be no assurance that a secondary market for the bonds will develop or, if it does develop, that it will continue or that it will provide bondholders with a sufficient level of liquidity of investment. The bonds will not be listed on any national securities exchange. The depositor and Redwood Trust have agreed to indemnify the underwriter against, or make contributions to the underwriter with respect to, certain liabilities, including liabilities under the Securities Act of 1933, as amended. LEGAL MATTERS The validity of the Bonds will be passed upon for the Issuer by Tobin & Tobin, a professional corporation, San Francisco, California. Certain tax matters will be passed upon by for the Issuer by Chapman and Cutler LLP, San Francisco, California. will act as counsel for the underwriter. S-31 RATINGS It is a condition of the issuance of the Senior Bonds that they be rated AAA by and AAA by ( and , together, the "Rating Agencies"). It is a condition to the issuance of the Subordinated Bonds that they be rated [AA] by . The ratings assigned by to collateralized mortgage obligations address the likelihood of the receipt of all payments on the mortgage loans by the related bondholders under the agreements pursuant to which such bonds are issued. 's ratings take into consideration the credit quality of the related mortgage pool, including any credit support providers, structural and legal aspects associated with such bonds, and the extent to which the payment stream on the mortgage pool is adequate to make the payments required by such bonds. 's ratings on such bonds do not, however, constitute a statement regarding frequency of prepayments of the mortgage loans. The ratings assigned by to the Senior Bonds address the likelihood of the receipt of all payments on the mortgage loans by the related Bondholders under the agreements pursuant to which such bonds are issued. 's ratings take into consideration the credit quality of the related mortgage pool, including any credit support providers, structural and legal aspects associated with such bonds, and the extent to which the payment stream on such mortgage pool is adequate to make payments required by such bonds. 's ratings on such bonds do not, however, constitute a statement regarding frequency of prepayments on the related mortgage loans. The ratings of the Rating Agencies do not address the possibility that, as a result of principal prepayments, Bondholders may receive a lower than anticipated yield. The ratings assigned to the Bonds should be evaluated independently from similar ratings on other types of securities. A rating is not a recommendation to buy, sell or hold securities and may be subject to revision or withdrawal at any time by the Rating Agencies. The Issuer has not requested a rating of the Bonds by any rating agency other than the Rating Agencies; there can be no assurance, however, as to whether any other rating agency will rate the Bonds or, if it does, what rating would be assigned by such other rating agency. The rating assigned by such other rating agency to the Bonds could be lower than the respective ratings assigned by the Rating Agencies. S-32 INDEX OF DEFINED TERMS
PAGE ---- Adjustment Date............................................. S-24 Advance..................................................... S-34 Available Funds............................................. S-16 Belgian Cooperative......................................... S-14 Beneficial owner............................................ S-12 Bond Distribution Amount.................................... S-15 Bond Interest Rate.......................................... S-16 Bond Owners................................................. S-12 Bond Trustee................................................ S-15 Bonds....................................................... S-1, S-5, S-11 Book-Entry Bonds............................................ S-12 CEDEL Participants.......................................... S-13 Certificate Interest Payment Amount......................... S-17 Certificate Interest Rate................................... S-12 Class Principal Amount...................................... S-12 Code........................................................ S-10, S-35 Collection Account.......................................... S-12 Company..................................................... S-2, S-5 Controlling Class........................................... S-22 Cooperative................................................. S-14 CPR......................................................... S-21 Cut-off Date Pool Principal Balance......................... S-24 Definitive Bond............................................. S-12 Deleted Mortgage Loan....................................... S-31 Deposit Trust Agreement..................................... S-5 Distribution Account........................................ S-9, S-15 DTC......................................................... S-12 Due Date.................................................... S-24 ERISA....................................................... S-10, S-35 Euroclear Operator.......................................... S-14 Euroclear Participants...................................... S-14 European Depositaries....................................... S-12 Expense Fee Rate............................................ S-33 FHLMC....................................................... S-25 Financial Intermediary...................................... S-12 FNMA........................................................ S-25 Index....................................................... S-8, S-24 Indirect Participants....................................... S-13 Insurance Proceeds.......................................... S-16 Interest Accrual Period..................................... S-6, S-17 Invested Amount............................................. S-12 Invested Payment Amount..................................... S-17 Investor Certificate........................................ S-1, S-11 Investor Percentage......................................... S-18 Issuer...................................................... S-5, S-11 Liquidated Mortgage Loan.................................... S-20
S-33
PAGE ---- Liquidation Proceeds........................................ S-16 Loan-to-Value Ratio......................................... S-25 Management Agreement........................................ S-5 Margin...................................................... S-24 Master Servicing Fee........................................ S-33 Maximum Rate................................................ S-24 Morgan...................................................... S-14 Mortgage.................................................... S-30 Mortgage File............................................... S-30 Mortgage Loan Pool.......................................... S-7, S-23 Mortgage Loan Purchase Agreement............................ S-23 Mortgage Loans.............................................. S-23 Mortgage Note............................................... S-30 Mortgaged Property.......................................... S-23 Net Interest Shortfall...................................... S-17 Net Interest Shortfalls..................................... S-17 Offered Bonds............................................... S-1, S-5, S-12 Original Invested Amount.................................... S-12 Original Senior Class Principal Amount...................... S-12 Original Subordinated Class Principal Amount................ S-12 Originator.................................................. S-31 Owner Trustee............................................... S-5 Participants................................................ S-12 Payment Date................................................ S-1, S-5, S-16 Periodic Rate Cap........................................... S-24 Plan........................................................ S-10, S-35 Plan Asset Regulations...................................... S-10, S-35 Plan Investors.............................................. S-10, S-35 Pool Principal Balance...................................... S-18 Prepayment Assumption....................................... S-21 Prepayment Interest Shortfall............................... S-17 Primary Mortgage Insurance Policy........................... S-25 PTCE........................................................ S-35 Rating Agencies............................................. S-8, S-36 Realized Loss............................................... S-20 Record Date................................................. S-16 Redwood Trust............................................... S-2, S-5, S-11 Relevant Depositary......................................... S-12 REMIC....................................................... S-35 REO Property................................................ S-34 Replacement Mortgage Loan................................... S-31 Rules....................................................... S-12 Scheduled Payments.......................................... S-24 Senior Bond Interest Rate................................... S-17 Senior Bonds................................................ S-1, S-11 Senior Class Principal Amount............................... S-12 Senior Interest Payment Amount.............................. S-17 Senior Percentage........................................... S-18
S-34
PAGE ---- Senior Principal Payment Amount............................. S-18 Servicing Fee............................................... S-33 Shortfalls.................................................. S-19 SMMEA....................................................... S-7 Stated Principal Balance.................................... S-18 Structuring Assumptions..................................... S-20 Subordinated Bond Interest Rate............................. S-17 Subordinated Bonds.......................................... S-1, S-11 Subordinated Class Principal Amount......................... S-12 Subordinated Interest Carryover Shortfall................... S-17 Subordinated Interest Payment Amount........................ S-17 Subordinated Percentage..................................... S-18 Subordinated Principal Carryover Shortfall.................. S-18 Subordinated Principal Payment Amount....................... S-18 Substitution Adjustment Amount.............................. S-31 Terms and Conditions........................................ S-14 Variable Rate Debt Instruments.............................. S-35
S-35 ANNEX I GLOBAL CLEARANCE, SETTLEMENT AND TAX DOCUMENTATION PROCEDURES Except in certain limited circumstances, the globally offered Sequoia Mortgage Trust , Collateralized Mortgage Bonds (the "Global Bonds") will be available only in book-entry form. Investors in the Global Bonds may hold such Global Bonds through any of The Depository Trust Company ("DTC"), CEDEL or Euroclear. The Global Bonds will be tradeable as home market instruments in both the European and U.S. domestic markets. Initial settlement and all secondary trades will settle in same-day funds. Secondary market trading between investors holding Global Bonds through CEDEL and Euroclear will be conducted in the ordinary way in accordance with their normal rules and operating procedures and in accordance with conventional Eurobond practice (i.e., seven calendar day settlement). Secondary market trading between investors holding Global Bonds through DTC will be conducted according to the rules and procedures applicable to U.S. corporate debt obligations and prior collateralized mortgage bond issues. Secondary cross-market trading between CEDEL or Euroclear and DTC Participants holding Global Bonds will be effected on a delivery-against-payment basis through the respective Depositaries of CEDEL and Euroclear (in such capacity) and as DTC Participants. Non-U.S. holders (as described below) of Global Bonds 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 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 (each, a "DTC Participant"). As a result, CEDEL and Euroclear will hold positions on behalf of their participants through their respective Depositaries, which in turn will hold such positions in accounts as DTC Participants. Investors electing to hold their Global Bonds through DTC will follow the settlement practices' applicable to other collateralized mortgage bond issues. Investor securities custody accounts will be credited with their holdings against payment in same-day funds on the settlement date. Investors electing to hold their Global Bonds through CEDEL 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 Bonds will be credited to the securities custody accounts on the settlement date against payment in same-day funds. SECONDARY MARKET TRADING Since the purchaser determines the place of delivery, it is important to establish at the time of the trade where both the purchaser's and seller's accounts are located to ensure that settlement can be made on the desired value date. TRADING BETWEEN DTC PARTICIPANTS. Secondary market trading between DTC Participants will be settled using the procedures applicable to prior collateralized mortgage bond issues in same-day funds. TRADING BETWEEN CEDEL AND/OR EUROCLEAR PARTICIPANTS. Secondary market trading between CEDEL Participants or Euroclear Participants will be settled using the procedures applicable to conventional Eurobonds in same-day funds. TRADING BETWEEN DTC SELLER AND CEDEL OR EUROCLEAR PURCHASER. When Global Bonds are to be transferred from the account of a DTC Participant to the account of a CEDEL Participant or a Euroclear Participant, the purchaser will send instructions to CEDEL or Euroclear through a CEDEL Participant or Euroclear Participant at least one business day prior to settlement. CEDEL or Euroclear will instruct the respective 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 S-36 settlement date, on the basis of the actual number of days in such accrual period and a year assumed to consist of 360 days. For transactions settling on the 31st of the month, payment will include interest accrued to and excluding the first day of the following month. Payment will then be made by the respective Depositary of 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 CEDEL 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 CEDEL or Euroclear cash debt will be valued instead as of the actual settlement date. CEDEL 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 CEDEL or Euroclear. Under this approach, they may take on credit exposure to CEDEL or Euroclear until the Global Bonds are credited to their accounts one day later. As an alternative, if CEDEL or Euroclear has extended a line of credit to them, CEDEL Participants or Euroclear Participants can elect not to preposition funds and allow that credit line to be drawn upon the finance settlement. Under this procedure, CEDEL 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 such overdraft charges, although this result will depend on each CEDEL Participant's or Euroclear Participant's particular cost of funds. Since the settlement is taking place during New York business hours, DTC Participants can employ their usual procedures for sending Global Bonds to the respective European Depository for the benefit of CEDEL Participants or Euroclear Participants. The sale proceeds will be available to the DTC seller on the settlement date. Thus, to the DTC Participants a cross-market transaction will settle no differently than a trade between two DTC Participants. TRADING BETWEEN CEDEL OR EUROCLEAR SELLER AND DTC PURCHASER. Due to time zone differences in their favor, CEDEL 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 CEDEL or Euroclear through a CEDEL Participant or Euroclear Participant at least one business day prior to settlement. In these cases CEDEL or Euroclear will instruct the respective Depositary, as appropriate, to deliver 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 such accrual period and a year assumed to consist of 360 days. For transactions settling on the 31st of the month, payment will include interest accrued to and excluding the first day of the following month. The payment will then be reflected in the account of the CEDEL Participant or Euroclear Participant the following day, and receipt of the cash proceeds in the CEDEL 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 CEDEL 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 valued date (i.e., the trade fails), receipt of the cash proceeds in the CEDEL Participant's or Euroclear Participant's account would instead be valued as of the actual settlement date. Finally, day traders that use CEDEL or Euroclear and that purchase Global Bonds from DTC Participants for delivery to CEDEL Participants or Euroclear Participants should note that these trades would S-37 automatically fail on the sale side unless affirmative action were taken. At least three techniques should be readily available to eliminate this potential problem: (a) borrowing through CEDEL or Euroclear for one day (until the purchase side of the day trade is reflected in their CEDEL or Euroclear accounts) in accordance with the clearing system's customary procedures; (b) 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 CEDEL or Euroclear account in order to settle the sale side of the trade; or (c) staggering the value dates for the buy and sell sides of the trade so that the value date for the purchase from the DTC Participant is at least one day prior to the value date for the sale to the CEDEL Participant or Euroclear Participant. CERTAIN U.S. FEDERAL INCOME TAX DOCUMENTATION REQUIREMENTS A beneficial owner of the Global Bonds holding securities through CEDEL or Euroclear (or through DTC if the holder has an address outside the U.S.) will be subject to the 30% U.S. withholding tax that generally applies to payments of interest (including original issue discount) on registered debt issued by U.S. Persons, unless (i) each clearing system, bank or other financial institution that holds customers' securities in the ordinary course of its trade or business in the chain of intermediaries between such beneficial owner and the U.S. entity required to withhold tax complies with applicable certification requirements and (ii) such beneficial owner takes one of the following steps to obtain an exemption or reduced tax rate: EXEMPTION FOR NON-U.S. PERSONS (FORM W-8). Beneficial owners of the Global Bonds that are non-U.S. Persons 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 such change. EXEMPTION FOR NON-U.S. PERSONS WITH EFFECTIVELY CONNECTED INCOME (FORM 4224). A non-U.S. Person, 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). EXEMPTION OR REDUCED RATE FOR NON-U.S. PERSONS RESIDENT IN TREATY COUNTRIES (FORM 1001). Non-U.S. Persons that are Bond Owners residing in a country that has a tax treaty with the United States can obtain an exemption or reduced tax rate (depending on the treaty terms) by filing Form 1001 (Ownership, 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 the Bond Owner or his 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 Bond Owner of a 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 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, or an estate whose income is subject to U.S. federal income tax regardless of its source of income, or a trust if a court within the United States is able to exercise primary supervision of the administration of the trust and one or more United States fiduciaries have the authority to control all substantial decisions of the trust. 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. S-38 THE INFORMATION IN THIS PROSPECTUS SUPPLEMENT IS NOT COMPLETE AND MAY BE CHANGED. WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS SUPPLEMENT IS NOT AN OFFER TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED. PROSPECTUS SUPPLEMENT (TO PROSPECTUS DATED , 2004) $ [LOGO] SEQUOIA MORTGAGE TRUST BOND ISSUER [LOGO] [ ] DEPOSITOR Consider carefully the risk factors beginning on page S-6 of this prospectus supplement and on page 8 of the prospectus. The bonds are redeemable only under circumstances described in this prospectus supplement. The bonds represent obligations of the trust only and do not represent an interest in or obligation of the trustee, the depositor or any of their affiliates. This prospectus supplement may be used to offer and sell bonds only if accompanied by the prospectus. COLLATERALIZED MORTGAGE BONDS $ CLASS A-1 BONDS $ CLASS B-1 BONDS THE TRUST WILL ISSUE: - One class of Senior Class A-1 Bonds; - One class of Subordinated Class B-1 Bonds; and - [One or Two] classes of Residual [Certificates or Bonds]. THE BONDS: - Will be collateralized by primarily year [fixed adjustable] rate, conventional mortgage loans secured by first liens on one- to four- family residential properties; - Pay the holders of senior bonds payments of interest and principal from the collateral pledged to secure the bonds and the bond insurance policy; - Pay the holders of subordinated bonds payments of interest and principal solely from the collateral pledged to secure the bonds; and - Pay all holders of bonds the amounts of principal and interest due thereon on the th day of each month, or if such day is not a business day, the next succeeding business day, commencing on , 200 . The senior bonds will be unconditionally and irrevocably guaranteed as to payment of insured payments, as defined in this prospectus supplement, pursuant to the terms of the financial guaranty insurance policy to be issued: [INSURER LOGO] The Trust will make a REMIC election for federal income tax purposes. NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED THESE SECURITIES OR DETERMINED IF THIS PROSPECTUS SUPPLEMENT IS ACCURATE OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. TABLE OF CONTENTS
PAGE ---- PROSPECTUS SUPPLEMENT Incorporation of Certain Documents by Reference............. Available Information....................................... Summary..................................................... S-3 Risk Factors................................................ S-6 The Bond Issuer............................................. S-6 Description of the Bonds.................................... S-7 Credit Enhancement.......................................... S-18 Security for the Bonds...................................... S-18 Servicing of the Mortgage Loans............................. S-26 Use of Proceeds............................................. S-30 Federal Income Tax Consequences............................. S-30 ERISA Matters............................................... S-30 Method of Distribution...................................... S-31 Legal Matters............................................... S-31 Ratings..................................................... S-32 Index of Defined Terms...................................... S-33
S-1 IMPORTANT NOTICE ABOUT THE INFORMATION PRESENTED IN THIS PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS We tell you about the bonds in two separate documents that progressively provide more detail: (1) the accompanying prospectus, which provides general information, some of which may not apply to your series of bonds, and (2) this prospectus supplement, which describes the specific terms of your series of bonds and may be different from the information in the prospectus. IF THE TERMS OF YOUR SERIES OF BONDS AND ANY OTHER INFORMATION CONTAINED HEREIN VARY BETWEEN THIS PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS, YOU SHOULD RELY ON THE INFORMATION IN THIS PROSPECTUS SUPPLEMENT. You can find a listing of the pages where capitalized terms used in this prospectus supplement are defined under "Index of Defined Terms" beginning on page S-36 in this prospectus supplement. The underwriter may engage in transactions that stabilize, maintain, or in some way affect the price of the bonds. These types of transactions may include stabilizing the purchase of bonds to cover syndicate short positions and the imposition of penalty bids. For a description of these activities, please read the section entitled "Underwriting" in this prospectus supplement. WHERE YOU CAN FIND MORE INFORMATION Federal securities law requires the filing of certain information with the Securities and Exchange Commission (the "SEC"), including annual, quarterly and special reports, proxy statements and other information. You can read and copy these documents at the public reference facility maintained by the SEC at Judiciary Plaza, 450 Fifth Street, NW, Room 1024, Washington, DC 20549. You can also copy and inspect such reports, proxy statements and other information at the following regional offices of the SEC: New York Regional Office Chicago Regional Office 233 Broadway 500 West Madison Street, Suite 1400 New York, New York 10279 Chicago, Illinois 60661
Please call the SEC at 1-800-SEC-0330 for further information on the public reference rooms. SEC filings are also available to the public on the SEC's web site at http://www.sec.gov. The SEC allows us to "incorporate by reference" the information we file with it, which means that we can disclose important information to you by referring you to those documents. The information that we incorporate by reference is considered to be part of this prospectus supplement, and later information that we file with the SEC will automatically update and supersede this information. This prospectus supplement and the accompanying prospectus are part of a registration statement filed by the Depositor with the SEC (Registration No. ). You may request a free copy of any of the above filings by writing or calling: [DEPOSITOR] ONE BELVEDERE PLACE, SUITE MILL VALLEY, CA 94941 (415) 389-7373 You should rely only on the information provided in this prospectus supplement or the accompanying prospectus or incorporated by reference herein. We have not authorized anyone else to provide you with different information. You should not assume that the information in this prospectus supplement or the accompanying prospectus is accurate as of any date other than the date on the cover page of this prospectus supplement or the accompanying prospectus or that the information incorporated by reference herein is accurate as of any date other than the date stated therein. S-2 SUMMARY This summary highlights selected information from this prospectus supplement and does not contain all the information that you need to consider in making your investment decision. Please read this entire prospectus supplement and the accompanying prospectus carefully for additional information about the Offered Bonds. OFFERED BONDS Sequoia Mortgage Trust , collateralized mortgage bonds, Class A-1 and Class B-1 are the bonds being offered by this prospectus supplement. SECURITIES OTHER THAN THE OFFERED BONDS In addition to the bonds, the residual [certificates or bonds] will be issued but will not be offered by this prospectus supplement. [The residual bonds will provide limited credit support for the bonds as described in this prospectus supplement.] DESIGNATIONS Senior bonds -- Class A-1 Bonds Subordinated bonds -- Class B-1 Bonds [Residual certificates -- Class R-UT Certificates and Class R-LT Certificates] [Residual bonds -- Residual Bonds] Bonds -- the senior bonds, the subordinated bonds [and the residual bonds] Book-entry bonds -- all classes of bonds
BOND ISSUER The bond issuer, Sequoia Mortgage Trust , is a statutory business trust established under the laws of the State of Delaware by the deposit trust agreement, as defined in this prospectus supplement, for the sole purpose of issuing the bonds and the residual [certificates or bonds]. The depositor, settlor and sole beneficiary of the issuer is [depositor], a Delaware corporation (the "Depositor" or the "Company"), and [a wholly owned subsidiary of RWT Holdings, Inc.,] a wholly owned subsidiary of Redwood Trust, Inc., a Maryland corporation. The owner trustee of the issuer is . Redwood Trust will be the manager of the issuer pursuant to a management agreement entered into with the issuer. None of the depositor, Redwood Trust or has guaranteed or is otherwise obligated with respect to payment of the bonds, and no other person or entity other than the issuer is obligated to pay the bonds. BOND TRUSTEE , a banking corporation organized under the laws of . OWNER TRUSTEE , a banking corporation organized under the laws of the state of Delaware. MASTER SERVICER AND SERVICERS will act as master servicer on behalf of the bond issuer. The servicers will be and . The servicers will service the mortgage loans pursuant to existing servicing agreements between each such servicer and [RWT Holdings, Inc. -- Redwood Trust, Inc.] [RWT Holdings, Inc. -- Redwood Trust, Inc.] will assign its right under the servicing agreements to the depositor who will, in turn, assign such right to the bond issuer. We refer you to "Servicing of the Mortgage Loans" in this prospectus supplement for more information. DEPOSIT TRUST AGREEMENT The bond issuer will be established pursuant to an amended and restated deposit trust agreement dated as of , 200 , among the depositor and the owner trustee. INDENTURE The bonds [and residual certificates] will be issued pursuant to an indenture dated as of , 20 , among the bond issuer and the trustee. S-3 CUT-OFF DATE , 200 CLOSING DATE On or about , 200 DETERMINATION DATE The th day of each month or, if such day is not a business day, the first business day thereafter. PAYMENT DATE The th day of each month or if such day is not a business day, the next business day thereafter, commencing in 200 . Payments on each payment date will be made to bondholders of record as of the related record date, except that the final payment on the bonds will be made only upon presentment and surrender of the bonds at the corporate trust office of the bond trustee. RECORD DATE The last business day preceding a payment date unless the bonds are no longer book-entry bonds in which case the record date is the last business day of the month preceding the month of a payment date. PRIORITY OF PAYMENTS Payments will be made on each payment date from available funds in the following order of priority: 1. To interest on the senior bonds; 2. To principal of the senior bonds; 3. To interest on the subordinated bonds; 4. To principal of the subordinated bonds; 5. [To interest on the residual bonds]; 6. [To principal of the residual bonds]; and 7. [To the holder of the residual certificate, all remaining funds.] PAYMENTS OF INTEREST To the extent funds are available, each class of bonds will be entitled to receive interest in the amount of the interest payment amount. The interest accrual period for each class of bonds will be the calendar month preceding the month of the respective payment date. PAYMENTS OF PRINCIPAL To the extent funds are available, principal payments in reduction of the class principal amount of each class of bonds will be made on each payment date. STATED MATURITY The stated maturity for each class of bonds is the date determined by the depositor which is years after the payment date immediately following the last maturity date of any mortgage loan. OPTIONAL REDEMPTION OF THE BONDS The bonds may be redeemed at a redemption price equal to 100% of the unpaid principal amount of such bonds, plus accrued and unpaid interest thereon at the applicable bond interest rate. The bonds are not otherwise subject to redemption or call at the option of the issuer nor are they subject to special redemption. CREDIT ENHANCEMENT - SUBORDINATION The subordinated bonds [and the residual bonds] will provide credit enhancement for the senior bonds. [The residual bonds will provide credit enhancement for the subordinated bonds.] The rights of holders of the subordinated bonds [and the residual bonds] to receive payments with respect to the mortgage loans will be subordinated to such rights of the holders of the senior bonds, [and the rights of the holder of the residual bonds will be further subordinated to such rights of the holders of the subordinated bonds.] - BOND INSURANCE POLICY will issue a financial guaranty insurance policy pursuant to which it will irrevocably and unconditionally guarantee payment of the insured payment if the bond trustee determines that S-4 available funds for a payment date are less than the senior bond interest payment amount and the senior bond principal payment amount. The insurer's claims paying ability is rated by . ADVANCES Each servicer is obligated to make advances of cash which will be included with mortgage collections, in an amount equal to the delinquent monthly payments due on the immediately preceding monthly payment date. No servicer is under an obligation to make advances to the extent it determines such advances are not recoverable from future payments or collections on the related mortgage loans or to guarantee or insure against losses. SECURITY FOR THE BONDS The bonds will be secured by collateral consisting of the following: - mortgage loans; - bond account; - distribution account; or - any combination of the above. FEDERAL INCOME TAX CONSEQUENCES For federal income tax purposes, the trust fund, will comprise multiple real estate mortgage investment conduits, organized in a [tiered] REMIC structure. The Class A-1 Bonds and Class B-1 Bonds will represent beneficial ownership of REMIC regular interests in the upper tier REMIC identified in the pooling and servicing agreement. The Class R Bonds will represent the beneficial ownership of the sole class of residual interest in each REMIC. ERISA CONSIDERATIONS A fiduciary of any employee benefit plan subject to the Employee Retirement Income Security Act of 1974, as amended, or section 4975 of the Internal Revenue Code of 1986, as amended, should carefully review with its legal advisors whether the purchase or holding of Class A Bonds could give rise to a transaction prohibited or not otherwise permissible under applicable law. LEGAL INVESTMENT So long as the Class A Bonds are rated in one of the two highest ratings categories by at least one nationally recognized statistical rating agency, the Class A Bonds will constitute "mortgage related securities" under the Secondary Mortgage Market Enhancement Act of 1984 or SMMEA. BOND RATING It is a condition to the issuance of the Class A Bonds that the Class A Bonds be rated "AAAr" by Standard & Poor's Ratings Services and "Aaa" by Moody's Investors Service, Inc. Standard & Poor's assigns the additional symbol of "r" to highlight classes of securities that Standard & Poor's believes may experience high volatility or high variability in expected returns due to non-credit risks; however, the absence of an "r" symbol should not be taken as an indication that a class will exhibit volatility or variability in total return. 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 agency. A security rating does not address the frequency of prepayments on the mortgage loans or the corresponding effect on yield to investors. USE OF PROCEEDS The bond issuer intends to distribute all of the net proceeds of the issuance of the bonds to the depositor which will apply such proceeds to the purchase of the mortgage loans. S-5 RISK FACTORS INVESTORS SHOULD CONSIDER THE FOLLOWING FACTORS IN CONNECTION WITH THE PURCHASE OF BONDS. YOU SHOULD ALSO CONSIDER THE RISK FACTORS DESCRIBED IN THE ACCOMPANYING PROSPECTUS. CASH FLOW CONSIDERATIONS AND RISKS The mortgaged property assets of the trust are the sole source of distributions for the bonds. Even if the mortgaged properties provide adequate security for the bond collateral mortgage loans, you could encounter substantial delays in connection with the liquidation of mortgage loans that are delinquent. This could result in shortfalls in payments on the bonds if the credit enhancement created by the overcollateralization of the bonds is insufficient and if payments under the bond insurance policy were unavailable. Further, liquidation expenses, such as legal fees, real estate taxes and maintenance and preservation expenses, will reduce the security for the related mortgage loans and could thereby reduce the proceeds payable to bondholders. If any of the mortgaged properties fail to provide adequate security for the related mortgage loans, bondholders could experience a loss if the credit enhancement created by the overcollateralization of the bonds has been exhausted and if payments under the bond insurance policy were unavailable. CONCENTRATION OF MORTGAGE LOANS COULD ADVERSELY AFFECT YOUR INVESTMENT Most of the mortgage loans are secured by mortgaged properties located in and . Consequently, losses and prepayments on the mortgage loans and the resultant payments on the bonds may be affected significantly by changes in the housing markets and the regional economies in these areas and by the occurrence of natural disasters, such as earthquakes, hurricanes, tornadoes, tidal waves, mud slides, fires and floods, in these areas. BANKRUPTCY AND INSOLVENCY RISKS It is believed that the transfer of the initial mortgage loans from the seller to the depositor and the depositor to the bond issuer will each be treated as a sale rather than a secured financing for purposes of state law. Counsel for the seller will render an opinion on the closing date that in the event of the bankruptcy of either the seller or the depositor, the mortgage loans and other assets of the bond issuer would not be considered part of the seller's or depositor's bankruptcy estates and, thus, would not be available to their creditors. One the other hand, a bankruptcy trustee or one of the creditors of the seller or the depositor might challenge this conclusion and argue that the transfer of the pledge mortgage loans should be characterized as a pledge of assets in a secured borrowing rather than as a sale. Such an attempt, even if unsuccessful, might result in delays in payments on the bonds. THE BOND ISSUER The bond issuer is a statutory business trust established under the laws of the State of Delaware by an amended and restated deposit trust agreement, dated as of , 200 . The bond issuer was formed for the sole purpose of issuing the bonds [and the residual certificates]. The depositor is the settlor and sole beneficiary of the bond issuer and is the owner trustee of the issuer. The depositor is a limited purpose finance corporation the capital stock of which is wholly owned by [ ] Redwood Trust, Inc., a Maryland corporation. Redwood Trust will be the manager of the bond issuer pursuant to a management agreement entered into with the issuer. None of the depositor, Redwood Trust, or any of their respective affiliates has guaranteed or is otherwise obligated with respect to payment of the bonds and no person or entity other than the issuer is obligated to pay the bonds, except as specifically set forth in this prospectus supplement with regard to the bond insurance policy. The bond issuer's assets will consist almost entirely of the mortgages which will be pledged to secure the bonds. If the mortgage loans and other collateral securing the bonds are insufficient for payment of the bonds, it is unlikely that significant other assets of the issuer will be available for payment of the bonds. The amount S-6 of funds available to pay the bonds may be affected by, among other things, realized losses incurred on defaulted mortgage loans. The Indenture prohibits the issuer from incurring any indebtedness other than the bonds, or assuming or guaranteeing the indebtedness of any other person. DESCRIPTION OF THE BONDS GENERAL The Bonds [and the Residual Certificates] will be issued pursuant to the Indenture. Set forth below are summaries of the specific terms and provisions pursuant to which the Bonds [and Residual Certificates] will be issued. The following summaries are subject to, and are qualified in their entirety by reference to, the provisions of the Indenture. When particular provisions or terms used in the Indenture are referred to, the actual provisions (including definitions of terms) are incorporated by reference. The Sequoia Mortgage Trust , Collateralized Mortgage Bonds (the "Bonds"), will consist of the Class A-1 Bonds (the "Senior Bonds") and the Class B-1 Bonds (the "Subordinated Bonds") [and the Residual Bonds (the "Residual Bonds")]. [The Issuer will also issue the Class R-UT Certificate and Class R-LT Certificate (the Class R-LT Certificate (the Class R-UT Certificate and the Class R-LT Certificate collectively, the "Residual Certificates")] as described herein. The Senior Bonds and the Subordinated Bonds are collectively referred to herein as the "Offered Bonds." Only the Senior Bonds and the Subordinated Bonds are offered hereby. The Classes of Bonds will have the respective Bond Interest Rates described on the cover hereof. The "Class Principal Amount" of (a) the Senior Bonds (the "Senior Class Principal Amount") as of any Payment Date is the Original Senior Class Principal Amount reduced by all amounts previously distributed to holders of the Senior Bonds as payments of principal, (b) the Subordinated Bonds (the "Subordinated Class Principal Amount") as of any Payment Date is the lesser of (i) the aggregate of the Stated Principal Balances of the Mortgage Loans, less the Senior Class Principal Amount immediately prior to such date, and (ii) the Original Subordinated Class Principal Amount reduced by all amounts previously distributed to holders of the Subordinated Bonds as payments of principal [and (c) the Residual Bonds (the "Residual Class Principal Amount") as of any Payment Date is the lesser of (i) the aggregate of the Stated Principal Balances of the Mortgage Loans. Less the Senior and Subordinated Class Principal Amount immediately prior to such date, and (ii) the Original Residual Class Principal Amount reduced by all amounts previously distributed to holders of the Residual Bonds as payments of principal]. The Senior Bonds will have an original Senior Class Principal Amount of $ (the "Original Senior Class Principal Amount") and the Subordinated Bonds will have an original Subordinated Class Principal Amount of $ (the "Original Subordinated Class Principal Amount") [and the Residual Bonds will have an original Residual Class Principal Amount of $ (the "Original Residual Class Principal Amount")]. BOOK-ENTRY BONDS The Bonds will be book-entry Bonds (each, a Class of "Book-Entry Bonds"). Persons acquiring beneficial ownership interests in the Bonds ("Bond Owners") may elect to hold their Bonds through the Depository Trust Company ("DTC") in the United States, or CEDEL or Euroclear (in Europe) if they are participants of such systems, or indirectly through organizations which are participants in such systems. The Book-Entry Bonds will be issued in one or more certificates which equal the aggregate principal amount of the Bonds and will initially be registered in the name of Cede & Co., the nominee of DTC. CEDEL and Euroclear will hold omnibus positions on behalf of their participants through customers' securities accounts in CEDEL's and Euroclear's names on the books of their respective depositaries which in turn will hold such positions in customers' securities accounts in the depositaries' names on the books of DTC. Citibank, N.A., will act as depositary for CEDEL and The Chase Manhattan Bank will act as depositary for Euroclear (in such capacities, individually the "Relevant Depositary" and collectively the "European Depositaries"). Investors may hold such beneficial interests in the Book-Entry Bonds in minimum denominations representing Class S-7 Principal Amounts of $ and in multiples of $1,000 in excess thereof. Except as described below, no person acquiring a Book-Entry Bond (each, a "beneficial owner") will be entitled to receive a physical certificate representing such Bond (a "Definitive Bond"). Unless and until Definitive Bonds are issued, it is anticipated that the only "Bondholders" of the Bonds will be Cede & Co., as nominee of DTC. Bond Owners will not be Bondholders as that term is used in the Indenture. Bond Owners are only permitted to exercise their rights indirectly through the participating organizations that utilize the services of DTC, including securities brokers and dealers, banks and trust companies and clearing corporations and certain other organizations ("Participants") and DTC. The beneficial owner's ownership of a Book-Entry Bond will be recorded on the records of the brokerage firm, bank, thrift institution or other financial intermediary (each, a "Financial Intermediary") that maintains the beneficial owner's account for such purpose. In turn, the Financial Intermediary's ownership of such Book-Entry Bond will be recorded on the records of DTC (or of a participating firm that acts as agent for the Financial Intermediary, whose interest will in turn be recorded on the records of DTC, if the beneficial owner's Financial Intermediary is not a DTC participant, and on the records of CEDEL or Euroclear, as appropriate). Bond Owners will receive all payments of principal of, and interest on, the Bonds from the Bond Trustee through DTC and DTC participants. While the Bonds are outstanding (except under the circumstances described below), under the rules, regulations and procedures creating and affecting DTC and its operations (the "Rules"), DTC is required to make book-entry transfers among Participants on whose behalf it acts with respect to the Bonds and is required to receive and transmit payments of principal of, and interest on, the Bonds. Participants and indirect participants which have indirect access to the DTC system, such as banks, brokers, dealers and trust companies that clear through or maintain a custodial relationship with a Participant, either directly or indirectly ("Indirect Participants"), with whom Bond Owners have accounts with respect to Bonds are similarly required to make book-entry transfers and receive and transmit such payments on behalf of their respective Bond Owners. Accordingly, although Bond Owners will not possess certificates, the Rules provide a mechanism by which Bond Owners will receive payments and will be able to transfer their interest. Bond Owners will not receive or be entitled to receive certificates representing their respective interests in the Bonds, except under the limited circumstances described below. Unless and until Definitive Bonds are issued, Bond Owners who are not Participants may transfer ownership of Bonds only through Participants and Indirect Participants by instructing such Participants and Indirect Participants to transfer Bonds, by book-entry transfer, through DTC for the account of the purchasers of such Bonds, which account is maintained with their respective Participants. Under the Rules and in accordance with DTC's normal procedures, transfers of ownership of Bonds will be executed through DTC and the accounts of the respective Participants at DTC will be debited and credited. Similarly, the Participants and Indirect Participants will make debits or credits, as the case may be, on their records on behalf of the selling and purchasing Bond Owners. Because of time zone differences, credits of securities received in CEDEL or Euroclear as a result of a transaction with a Participant will be made during subsequent securities settlement processing and dated the business day following the DTC settlement date. Such credits or any transactions in such securities settled during such processing will be reported to the relevant Euroclear or CEDEL Participants on such business day. Cash received in CEDEL or Euroclear as a result of sales of securities by or through a CEDEL Participant (as defined herein) or Euroclear Participant (as defined herein) to a DTC Participant will be received with value on the DTC settlement date but will be available in the relevant CEDEL or Euroclear cash account only as of the business day following settlement in DTC. For information relating to tax documentation procedures relating to the Bonds, see "FEDERAL INCOME TAX CONSEQUENCES -- Withholding with Respect to Certain Foreign Investors" and "-- Backup Withholding" in the prospectus and "GLOBAL CLEARANCE, SETTLEMENT AND TAX DOCUMENTATION PROCEDURES -- Certain U.S. Federal Income Tax Documentation Requirements" in Annex I hereto. Transfers between Participants will occur in accordance with DTC Rules. Transfers between CEDEL Participants and Euroclear Participants will occur in accordance with their respective rules and operating procedures. S-8 Cross-market transfers between persons holding directly or indirectly through DTC, on the one hand, and directly or indirectly through CEDEL Participants or Euroclear Participants, on the other, will be effected in DTC in accordance with DTC rules on behalf of the relevant European international clearing system by the Relevant Depositary; however, such cross-market transactions will require delivery of instructions to the relevant European international clearing system by the counterparty in such system in accordance with its rules and procedures and within its established deadlines (European time). The relevant European international clearing system will, if the transaction meets its settlement requirements, deliver instructions to the Relevant Depositary to take action to effect final settlement on its behalf by delivering or receiving securities in DTC, and making or receiving payment in accordance with normal procedures for same day fund settlement applicable to DTC. CEDEL Participants and Euroclear Participants may not deliver instructions directly to the European Depositaries. DTC, which is a New York-chartered limited purpose trust company, performs services for its participants, some of which (and/or their representatives) own DTC. In accordance with its normal procedures, DTC is expected to record the positions held by each DTC participant in the Book-Entry Bonds, whether held for its own account or as nominee for another person. In general, beneficial ownership of Book-Entry Bonds will be subject to the rules, regulations and procedures governing DTC and DTC participants as in effect from time to time. CEDEL is incorporated under the laws of Luxembourg as a professional depository. CEDEL holds securities for its participating organizations ("CEDEL Participants") and facilitates the clearance and settlement of securities transactions between CEDEL Participants through electronic book-entry changes in accounts of CEDEL Participants, thereby eliminating the need for physical movement of certificates. Transactions may be settled in CEDEL in any of 28 currencies, including United States dollars. CEDEL provides to its CEDEL Participants, among other things, services for safekeeping, administration, clearance and settlement of internationally traded securities and securities lending and borrowing. CEDEL interfaces with domestic markets in several countries. As a professional depository, CEDEL is subject to regulation by the Luxembourg Monetary Institute. CEDEL participants are recognized financial institutions around the world, including underwriters, securities brokers and dealers, banks, trust companies, clearing corporations and certain other organizations. Indirect access to CEDEL is also available to others, such as banks, brokers, dealers and trust companies that clear through or maintain a custodial relationship with a CEDEL Participant, either directly or indirectly. Euroclear was created in 1968 to hold securities for its participants ("Euroclear Participants") and to clear and settle transactions between Euroclear Participants through simultaneous electronic book-entry delivery against payment, thereby eliminating the need for physical movement of certificates and any risk from lack of simultaneous transfers of securities and cash. Transactions may be settled in any of 32 currencies, including United States dollars. Euroclear includes various other services, including securities lending and borrowing and interfaces with domestic markets in several countries generally similar to the arrangements for cross-market transfers with DTC described above. Euroclear is operated by the Brussels, Belgium office of Morgan Guaranty Trust Company of New York ("Morgan" and in such capacity, the "Euroclear Operator"), under contract with Euroclear Clearance Systems S.C., a Belgian cooperative corporation (the "Cooperative"). All operations are conducted by Morgan, and all Euroclear securities clearance accounts and Euroclear cash accounts are accounts with the Euroclear Operator, not the Belgian Cooperative. The Belgian Cooperative establishes policy for Euroclear on behalf of Euroclear Participants. Euroclear Participants include banks (including central banks), securities brokers and dealers and other professional financial intermediaries. Indirect access to Euroclear is also available to other firms that clear through or maintain a custodial relationship with a Euroclear Participant, either directly or indirectly. The Euroclear Operator is the Belgian branch of a New York banking corporation which is a member bank of the Federal Reserve System. As such, it is regulated and examined by the Board of Governors of the Federal Reserve System and the New York State Banking Department, as well as the Belgian Banking Commission. S-9 Securities clearance accounts and cash accounts with Morgan are governed by the Terms and Conditions Governing Use of Euroclear and the related Operating Procedures of the Euroclear System and applicable Belgian law (collectively, the "Terms and Conditions"). The Terms and Conditions govern transfers of securities and cash within Euroclear, withdrawals of securities and cash from Euroclear, and receipts of payments with respect to securities in Euroclear. All securities in Euroclear are held on a fungible basis without attribution of specific certificates to specific securities clearance accounts. The Euroclear Operator acts under the Terms and Conditions only on behalf of Euroclear Participants, and has no record of or relationship with persons holding through Euroclear Participants. Payments on the Book-Entry Bonds will be made on each Distribution Date by the Bond Trustee to DTC. DTC will be responsible for crediting the amount of such payments to the accounts of the applicable DTC participants in accordance with DTC's normal procedures. Each DTC participant will be responsible for disbursing such payments to the beneficial owners of the Book-Entry Bonds that it represents and to each Financial Intermediary for which it acts as agent. Each such Financial Intermediary will be responsible for disbursing funds to the beneficial owners of the Book-Entry Bonds that it represents. Under a book-entry format, beneficial owners of the Book-Entry Bonds may experience some delay in their receipt of payments, since such payments will be forwarded by the Bond Trustee to Cede & Co., as nominee of DTC. Payments with respect to Bonds held through CEDEL or Euroclear will be credited to the cash accounts of CEDEL Participants or Euroclear Participants in accordance with the relevant system's rules and procedures, to the extent received by the Relevant Depositary. Such payments will be subject to tax reporting in accordance with relevant United States tax laws and regulations. See "FEDERAL INCOME TAX CONSEQUENCES -- Withholding with Respect to Certain Foreign Investors" and "-- Backup Withholding" in the prospectus. Because DTC can only act on behalf of Financial Intermediaries, the ability of a beneficial owner to pledge Book-Entry Bonds to persons or entities that do not participate in the depository system, or otherwise take actions in respect of such Book-Entry Bond, may be limited due to the lack of physical certificates for such Book-Entry Bonds. In addition, issuance of the Book-Entry Bonds in book-entry form may reduce the liquidity of such Bonds in the secondary market since certain potential investors may be unwilling to purchase Bonds for which they cannot obtain physical certificates. Monthly and annual reports on the Issuer will be provided to Cede & Co., as nominee of DTC, and may be made available by Cede & Co. to beneficial owners upon request, in accordance with the rules, regulations and procedures creating and affecting DTC or the Relevant Depositary, and to the Financial Intermediaries to whose DTC accounts the Book-Entry Bonds of such beneficial owners are credited. DTC has advised the Issuer and the Bond Trustee that, unless and until Definitive Bonds are issued, DTC will take any action permitted to be taken by the holders of the Book-Entry Bonds under the Indenture only at the direction of one or more Financial Intermediaries to whose DTC accounts the Book-Entry Bonds are credited, to the extent that such actions are taken on behalf of Financial Intermediaries whose holdings include such Book-Entry Bonds. CEDEL or the Euroclear Operator, as the case may be, will take any other action permitted to be taken by a Bondholder under the Indenture on behalf of a CEDEL Participant or Euroclear Participant only in accordance with its relevant rules and procedures and subject to the ability of the Relevant Depositary to effect such actions on its behalf through DTC. DTC may take actions, at the direction of the related Participants, with respect to some Bonds which conflict with actions taken with respect to other Bonds. Definitive Bonds will be issued to beneficial owners of the Book-Entry Bonds, or their nominees rather than to DTC, only if (a) DTC or the Issuer advises the Bond Trustee in writing that DTC is no longer willing, qualified or able to discharge properly its responsibilities as nominee and depositary with respect to the Book-Entry Bonds and the Issuer or the Bond Trustee is unable to locate a qualified successor or (b) the Issuer, at its sole option, elects to terminate a book-entry system through DTC. Upon the occurrence of any of the events described in the immediately preceding paragraph, the Bond Trustee will be required to notify all beneficial owners of the occurrence of such event and the availability through DTC of the Definitive Bonds. Upon surrender by DTC of the global certificate or certificates representing the Book-Entry Bonds and instructions for re-registration, the Bond Trustee will issue Definitive S-10 Bonds, and thereafter the Bond Trustee will recognize the holders of such Definitive Bonds as Bondholders under the Indenture. Although DTC, CEDEL and Euroclear have agreed to the foregoing procedures in order to facilitate transfers of Bonds among participants of DTC, CEDEL and Euroclear, they are under no obligation to perform or continue to perform such procedures and such procedures may be discontinued at any time. None of the Master Servicer, the Company, the Issuer or the Bond Trustee will have any responsibility for any aspect of the records relating to or payments made on account of beneficial ownership interests of the Book-Entry Bonds held by Cede & Co., as nominee of DTC, or for maintaining, supervising or reviewing any records relating to such beneficial ownership interests. PAYMENTS ON MORTGAGE LOANS; ACCOUNTS On or prior to the closing date, each Servicer will establish and maintain or cause to be established and maintained an account or accounts for the collection of payments on the Mortgage Loans which will be separate from such Servicer's other assets (each, a "Custodial Account"). On or prior to the Closing Date, the Master Servicer will establish and maintain or cause to be established and maintained a separate account or accounts for the collection of payments on the Mortgage Loans (the "Collection Account"). On or prior to the Closing Date, the Bond Trustee will establish an account (the "Distribution Account"), which will be maintained with the Bond Trustee in trust for the benefit of the Bondholders. On the 18(th) day of each month (or, if such 18(th) day is not a Business Day, on the immediately preceding Business Day), each Servicer will remit all amounts on deposit in the related Custodial Account to the Collection Account. On or prior to the business day immediately preceding each Payment Date, the Master Servicer will withdraw from the Collection Account the Bond Distribution Amount for such Payment Date, to the extent of Available Funds on deposit therein, and will deposit such amount in the Distribution Account. The "Bond Distribution Amount" for any Payment Date will equal the sum of (i) the Senior Interest Payment Amount, (ii) the Senior Principal Payment Amount, (iii) the Subordinated Interest Payment Amount and (iv) the Subordinated Principal Payment Amount [(v) the Residual Interest Payment Amount and (vi) the Residual Principal Payment Amount,] (as each such term is defined herein). Funds credited to the Collection Account or the Distribution Account may be invested at the direction of the Company for the benefit and at the risk of the Company in Permitted Investments, as defined in the Indenture, that are scheduled to mature on or prior to the business day preceding the next Payment Date. PAYMENTS Payments on the Bonds will be made by the Bond Trustee on [the th day of each month], or if such day is not a business day, on the first business day thereafter, commencing in 200 (each, a "Payment Date"), to the persons in whose names such Bonds are registered at the close of business on the last business day of the month preceding the month of such Payment Date (the "Record Date"). Payments on each Payment Date will be made by check mailed to the address of the person entitled thereto as it appears on the applicable bond register or, in the case of a Bondholder who holds 100% of a Class of Bonds or who holds Bonds with an aggregate initial Class Principal Amount of $1,000,000 or more and who has so notified the Bond Trustee in writing in accordance with the Indenture, by wire transfer in immediately available funds to the account of such Bondholder at a bank or other depository institution having appropriate wire transfer facilities; provided, however, that the final payment in retirement of the Bonds will be made only upon presentment and surrender of such Bonds at the Corporate Trust Office of the Bond Trustee. As more fully described herein, payments will be made on each Payment Date from Available Funds in the following order of priority: (i) to interest on the Senior Bonds; (ii) to principal of the Senior Bonds; (iii) to interest on the Subordinated Bonds; (iv) to principal of the Subordinated Bonds; [(v) to interest on the Residual Bonds; (vi) to principal of the Residual Bonds; and] [(vii) to the holder of the Residual Certificates, all remaining Available Funds, subject to certain limitations set forth herein under " -- Principal."] S-11 "Available Funds" with respect to any Payment Date will be equal to the sum of (i) all scheduled installments of interest (net of the related Expense Fees) and principal due [on the Due Date in the month] in which such Payment Date occurs and received prior to the related Determination Date, together with any Advances in respect thereof; (ii) all proceeds of any primary mortgage guaranty insurance policies and any other insurance policies with respect to the Mortgage Loans, to the extent such proceeds are not applied to the restoration of the related Mortgaged Property or released to the Mortgagor in accordance with the applicable Servicer's or the Master Servicer's normal servicing procedures (collectively, "Insurance Proceeds") and all other cash amounts received and retained in connection with the liquidation of defaulted Mortgage Loans, by foreclosure or otherwise ("Liquidation Proceeds"), during the [month] preceding the month of such Payment Date (in each case, net of unreimbursed expenses incurred in connection with a liquidation or foreclosure and unreimbursed Advances, if any); (iii) all partial or full prepayments received during the [month] preceding the month of such Payment Date; and (iv) amounts received with respect to such Payment Date as the Substitution Adjustment Amount or purchase price in respect of a Deleted Mortgage Loan or a Mortgage Loan purchased by Redwood Trust [or by the Master Servicer or the Company] as of such Payment Date, reduced by amounts in reimbursement for Advances previously made and other amounts as to which the applicable Servicer or the Master Servicer is entitled to be reimbursed pursuant to the Master Servicing Agreement. On each Payment Date after the Subordinated Class Principal Amount and the Residual Class Principal Amount have been reduced to zero, the amount, if any, by which the Senior Interest Payment Amount and the Senior Principal Payment Amount exceed the Available Funds, shall be paid by the Insurer to the Senior Bondholders pursuant to the Bond Insurance Policy. INTEREST The Bond Interest Rate for each Class of Bonds for each Payment Date (each, a "Bond Interest Rate") is described on the cover hereof. On each Payment Date, to the extent of funds available therefor, each Class of Bonds will be entitled to receive an amount allocable to interest as described below (as to each such Class, as applicable, the "Interest Payment Amount") with respect to the related Interest Accrual Period. With respect to each Payment Date, the "Interest Accrual Period" for each Class of Bonds will be the [calendar month] preceding the month of such Payment Date. The Interest Payment Amount for the Senior Bonds (the "Senior Interest Payment Amount") will be equal to the sum of (i) interest at the Senior Bond Interest Rate on the Senior Class Principal Amount, and (ii) the sum of the amounts, if any, by which the amount described in clause (i) above on each prior Payment Date exceeded the amount actually distributed as interest on such prior Payment Dates and not subsequently distributed. The Interest Payment Amount for the Subordinated Bonds (the "Subordinated Interest Payment Amount") will be equal to the sum of (i) interest at the Subordinated Bond Interest Rate on the Subordinated Class Principal Amount, (ii) interest at the Subordinated Bond Interest Rate on any Subordinated Principal Carryover Shortfall, (iii) the sum of the amounts, if any, by which the sum of the amounts described in clauses (i) and (ii) above on each prior Payment Date exceeded the amount actually distributed as interest on such prior Payment Dates and not subsequently distributed (the "Subordinated Interest Carryover Shortfall") and (iv) interest at the Subordinated Bond Interest Rate on any Subordinated Interest Carryover Shortfall (to the extent permitted by applicable law). [The Interest Payment Amount for the Residual Bonds (the "Residual Interest Payment Amount") will be equal to sum of (i) interest at the Residual Bond Interest Rate on the Residual Class Principal Amount, (ii) interest at the Residual Bond Interest Rate on any Residual Principal Carryover Shortfall, (iii) the sum of the amounts, if any, by which the sum of the amounts described in clauses (i) and (ii) above on each prior Payment Date exceeded the amount actually distributed as interest on such prior Payment Dates and not subsequently distributed (the "Residual Interest Carryover Shortfall") and (iv) interest at the Residual Bond Interest Rate on any Residual Interest Carryover Shortfall (to the extent permitted by applicable law).] The Senior Bonds will not be entitled to interest on any Senior Interest Payment Amount not paid when due prior to such time as the Bonds are declared immediately due and payable upon the occurrence of an Event of Default as described herein under " -- Priority of Payments and Allocation of Shortfalls." S-12 The interest payable on any Payment Date as described above, but not the entitlement thereto, for the Subordinated Bonds, and in the event of a default of the Insurer under the Bond Insurance Policy, the Senior Bonds, will be reduced by their respective proportionate amounts of "Net Interest Shortfalls" for such Payment Date, if any, based on the amount of interest each Class of Bonds would otherwise be entitled to receive on such Payment Date before taking into account any reduction in such amounts resulting from such Net Interest Shortfalls. With respect to any Payment Date, the "Net Interest Shortfall" is equal to the amount by which the sum of (i) the amount of interest which would otherwise have been received with respect to any Mortgage Loan that was the subject of a Relief Act Reduction and (ii) any Prepayment Interest Shortfalls, in each case during the calendar month preceding the month of such Payment Date, exceeds the [sum of (i)] the Master Servicing Fee for such period [and (ii) the amounts otherwise payable on such Payment Date to the holder of the Residual Bond as described in clauses "fifth", and "sixth" under " -- Priority of Payments and Allocation of Shortfalls" below.] A "Relief Act Reduction" is a reduction in the amount of monthly interest payment on a Mortgage Loan pursuant to the Servicemembers Civil Relief Act. A "Prepayment Interest Shortfall" is the amount by which interest paid by a borrower in connection with a prepayment of principal on a Mortgage Loan is less than one month's interest at the related Mortgage Rate on the Stated Principal Balance of such Mortgage Loan. Accrued interest to be paid on any Payment Date will be calculated, in the case of each Class of Bonds, on the basis of the related Class Principal Amount, as applicable, immediately prior to such Payment Date. Interest will be calculated and payable on the basis of a 360-day year divided into twelve 30-day months. PRINCIPAL GENERAL. All payments and other amounts received in respect of principal of the Mortgage Loans will be allocated among the Senior Bonds, the Subordinated Bonds [and the Residual Bonds]. SENIOR PRINCIPAL PAYMENT AMOUNT. On each Payment Date, the Available Funds remaining after payment of interest with respect to the Senior Bonds, up to the amount of the Senior Principal Payment Amount for such Payment Date, will be distributed as principal of the Senior Bonds. The "Senior Principal Payment Amount" for any Payment Date will equal the Senior Percentage of the sum of (a) the principal portion of the Scheduled Payment due on each Mortgage Loan [on the related Due Date], (b) the principal portion of the purchase price of each Mortgage Loan that was purchased by Redwood Trust or another person pursuant to the Mortgage Loan Purchase Agreement (as defined herein) [or any optional purchase by the Master Servicer or the Company of a default Mortgage Loan] as of such Payment Date, (c) the Substitution Adjustment Amount in connection with any Deleted Mortgage Loan received with respect to such Payment Date, (d) any Insurance Proceeds or Liquidation Proceeds allocable to recoveries of principal of Mortgage Loans that are not yet Liquidated Mortgage Loans received during the [calendar month] preceding the month of such Payment Date, (e) with respect to each Mortgage Loan that became a Liquidated Mortgage Loan during the [calendar month] preceding the month of such Payment Date, the Stated Principal Balance of such Mortgage Loan, and (f) all partial and full principal prepayments by borrowers received during the [calendar month] preceding the month of such Payment Date. "Stated Principal Balance" means, as to any Mortgage Loan and Due Date, the unpaid principal balance of such Mortgage Loan as of such Due Date, as specified in the amortization schedule at the time relating thereto (before any adjustment to such amortization schedule by reason of any moratorium or similar waiver or grace period), after giving effect to any previous partial principal prepayments and Liquidation Proceeds received and to the payment of principal due on such Due Date and irrespective of any delinquency in payment by the related Mortgagor. The "Pool Principal Balance" with respect to any Payment Date equals the aggregate of the Stated Principal Balances of the Mortgage Loans outstanding on the Due Date in the month preceding the month of such Payment Date. The "Senior Percentage" for any Payment Date is the percentage equivalent of a fraction the numerator of which is the Senior Class Principal Amount immediately prior to such date and the denominator of which is the sum of (i) the Senior Class Principal Amount, (ii) the Subordinated Class Principal Amount [and (iii) the Residual Class Principal Amount,] in each case immediately prior to such date. The "Subordinated S-13 Percentage" for any Payment Date is the percentage equivalent of a fraction the numerator of which is the Subordinated Class Principal Amount immediately prior to such date and the denominator of which is the sum of (i) the Senior Class Principal Amount, (ii) the Subordinated Class Principal Amount [and (iii) the Residual Class Principal Amount,] in each case immediately prior to such date. SUBORDINATED PRINCIPAL PAYMENT AMOUNT. On each Payment Date, to the extent of Available Funds therefor, the Subordinated Principal Payment Amount for such Payment Date will be distributed as principal of the Subordinated Bonds. The "Subordinated Principal Payment Amount" for any Payment Date will equal the sum of (i) the Subordinated Percentage of the sum of (a) the principal portion of the Scheduled Payment due on each Mortgage Loan [on the related Due Date], (b) the principal portion of the purchase price of each Mortgage Loan that was purchased by Redwood Trust or another person pursuant to the Mortgage Loan Purchase Agreement [or by the Master Servicer or the Company in connection with any optional purchase by the Master Servicer of a defaulted Mortgage Loan] as of such Payment Date, (c) the Substitution Adjustment Amount in connection with any Deleted Mortgage Loan received with respect to such Payment Date, (d) any Insurance Proceeds or Liquidation Proceeds allocable to recoveries of principal of Mortgage Loans that are not yet Liquidated Mortgage Loans received during the [calendar month] preceding the month of such Payment Date, (e) with respect to each Mortgage Loan that became a Liquidated Mortgage Loan during the [calendar month] preceding the month of such Payment Date, the Stated Principal Balance of such Mortgage Loan and (f) all partial and full principal prepayments by borrowers received during the [calendar month] preceding the month of such Payment Date and (ii) any Subordinated Principal Carryover Shortfall. The "Subordinated Principal Carryover Shortfall" for any Payment Date will equal the excess of (a) the Original Subordinated Class Principal Amount reduced by all amounts previously distributed to holders of the Subordinated Bonds as payments of principal or Subordinated Principal Carryover Shortfall, over (b) the Subordinated Class Principal Amount immediately prior to such date. [RESIDUAL PRINCIPAL PAYMENT AMOUNT. On each Payment Date, to the extent of Available Funds therefor, the Residual Principal Payment Amount shall be distributed as set forth in the Priority of Payments and Allocation of Shortfalls.] PRIORITY OF PAYMENTS AND ALLOCATION OF SHORTFALLS Prior to the declaration that the Bonds are due and payable, on any Payment Date Available Funds will be applied in the following order of priority: first, to the Senior Interest Payment Amount; second, to the Senior Principal Payment Amount; third, to the Subordinated Interest Payment Amount; fourth, to the Subordinated Principal Payment Amount; [fifth, to the Residual Interest Payment Amount;] [sixth, to the Residual Amount Payment; and] [seventh, to the holder of the Residual Certificate, the balance of any Available Funds remaining in the Bond Account.] If a Realized Loss results in the Stated Principal Balances of the Mortgage Loans declining in an amount greater than the sum of (i) the payments of principal on the Senior Bonds, (ii) the payments of principal on the Subordinated Bonds [and (iii) the payments of principal on the Residual Bonds], the Senior Percentage, the Subordinated Percentage [and the residual percentage] may shift (as a result of their methods of computation as described above under "-- Principal") such that funds available in the Distribution Account for payments of principal on each future Payment Date may be allocated in a higher ratio to the Senior Bonds as a result of such shortfall. This shift of the Senior Percentage, the Subordinated Percentage [and the Residual Percentage] may cause the Senior Bonds to amortize more rapidly, and the Subordinated Bonds [and the Residual Bonds] to amortize more slowly, than would otherwise have been the case in the absence of S-14 such shortfalls. 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 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 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. In addition, an investor in the Bonds should consider the risk that there can be no assurance that investors in the Bonds will be able to reinvest the payments thereon at yields equaling or exceeding the yields on such Bonds. It is possible that yields on any such reinvestments will be lower, and may be significantly lower, than the yields on the Bonds. See "RISK FACTORS -- Yield, Prepayment and Maturity Risks" herein and "RISK FACTORS -- Prepayment and Yield Considerations" in the Prospectus. In general, a "Realized Loss" means, with respect to a Liquidated Mortgage Loan, the amount by which the remaining unpaid principal balance of the related Mortgage Loan exceeds the amount of Liquidation Proceeds applied to the principal balance of the related Mortgage Loan. A "Liquidated Mortgage Loan" is a defaulted Mortgage Loan as to which the Master Servicer has determined that all recoverable liquidation and insurance proceeds have been received. Under the Indenture, an Event of Default will not occur solely due to the occurrence of Shortfalls that affect only the Subordinated Bonds [and/or the Residual Bonds] until all the Senior Bonds have been paid in full and then only if Shortfalls on the Subordinated Bonds have not been paid. In addition, an Event of Default by reason of any Shortfalls that affect the Senior Bonds will occur on any Payment Date only when the Pool Principal Balance is less than the principal amount of the Senior Bonds outstanding after application of all available amounts on deposit in the Distribution Account on such Payment Date. Nevertheless, at any time following an Event of Default arising from a Shortfall affecting the Senior Bonds, the holders of outstanding Bonds, whether Senior Bonds or Subordinated Bonds [or Residual Bonds], representing more than 50% in principal amount of all Bonds then outstanding, may declare the Bonds due and payable or take any other action pursuant to the terms of the Indenture. Until the Bonds have been declared due and payable following an Event of Default, the holders of the Subordinated Bonds [or the Residual Bonds] may not request the Bond Trustee to take any action, other than the application of available funds in the Distribution Account to pay principal and interest as provided herein, and may not otherwise cause any action to be taken to enforce the obligation of the Issuer to pay principal and interest on the Subordinated Bonds. Additionally, prior to the Bonds being declared due and payable following an Event of Default, the Senior Bonds will not accrue interest in any form on the interest component of any Shortfall attributable to the Senior Bonds. Should an Event of Default occur, payments will be allocated on each Payment Date in accordance with the priorities described herein under " -- Principal", which would otherwise be applicable on such Payment Date had an Event of Default not occurred. If Available Funds are insufficient to make payments on the Senior Bonds, Senior Bondholders will be dependent upon the ability of the Insurer to meet its obligations under the Bond Insurance Policy. For any Payment Date, the amount of Available Funds will be dependent in part upon whether any Realized Losses have been incurred on the Mortgage Loans during the most recent Prepayment Period. Realized Losses on the Mortgage Loans will be allocated first to the [Residual Bonds], second to the Subordinated Bonds and third, in the event the Insurer defaults on its obligations under the Bond Insurance Policy, to the Senior Bonds. STATED MATURITY The Stated Maturity for each Class of Bonds is the date determined by the Company which is years after the Payment Date immediately following the latest maturity date of any Mortgage Loan. The Stated Maturity of each Class of Bonds is , 20 . STRUCTURING ASSUMPTIONS Unless otherwise specified, the information in the tables in this Prospectus Supplement has been prepared on the basis of the following assumed characteristics of the Mortgage Loans and the following additional S-15 assumptions (collectively, the "Structuring Assumptions"): (i) the Mortgage Loan Pool consists of one Mortgage Loan with the following characteristics:
ORIGINAL TERM REMAINING TERM PRINCIPAL NET MORTGAGE IN MATURITY TO MATURITY BALANCE MORTGAGE RATE RATE (IN MONTHS) (IN MONTHS) ----------------- ------------- ------------ ------------- -------------- $ % %
(ii) the Mortgage Loans prepay at the specified constant Prepayment Assumptions, (iii) no defaults in the payment by Mortgagors of principal of and interest on the Mortgage Loans are experienced, (iv) scheduled payments on the Mortgage Loans are received on the first day of each month commencing in the calendar month following the Closing Date and are computed prior to giving effect to prepayments received on the last day of the prior month, (v) prepayments are allocated as described herein without giving effect to loss and delinquency tests, (vi) there are no Net Interest Shortfalls and prepayments represent prepayments in full of individual Mortgage Loans and are received on the last day of each month, commencing in the calendar month of the Closing Date, (vii) the scheduled monthly payment for each Mortgage Loan has been calculated based on the assumed mortgage loan characteristics described in item (i) above such that each such mortgage loan will amortize in amounts sufficient to repay the principal balance of such assumed mortgage loan by its remaining term to maturity, (viii) the initial Class Principal Amount, of each Class of Bonds, is as set forth on the cover page hereof and under "SUMMARY -- Securities Other than the Bonds" herein, (ix) interest accrues on each Class of Bonds at the applicable interest rate described on the cover hereof or described herein, (x) payments in respect of the Bonds are received in cash on the th day of each month commencing in the calendar month following the Closing Date, (xi) the closing date of the sale of the Bonds is , 200 , (xii) Redwood Trust is not required to purchase or substitute for any Mortgage Loan and (xiii) [the Master Servicer or the Company does not exercise any option to purchase any Mortgage Loans described herein under "-- Optional Purchase of Defaulted Loans"] and the Issuer does not exercise any option to redeem the Bonds as described herein under "-- Redemption at the Option of the Issuer." While it is assumed that each of the Mortgage Loans prepays at the specified constant Prepayment Assumptions, this is not likely to be the case. Moreover, discrepancies exist between the characteristics of the actual Mortgage Loans which will be delivered to the Bond Trustee and characteristics of the Mortgage Loans assumed in preparing the tables herein. Prepayments of mortgage loans commonly are measured relative to a prepayment standard or model. The model used in this Prospectus Supplement (the "Prepayment Assumption") represents an assumed rate of prepayment each month relevant to the then outstanding principal balance of a pool of mortgage loans. The Prepayment Assumption does not purport to be either an historical description of the prepayment experience of any pool of mortgage loans or a prediction of the anticipated rate of prepayment of any pool of mortgage loans, including the Mortgage Loans. A 100% Prepayment Assumption assumes a Constant Prepayment Rate ("CPR") of % per annum of the then outstanding principal balance of such mortgage loans in the first month of the life of the mortgage loans and an additional % per annum in each month thereafter until the month. Beginning in the month and in each month thereafter during the life of such mortgage loans, a 100% Prepayment Assumption assumes a CPR of % per annum each month. As used in the tables below, a % Prepayment Assumption assumes a prepayment rate equal to % of the Prepayment Assumption. Correspondingly, a % Prepayment Assumption assumes a prepayment rate equal to % of the Prepayment Assumption, and so forth. OPTIONAL PURCHASE OF DEFAULTED LOANS The Master Servicer or the Company may, at its option, purchase from the Issuer any Mortgage Loan which is delinquent in payment by days or more. Any such purchase will be at a price equal to 100% of the Stated Principal Balance of such Mortgage Loan plus accrued interest thereon at the applicable Mortgage Rate from the date through which interest was last paid by the related Mortgagor or advanced to the first day of the month in which such amount is to be distributed. S-16 WEIGHTED AVERAGE LIVES OF THE BONDS The weighted average life of a Bond is determined by (a) multiplying the amount of the reduction, if any, of the Class Principal Amount of such Bond on each Payment Date by the number of years from the date of issuance to such Payment Date, (b) summing the results and (c) dividing the sum by the aggregate amount of the reductions in Class Principal Amount of such Bond referred to in clause (a). For a discussion of the factors which may influence the rate of payments (including prepayments) of the Mortgage Loans, see "RISK FACTORS -- Yield, Prepayment and Maturity Risks" herein and "RISK FACTORS -- Prepayment and Yield Considerations" in the Prospectus. In general, the weighted average lives of the Bonds will be shortened if the level of prepayments of principal of the Mortgage Loans increases. However, the weighted average lives of the Bonds will depend upon a variety of other factors, including the timing of changes in such rate of principal payments and the priority sequence of distributions of principal of the Classes of Bonds. See "DESCRIPTION OF THE BONDS -- Principal" herein. The interaction of the foregoing factors may have different effects on the Senior Bonds and the Subordinated Bonds [and the Residual Bonds] and the effects on any Class may vary at different times during the life of such Class. Accordingly, no assurance can be given as to the weighted average life of any Class of Bonds. Further, to the extent the prices of the Bonds represent discounts or premiums to their respective original Class Principal Amounts, variability in the weighted average lives of such Classes of Bonds will result in variability in the related yields to maturity. For an example of how the weighted average lives of the Classes of Bonds may be affected at various constant Prepayment Assumptions, see the Decrement Tables below. DECREMENT TABLES The following tables indicate the percentages of the initial Class Principal Amounts of the Classes of Bonds that would be outstanding after each of the dates shown at various constant Prepayment Assumptions and the corresponding weighted average lives of such Classes. The tables have been prepared on the basis of the Structuring Assumptions. It is not likely that (i) all of the Mortgage Loans will have the characteristics assumed, (ii) all of the Mortgage Loans will prepay at the constant Prepayment Assumptions specified in the tables or at any constant Prepayment Assumption or (iii) all of the Mortgage Loans will prepay at the same rate. Moreover, the diverse remaining terms to maturity of the Mortgage Loans could produce slower or faster principal payments than indicated in the tables at the specified constant Prepayment Assumptions, even if the weighted average remaining term to maturity of the Mortgage Loans is consistent with the remaining terms to maturity of the Mortgage Loans specified in the Structuring Assumptions. PERCENT OF INITIAL CLASS PRINCIPAL AMOUNTS OUTSTANDING [DECREMENT TABLES] REDEMPTION AT THE OPTION OF THE ISSUER The Bonds may be redeemed in whole, but not in part, at the Issuer's option, on any Payment Date on or after the earlier of (a) years after the initial issuance of the Bonds and (b) the Payment Date on which the sum of (i) the Senior Class Principal Amount (ii) the Subordinated Class Principal Amount and [(iii) the Residual Class Principal Amount, after giving effect to payments to be made on such Payment Date, is % or less of the aggregate of the Stated Principal Balances of the Mortgage Loans as of the Cut-off Date, at a redemption price equal to 100% of the unpaid principal amount of such Bonds (including, in the case of the Subordinated Bonds, any unpaid Subordinated Principal Carryover Shortfall), plus accrued and unpaid interest at the applicable Bond Interest Rate through the month preceding the month in which such optional redemption date occurs. The Bonds are not otherwise subject to call or redemption at the option of the Issuer nor are they subject to special redemption. S-17 Notice of any redemption to be made at the option of the Issuer must be given by the Issuer to the Bond Trustee not less than 30 days prior to the redemption date and must be mailed by the Issuer or the Bond Trustee to affected Bondholders at least ten days prior to the redemption date. CONTROLLING CLASS UNDER THE INDENTURE For the purposes described in the prospectus under the headings "The Indenture -- Modification of Indenture," "-- Events of Default" and "Rights Upon Event of Default," the "Controlling Class" shall be the Class A-1 Bondholders or, if the Class A-1 Bonds are no longer outstanding, the Class B-1 Bondholders. CREDIT ENHANCEMENT Credit enhancement for the Senior Bonds will be provided by the Subordinated Bonds, [by the Residual Bonds] and by the Bond Insurance Policy (as defined herein). [Credit enhancement for the Subordinated Bonds will be provided by the Residual Bonds.] SUBORDINATION The rights of holders of the Subordinated Bonds [and the Residual Bonds] to receive payments with respect to the Mortgage Loans will be subordinated to such rights of the holders of the Senior Bonds [and the rights of the holders of the Residual Bonds will be subordinated to such rights of the holders of the Subordinated Bonds, in each case only to the extent described herein.] The subordination of the Subordinated Bonds [and the Residual Bonds] to the Senior Bonds [and the further subordination of the Residual Bonds to the Subordinated Bonds] are each intended to increase the likelihood of timely receipt by the holders of Bonds with higher relative payment priority of the maximum amount to which they are entitled on any Payment Date and to provide such holders protection against losses resulting from defaults on Mortgage Loans to the extent described herein. [However, the amount of protection afforded the Subordinated Bondholders by subordination of the Residual Bonds may be exhausted and Shortfalls in payments on the Subordinated Bonds could result. Any losses realized on the Mortgage Loans in excess of the protection afforded by the Residual Bonds will result in losses on the Subordinated Bonds.] THE BOND INSURANCE POLICY [DESCRIPTION OF THE BOND INSURANCE POLICY] THE INSURER [DESCRIPTION OF THE INSURER] SECURITY FOR THE BONDS GENERAL The Bonds will be secured by assignments to the Bond Trustee of collateral consisting of (i) the Mortgage Loans, (ii) funds on deposit in the Bond Account and the Distribution Account, (iii) the Issuer's rights under the Master Servicing Agreement, (iv) [the Issuer's rights under any Servicing Agreement,] (v) the Issuer's rights under the Mortgage Loan Purchase Agreement (as defined herein), and (vi) the proceeds of all of the foregoing. THE MORTGAGE LOANS The Bonds will be secured by a pool (the "Mortgage Loan Pool") of -year conventional mortgage loans secured by first liens on one- to four-family residential properties (each, a "Mortgaged Property"). None of the Mortgage Loans will be guaranteed by any governmental agency. All of the Mortgage Loans will have been deposited with the Issuer by the Company which, in turn, will have acquired them from Redwood Trust S-18 pursuant to an agreement (the "Mortgage Loan Purchase Agreement") between the Company and Redwood Trust. All of the Mortgage Loans will have been acquired by Redwood Trust in the ordinary course of its business and substantially in accordance with the underwriting criteria specified herein. GENERAL. Under the Mortgage Loan Purchase Agreement, Redwood Trust will make certain representations, warranties and covenants to the Company relating to, among other things, the due execution and enforceability of the Mortgage Loan Purchase Agreement and certain characteristics of the Mortgage Loans and, subject to the limitations described below under " -- Assignment of Mortgage Loans," will be obligated to purchase or substitute a similar mortgage loan for any Mortgage Loan as to which there exists deficient documentation or an uncured material breach of any such representation, warranty or covenant. Under the Deposit Trust Agreement, the Company will assign all of its rights under the Mortgage Loan Purchase Agreement to the Issuer. Under the Indenture, the Issuer will pledge all its right, title and interest in and to such representations, warranties and covenants (including Redwood Trust's purchase obligation) to the Bond Trustee for the benefit of the Bondholders. The Issuer will make no representations or warranties with respect to the Mortgage Loans and will have no obligation to repurchase or substitute Mortgage Loans with deficient documentation or which are otherwise defective. The obligations of Redwood Trust with respect to the Bonds are limited to Redwood Trust's obligation to purchase or substitute Mortgage Loans with deficient documentation or which are otherwise defective under the Mortgage Loan Purchase Agreement. Certain information with respect to the Mortgage Loan Pool is set forth below. Prior to the Closing Date, Mortgage Loans may be removed from the collateral and other Mortgage Loans may be substituted therefor. The Issuer believes that the information set forth herein with respect to the Mortgage Loans as presently constituted is representative of the characteristics of the Mortgage Loans as they will be constituted at the Closing Date, although certain characteristics of the Mortgage Loans in the Mortgage Loan Pool may vary. Unless otherwise indicated, information presented below expressed as a percentage (other than rates of interest) are approximate percentages based on the Stated Principal Balances of the Mortgage Loans as of the Cut-off Date. As of the Cut-off Date, the aggregate of the Stated Principal Balances of the Mortgage Loans is expected to be approximately $ (the "Cut-off Date Pool Principal Balance"). [The Mortgage Loans provide for the amortization of the amount financed over a series of substantially equal monthly payments.] All of the Mortgage Loans provide for payments due on the first day of each month (the "Due Date"). At origination, substantially all of the Mortgage Loans had stated terms to maturity of years. Scheduled monthly payments made by the Mortgagors on the Mortgage Loans ("Scheduled Payments") either earlier or later than the scheduled Due Dates thereof will not affect the amortization schedule or the relative application of such payments to principal and interest. [Mortgagors may prepay their Mortgage Loans at any time without penalty.] Each Mortgage Loan will bear interest at a [fixed][adjustable] Mortgage Rate. [Each Mortgage Loan will bear interest at a Mortgage Rate, subject to annual adjustment on the first day of the month specified in the related Mortgage Note (each such date, an "Adjustment Date"), equal to the sum, rounded to the nearest of one percentage point ( %), of (i) (the "Index") as made available by the and most recently available as of days prior to the Adjustment Date and (ii) a fixed percentage amount specified in the related Mortgage Note (the "Margin") provided, however, that the Mortgage Rate will not increase or decrease by more than percentage points ( %), except for Mortgage Loans, representing approximately % of the Cut-off Date Pool Principal Balance which will not increase or decrease by more than percentage points ( %), on the first Adjustment Date or more than percentage points ( %) on any Adjustment Date thereafter (the "Periodic Rate Cap"). The Index with respect to any Bond Interest Rate and any Payment Date shall be the Index in effect as of the first day of the month preceding the month in which such Payment Date occurs.] [All of the Mortgage Loans provide that over the life of the Mortgage Loan the Mortgage Rate will in no event increase by more than the Mortgage Rate fixed at origination plus a fixed number of percentage points specified in the related Mortgage Note (such rate, the "Maximum Rate"). None of the Mortgage Loans are subject to minimum Mortgage Rates. Effective with the first payment due on a Mortgage Loan after each S-19 related Adjustment Date, the Scheduled Payment will be adjusted to an amount which will pay interest at the adjusted rate and fully amortize the then-outstanding principal balance of the Mortgage Loan over its remaining term. If the Index ceases to be published or is otherwise unavailable, the Master Servicer will select an alternative index based upon comparable information.] Each Mortgage Loan is, by its terms, assumable in connection with a transfer of the related Mortgaged Property if the proposed transferee submits certain information to the Master Servicer required to enable it to evaluate the transferee's ability to repay the Mortgage Loan and if the Master Servicer reasonably determines that the security for the Mortgage Loan would not be impaired by the assumption. See "RISK FACTORS" herein and in the Prospectus. Each Mortgage Loan was originated on or after , 19 . The latest stated maturity date of any Mortgage Loan is , 20 . The earliest stated maturity date of any Mortgage Loan is , 20 . [As of the Cut-off Date, no Mortgage Loan was delinquent more than days.] [None of the Mortgage Loans are subject to buydown agreements.] [No Mortgage Loan provides for deferred interest or negative amortization.] No Mortgage Loan had a Loan-to-Value Ratio at origination of more than %. [Except for Mortgage Loans, representing approximately % of the Cut-off Date Pool Principal Balance,] each Mortgage Loan with a Loan-to-Value Ratio at origination of greater than 80% is covered by a primary mortgage insurance policy (each a "Primary Mortgage Insurance Policy") issued by a mortgage insurance company acceptable to the Federal National Mortgage Association ("FNMA"), the Federal Home Loan Mortgage Corporation ("FHLMC") or any nationally recognized statistical rating organization, which policy provides coverage of a portion of the original principal balance of the related Mortgage Loan equal to the product of the original principal balance thereof and a fraction, the numerator of which is the excess of the original principal balance of the related Mortgage Loan over 75% of the lesser of the appraised value and selling price of the related Mortgage Property and the denominator of which is the original principal balance of the related Mortgage Loan, plus accrued interest thereon and related foreclosure expenses. No such Primary Mortgage Insurance Policy will be required with respect to any such Mortgage Loan after the date on which the related Loan-to-Value Ratio is 80% or less or, based on a new appraisal, the principal balance of such Mortgage Loan represents 80% or less of the new appraised value. See " -- Underwriting Standards" herein. The "Loan-to-Value Ratio" of a Mortgage Loan at any given time is a fraction, expressed as a percentage, the numerator of which is the principal balance of the related Mortgage Loan at the date of determination and the denominator of which is (a) in the case of a purchase, the lesser of the selling price of the Mortgaged Property and its appraised value determined in an appraisal obtained by the originator at origination of such Mortgage Loan, or (b) in the case of a refinance, the appraised value of the Mortgaged Property at the time of such refinance. No assurance can be given that the value of any Mortgaged Property has remained or will remain at the level that existed on the appraisal or sales date. If residential real estate values generally or in a particular geographic area decline, the Loan-to-Value Ratios might not be a reliable indicator of the rates of delinquencies, foreclosures and losses that could occur with respect to such Mortgage Loans. S-20 The following information sets forth in tabular format certain information, as of the Cut-off Date, as to the Mortgage Loans. Other than with respect to rates of interest, percentages (approximate) are stated by Stated Principal Balance of the Mortgage Loans as of the Cut-off Date and have been rounded in order to total 100%.
ORIGINAL LOAN-TO-VALUE RATIOS(1) - ----------------------------------------------------------------------------------------------- AGGREGATE NUMBER OF PRINCIPAL PERCENT OF MORTGAGE BALANCE MORTGAGE ORIGINAL LOAN-TO-VALUE RATIOS(%) LOANS OUTSTANDING POOL - ------------------------------------------------------- --------- ----------- ---------- $ % --- -------- ---- Total............................................. $ % === ======== ====
- --------------- (1) The weighted average original Loan-to-Value Ratio of the Mortgage Loans is expected to be approximately %.
ORIGINAL TERMS TO MATURITY(1) - ----------------------------------------------------------------------------------------------- AGGREGATE NUMBER OF PRINCIPAL PERCENT OF MORTGAGE BALANCE MORTGAGE ORIGINAL TERM TO MATURITY (MONTHS) LOANS OUTSTANDING POOL - ------------------------------------------------------- --------- ----------- ---------- $ % --- -------- ---- Total............................................. $ % === ======== ====
- --------------- (1) As of the Cut-off Date, the weighted average remaining term to maturity of the Mortgage Loans is expected to be approximately months. S-21
CURRENT MORTGAGE LOAN PRINCIPAL BALANCE(1) - ----------------------------------------------------------------------------------------------- AGGREGATE NUMBER OF PRINCIPAL PERCENT OF MORTGAGE BALANCE MORTGAGE RANGE OF CURRENT MORTGAGE LOAN PRINCIPAL BALANCES LOANS OUTSTANDING POOL - ------------------------------------------------------- --------- ----------- ---------- $ % --- -------- ---- Total............................................. $ % === ======== ====
- --------------- (1) As of the Cut-off Date, the average current Mortgage Loans principal balance is expected to be approximately $ .
CURRENT MORTGAGE RATES(1) - ----------------------------------------------------------------------------------------------- AGGREGATE NUMBER OF PRINCIPAL PERCENT OF MORTGAGE BALANCE MORTGAGE CURRENT MORTGAGE RATES(%) LOANS OUTSTANDING POOL - ------------------------------------------------------- --------- ----------- ---------- $ % --- -------- ---- Total............................................. $ % === ======== ====
- --------------- (1) As of the Cut-off Date, the weighted average Mortgage Rate of the Mortgage Loans is expected to be approximately % per annum. S-22
PURPOSE OF MORTGAGE LOANS - ----------------------------------------------------------------------------------------------- AGGREGATE NUMBER OF PRINCIPAL PERCENT OF MORTGAGE BALANCE MORTGAGE LOAN PURPOSE LOANS OUTSTANDING POOL - ------------------------------------------------------- --------- ----------- ---------- Purpose................................................ $ % Refinance (Rate or Term)............................... Refinance (Cash-out)................................... --- -------- ---- Total............................................. $ % === ======== ====
STATE DISTRIBUTION OF MORTGAGED PROPERTIES(1) - ----------------------------------------------------------------------------------------------- AGGREGATE NUMBER OF PRINCIPAL PERCENT OF MORTGAGE BALANCE MORTGAGE STATE LOANS OUTSTANDING POOL - ------------------------------------------------------- --------- ----------- ---------- $ % Other(1)............................................... --- -------- ---- Total............................................. $ % === ======== ====
- --------------- (1) Other includes other states, and the District of Columbia, with under % concentrations individually. No more than approximately % of the Mortgage Loans will be secured by Mortgaged Properties located in any one postal zip code area.
DOCUMENTATION FOR MORTGAGE LOANS - ----------------------------------------------------------------------------------------------- AGGREGATE NUMBER OF PRINCIPAL PERCENT OF MORTGAGE BALANCE MORTGAGE TYPE OF PROGRAM LOANS OUTSTANDING POOL - ------------------------------------------------------- --------- ----------- ---------- Full................................................... $ % Alternative............................................ Reduced................................................ --- -------- ---- Total............................................. $ % === ======== ====
OCCUPANCY TYPES(1) - ----------------------------------------------------------------------------------------------- AGGREGATE NUMBER OF PRINCIPAL PERCENT OF MORTGAGE BALANCE MORTGAGE OCCUPANCY TYPE LOANS OUTSTANDING POOL - ------------------------------------------------------- --------- ----------- ---------- Primary Home........................................... $ % Investor............................................... Second Home............................................ --- -------- ---- Total............................................. $ % === ======== ====
- --------------- (1) Based upon representations of the related Mortgagors at the time of origination. S-23
PROPERTY TYPE - ----------------------------------------------------------------------------------------------- AGGREGATE NUMBER OF PRINCIPAL PERCENT OF MORTGAGE BALANCE MORTGAGE PROPERTY TYPE LOANS OUTSTANDING POOL - ------------------------------------------------------- --------- ----------- ---------- Single Family.......................................... $ % Planned Unit Development Condominium............................................ 2-4 Units.............................................. --- -------- ---- Total............................................. $ % === ======== ====
MAXIMUM MORTGAGE RATES(1) - ----------------------------------------------------------------------------------------------- AGGREGATE NUMBER OF PRINCIPAL PERCENT OF MORTGAGE BALANCE MORTGAGE LIFETIME CAPS(%) LOANS OUTSTANDING POOL - ------------------------------------------------------- --------- ----------- ---------- $ % --- -------- ---- Total............................................. $ % === ======== ====
- --------------- (1) As of the Cut-off Date, the weighted average Lifetime Cap of the Mortgage Loans is expected to be approximately % per annum.
MARGIN(1) - ----------------------------------------------------------------------------------------------- AGGREGATE NUMBER OF PRINCIPAL PERCENT OF MORTGAGE BALANCE MORTGAGE MARGIN LOANS OUTSTANDING POOL - ------------------------------------------------------- --------- ----------- ---------- $ % --- -------- ---- Total............................................. $ % === ======== ====
- --------------- (1) As of the Cut-off Date, the weighted average margin of the Mortgage Loans is expected to be approximately %. S-24
NEXT NOTE RATE ADJUSTMENT DATES(1) - ----------------------------------------------------------------------------------------------- AGGREGATE NUMBER OF PRINCIPAL PERCENT OF MORTGAGE BALANCE MORTGAGE MONTHS LOANS OUTSTANDING POOL - ------------------------------------------------------- --------- ----------- ---------- $ % --- -------- ---- Total............................................. $ % === ======== ====
- --------------- (1) As of the Cut-off Date, the weighted average months to the next Adjustment Date of the Mortgage Loans was approximately months. THE INDEX [DESCRIPTION OF INDEX] ASSIGNMENT OF THE MORTGAGE LOANS Pursuant to the Indenture, the Issuer on the Closing Date will pledge, transfer, assign, set over and otherwise convey without recourse to the Bond Trustee in trust for the benefit of the Bondholders all right, title and interest of the Issuer in and to each Mortgage Loan and all right, title and interest in and to all other assets included in the Collateral, including all principal and interest received on or with respect to the Mortgage Loans, exclusive of principal and interest due on or prior to the Cut-off Date. In connection with such transfer and assignment, the Issuer will deliver or cause to be delivered to the Bond Trustee, or a custodian for the Bond Trustee, among other things, the original promissory note (the "Mortgage Note") (and any modification or amendment thereto) endorsed in blank without recourse, the original instrument creating a first lien on the related Mortgaged Property (the "Mortgage") with evidence of recording indicated thereon, an assignment in recordable form of the Mortgage, the title policy with respect to the related Mortgaged Property and, if applicable, all recorded intervening assignments of the Mortgage and any riders or modifications to such Mortgage Note and Mortgage (except for any such document not returned from the public recording office, which will be delivered to the Bond Trustee as soon as the same is available to the Issuer) (collectively, the "Mortgage File"). [Assignments of the Mortgage Loans to the Bond Trustee (or its nominee) will be recorded in the appropriate public office for real property records, except in states such as California where, in the opinion of counsel, such recording is not required to protect the Bond Trustee's interest in the Mortgage Loans against the claim of any subsequent transferee or any successor to or creditor of the Issuer.] The Bond Trustee will review each Mortgage File within days of the Closing Date (or promptly after the Bond Trustee's receipt of any document permitted to be delivered after the Closing Date) and if any document in a Mortgage File is found to be missing or defective in a material respect and the Issuer does not cure such defect within days of notice thereof from the Bond Trustee (or within such longer period not to exceed days after the Closing Date as provided in the Mortgage Loan Purchase Agreement in the case of missing documents not returned from the public recording office), Redwood Trust will be obligated to purchase the related Mortgage Loan. Rather than purchase the Mortgage Loan as provided above, Redwood S-25 Trust may remove such Mortgage Loan (a "Deleted Mortgage Loan") from the Collateral and substitute in its place another mortgage loan (a "Replacement Mortgage Loan"). Any Replacement Mortgage Loan generally will, on the date of substitution, among other characteristics set forth in the Mortgage Loan Purchase Agreement, (i) have a principal balance, after deduction of all Scheduled Payments due in the month of substitution, not in excess of, and not more than % less than, the Stated Principal Balance of the Deleted Mortgage Loan (the amount of any shortfall to be deposited in the Bond Account by Redwood and held for distribution to the Bondholders on the related Payment Date (a "Substitution Adjustment Amount")), (ii) have a Mortgage Rate not lower than, and not more than % per annum higher than, that of the Deleted Mortgage Loan, (iii) have a Loan-to-Value Ratio not higher than that of the Deleted Mortgage Loan, (iv) have a remaining term to maturity not greater than (and not more than less than) that of the Deleted Mortgage Loan, and (v) comply with all of the representations and warranties set forth in the Mortgage Loan Purchase Agreement as of the date of substitution. This cure, purchase or substitution obligation constitutes the sole remedy available to Bondholders or the Bond Trustee for omission of, or a material defect in, a Mortgage Loan document. Notwithstanding anything contained herein to the contrary, no Replacement Mortgage Loan may be substituted for a Deleted Mortgage Loan at any time after two (2) years after the Closing Date. UNDERWRITING STANDARDS All of the Mortgage Loans have been purchased by Redwood Trust in the ordinary course of business directly from banks, savings and loan associations, mortgage bankers and other mortgage loan originators (each, an "Originator") or in the secondary market. Redwood Trust approves individual institutions as eligible Originators after an evaluation of certain criteria, including the Originator's mortgage origination and servicing experience and financial stability. Each Originator and/or the entity from which Redwood Trust purchased the Mortgage Loans will represent and warrant that all Mortgage Loans originated and/or sold by it will have been underwritten in accordance with standards consistent with those utilized by mortgage lenders generally during the period of origination. Underwriting standards are applied by or on behalf of a lender to evaluate the borrower's credit standing and repayment ability, and the value and adequacy of the related Mortgaged Property as collateral. In general, a prospective borrower applying for a loan is required to fill out a detailed application designed to provide to the underwriting officer pertinent credit information. As part of the description of the borrower's financial condition, the borrower generally is required to provide a current list of assets and liabilities and a statement of income and expense, as well as an authorization to apply for a credit report which summarizes the borrower's credit history with local merchants and lenders and any record of bankruptcy. In most cases, an employment verification is obtained from an independent source (typically the borrower's employer) which verification reports, among other things, the length of employment with that organization, the current salary, and whether it is expected that the borrower will continue such employment in the future. If a prospective borrower is self-employed, the borrower may be required to submit copies of signed tax returns. The borrower may also be required to authorize verification of deposits at financial institutions where the borrower has demand or savings accounts. SERVICING OF THE MORTGAGE LOANS GENERAL , with its principal master servicing offices at , will perform the duties of Master Servicer in accordance with the terms set forth in the Indenture. The Master Servicer will not be ultimately responsible for the performance of the servicing activities by a Servicer, except as described under "-- Servicing Compensation and Payment of Expenses; Master Servicing Compensation," "-- Adjustment to Servicing Fees in Connection with Certain Prepaid Mortgage Loans" and "-- Advances" below. If any Servicer fails to fulfill its obligations under the applicable Servicing Agreement, the Master Servicer is obligated to terminate that Servicer and appoint a successor servicer as provided in the Indenture. S-26 FORECLOSURE, DELINQUENCY AND LOSS EXPERIENCE The following table summarizes the delinquency, foreclosure and loss experience, respectively, as of December 31, , December 31, and December 31, on approximately $ , $ and $ , respectively, in outstanding principal balance of conventional mortgage loans master serviced by . commenced master servicing conventional mortgage loans during . The delinquency and foreclosure percentages and the loss experience may be affected by the size and relative lack of seasoning of the servicing portfolio because many of such mortgage loans were not outstanding long enough to give rise to some or all of the indicated periods of delinquency. Accordingly, the information should not be considered as a basis for assessing the likelihood, amount or severity of delinquency or losses on the Mortgage Loans, and no assurances can be given that the foreclosure, delinquency and loss experience presented in the table below will be indicative of such experience on the Mortgage Loans in the future:
AS OF AS OF AS OF DECEMBER 31, DECEMBER 31, DECEMBER 31, 199 199 199 ------------ ------------ ------------ Total Number of Conventional Mortgage Loans in Portfolio........................................... Delinquent Mortgage Loans and Pending Foreclosures at Period End(1):...................................... 30-59 days....................................... 60-89............................................ 90 days or more (excluding foreclosures)......... Total Delinquencies.............................. Foreclosures pending Total delinquencies and foreclosures pending........ Net Loss(2)...........................................
- --------------- (1) As a percentage of the total number of loans master serviced. (2) There is no material difference between gross loss and net loss. There can be no assurance that factors beyond the Master Servicer's control, such as national or local economic conditions or downturns in the real estate markets of its lending areas, will not result in increased rates of delinquencies and foreclosure losses in the future. [For example, over the last several years there has been a general deterioration of the real estate market and weakening of the economy in many regions of the of the country, including California. The general deterioration of the real estate market has been reflected in increases in delinquencies of loans secured by real estate, slower absorption rates of real estate into the market and lower sales prices for real estate. The general weakening of the economy has been reflected in decreases in the financial strength of borrowers and decreases in the value of collateral serving as collateral for loans. If the real estate market and economy continue to decline, the Master Servicer may experience an increase in delinquencies on the loans it services and higher net loss on liquidated loans.] SERVICING AND COLLECTION PROCEDURES Servicing functions to be performed by each Servicer under the related Servicing Agreement include collection and remittance of principal and interest payments, administration of mortgage escrow accounts, collection of certain insurance claim and, if necessary, foreclosure. Each Servicer may contract with subservicers to perform some or all of such Servicer's servicing duties, but the Servicer will not thereby be released from its obligations under the related Servicing Agreement. When used herein with respect to servicing obligations, the term Servicer includes a subservicer. Each Servicer will make reasonable efforts to collect all payments called for under the Mortgage Loans and will, consistent with the related Servicing Agreement and any primary mortgage insurance policy, follow such collection procedures as are customary with respect to mortgage loans that are comparable to the Mortgage Loans. Consistent with the above, each Servicer may, in its discretion, (i) waive any assumption fee, late payment or other charge in connection with a Mortgage Loan and (ii) to the extent not consistent S-27 with the coverage of such Mortgage Loan by a primary mortgage insurance policy, arrange with a mortgagor a schedule for the liquidation of delinquencies. So long as no Event of Default has occurred and is continuing under the Indenture, the Bond Issuer's prior approval or consent will be required for certain servicing activities such as modification of the terms of any Mortgage Loan and the sale of any defaulted Mortgage Loan or REO Property. Pursuant to each Servicing Agreement, the Servicer will deposit collections on the Mortgage Loans into the Custodial Account established by it. Each Custodial Account is required to be kept segregated from operating accounts of the related Servicer and to meet the eligibility criteria set forth in the related Servicing Agreement. Under each Servicing Agreement, amounts on deposit in the Custodial Account may be invested in certain permitted investments described therein. Any losses resulting from such investments are required to be reimbursed to the Custodial Account by the related Servicer out of its own funds. On or before the closing date, the Master Servicer, on behalf of the Trustee, will establish the Collection Account into which each Servicer will remit all amounts required to be deposited therein pursuant to the related Servicing Agreement (net of such Servicer's servicing compensation) on the 18(th) day of each month (or, if the 18(th) is not a Business Day, on the immediately preceding Business Day). Not later than the 15(th) day of each month (a "Determination Date"), each Servicer will furnish to the Master Servicer information with respect to loan level remittance data for such month's remittance. In the event of a default by a Servicer under its Servicing Agreement, the Master Servicer will have the right to remove the Servicer and will exercise the right if it considers such removal to be in the best interest of the Bondholders. In the event that the Master Servicer removes a Servicer, the Master Servicer will, in accordance with the Indenture, act as successor servicer under the related Servicing Agreement or will appoint a successor servicer reasonably acceptable to the Bond Issuer and the Bond Trustee. In connection with the removal of a Servicer, the Master Servicer will be entitled to be reimbursed from the assets of the Bond Issuer for all of its reasonable costs associated with the termination of the Servicer and the transfer of servicing to a successor servicer. SERVICING COMPENSATION AND PAYMENT OF EXPENSES; MASTER SERVICING COMPENSATION Each Servicer shall be entitled to receive, from interest actually collected on each Mortgage Loan serviced by it, a servicing fee (the "Servicing Fee") equal to the product of (1) the principal balance of such Mortgage Loans as of the first day of the related Due Period and (2) a per annum rate (the "Servicing Fee Rate") ranging from approximately % to approximately %. As of the Cut-off Date, the weighted average Servicing Fee Rate is approximately % per annum. The Servicers are also entitled to receive, as additional servicing compensation, all late payment fees, assumption fees and other similar charges and all reinvestment income earned on amounts on deposit in the Custodial Accounts. The Master Servicer will be paid a monthly fee (the "Master Servicer Fee") with respect to each Mortgage Loan, calculated as % annually (the "Master Servicing Fee Rate") of the Stated Principal Balance of each Mortgage Loan as of the first day of the related Due Period. The Master Servicer will pay the fees of the Bond Trustee from the Master Servicing Fee. As additional compensation for master servicing, the Master Servicer is entitled to retain all investment earnings on amounts on deposit in the Distribution Account. The amount of the Master Servicing Fee and each Servicer's Servicing Fee is subject to adjustment with respect to prepaid Mortgage Loans, as described below under "-- Adjustment to Servicing Fees in Connection with Certain Prepaid Mortgage Loans." ADJUSTMENT TO SERVICING FEES IN CONNECTION WITH CERTAIN PREPAID MORTGAGE LOANS When a borrower prepays a Mortgage Loan in full between Due Dates, the borrower is required to pay interest on the amount prepaid only to the date of prepayment and not thereafter. Principal prepayments by borrowers received by a Servicer during the Due Period for a Payment Date will be distributed to Bondholders on the related Payment Date. Thus, less than one month's interest may have been collected on Mortgage S-28 Loans that have been prepaid in full with respect to any Payment Date. Pursuant to each Servicing Agreement, either (i) the related Servicing Fee for any month will be reduced (but not below zero) by the amount of any prepayment Interest Shortfall or (ii) the related Servicer will be required to make payments in respect of Prepayment Interest Shortfalls from its own funds with respect to Mortgage Loans serviced by such Servicer. The Master Servicer is obligated to reduce a portion of its Master Servicing Fee for the related Payment Date to the extent necessary to fund any Prepayment Interest Shortfalls required to be paid but not paid by a Servicer. The amount of interest available to be paid to Bondholders will be reduced by any uncompensated Prepayment Interest Shortfalls. ADVANCES Subject to the limitations described in the following paragraph, each Servicer will be required to advance prior to each Payment Date, from its own funds, or funds in its Custodial Account that are not otherwise required to be remitted to the Distribution Account for such Payment Date, an amount equal to the scheduled payment of interest at the related Mortgage Rate (less the applicable Servicing Fee Rate) and scheduled principal payment on each Mortgage Loan which were due on the related Due Date and which were not received prior to the related Determination Date (any such advance, a "Monthly Advance"). The Master Servicer will be obligated to make any required Monthly Advance if the Servicer fails in its obligation to do so, to the extent provided in the Indenture and the related Servicing Agreement. Monthly Advances are intended to maintain a regular flow of scheduled interest and principal payments on the Bonds rather than to guarantee or insure against losses. Each Servicer is obligated to make Monthly Advances with respect to delinquent payments of interest and principal on each Mortgage Loan serviced by it, to the extent that such Monthly Advances are, in its reasonable judgment, recoverable from future payment and collections or insurance payments or proceeds of liquidation of the related Mortgage Loans. Any failure by a Servicer to make a Monthly Advance as required under the related Servicing Agreement will constitute a default thereunder, in which case the Master Servicer will be required, as successor servicer, to make a Monthly Advance in accordance with the terms of the Indenture; provided, however, that in no event will the Master Servicer be required to make a Monthly Advance that is not, in its reasonable judgment, recoverable from future payments and collections or insurance payments or proceeds of liquidation of the related Mortgage Loans. If a Servicer determines on any Determination Date to make a Monthly Advance, such Monthly Advance will be included with the payment to Bondholders on the related Payment Date. Any failure by the Master Servicer to make a Monthly Advance as required under the Indenture will constitute a Master Servicer Default thereunder, in which case the Trustee or the successor master servicer will be obligated to make such Monthly Advance. EVIDENCE AS TO COMPLIANCE Each Servicing Agreement provides that on or before a specified date in each year, a firm of independent public accountants will furnish a statement to the Master Servicer, the Bond Issuer and the Bond Trustee to the effect that, on the basis of the examination by such firm conducted substantially in compliance with the Uniform Single Attestation Program for Mortgage Bankers, the servicing by or on behalf of the Servicer was conducted in compliance with its Servicing Agreement, except for any significant exceptions or errors in records that, in the opinion of the firm, the Uniform Single Attestation Program for Mortgage Bankers requires it to report. Each Servicing Agreement also provides for delivery to the Master Servicer, the Bond Issuer and the Bond Trustee, on or before a specified date in each, of an annual officer's certificate to the effect that the Servicer has fulfilled its obligations under its Servicing Agreement throughout the preceding year. MASTER SERVICER DEFAULT; SERVICER DEFAULT If the Master Servicer is in default in its obligations under the Indenture, the Bond Trustee may, and must if directed to do so by Bondholders having more than 50% of the Class Principal Amount applicable to S-29 each Class of Bonds affected thereby, terminate the Master Servicer and either appoint a successor Master Servicer in accordance with the Indenture or succeed to the responsibilities of the Master Servicer. If a Servicer is in default in its obligations under the applicable Servicing Agreement, the Master Servicer may, at its option, terminate the defaulting Servicer and either appoint a successor Servicer in accordance with the applicable Servicing Agreement and the Indenture or succeed to the responsibilities of the terminated Servicer. RESIGNATION OF SERVICERS; ASSIGNMENT AND MERGER A Servicer may not resign from its obligations and duties under its Servicing Agreement or assign or transfer its rights, duties or obligations except (i) upon a determination that its duties thereunder are no longer permissible under applicable law, (ii) in certain cases, upon the sale of substantially all of its assets or (iii) upon a sale of its servicing rights with respect to the Mortgage Loans with the prior written consent of the Bond Issuer, which consent may not be unreasonably withheld. No such resignation will become effective until the Master Servicer or a successor servicer appointed by it has assumed the Servicer's obligations and duties under such Servicing Agreement. Any person into which a Servicer may be merged or consolidated, any person resulting from any merger or consolidation which a Servicer is a party, any person succeeding to the business of a Servicer or any person to whom a Servicer assigns or transfers its duties and obligations, will be the successor of such Servicer under the related Servicing Agreement. USE OF PROCEEDS The Issuer intends to distribute all of the net proceeds of the issuance of the Bonds to the Company which will use such proceeds to pay certain indebtedness incurred by Redwood Trust in connection with the acquisition of the Mortgage Loans. FEDERAL INCOME TAX CONSEQUENCES Investors may wish to review the material set forth in this section together with the information in the section "Federal Income Tax Consequences" in the prospectus. For federal income tax purposes, the Trust Estate [(exclusive of the rights in respect of the Additional Collateral)] will consist of a pool of assets with respect to which an election will be made to treat such pool as a "real estate mortgage investment conduit" ("REMIC") for federal income tax purposes. The Class A and Class B Bonds will be designated as "regular interests" in the REMIC and the Class R [Bonds/Certificates] will represent the "residual interest" in the [upper tier/lower tier] REMIC. The Class A and Class B Bonds may be treated as having been issued with original issue discount. The prepayment assumption that will be used for purposes of computing original issue discount, if any, for federal income tax purposes is a CPR of []%. No representation is made that the Mortgage Loans will, in fact, prepay at this or any other rate. ERISA MATTERS Fiduciaries of employee benefit plans and certain other retirement plans and arrangements, including individual retirement accounts and annuities, Keogh plans, and collective investment funds in which such plans, accounts, annuities or arrangements are invested, that are subject to the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), or corresponding provisions of the Internal Revenue Code of 1986, as amended (the "Code") (any of the foregoing a "Plan"), persons acting on behalf of a Plan, or persons using the assets of a Plan ("Plan Investors"), should carefully review with their legal advisors whether the purchase or holding of the Bonds could give rise to a transaction that is prohibited under ERISA or the Code or cause the Mortgage Loans securing the Bonds to be treated as "plan assets" for purposes of S-30 regulations of the Department of Labor set forth in 29 C.F.R. 2510.3-101 (the "Plan Asset Regulations"). Prospective investors should be aware that, although certain exceptions from the application of the prohibited transaction rules and the Plan Asset Regulations exist, there can be no assurance that any such exception will apply with respect to the acquisition of the Bonds. If the Bonds are treated as equity for purposes of ERISA, the purchaser of the Bonds could be treated as having acquired a direct interest in the Mortgage Loans securing the Bonds. In that event, the purchase, holding, or resale of the Bonds could result in a transaction that is prohibited under ERISA or the Code. Furthermore, regardless of whether the Bonds are treated as equity for purposes of ERISA, the acquisition or holding of the Bonds by or on behalf of a Plan could still be considered to give rise to a prohibited transaction if the Issuer, the Trustee, the Master Servicer, any Servicer or any of their respective Affiliates is or becomes a party in interest or a disqualified person with respect to such Plan. However, one or more alternative exemptions may be available with respect to certain prohibited transaction rules of ERISA that might apply in connection with the initial purchase, holding and resale of the Bonds, depending in part upon the type of Plan fiduciary making the decision to acquire the Bonds and the circumstances under which such decision is made. Those exemptions include, but are not limited to: (i) Prohibited Transaction Class Exemption ("PTCE") 95-60, regarding investments by insurance company general accounts; (ii) PTCE 91-38, regarding investments by bank collective investment funds; (iii) PTCE 90-1, regarding investments by insurance company pooled separate accounts; (iv) PTCE 84-14, regarding transactions negotiated by qualified professional asset managers; or (v) PTCE 96-23, regarding transactions effected by in-house asset managers. Before purchasing the Bonds, a Plan subject to the fiduciary responsibility provisions of ERISA or described in Section 4975(e)(1) (and not exempt under Section 4975(g)) of the Code should consult with its counsel to determine whether the conditions of any exemption would be met. A purchaser of the Bonds should be aware, however, that even if the conditions specified in one or more exemptions are met, the scope of the relief provided by an exemption might not cover all acts that might be construed as prohibited transactions. Although not entirely free from doubt, the Issuer believes that the Bonds will be treated as debt obligations without significant equity features for purposes of the Plan Asset Regulations. Accordingly, a Plan that acquires the Bonds should not be treated as having acquired a direct interest in the assets of the Issuer. However, there can be no complete assurance that the Bonds will be treated as debt obligations without significant equity features for purposes of the Plan Asset Regulations. [Revise per REMIC regular interests] METHOD OF DISTRIBUTION Subject to the terms and conditions set forth in the Underwriting Agreement between the depositor, Redwood Trust and the underwriter, the depositor has agreed to cause the issuer to sell to the underwriter, and the underwriter has agreed to purchase from the Issuer, the Bonds. Distribution of the bonds will be made by the underwriter from time to time in negotiated transactions or otherwise at varying prices to be determined at the time of sale. In connection with the sale of the bonds, the Underwriter may be deemed to have received compensation from the issuer in the form of underwriting discounts. The underwriter intends to make a secondary market in the bonds, but has no obligation to do so. There can be no assurance that a secondary market for the bonds will develop or, if it does develop, that it will continue or that it will provide bondholders with a sufficient level of liquidity of investment. The bonds will not be listed on any national securities exchange. The depositor and Redwood Trust have agreed to indemnify the underwriter against, or make contributions to the underwriter with respect to, certain liabilities, including liabilities under the Securities Act of 1933, as amended. LEGAL MATTERS The validity of the Bonds will be passed upon for the Issuer by Tobin & Tobin, a professional corporation, San Francisco, California. Certain tax matters will be passed upon by for the Issuer by Chapman and Cutler LLP, San Francisco, California. will act as counsel for the underwriter. S-31 RATINGS It is a condition of the issuance of the Senior Bonds that they be rated AAA by and AAA by ( and , together, the "Rating Agencies"). It is a condition to the issuance of the Subordinated Bonds that they be rated [AA] by . The ratings assigned by to collateralized mortgage obligations address the likelihood of the receipt of all payments on the mortgage loans by the related bondholders under the agreements pursuant to which such bonds are issued. 's ratings take into consideration the credit quality of the related mortgage pool, including any credit support providers, structural and legal aspects associated with such bonds, and the extent to which the payment stream on the mortgage pool is adequate to make the payments required by such bonds. 's ratings on such bonds do not, however, constitute a statement regarding frequency of prepayments of the mortgage loans. The ratings assigned by to the Senior Bonds address the likelihood of the receipt of all payments on the mortgage loans by the related Bondholders under the agreements pursuant to which such bonds are issued. 's ratings take into consideration the credit quality of the related mortgage pool, including any credit support providers, structural and legal aspects associated with such bonds, and the extent to which the payment stream on such mortgage pool is adequate to make payments required by such bonds. 's ratings on such bonds do not, however, constitute a statement regarding frequency of prepayments on the related mortgage loans. The ratings of the Rating Agencies do not address the possibility that, as a result of principal prepayments, Bondholders may receive a lower than anticipated yield. The ratings assigned to the Bonds should be evaluated independently from similar ratings on other types of securities. A rating is not a recommendation to buy, sell or hold securities and may be subject to revision or withdrawal at any time by the Rating Agencies. The Issuer has not requested a rating of the Bonds by any rating agency other than the Rating Agencies; there can be no assurance, however, as to whether any other rating agency will rate the Bonds or, if it does, what rating would be assigned by such other rating agency. The rating assigned by such other rating agency to the Bonds could be lower than the respective ratings assigned by the Rating Agencies. S-32 INDEX OF DEFINED TERMS
PAGE ---- Adjustment Date............................................. S-22 Advance..................................................... S-31 Available Funds............................................. S-14 Belgian Cooperative......................................... S-12 Beneficial owner............................................ S-10 Bond Distribution Amount.................................... S-14 Bond Interest Rate.......................................... S-15 Bond Owners................................................. S-10 Bond Trustee................................................ S-3 Bonds....................................................... S-1, S-3, S-9 Book-Entry Bonds............................................ S-10 CEDEL Participants.......................................... S-11 Class Principal Amount...................................... S-10 Code........................................................ S-32 Collection Account.......................................... S-11 Company..................................................... S-3, S-9 Controlling Class........................................... S-20 Cooperative................................................. S-12 CPR......................................................... S-19 Custodial Account........................................... S-11 Cut-off Date Pool Principal Balance......................... S-22 Definitive Bond............................................. S-10 Deleted Mortgage Loan....................................... S-28 Deposit Trust Agreement..................................... S-3 Distribution Account........................................ S-13 DTC......................................................... S-10 Due Date.................................................... S-22 ERISA....................................................... S-5, S-32 Euroclear Operator.......................................... S-12 Euroclear Participants...................................... S-12 European Depositaries....................................... S-10 Expense Fee Rate............................................ S-30 FHLMC....................................................... S-23 Financial Intermediary...................................... S-10 FNMA........................................................ S-23 Index....................................................... S-22 Indirect Participants....................................... S-11 Insurance Proceeds.......................................... S-11 Interest Accrual Period..................................... S-15 Interest Payment Amount..................................... S-15 Issuer...................................................... S-3 Liquidated Mortgage Loan.................................... S-17 Liquidation Proceeds........................................ S-14 Loan-to-Value Ratio......................................... S-23 Management Agreement........................................ S-3 Margin...................................................... S-22
S-33
PAGE ---- Master Servicing Fee........................................ S-30 Maximum Rate................................................ S-22 Morgan...................................................... S-12 Mortgage.................................................... S-28 Mortgage File............................................... S-28 Mortgage Loan Pool.......................................... S-21 Mortgage Loan Purchase Agreement............................ S-21 Mortgage Loans.............................................. S-21 Mortgage Note............................................... S-28 Mortgaged Property.......................................... S-21 Net Interest Shortfall...................................... S-15 Net Interest Shortfalls..................................... S-15 Offered Bonds............................................... S-1, S-3, S-10 Original Subordinated Class Principal Amount................ S-10 Original Senior Class Principal Amount...................... S-10 Original Residual Class Principal Amount.................... S-10 Originator.................................................. S-28 Owner Trustee............................................... S-3 Participants................................................ S-10 Payment Date................................................ S-14 Periodic Rate Cap........................................... S-22 Plan........................................................ S-32 Plan Asset Regulations...................................... S-32 Plan Investors.............................................. S-32 Pool Principal Balance...................................... S-16 Prepayment Assumption....................................... S-19 Prepayment Interest Shortfall............................... S-15 Primary Mortgage Insurance Policy........................... S-23 PTCE........................................................ S-32 Rating Agencies............................................. S-6, S-33 Realized Loss............................................... S-17 Record Date................................................. S-14 Redwood Trust............................................... S-3, S-9 Relevant Depositary......................................... S-10 Relief Act Reduction........................................ S-15 REMIC....................................................... S-32 REO Property................................................ S-31 Replacement Mortgage Loan................................... S-28 Residual Bonds.............................................. S-9 Residual Certificates....................................... S-10 Residual Class Principal Amount............................. S-10 Residual Interest Carryover Shortfall....................... S-15 Residual Interest Payment Amount............................ S-15 Rules....................................................... S-10 Scheduled Payments.......................................... S-22 Senior Bond Interest Rate................................... S-15 Senior Bonds................................................ S-3, S-9 Senior Class Principal Amount............................... S-10
S-34
PAGE ---- Senior Interest Payment Amount.............................. S-15 Senior Percentage........................................... S-16 Senior Principal Payment Amount............................. S-16 Servicer.................................................... S-29 Servicing Agreement......................................... S-29 Servicing Fee............................................... S-30 Shortfalls.................................................. S-17 SMMEA....................................................... S-6 Stated Principal Balance.................................... S-16 Structuring Assumptions..................................... S-18 Subordinated Bond Interest Rate............................. S-15 Subordinated Bonds.......................................... S-3, S-9 Subordinated Class Principal Amount......................... S-10 Subordinated Interest Carryover Shortfall................... S-15 Subordinated Interest Payment Amount........................ S-15 Subordinated Percentage..................................... S-16 Subordinated Principal Carryover Shortfall.................. S-16 Subordinated Principal Payment Amount....................... S-16 Substitution Adjustment Amount.............................. S-28 Terms and Conditions........................................ S-12
S-35 ANNEX I GLOBAL CLEARANCE, SETTLEMENT AND TAX DOCUMENTATION PROCEDURES Except in certain limited circumstances, the globally offered Sequoia Mortgage Trust , Collateralized Mortgage Bonds (the "Global Bonds") will be available only in book-entry form. Investors in the Global Bonds may hold such Global Bonds through any of The Depository Trust Company ("DTC"), CEDEL or Euroclear. The Global Bonds will be tradeable as home market instruments in both the European and U.S. domestic markets. Initial settlement and all secondary trades will settle in same-day funds. Secondary market trading between investors holding Global Bonds through CEDEL and Euroclear will be conducted in the ordinary way in accordance with their normal rules and operating procedures and in accordance with conventional Eurobond practice (i.e., seven calendar day settlement). Secondary market trading between investors holding Global Bonds through DTC will be conducted according to the rules and procedures applicable to U.S. corporate debt obligations and prior collateralized mortgage bond issues. Secondary cross-market trading between CEDEL or Euroclear and DTC Participants holding Global Bonds will be effected on a delivery-against-payment basis through the respective Depositaries of CEDEL and Euroclear (in such capacity) and as DTC Participants. Non-U.S. holders (as described below) of Global Bonds 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 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 (each, a "DTC Participant"). As a result, CEDEL and Euroclear will hold positions on behalf of their participants through their respective Depositaries, which in turn will hold such positions in accounts as DTC Participants. Investors electing to hold their Global Bonds through DTC will follow the settlement practices' applicable to other collateralized mortgage bond issues. Investor securities custody accounts will be credited with their holdings against payment in same-day funds on the settlement date. Investors electing to hold their Global Bonds through CEDEL 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 Bonds will be credited to the securities custody accounts on the settlement date against payment in same-day funds. SECONDARY MARKET TRADING Since the purchaser determines the place of delivery, it is important to establish at the time of the trade where both the purchaser's and seller's accounts are located to ensure that settlement can be made on the desired value date. TRADING BETWEEN DTC PARTICIPANTS. Secondary market trading between DTC Participants will be settled using the procedures applicable to prior collateralized mortgage bond issues in same-day funds. TRADING BETWEEN CEDEL AND/OR EUROCLEAR PARTICIPANTS. Secondary market trading between CEDEL Participants or Euroclear Participants will be settled using the procedures applicable to conventional Eurobonds in same-day funds. TRADING BETWEEN DTC SELLER AND CEDEL OR EUROCLEAR PURCHASER. When Global Bonds are to be transferred from the account of a DTC Participant to the account of a CEDEL Participant or a Euroclear Participant, the purchaser will send instructions to CEDEL or Euroclear through a CEDEL Participant or Euroclear Participant at least one business day prior to settlement. CEDEL or Euroclear will instruct the S-36 respective 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 such accrual period and a year assumed to consist of 360 days. For transactions settling on the 31st of the month, payment will include interest accrued to and excluding the first day of the following month. Payment will then be made by the respective Depositary of 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 CEDEL 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 CEDEL or Euroclear cash debt will be valued instead as of the actual settlement date. CEDEL 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 CEDEL or Euroclear. Under this approach, they may take on credit exposure to CEDEL or Euroclear until the Global Bonds are credited to their accounts one day later. As an alternative, if CEDEL or Euroclear has extended a line of credit to them, CEDEL Participants or Euroclear Participants can elect not to preposition funds and allow that credit line to be drawn upon the finance settlement. Under this procedure, CEDEL 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 such overdraft charges, although this result will depend on each CEDEL Participant's or Euroclear Participant's particular cost of funds. Since the settlement is taking place during New York business hours, DTC Participants can employ their usual procedures for sending Global Bonds to the respective European Depository for the benefit of CEDEL Participants or Euroclear Participants. The sale proceeds will be available to the DTC seller on the settlement date. Thus, to the DTC Participants a cross-market transaction will settle no differently than a trade between two DTC Participants. TRADING BETWEEN CEDEL OR EUROCLEAR SELLER AND DTC PURCHASER. Due to time zone differences in their favor, CEDEL 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 CEDEL or Euroclear through a CEDEL Participant or Euroclear Participant at least one business day prior to settlement. In these cases CEDEL or Euroclear will instruct the respective Depositary, as appropriate, to deliver 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 such accrual period and a year assumed to consist of 360 days. For transactions settling on the 31st of the month, payment will include interest accrued to and excluding the first day of the following month. The payment will then be reflected in the account of the CEDEL Participant or Euroclear Participant the following day, and receipt of the cash proceeds in the CEDEL 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 CEDEL 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 valued date (i.e., the trade fails), receipt of the cash proceeds in the CEDEL Participant's or Euroclear Participant's account would instead be valued as of the actual settlement date. Finally, day traders that use CEDEL or Euroclear and that purchase Global Bonds from DTC Participants for delivery to CEDEL Participants or Euroclear Participants should note that these trades would S-37 automatically fail on the sale side unless affirmative action were taken. At least three techniques should be readily available to eliminate this potential problem: (a) borrowing through CEDEL or Euroclear for one day (until the purchase side of the day trade is reflected in their CEDEL or Euroclear accounts) in accordance with the clearing system's customary procedures; (b) 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 CEDEL or Euroclear account in order to settle the sale side of the trade; or (c) staggering the value dates for the buy and sell sides of the trade so that the value date for the purchase from the DTC Participant is at least one day prior to the value date for the sale to the CEDEL Participant or Euroclear Participant. CERTAIN U.S. FEDERAL INCOME TAX DOCUMENTATION REQUIREMENTS A beneficial owner of the Global Bonds holding securities through CEDEL or Euroclear (or through DTC if the holder has an address outside the U.S.) will be subject to the 30% U.S. withholding tax that generally applies to payments of interest (including original issue discount) on registered debt issued by U.S. Persons, unless (i) each clearing system, bank or other financial institution that holds customers' securities in the ordinary course of its trade or business in the chain of intermediaries between such beneficial owner and the U.S. entity required to withhold tax complies with applicable certification requirements and (ii) such beneficial owner takes one of the following steps to obtain an exemption or reduced tax rate: EXEMPTION FOR NON-U.S. PERSONS (FORM W-8). Beneficial owners of the Global Bonds that are non-U.S. Persons 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 such change. EXEMPTION FOR NON-U.S. PERSONS WITH EFFECTIVELY CONNECTED INCOME (FORM 4224). A non-U.S. Person, 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). EXEMPTION OR REDUCED RATE FOR NON-U.S. PERSONS RESIDENT IN TREATY COUNTRIES (FORM 1001). Non-U.S. Persons that are Bond Owners residing in a country that has a tax treaty with the United States can obtain an exemption or reduced tax rate (depending on the treaty terms) by filing Form 1001 (Ownership, 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 the Bond Owner or his 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 Bond Owner of a 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 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, or an estate whose income is subject to U.S. federal income tax regardless of its source of income, or a trust if a court within the United States is able to exercise primary supervision of the administration of the trust and one or more United States fiduciaries have the authority to control all substantial decisions of the trust. 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. S-38 The information in this prospectus supplement is not complete and may be changed. We may not sell these securities until the registration statement filed with the SEC is effective. This prospectus supplement is not an offer to sell these securities and is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted. SUBJECT TO COMPLETION, DATED , 200 PROSPECTUS SUPPLEMENT (TO PROSPECTUS DATED , 2004) $ (APPROXIMATE) SEQUOIA MORTGAGE TRUST 200 MORTGAGE LOAN ASSET-BACKED CERTIFICATES, SERIES 200 [LOGO] [ ] AS DEPOSITOR [LOGO] [ ] AS MASTER SERVICER The certificates represent obligations of the trust only and do not represent an interest in or obligation of the depositor, the trustee or any of their affiliates. This prospectus supplement may be used to offer and sell the certificates only if accompanied by the prospectus. THE TRUST - will issue classes of senior certificates; - will issue a single residual certificate; and - will make a REMIC election for federal income tax purposes. THE CERTIFICATES - represent the entire beneficial interest in a trust, whose assets consist of pools of conventional mortgage loans; - currently have no trading market; and - are obligations of the trust only and are not obligations of the depositor or its affiliates. CREDIT ENHANCEMENT - will be provided in the form of overcollateralization and an irrevocable and unconditional certificate guaranty insurance policy issued by [Insurer]. REVIEW THE INFORMATION IN "RISK FACTORS" ON PAGE S-8 HEREIN AND ON PAGE 7 IN THE PROSPECTUS. - - For complete information about the certificates, read both this prospectus supplement and the prospectus. - - , the underwriter, will buy the offered certificates from at a price equal to of their face value. The underwriter will sell the offered certificates from time to time in negotiated transactions. NEITHER THE SEC NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE ADEQUACY OR ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. [UNDERWRITER] , 200 TABLE OF CONTENTS PROSPECTUS SUPPLEMENT Important Notice about the Information Presented in this Prospectus Supplement and the Accompanying Prospectus..... S-3 Where You can Find More Information......................... S-3 Summary..................................................... S-4 Risk Factors................................................ S-8 The Insurer................................................. S-9 The Depositor............................................... S-9 Description of the Mortgage Loans........................... S-9 Servicing of the Mortgage Loans............................. S-17 Description of the Certificates............................. S-19 Use of Proceeds............................................. S-34 Federal Income Tax Consequences............................. S-34 Prepayment and Yield Considerations......................... S-34 State Taxes................................................. S-37 ERISA Considerations........................................ S-37 Legal Investment Considerations............................. S-38 Underwriting................................................ S-38 Experts..................................................... S-38 Legal Matters............................................... S-38 Ratings..................................................... S-38 Index of Defined Terms...................................... S-40 Annex I: Insurer's Audited Financial Statements............. A-I-1 Annex II: Clearance, Settlement and Tax Documentation Procedures................................................ A-II-1
S-2 IMPORTANT NOTICE ABOUT THE INFORMATION PRESENTED IN THIS PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS We tell you about the certificates in two separate documents that progressively provide more detail: (1) the accompanying prospectus, which provides general information, some of which may not apply to your series of certificates, and (2) this prospectus supplement, which describes the specific terms of your series of certificates and may be different from the information in the prospectus. IF THE TERMS OF YOUR SERIES OF CERTIFICATES AND ANY OTHER INFORMATION CONTAINED HEREIN VARY BETWEEN THIS PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS, YOU SHOULD RELY ON THE INFORMATION IN THIS PROSPECTUS SUPPLEMENT. You can find a listing of the pages where capitalized terms used in this prospectus supplement are defined under "Index of Defined Terms" beginning on page S- in this prospectus supplement. The underwriter may engage in transactions that stabilize, maintain, or in some way affect the price of the certificates. These types of transactions may include stabilizing the purchase of certificates to cover syndicate short positions and the imposition of penalty bids. For a description of these activities, please read the section entitled "Underwriting" in this prospectus supplement. WHERE YOU CAN FIND MORE INFORMATION Federal securities law requires the filing of certain information with the Securities and Exchange Commission (the "SEC"), including annual, quarterly and special reports, proxy statements and other information. You can read and copy these documents at the public reference facility maintained by the SEC at Judiciary Plaza, 450 Fifth Street, NW, Room 1024, Washington, DC 20549. You can also copy and inspect such reports, proxy statements and other information at the following regional offices of the SEC: New York Regional Office Chicago Regional Office 233 Broadway 500 West Madison Street, Suite 1400 New York, New York 10279 Chicago, Illinois 60661
Please call the SEC at 1-800-SEC-0330 for further information on the public reference rooms. SEC filings are also available to the public on the SEC's web site at http://www.sec.gov. The SEC allows us to "incorporate by reference" the information we file with it, which means that we can disclose important information to you by referring you to those documents. The information that we incorporate by reference is considered to be part of this prospectus supplement, and later information that we file with the SEC will automatically update and supersede this information. This prospectus supplement and the accompanying prospectus are part of a registration statement filed by the Depositor with the SEC (Registration No. ). You may request a free copy of any of the above filings by writing or calling: [DEPOSITOR] ONE BELVEDERE PLACE, SUITE MILL VALLEY, CA 94941 (415) 389-7373 You should rely only on the information provided in this prospectus supplement or the accompanying prospectus or incorporated by reference herein. We have not authorized anyone else to provide you with different information. You should not assume that the information in this prospectus supplement or the accompanying prospectus is accurate as of any date other than the date on the cover page of this prospectus supplement or the accompanying prospectus or that the information incorporated by reference herein is accurate as of any date other than the date stated therein. S-3 SUMMARY This summary highlights selected information from this document and does not contain all of the information that you need to consider in making your investment decision. Please read this entire prospectus supplement and the accompanying prospectus carefully for additional information about the offered certificates. MORTGAGE LOAN ASSET-BACKED CERTIFICATES, SERIES 200 -
INITIAL CLASS CERTIFICATE PRINCIPAL LAST SCHEDULED CLASS RATE BALANCE PAYMENT DATE RATING RATING TYPE - ----- ----------- ------------- -------------- ------ ------ ---- Class A-1........................ % $ -- Class A-2........................ % $ -- Class R.......................... N/A $ 0 --
The initial class principal balance is subject to a variance of %. The Class R certificates are not being offered. THE SELLER [Seller] THE DEPOSITOR - - maintains its principal office at One Belvedere Place, Suite , Mill Valley, California 94941. Its telephone number is (415) 389-7373. THE MASTER SERVICER [Master Servicer] The master servicer will act as servicer under the pooling and servicing agreement. TRUST - Sequoia Mortgage Trust 200 . TRUSTEE - [Trustee] INSURER - [Insurer]. CUT-OFF DATE - , 200 . CLOSING DATE - , 200 . PAYMENT DATE - The 15th day of each month, or if that day is not a business day, the next business day. The first payment date is , 200 . DUE PERIOD - The calendar month immediately preceding a determination date or a payment date, as applicable. REGISTRATION OF OFFERED CERTIFICATES We will issue the offered certificates in book-entry form. You will hold your interests either through a depository in the United States or through one of two depositories in Europe. While the certificates are book-entry, they will be registered in the name of a depository, or in the name of a depository's nominee. TRUST PROPERTY The trust property is held by the trustee for the benefit of the certificateholders. The trust property includes: - two pools of closed-end fixed rate mortgage loans, secured by first and second deeds of S-4 trust or mortgages on one- to four-family residential properties; - payments on the mortgage loans received on and after the cut-off date; - property that secured a mortgage loan which has been acquired by foreclosure or deed in lieu of foreclosure; - rights under any hazard insurance policies covering the mortgaged properties; and - amounts on deposit in accounts described in this prospectus supplement. THE MORTGAGE LOANS POOL I The mortgage loans in pool I will consist of: - Mortgage loans secured by first or second lien deeds of trust on residential properties located in states [and in the District of Columbia]. As of the close of business on , 200 , these mortgage loans in pool I had an aggregate principal balance of approximately $ and had the following characteristics: Number of Mortgage Loans: Range of Outstanding $ to Principal Balances(1): $ Average Outstanding Principal Balance(1): $ Range of Remaining Terms to Stated Maturity: to months Weighted Average Remaining Term to Stated Maturity(1): months Range of Loan Rates: % to % Weighted Average Loan Rate(1): % Range of Combined Loan-to- Value Ratios(1): % to % Weighted Average Combined Loan-to-Value Ratio(1): % Geographic Concentrations in Excess of 5%(1): [State] %
- --------------- (1) Approximate - The mortgage loans in pool I substantially conform to loan origination standards with respect to the date of origination set forth by Freddie Mac. POOL II The mortgage loans in pool II will consist of: - Mortgage loans secured by first or second lien deeds of trust on residential properties located in states [and the District of Columbia]. As of the close of business on , 200 , these mortgage loans in pool II had an aggregate principal balance of approximately $ and had the following characteristics: Number of Mortgage Loans: Range of Outstanding Principal Balances(1): $ to $ Average Outstanding Principal Balance(1): $ Range of Remaining Terms to Stated Maturity: to months Weighted Average Remaining Term to Stated Maturity(1): months Range of Loan Rates: % to % Weighted Average Loan Rate(1): % Range of Combined Loan-to- Value Ratios(1): % to % Weighted Average Combined Loan-to-Value Ratio(1): % Geographic Concentrations in Excess of 5%(1): [State] %
- --------------- (1) Approximate - The mortgage loans in pool II do not conform to loan origination standards with respect to the date of origination set forth by Freddie Mac. MONTHLY ADVANCES If the servicer reasonably believes that cash advances can be recovered from future payments or collections on the mortgage loans, the servicer will make cash advances to the trust to cover delinquent mortgage loan payments. The servicer will make advances only to maintain a regular flow of scheduled interest and principal payments on the certificates, not to guarantee or insure against losses. S-5 THE CERTIFICATES 1. General - Each month the trustee will calculate the amount you are owed. - If you hold a certificate on the last day of a calendar month, you will be entitled to receive payments on the payment date in the next month. 2. Interest Distributions - Interest accrues on the certificates from the first day of a calendar month through the last day of that calendar month. On each payment date, you will be entitled to the following: - interest at the certificate rate that accrued during the interest period; and - any interest that was due on a prior payment date and not paid. In addition, interest will have accrued on the amount of interest which was previously due and not paid. 3. Principal distributions - Principal distributions are payable on each payment date. However, no class of certificates will receive a principal distribution until the other classes with a lower numerical class designation are paid in full. - Shortfalls in available funds may result in a class receiving less than what is due. - The calculation of the amount a class is entitled to receive on each payment date and the priority of principal distributions among the certificates is described in this prospectus supplement under "Description of the Certificates -- Principal." CREDIT ENHANCEMENTS 1. The Certificate Insurance Policy: The policy guarantees the payment of: - accrued and unpaid interest on the offered certificates; - principal losses on the mortgage loans; and - any principal amounts owed to the certificateholders on the last scheduled payment date. 2. Overcollateralization: Certain receipts in excess of the amounts due on the certificates will be applied as principal payments to the certificates. This will result in an acceleration of principal payments on the certificates relative to the amortization of the related mortgage loans, increasing the amount of credit support for the certificates. PRE-FUNDING ACCOUNT On the closing date, the depositor shall deposit cash to the trust, which the trust will use to acquire additional mortgage loans from the seller. The trustee may only acquire such additional mortgage loans until . If any amounts are left in the pre-funding accounts on , 200 , holders of the certificates will receive such amounts as an early payment of principal. CAPITALIZED INTEREST ACCOUNT On the closing date, the trustee shall deposit cash to the trust which will be used to cover interest shortfalls on the certificates expected to occur prior to the trust's purchase of the additional mortgage loans. Until the trust purchases the additional mortgage loans or prepays the certificates, interest payments on the mortgage loans will not cover the amount of interest due on the certificates. Any amounts left in the capitalized interest account after , 200 will be paid to seller. OPTIONAL TERMINATION If the total pool balance declines below [10%] of the total pool balance as of the cut-off date, then the depositor may purchase all of the trust assets and terminate the trust. In this event, you will receive a final distribution. FEDERAL INCOME TAX CONSEQUENCES Chapman and Cutler LLP acted as special tax counsel to the trust and is of the opinion that the trust will be treated as a real estate mortgage investment conduit, or REMIC, for federal income tax purposes and the class [A] certificates will be regular interests in the REMIC and will be treated as debt instruments of the REMIC for federal income tax purposes. S-6 ERISA CONSIDERATIONS The fiduciary responsibility provisions of ERISA and prohibited transaction provisions of ERISA and the Internal Revenue Code of 1986, as amended, can limit investments by certain pension and other employee benefit plans. Provided certain conditions are met, the offered certificates may be purchased by pension and other employee benefit plans. If you are a fiduciary of a pension or other employee benefit plan which is subject to ERISA, you should consult with your counsel regarding the applicability of the provisions of ERISA and the Code before purchasing a certificate. LEGAL INVESTMENT CONSIDERATIONS The certificates are not eligible under the Secondary Mortgage Market Enhancement Act of 1984. Consequently, some institutions will be unable to invest in the certificates. CERTIFICATE RATING The trust will not issue the offered certificates unless they receive a rating of " " by [First Rating Agency] and " " by [Second Rating Agency]. A rating is not a recommendation to buy, sell or hold securities and may be subject to revision or withdrawal by either rating agency. S-7 RISK FACTORS YOU SHOULD CAREFULLY CONSIDER THE FOLLOWING RISK FACTORS PRIOR TO ANY PURCHASE OF CERTIFICATES. YOU SHOULD ALSO CAREFULLY CONSIDER THE INFORMATION SET FORTH UNDER "RISK FACTORS" IN THE PROSPECTUS. RATINGS BASED PRIMARILY ON CLAIMS -- PAYING ABILITY OF THE INSURER The ratings on the certificates depends primarily on an assessment by the rating agencies of the mortgage loans and upon the financial strength of the insurer. Any reduction of the rating assigned to the financial strength of the insurer may cause a corresponding reduction of the ratings assigned to the certificates. A reduction in the rating assigned to the certificates will reduce the market value of the certificates and may affect your ability to sell them. INTEREST PAYMENTS ON THE MORTGAGE LOANS MAY BE REDUCED PREPAYMENTS OF PRINCIPAL MAY REDUCE INTEREST PAYMENTS. If a mortgagor prepays a mortgage loan in full, the mortgagor is charged interest only up to the date of the prepayment, instead of a full month. The servicer is obligated to reduce its servicing fee in the month of such prepayment so that one month's interest is paid with such prepayment in full. If the servicing fee is insufficient to pay such interest shortfalls attributed to prepayments, a shortfall in interest due on the certificates may result. The insurer is required to cover this shortfall. If the insurer fails to perform its obligations under the policy, you may incur a loss. CERTAIN INTEREST SHORTFALLS ARE NOT COVERED BY THE SERVICER OR THE INSURANCE POLICY. The Servicemembers Civil Relief Act permits certain modifications to the payment terms for mortgage loans, including a reduction in the amount of interest paid by the borrower, under certain circumstances. Neither the servicer nor the insurer will pay for any interest shortfalls created by the Servicemembers Civil Relief Act. RISK OF LOSSES AS A RESULT OF GEOGRAPHIC CONCENTRATION As of , 200 , approximately % of the mortgage loans in pool I by aggregate pool principal balance were secured by properties that are located in the state of [State] and approximately % of the mortgage loans in pool I by aggregate pool principal balance were secured by properties that are located in the state of [State]. As of , 200 , approximately % of the mortgage loans in pool II by aggregate pool principal balance were secured by properties that are located in the state of [State] and approximately % of the mortgage loans in pool II by aggregate pool principal balance were secured by properties that are located in the state of [State]. An overall decline in the residential real estate markets in these states could reduce the values of the properties securing such mortgage loans such that the principal balances of the related mortgage loans, together with any primary financing on the properties underlying these mortgage loans, could equal or exceed the value of such properties. Since the residential real estate market is influenced by many factors, including the general condition of the economy and interest rates, there is no guaranty that the residential real estate markets in these states will not weaken. If these residential real estate markets should weaken after the dates of origination of the mortgage loans, losses on such mortgage loans will probably increase substantially. In the event of a natural disaster, such as an earthquake, fire or flood, the values of the properties may decline. Neither the mortgages, the Sale and Servicing Agreement nor the loan agreements require natural disaster insurance that would cover earthquake damage. RISK OF INCREASED DELINQUENCY, DEFAULT AND FORECLOSURE EXPERIENCE DUE TO LESS STRINGENT UNDERWRITING STANDARDS The seller's underwriting standards are generally less stringent than those of Fannie Mae or the Freddie Mac with respect to credit history and certain other items. If a borrower has a poor credit history, the seller S-8 may still make a loan to the borrower. This approach to underwriting may result in higher rates of delinquencies, defaults and foreclosures than for mortgage loans underwritten in a more traditional manner. [RISK OF PREPAYMENT DUE TO SUBSEQUENT MORTGAGE LOANS The trust will buy additional mortgage loans from the seller until . The seller will sell mortgage loans to the trust if it has mortgage loans to sell. The ability of the seller to originate and acquire additional mortgage loans is affected by a variety of factors, including interest rates, unemployment levels, the rate of inflation and consumer perception of economic conditions generally. If the full amount deposited in the pre-funding accounts for the purpose of purchasing additional mortgage loans cannot be used for that purpose within [three] months from the closing date, any remaining amounts will be paid to you as a prepayment on the certificates.] THE INSURER The information set forth in this section has been provided by [Insurer] (the "INSURER") for inclusion in this Prospectus Supplement. No representation is made by [Underwriter] (the "UNDERWRITER"), the Depositor, the Servicer, the Indenture Trustee or any of their affiliates as to the accuracy or completeness of such information. [Information regarding the Insurer to be provided by the Insurer] THE DEPOSITOR [Sequoia] (the "DEPOSITOR") is a Delaware corporation which was incorporated on . The Depositor is a special purpose corporation organized for limited purposes, with limited assets and a limited operating history. The depositor maintains its principal office at One Belvedere Place, Suite , Mill Valley, California 94941. Its telephone number is (415) 389-7373. DESCRIPTION OF THE MORTGAGE LOANS The certificates will be secured by a pool of -year conventional mortgage loans secured by first liens on one- to four-family residential properties (each, a "Mortgaged Property"). None of the Mortgage Loans will be guaranteed by any governmental agency. All of the Mortgage Loans will have been deposited with the Issuer by the Company which, in turn, will have acquired them from Redwood Trust pursuant to an agreement (the "Mortgage Loan Purchase Agreement") between the Company and Redwood Trust. All of the Mortgage Loans will have been acquired by Redwood Trust in the ordinary course of its business and substantially in accordance with the underwriting criteria specified herein. GENERAL. Under the Mortgage Loan Purchase Agreement, Redwood Trust will make certain representations, warranties and covenants to the Company relating to, among other things, the due execution and enforceability of the Mortgage Loan Purchase Agreement and certain characteristics of the Mortgage Loans and, subject to the limitations described below under "-- Assignment of Mortgage Loans," will be obligated to purchase or substitute a similar mortgage loan for any Mortgage Loan as to which there exists deficient documentation or an uncured material breach of any such representation, warranty or covenant. Under the Deposit Trust Agreement, the Company will assign all of its rights under the Mortgage Loan Purchase Agreement to the Issuer. Under the Agreement, the Issuer will pledge all its right, title and interest in and to such representations, warranties and covenants (including Redwood Trust's purchase obligation) to the Trustee for the benefit of the certificateholders. The Issuer will make no representations or warranties with respect to the Mortgage Loans and will have no obligation to repurchase or substitute Mortgage Loans with deficient documentation or which are otherwise defective. The obligations of Redwood Trust with respect to the certificates are limited to Redwood Trust's obligation to purchase or substitute Mortgage Loans with deficient documentation or which are otherwise defective under the Mortgage Loan Purchase Agreement. S-9 Certain information with respect to the Mortgage Loan Pool is set forth below. Prior to the Closing Date, Mortgage Loans may be removed from the collateral and other Mortgage Loans may be substituted therefor. The Issuer believes that the information set forth herein with respect to the Mortgage Loans as presently constituted is representative of the characteristics of the Mortgage Loans as they will be constituted at the Closing Date, although certain characteristics of the Mortgage Loans in the Mortgage Loan Pool may vary. Unless otherwise indicated, information presented below expressed as a percentage (other than rates of interest) are approximate percentages based on the Stated Principal Balances of the Mortgage Loans as of the Cut-off Date. As of the Cut-off Date, the aggregate of the Stated Principal Balances of the Mortgage Loans is expected to be approximately $ (the "Cut-off Date Pool Principal Balance"). [The Mortgage Loans provide for the amortization of the amount financed over a series of substantially equal monthly payments.] All of the Mortgage Loans provide for payments due on the first day of each month (the "Due Date"). At origination, substantially all of the Mortgage Loans had stated terms to maturity of years. Scheduled monthly payments made by Mortgagors on the Mortgage Loans ("Scheduled Payments") either earlier or later than the scheduled Due Dates thereof will not affect the amortization schedule or the relative application of such payments to principal and interest. [Mortgagors may prepay their Mortgage Loans at any time without penalty.] Each Mortgage Loan will bear interest at a [fixed][adjustable] Mortgage Rate. [Each Mortgage Loan will bear interest at a Mortgage Rate, subject to annual adjustment on the first day of the month specified in the related Mortgage Note (each such date, an "Adjustment Date"), equal to the sum, rounded to the nearest of one percentage point ( %), of (i) (the "Index") as made available by the and most recently available as of days prior to the Adjustment Date and (ii) a fixed percentage amount specified in the related Mortgage Note (the "Margin") provided, however, that the Mortgage Rate will not increase or decrease by more than percentage points ( %), except for Mortgage Loans, representing approximately % of the Cut-off Date Pool Principal Balance which will not increase or decrease by more than percentage points ( %), on the first Adjustment Date or more than percentage points ( %) on any Adjustment Date thereafter (the "Periodic Rate Cap"). The Index with respect to any Bond Interest Rate and any Payment Date shall be the Index in effect as of the first day of the month preceding the month in which such Payment Date occurs.] [All of the Mortgage Loans provide that over the life of the Mortgage Loan the Mortgage Rate will in no event increase by more than the Mortgage Rate fixed at origination plus a fixed number of percentage points specified in the related Mortgage Note (such rate, the "Maximum Rate"). None of the Mortgage Loans are subject to minimum Mortgage Rates. Effective with the first payment due on a Mortgage Loan after each related Adjustment Date, the Scheduled Payment will be adjusted to an amount which will pay interest at the adjusted rate and fully amortize the then-outstanding principal balance of the Mortgage Loan over its remaining term. If the Index ceases to be published or is otherwise unavailable, the Master Servicer will select an alternative index based upon comparable information.] Each Mortgage Loan is, by its terms, assumable in connection with a transfer of the related Mortgaged Property if the proposed transferee submits certain information to the Master Servicer required to enable it to evaluate the transferee's ability to repay the Mortgage Loan and if the Master Servicer reasonably determines that the security for the Mortgage Loan would not be impaired by the assumption. See "RISK FACTORS" herein and in the Prospectus. Each Mortgage Loan was originated on or after , 19 . The latest stated maturity date of any Mortgage Loan is , 20 . The earliest stated maturity date of any Mortgage Loan is , 20 . [As of the Cut-off Date, no Mortgage Loan was delinquent more than days.] [None of the Mortgage Loans are subject to buydown agreements.] [No Mortgage Loan provides for deferred interest or negative amortization.] S-10 No Mortgage Loan had a Loan-to-Value Ratio at origination of more than %. [Except for Mortgage Loans, representing approximately % of the Cut-off Date Pool Principal Balance,] each Mortgage Loan with a Loan-to-Value Ratio at origination of greater than 80% is covered by a primary mortgage insurance policy (each a "Primary Mortgage Insurance Policy") issued by a mortgage insurance company acceptable to the Federal National Mortgage Association ("FNMA"), the Federal Home Loan Mortgage Corporation ("FHLMC") or any nationally recognized statistical rating organization, which policy provides coverage of a portion of the original principal balance of the related Mortgage Loan equal to the product of the original principal balance thereof and a fraction, the numerator of which is the excess of the original principal balance of the related Mortgage Loan over 75% of the lesser of the appraised value and selling price of the related Mortgage Property and the denominator of which is the original principal balance of the related Mortgage Loan, plus accrued interest thereon and related foreclosure expenses. No such Primary Mortgage Insurance Policy will be required with respect to any such Mortgage Loan after the date on which the related Loan-to-Value Ratio is 80% or less or, based on a new appraisal, the principal balance of such Mortgage Loan represents 80% or less of the new appraised value. The "Loan-to-Value Ratio" of a Mortgage Loan, at any given time is a fraction, expressed as a percentage, the numerator of which is the principal balance of the related Mortgage Loan at the date of determination and the denominator of which is (a) in the case of a purchase, the lesser of the selling price of the Mortgaged Property and its appraised value determined in an appraisal obtained by the originator at origination of such Mortgage Loan, or (b) in the case of a refinance, the appraised value of the Mortgaged Property at the time of such refinance. No assurance can be given that the value of any Mortgaged Property has remained or will remain at the level that existed on the appraisal or sales date. If residential real estate values generally or in a particular geographic area decline, the Loan-to-Value Ratios might not be a reliable indicator of the rates of delinquencies, foreclosures and losses that could occur with respect to such Mortgage Loans. S-11 The following information sets forth in tabular format certain information, as of the Cut-off Date, as to the Mortgage Loans. Other than with respect to rates of interest, percentages (approximate) are stated by Stated Principal Balance of the Mortgage Loans as of the Cut-off Date and have been rounded in order to total 100%.
ORIGINAL LOAN-TO-VALUE RATIOS(1) - ----------------------------------------------------------------------------------------------- AGGREGATE NUMBER OF PRINCIPAL PERCENT OF MORTGAGE BALANCE MORTGAGE ORIGINAL LOAN-TO-VALUE RATIOS(%) LOANS OUTSTANDING POOL - ------------------------------------------------------- --------- ----------- ---------- $ % --- -------- ---- Total............................................. $ % === ======== ====
- --------------- (1) The weighted average original Loan-to-Value Ratio of the Mortgage Loans is expected to be approximately %.
ORIGINAL TERMS TO MATURITY(1) - ----------------------------------------------------------------------------------------------- AGGREGATE NUMBER OF PRINCIPAL PERCENT OF MORTGAGE BALANCE MORTGAGE ORIGINAL TERM TO MATURITY (MONTHS) LOANS OUTSTANDING POOL - ------------------------------------------------------- --------- ----------- ---------- $ % --- -------- ---- Total............................................. $ % === ======== ====
- --------------- (1) As of the Cut-off Date, the weighted average remaining term to maturity of the Mortgage Loans is expected to be approximately months. S-12
CURRENT MORTGAGE LOAN PRINCIPAL BALANCES(1) - ----------------------------------------------------------------------------------------------- AGGREGATE NUMBER OF PRINCIPAL PERCENT OF MORTGAGE BALANCE MORTGAGE RANGE OF CURRENT MORTGAGE LOAN PRINCIPAL BALANCES LOANS OUTSTANDING POOL - ------------------------------------------------------- --------- ----------- ---------- $ % --- -------- ---- Total............................................. $ % === ======== ====
- --------------- (1) As of the Cut-off Date, the average current Mortgage Loans principal balance is expected to be approximately $ .
CURRENT MORTGAGE RATES(1) - ----------------------------------------------------------------------------------------------- AGGREGATE NUMBER OF PRINCIPAL PERCENT OF MORTGAGE BALANCE MORTGAGE CURRENT MORTGAGE RATES (%) LOANS OUTSTANDING POOL - ------------------------------------------------------- --------- ----------- ---------- $ % --- -------- ---- Total............................................. $ % === ======== ====
- --------------- (1) As of the Cut-off Date, the weighted average Mortgage Rate of the Mortgage Loans is expected to be approximately % per annum. S-13
PURPOSE OF MORTGAGE LOANS - ----------------------------------------------------------------------------------------------- AGGREGATE NUMBER OF PRINCIPAL PERCENT OF MORTGAGE BALANCE MORTGAGE LOAN PURPOSE LOANS OUTSTANDING POOL - ------------------------------------------------------- --------- ----------- ---------- Purchase............................................... $ % Refinance (Rate or Term)............................... Refinance (Cash-out)................................... --- -------- ---- Total............................................. $ % === ======== ====
STATE DISTRIBUTION OF MORTGAGED PROPERTIES(1) - ----------------------------------------------------------------------------------------------- AGGREGATE NUMBER OF PRINCIPAL PERCENT OF MORTGAGE BALANCE MORTGAGE STATE LOANS OUTSTANDING POOL - ------------------------------------------------------- --------- ----------- ---------- $ % Other(1)............................................... --- -------- ---- Total............................................. $ % === ======== ====
- --------------- (1) Other includes other states, and the District of Columbia, with under % concentrations individually. No more than approximately % of the Mortgage Loans will be secured by Mortgaged Properties located in any one postal zip code area.
DOCUMENTATION FOR MORTGAGE LOANS - ----------------------------------------------------------------------------------------------- AGGREGATE NUMBER OF PRINCIPAL PERCENT OF MORTGAGE BALANCE MORTGAGE TYPE OF PROGRAM LOANS OUTSTANDING POOL - ------------------------------------------------------- --------- ----------- ---------- Full................................................... $ % Alternative............................................ Reduced................................................ --- -------- ---- Total............................................. $ % === ======== ====
S-14
OCCUPANCY TYPES(1) - ----------------------------------------------------------------------------------------------- AGGREGATE NUMBER OF PRINCIPAL PERCENT OF MORTGAGE BALANCE MORTGAGE OCCUPANCY TYPE LOANS OUTSTANDING POOL - ------------------------------------------------------- --------- ----------- ---------- Primary Home........................................... $ % Investor............................................... Second Home............................................ --- -------- ---- Total............................................. $ % === ======== ====
- --------------- (1) Based upon representations of the related Mortgagors at the time of origination.
PROPERTY TYPE - ----------------------------------------------------------------------------------------------- AGGREGATE NUMBER OF PRINCIPAL PERCENT OF MORTGAGE BALANCE MORTGAGE PROPERTY TYPE LOANS OUTSTANDING POOL - ------------------------------------------------------- --------- ----------- ---------- Single Family.......................................... $ % Planned Unit Development Condominium................... 2-4 Units.............................................. --- -------- ---- Total............................................. $ % === ======== ====
MAXIMUM MORTGAGE RATES(1) - ----------------------------------------------------------------------------------------------- AGGREGATE NUMBER OF PRINCIPAL PERCENT OF MORTGAGE BALANCE MORTGAGE LIFETIME CAPS(%) LOANS OUTSTANDING POOL - ------------------------------------------------------- --------- ----------- ---------- $ % --- -------- ---- Total............................................. $ % === ======== ====
- --------------- (1) As of the Cut-off Date, the weighted average Lifetime Cap of the Mortgage Loans is expected to be approximately % per annum. S-15
MARGIN(1) - ----------------------------------------------------------------------------------------------- AGGREGATE NUMBER OF PRINCIPAL PERCENT OF MORTGAGE BALANCE MORTGAGE MARGIN LOANS OUTSTANDING POOL - ------------------------------------------------------- --------- ----------- ---------- $ % --- -------- ---- Total............................................. $ % === ======== ====
- --------------- (1) As of the Cut-off Date, the weighted average margin of the Mortgage Loans is expected to be approximately %.
NEXT NOTE RATE ADJUSTMENT DATES(1) - ----------------------------------------------------------------------------------------------- AGGREGATE NUMBER OF PRINCIPAL PERCENT OF MORTGAGE BALANCE MORTGAGE MONTHS LOANS OUTSTANDING POOL - ------------------------------------------------------- --------- ----------- ---------- $ % --- -------- ---- Total............................................. $ % === ======== ====
- --------------- (1) As of the Cut-off Date, the weighted average months to the next Adjustment Date of the Mortgage Loans was approximately months. THE INDEX [DESCRIPTION OF INDEX] UNDERWRITING STANDARDS All of the Mortgage Loans have been purchased by Redwood Trust in the ordinary course of business directly from banks, savings and loan associations mortgage bankers and other mortgage loan originators (each, an "Originator"), or in the secondary mortgage market. Redwood Trust approves individual institutions as eligible Originators after an evaluation of certain criteria, including the Originator's mortgage origination and servicing experience and financial stability. Each Originator and/or the entity from which Redwood Trust purchased the Mortgage Loans will represent and warrant that all Mortgage Loans originated and/or sold by it S-16 will have been underwritten in accordance with standards consistent with those utilized by mortgage lenders generally during the period of origination. Underwriting standards are applied by or on behalf of a lender to evaluate the borrower's credit standing and repayment ability, and the value and adequacy of the related Mortgaged Property as collateral. In general, a prospective borrower applying for a loan is required to fill out a detailed application designed to provide to the underwriting officer pertinent credit information. As part of the description of the borrower's financial condition, the borrower generally is required to provide a current list of assets and liabilities and a statement of income and expense, as well as an authorization to apply for a credit report which summarizes the borrower's credit history with local merchants and lenders and any record of bankruptcy. In most cases, an employment verification is obtained from an independent source (typically the borrower's employer) which verification reports, among other things, the length of employment with that organization, the current salary, and whether it is expected that the borrower will continue such employment in the future. If a prospective borrower is self-employed, the borrower may be required to submit copies of signed tax returns. The borrower may also be required to authorize verification of deposits at financial institutions where the borrower has demand or savings accounts. SERVICING OF THE MORTGAGE LOANS THE MASTER SERVICER will act as servicer for the mortgage loans. The principal executive offices of are located at . The master servicer will be responsible for servicing the mortgage loans in accordance with the terms set forth in the Pooling and Servicing Agreement. The Master Servicer may perform its servicing obligations through one or more subservicers. The master servicer will administer and supervise the performance of each subservicer and will remain responsible for the performance of the servicing functions. FORECLOSURE, DELINQUENCY AND LOSS EXPERIENCE The following table summarizes the delinquency, foreclosure and loss experience, respectively, as of December 31, , December 31, , and December 31, on approximately $ , $ and $ , respectively, in outstanding principal balance of conventional mortgage loans master serviced by commenced master servicing conventional mortgage loans during . The delinquency and foreclosure percentages and the loss experience may be affected by the size and relative lack of seasoning of the servicing portfolio because many of such mortgage loans were not outstanding long enough to give rise to some or all of the indicated periods of delinquency. Accordingly, the information should not be considered as a basis for assessing the likelihood, amount or severity of delinquency or losses on the Mortgage Loans, and no assurances can be given that the foreclosure, delinquency and loss experience presented in the table below will be indicative of such experience on the Mortgage Loans in the future:
AS OF AS OF AS OF DECEMBER 31, DECEMBER 31, DECEMBER 31, 199 199 199 ------------ ------------ ------------ Total Number of Conventional Mortgage Loans in Portfolio........................................... Delinquent Mortgage Loans and Pending Foreclosures at Period End(1):...................................... 30-59 days....................................... 60-89 days....................................... 90 days or more (excluding foreclosures)......... Total Delinquencies.............................. Foreclosures pending Total delinquencies and foreclosures pending........ Net Loss(2)...........................................
S-17 - --------------- (1) As a percentage of the total number of loans master serviced. (2) There is no material difference between gross loss and net loss. There can be no assurance that factors beyond the Master Servicer's control, such as national or local economic conditions or downturns in the real estate markets of its lending areas, will not result in increased rates of delinquencies and foreclosure losses in the future. [For example, over the last several years there has been a general deterioration of the real estate market and weakening of the economy in many regions of the country, including California. The general deterioration of the real estate market has been reflected in increases in delinquencies of loans secured by real estate, slower absorption rates of real estate into the market and lower sales prices for real estate. The general weakening of the economy has been reflected in decreases in the financial strength of borrowers and decreases in the value of collateral serving as collateral for loans. If the real estate market and economy continue to decline, the Master Servicer may experience an increase in delinquencies on the loans it services and higher net losses on liquidated loans.] S-18 DESCRIPTION OF THE CERTIFICATES The Mortgage Loan Asset-Backed Certificates, Series 200_-_ will be issued pursuant to the pooling and servicing agreement. The form of the pooling and servicing agreement has been filed as an exhibit to the registration statement of which this prospectus supplement and the prospectus are a part. The following summaries describe certain provisions of the pooling and servicing agreement. The summaries do not purport to be complete and are subject to, and are qualified in their entirety by reference to, all of the provisions of the pooling and servicing agreement. Wherever particular sections or defined terms of the pooling and servicing agreement are referred to, these sections or defined terms are incorporated into this prospectus supplement by reference. GENERAL The offered certificates will be issued in denominations of $1,000 and multiples of $1 in excess of $1,000 and will evidence specified undivided interests in the trust. The property of the trust will consist of, to the extent provided in the pooling and servicing agreement: - the mortgage loans; - payments on the mortgage loans received on and after the Cut-Off Date (exclusive of amounts that were due prior to the Cut-Off Date); - mortgaged properties relating to the mortgage loans that are acquired by foreclosure or deed in lieu of foreclosure; - the Collection Account and the Distribution Account and funds on deposit in these accounts, but not including any interest earned on these accounts; and - rights under hazard insurance policies covering the mortgaged properties. In addition, the seller has caused the Insurer to issue an irrevocable and unconditional certificate guaranty insurance policy (the "Policy") for the benefit of the holders of the Class A certificates, pursuant to which the Insurer will guarantee payments to the Class A certificateholders. Definitive certificates will be transferable and exchangeable at the corporate trust office of the trustee, which will initially act as certificate registrar. See "Book-Entry Certificates" below. No service charge will be made for any registration of exchange or transfer of certificates, but the trustee may require payment of a sum sufficient to cover any tax or other governmental charge. The Class A-1 and Class A-2 certificates will represent undivided ownership interests in the mortgage loans, all collections on these mortgage loans (exclusive of interest payments due prior to the Cut-Off Date) and the proceeds of these mortgage loans. The principal amount of a class of certificates on any Payment Date is equal to the balance on the closing date minus the aggregate of amounts actually distributed as principal to the holders of that class. On any date, the Aggregate Class A Principal Balance is the aggregate of the Class A Principal Balances of the Class A-1 and Class A-2 certificates. The person in whose name a certificate is registered as such in the certificate register is referred to herein as a certificateholder. The percentage interest of a Class A certificate as of any date of determination will be equal to the percentage obtained by dividing the denomination of such certificate by the Class A Principal Balance for the related class as of the Cut-Off Date. The certificates will not be listed on any securities exchange. BOOK-ENTRY CERTIFICATES The offered certificates will be issued in book-entry form. Persons acquiring beneficial ownership interests in the offered certificates ("Certificate Owners") will hold their offered certificates through The Depository Trust Company ("DTC") in the United States, or Cedelbank or the Euroclear System ("Euroclear") in S-19 Europe if they are participants of such systems, or indirectly through organizations which are participants in such systems. Investors may hold beneficial interests in the certificates in minimum denominations representing Certificate Principal Balances of $1,000 and in multiples of $1 in excess of $1,000. Except under limited circumstances, no person acquiring a book-entry certificate will be entitled to receive a physical certificate representing such certificate. Unless and until physical certificates are issued, it is anticipated that the only "certificateholder" of the offered certificates will be Cede & Co., as nominee of DTC. Certificate Owners will not be certificateholders as that term is used in the pooling and servicing agreement. Certificate Owners are only permitted to exercise their rights indirectly through the DTC system. Neither the depositor, the seller, the servicer nor the trustee will have any responsibility for any aspect of the records relating to or payments made on account of beneficial ownership interests of the book-entry certificates, or for maintaining, supervising or reviewing any records relating to such beneficial ownership interests. ASSIGNMENT OF MORTGAGE LOANS On , the closing date, the depositor will transfer to the trust all of its right, title and interest in and to each mortgage loan, the mortgage notes, mortgages and other documents (collectively, the "Related Documents"), including all payments received on or with respect to each mortgage loan on or after the applicable Cut-Off Date, but not including interest payments due prior to the Cut-Off Date. The trustee, concurrently with this transfer, will deliver the certificates to the depositor. Each mortgage loan transferred to the trust will be identified oil a mortgage loan schedule delivered to the trustee pursuant to the pooling and servicing agreement. The mortgage loan schedule will include information about the principal balance of each mortgage loan as of the Cut-Off Date, its loan rate as well as other information. Within 90 days of the closing date, the trustee will review the mortgage loans and the Related Documents pursuant to the pooling and servicing agreement and if any mortgage loan or Related Document is found to be defective in any material respect and that defect is not cured within 90 days following notification of the defect to the depositor, the depositor will be obligated to either replace the defective mortgage loan with an Eligible Substitute Mortgage Loan or to repurchase the defective mortgage loan. A substitution is permitted only within two years of the closing date and may not be made unless an opinion of counsel is provided stating that such substitution will not disqualify the trust as a REMIC or result in a prohibited transaction tax under the Internal Revenue Code of 1986, as amended (the "CODE"). The depositor may purchase the defective mortgage loan at a price equal to the outstanding principal balance of that mortgage loan as of the date of purchase, plus all accrued and unpaid interest on the defective mortgage loan, computed at the loan rate, net of the servicing fee (if the seller is the servicer), plus the amount of any unreimbursed servicing advances made by the servicer. The purchase price will be deposited in the Collection Account on or prior to the next succeeding Determination Date after the substitutions or repurchase obligation arises. The Determination Date is the [ ] day of each month. The obligation of the depositor to repurchase or substitute a defective mortgage loan is the sole remedy regarding any defects in the mortgage loans and Related Documents available to the trustee or the certificateholders. In connection with the substitution of an Eligible Substitute Mortgage Loan, the depositor will be required to deposit in the Collection Account on or prior to the next succeeding Determination Date after the substitution or repurchase obligation arises an amount (the "Substitution Adjustment") equal to the excess of the principal balance of the related defective mortgage loan over the Principal Balance of the Eligible Substitute Mortgage Loan. An Eligible Substitute Mortgage Loan is a mortgage loan substituted by the depositor for a defective mortgage loan which must, on the date of the substitution: - have an outstanding principal balance (or in the case of a substitution of more than one mortgage loan for a defective mortgage loan, an aggregate principal balance), equal to or less than the principal balance of the defective mortgage loan; S-20 - have a loan rate not less than the loan rate of the defective mortgage loan and not more than % in excess of the loan rate of a defective mortgage loan; - have a mortgage of the same or higher level of priority as the defective mortgage loan at the time substitution; - have a remaining term to maturity not more than six months earlier and not later than the remaining term to maturity of the defective mortgage loan; - comply with each representation and warranty set forth in the pooling and servicing agreement (deemed to be made as of the date of substitution); - have an original loan-to-value ratio not greater than that of the defective mortgage loan; - be of the same type of mortgaged property as the defective mortgage loan or a detached single family residence. More than one Eligible Substitute Mortgage Loan may be substituted for a defective mortgage loan if such Eligible Substitute Mortgage Loans meet the foregoing attributes in the aggregate and such substitution is approved in writing in advance by the insurer. The depositor will make certain representations and warranties as to the accuracy in all material respects of certain information furnished to the trustee with respect to each mortgage loan (e.g., Cut-Off Date principal balance and the loan rate). In addition, the depositor will represent and warrant, on the closing date, that, among other things: - at the time of transfer to the trust, the depositor has transferred or assigned all of its right, title and interest in each mortgage loan and the Related Documents, free of any lien; and - each mortgage loan complied, at the time of origination, in all material respects with applicable state and federal laws. Upon discovery of a breach of any representation and warranty which materially and adversely affects the interests of the trust, the certificateholders or the Insurer in the related mortgage loan and Related Documents, the seller will have a period of 90 days after discovery or notice of the breach to effect a cure. If the breach cannot be cured within the 90-day period, the depositor will be obligated to substitute for the defective mortgage loan with an Eligible Substitute Mortgage Loan or purchase the defective mortgage loan from the trust. The same procedure and limitations that are set forth above for the substitution or purchase of defective mortgage loans as a result of deficient documentation relating will apply to the substitution or purchase of a defective mortgage loan as a result of a breach of a representation or warranty in the pooling and servicing agreement that materially and adversely affects the interests of the certificateholders or the Insurer. Pursuant to the pooling and servicing agreement, the servicer will service and administer the mortgage loans as more fully set forth above. [CONVEYANCE OF SUBSEQUENT MORTGAGE LOANS The pooling and servicing agreement permits the trust to purchase from the seller, subsequent to the Cut-Off Date and prior to , 200 , subsequent mortgage loans in an amount not to exceed approximately $ in aggregate principal balance for inclusion in the trust. Each subsequent mortgage loan will have been originated or purchased by the seller in accordance with the underwriting guidelines. Accordingly, the statistical characteristics of the pool set forth above are based exclusively on the initial mortgage loans and the statistical characteristics of the pool after giving effect to the acquisition of any subsequent mortgage loans will likely differ from the information provided in this prospectus supplement. The date on which the seller transfers a subsequent mortgage loan to the trust shall be referred to in this prospectus supplement as the Subsequent Transfer Date. S-21 Each conveyance of subsequent mortgage loans will be subject to, among other things, the following conditions: - the subsequent mortgage loans must: - satisfy the eligibility criteria set forth in the prospectus under "The Loan Program -- Representations by Sellers; Repurchases" and - comply with each representation and warranty for the mortgage loans set forth in the pooling and servicing agreement; - subsequent mortgage loan must not have been selected by the seller in a manner that it believes is adverse to the interests of the certificateholders, - no subsequent mortgage loan may be or more days contractually delinquent as of the applicable Cut-Off Date; - no subsequent mortgage loan may have a remaining term to maturity in excess of years; - no subsequent mortgage loan may have a loan rate less than %; - following the purchase of the subsequent mortgage loans by the trust, the mortgage loans - will have a weighted average loan rage of at least %; - will have a weighted average loan-to-value ratio of not more than %; - will not have a weighted average remaining term to stated maturity of more than months; - will, in each case, have a principal balance in excess of $ as of the Cut-Off Date; - the seller, [the depositor and the trustee shall not have been notified by either rating agency that the conveyance of the subsequent mortgage loans will result in a qualification, modification or withdrawal of its then-current rating of any class of certificates] [shall have notified each rating agency of such conveyance as required by the pooling and servicing agreement]; and - the trustee shall have received certain opinions of counsel as to, among other things, the enforceability and validity of the transfer agreements relating to such conveyance of such subsequent mortgage loans. All subsequent mortgage loans shall be added from a specified group of mortgage loans. PAYMENTS ON MORTGAGE LOANS; DEPOSITS TO COLLECTION ACCOUNT AND DISTRIBUTION ACCOUNT The servicer shall establish and maintain in the name of the trustee a separate Collection Account for the benefit of the holders of the certificates. The Collection Account will be all Eligible Account. Subject to the investment provision described in the following paragraphs, upon receipt by the servicer of amounts in respect of the mortgage loans (excluding amounts representing the servicing fee), the servicer will deposit these amounts in the Collection Account. Amounts deposited may be invested in Eligible Investments maturing no later than two Business Days prior to the next succeeding date on which amounts on deposit in the Collection Amount are required to be deposited in the Distribution Account. The trustee will establish a Distribution Account into which amounts withdrawn from the Collection Account for distribution to certificateholders on a Payment Date will be deposited. The Distribution Account will be an Eligible Account. Amounts on deposited in the Distribution Account may be invested in Eligible Investments maturing on or before tile Business Day prior to the related Payment Date. An Eligible Account is an account that is maintained with a depository institution whose debt obligations at the time of any deposit therein have the highest short-teen debt rating by the rating agencies, and whose accounts are fully insured by either the Savings Association Insurance Fund or the Bank Insurance Fund of the FDIC established by such fund with a minimum long-teen unsecured debt rating of "A2" by Moody's and "A" by S&P, otherwise acceptable to each rating agency and the Insurer as evidenced by a letter from each S-22 rating agency and the Insurer to the trustee, without reduction or withdrawal of their then current ratings of the certificates. Eligible Investments are specified in the pooling and servicing agreement and are limited to investments which meet the criteria of the rating agencies from time to time as being consistent with their then current ratings of the certificates. "Eligible Investments" are limited to: - direct obligations of, or obligations fully guaranteed as to timely payment of principal and interest by, the United States or any agency or instrumentality of the United States; provided that such obligations are backed by the full faith and credit of the United States; - repurchase agreements on obligations specified in the prior clause maturing not more than three months from the date of acquisition thereof; provided that the short-term unsecured debt obligations of the party agreeing to repurchase such obligations are at the time rated by each rating agency in its highest short-term rating category; - certificates of deposit, time deposits and bankers' acceptances (which, if Moody's is a rating agency, shall each have an original maturity of not more than 90 days and, in the case of bankers' acceptances, shall in no event have an original maturity of more than 365 days) of any U.S. depository institution or trust company incorporated under the laws of the United States or any state thereof and subject to supervision and examination by federal and/or state banking authorities; provided that the unsecured short-term debt obligations of such depository institution or trust company at the date of acquisition thereof have been rated by each of the rating agencies in its highest unsecured short-term debt rating category; - commercial paper (having original maturities of not more than 90 days) of any corporation incorporated under the laws of the United States or any state thereof which on the date of acquisition has been rated by the rating agencies in their highest short-term rating categories; - short term investment funds deposited by any trust company or bank incorporated under the laws of the United States or any state thereof which on the date of acquisition has been rated by the rating agencies in their respective highest rating category of long term unsecured debt; - interests in any money market fund which at the date of acquisition of the interests in such fund and throughout the time as the interest is held in such fund has the rating specified by each rating agency; and - other obligations or securities that are acceptable to each rating agency as an Eligible Investment hereunder and will not result in a reduction in the then current rating of the certificates, as evidenced by a letter to such effect from such rating agency and with respect to which the depositor has received confirmation that, for tax purposes, the investment complies with the last clause of this definition; provided that no instrument described hereunder shall evidence either the right to receive only interest with respect to the obligations underlying such installment or - both principal and interest payments derived from obligations underlying such instrument and the interest and principal payments with respect to such instrument provided a yield to maturity at par greater than 120% of the yield to maturity at par of the underlying obligations; and - provided, further, that no instrument described hereunder may be purchased at a price greater than par if such instrument may be prepaid or called at a price less than its purchase price prior to its stated maturity. ADVANCES Not later than two Business Days prior to each Payment Date, the servicer will remit to the trustee for deposit in the Distribution Account an amount to be distributed on that Payment Date, equal to the sum of the interest accrued and principal due on each mortgage loan through the related Due Date but not received by the servicer as of the close of business on tile last day of the related Due Period (net of the servicing fee) (the S-23 "Monthly Advance"). Such obligation of the servicer continues with respect to each mortgage loan until a mortgage loan becomes a liquidated mortgage loan. In the course of performing its servicing obligations, the servicer will pay all reasonable and customary "out-of-pocket" costs and expenses incurred in the performance of its servicing obligations, including, but not limited to, the cost of - the preservation, restoration and protection of the mortgaged properties, - any enforcement or judicial proceedings, including foreclosures, and - the management and liquidation of mortgaged properties acquired in satisfaction of the related mortgage. Each such expenditure will constitute a "Servicing Advance." The servicer's right to reimbursement for Servicing Advances is limited to late collections on the related mortgage loan, including Liquidation Proceeds, Insurance Proceeds and other amounts as may be collected by the servicer from the related mortgagor or that relate to these unreimbursed amounts. The servicer's right to reimbursement for Monthly Advances shall be limited to late collections of interest on any mortgage loan and to Liquidation Proceeds and Insurance Proceeds on the related mortgage loan. The servicer's right to these reimbursements is prior to the rights of certificateholders. If in the good faith judgment and sole discretion of the servicer it determines that an advance will not be ultimately recoverable from the related mortgagor or other collections from that mortgage, the servicer will not be required to make an advance for that mortgage loan. If the servicer determines that an advance will not be recoverable from the related Mortgagor or tile other collections from the mortgage then the servicer may be reimbursed from other amounts on deposit in the Collection Account. PAYMENT DATES On each Payment Date, which is the [15th] day of each month, or if such day is not a Business Day, then the next Business Day, commencing in , the holders of the offered certificates will be entitled to receive, from amounts then on deposit in the Distribution Account, to the extent of funds available therefor in accordance with the priorities and in the amounts described below under "Priority of Distributions," an aggregate amount equal to the sum of (a) the Class Interest Distribution for each class of offered certificates and (b) the Class A Principal Distribution. Distributions will be made (1) in immediately available funds to holders of offered certificates, the aggregate principal balance of which is at least $1,000,000, by wire transfer or to the account of such certificateholder at a domestic bank or other entity having appropriate facilities therefor, if such certificateholder has so notified the trustee in accordance with the pooling and servicing agreement, or (2) by check mailed to the address of the person as it appears on the certificate register maintained by the trustee as certificate registrar. DEPOSITS TO THE DISTRIBUTION ACCOUNT No later than one Business Day prior to each Payment Date, the following amounts for the previous Due Period shall be deposited into the Distribution Account and shall constitute the Available Funds for that Payment Date: - payments of principal and interest on the mortgage loans (net of amounts representing the servicing fee with respect to each mortgage loan and reimbursement for related Monthly Advances and Servicing Advances); - Net Liquidation Proceeds and Insurance Proceeds with respect to the mortgage loans (net of amounts applied to the restoration or repair of a mortgaged property); - the purchase price for repurchased defective mortgage loans and any related Substitution Adjustment Amounts; S-24 - payments from the servicer in connection with - Monthly Advances, - Prepayment Interest Shortfalls and - the termination of the trust as provided in the pooling and servicing agreement; and - any amounts paid under the Policy. PRIORITY OF DISTRIBUTIONS A. On each Payment Date the trustee shall withdraw from the Distribution Account the Available Funds and make distributions as described below and to the tile extent of Available Funds in the following order of priority: (1) to the trustee, the trustee fee for that Payment Date; (2) to holders of each class of Class A certificates, an amount equal to the related Class Interest Distribution for that Payment Date; (3) sequentially, to the Class A-1 and the Class A-2 certificateholders, in that order, until the respective Class A Principal Balance of each of these classes is reduced to zero, the related Class A Principal Distribution) other than the portion constitution the Distributable Excess Spread) for such Payment Date; provided, however, that after the occurrence and continuance of an Insurer Default, this portion of the Class A Principal Distribution will be distributed pro rata to the holders of these certificates based on the respective Class A Principal Balances; (4) to the Insurer, the amount owing to the Insurer under the Insurance Agreement for the premium; (5) sequentially, to the Class A-1 and Class A-2 certificateholders, in that order, until the respective Class A Principal Balance of each of these classes is reduced to zero, the related Distributable Excess Spread for such Payment Date; provided, however, that after the occurrence and continuance of an Insurer Default, the Distributable Excess Spread will be distributed pro rata to the holders of these certificates based on the respective Class A Principal Balances. (6) to the servicer, the amount of any accrued and unpaid servicing fee; (7) to the Insurer, amounts owing to the Insurer for reimbursement for prior draws made on the Policy; (8) to the servicer, the amount of Nonrecoverable Advances not previously reimbursed; (9) to the Insurer, any other amounts owing to the Insurer under the Insurance Agreement; and (10) to the Class R certificateholders, the balance. THE CERTIFICATE RATE The Certificate Rate for any interest accrual period with respect to the Class A-1 certificates will be % per annum, and the class A-2 certificates will be % per annum. Interest accrual period means the period from the first day of the calendar month preceding the month of that Payment Date through the last day of that calendar month. Interest will accrue on the certificates on the basis of a 360-day year consisting of twelve 30-day months. INTEREST On each Payment Date, if there are sufficient funds available, the Class Interest Distribution will be distributed for each class of Class A certificates. The Class Interest Distribution is equal to the sum of (a) one month's interest at the Certificate Rate on the related Class A Principal Balance immediately prior to that S-25 Payment Date (the "Class Monthly Interest Distributable Amount") and (b) any Class Interest Carryover Shortfall for such Class of Class A certificates for that Payment Date. As to any Payment Date and Class of Class A certificates, the Class Interest Carryover Shortfall is the sum of (x) the excess of the related Class Monthly Interest Distributable Amount for the preceding Payment Date and any outstanding Class Interest Carryover Shortfall with respect to that class on the preceding Payment Date, over the amount in respect of interest that is actually distributed to that class on the prior Payment Date plus (y) one month's interest on the excess, to the extent permitted by law, at the related Certificate Rate. The interest entitlement described in (a) above will be reduced by such class' pro rata share of Civil Relief Act Interest Shortfalls, if any, for that Payment Date. Civil Relief Act Interest Shortfalls will not be covered by payments under the Policy. On each Payment Date, the Class Interest Distribution for each class of Class A certificates will be distributed on an equal priority and any shortfall in the amount required to be distributed as interest to each class will be allocated between the classes pro rata based on the amount each class would have been distributed in the absence of such shortfall. PRINCIPAL On each Payment Date, if there are sufficient finds available in accordance with the priorities described above under "Priorities of Distributions," principal will be distributed to the holders of Class A certificates then entitled to distributions of principal in an amount equal to the lesser of (A) the related Aggregate Class A Principal Balance and (B) the related Class A Principal Distribution for such Payment Date. "Class A Principal Distribution" means the sum of the related Class A Monthly Principal Distribution Amount for a Payment Date and any outstanding Class A Principal Carryover Shortfall as of the close of business on the preceding Payment Date. Class A Monthly Principal Distributable Amount means to the extent that funds are available, the amount equal to the sum of the following amounts, without duplication, for the immediately preceding Due Period: - each payment of principal on a mortgage loan received by the servicer during the Due Period, including all full and partial principal prepayments, - the principal balance as of the end of the immediately preceding Due Period of each mortgage loan that became a liquidated mortgage loan for the first time during that Due Period, - the portion of the purchase price allocable to principal of all repurchased defective mortgage loans with respect to that Due Period, - any Substitution Adjustment Amounts received on or prior to the previous Determination Date and not yet distributed, and - the portion of Excess Spread, if any, required to be distributed on such Payment Date to satisfy the required level of overcollateralization for such Payment Date (the "Distributable Excess Spread") but not greater than 100%. "Class A Principal Carryover Shortfall" means, with respect to any Payment Date, the excess of the sum of the related Class A Monthly Principal Distributable Amount for the preceding Payment Date and any outstanding Class A Principal Carryover Shortfall on the preceding Payment Date over the amount in respect of principal that is actually distributed to the Class A certificateholders on the preceding Payment Date. If the required level of overcollateralization is reduced below the then existing amount of overcollateralization or if the required level of overcollateralization is satisfied, the amount of the related Class A Monthly Principal Distributable Amount on the following Payment Date will be correspondingly reduced by the amount of the reduction in overcollateralization and by the amount necessary so that the overcollateralization will not exceed the required level of overcollateralization after giving effect to the principal distribution to be made on that Payment Date. S-26 The application of Distributable Excess Spread is intended to create overcollateralization to provide a source of additional cashflow to cover losses on the mortgage loans. If the amount of losses in a particular Due Period exceeds the amount of the related Excess Spread for the related Payment Date, the amount distributed in respect of principal will be reduced. A draw on the Policy for the payment of principal will not be made until the Class A Principal Balance exceeds the pool balance. See "The Policy" herein. Accordingly, there may be Payment Dates on which Class A certificateholders receive little or no principal distributions. So long as an Insurer Default has not occurred and is continuing, distributions of the Class A Principal Distribution with respect to the offered certificates will be applied, sequentially, so that no class of offered certificates having a higher numerical designation is entitled to distributions of principal until each class of certificates having a lower numerical designation has been reduced to zero. If on any Payment Date, an Insurer Default has occurred and is continuing, the Class A Principal Distribution for the offered certificates will be applied to the distribution of principal of each class outstanding on a pro rata basis in accordance with the Class A Principal Balance of each class. On each Payment Date following an Insurer Default, net losses realized on liquidated mortgage loans (if the net losses realized is not covered by Available Funds) will reduce the amount of any overcollateralization. Due Period means, with respect to any Determination Date or Payment Date, the calendar month immediately preceding that Determination Date or Payment Date. A liquidated mortgage loan, for any Payment Date, is a mortgage loan that the servicer has determined that all Liquidation Proceeds which it expects to recover with respect to such mortgage loan (including disposition of the related REO Property) have been recovered. This determination shall be in accordance with the servicing procedures in the pooling and servicing agreement and shall be made at the end of the proceeding Due Period. "Excess Spread" means, with respect to any Payment Date, the positive excess, if any, of (A) Available Funds for such Payment Date over (B) the amount required to be distributed pursuant to subclause items (1) through (4), in each case set forth under the heading "Description of the Certificates -- Priority of Distributions" on the Payment Date. An Insurer Default will occur in the event the Insurer fails to make a payment required under the Policy or if certain events of bankruptcy or insolvency occur with respect to the Insurer. THE POLICY The following information has been supplied by the Insurer for inclusion in this prospectus supplement. Accordingly, neither the depositor nor the servicer makes any representation as to the accuracy and completeness of such information. [To be provided by the Insurer.] OVERCOLLATERALIZATION The credit enhancement provisions of the trust result in a limited acceleration of the Class A certificates relative to the amortization of the mortgage loans in the early months of the transaction. The accelerated amortization is achieved by the application of Distributable Excess Spread to principal distributions on the Class A certificates. This acceleration feature creates overcollateralization (i.e., the excess of the pool balance over the related Aggregate Class A Principal Balance). Once the required level of overcollateralization is reached, and subject to the provisions described in the next paragraph, the acceleration feature will cease, until necessary to maintain the required level of overcollateralization. The pooling and servicing agreement provides that, subject to certain floors, caps and triggers, the required level of overcollateralization may increase or decrease over time. Any decrease in the required level of overcollateralization will occur only at the sole discretion of the Insurer. The decrease will have the effect of reducing the amortization of the Class A certificates below what it otherwise would have been. S-27 [PRE-FUNDING ACCOUNT On the closing date, ($____) will be deposited in a pre-funding account. The pre-funding account shall be part of the trust and will be used to acquire additional mortgage loans in accordance with the pooling and servicing agreement. The funding period will begin on the closing date and terminate on ________, 200__. Any funds remaining at the end of the funding period will be distributed to holders of the classes of certificates entitled to receive principal on the Payment Date in ________, 200__ in reduction of the related Certificate Principal Balances. This will result in a partial principal prepayment of the related certificates on that date. Amounts on deposit in the pre-funding account will be invested in Permitted Investments. All interest and any other investment earnings on amounts on deposit in the pre-funding account will be deposited in the capitalized interest account. The pre-funding account shall not be an asset of the REMIC. All reinvestment earnings on the pre-funding account shall be owned by, and be taxable to, the seller. CAPITALIZED INTEREST ACCOUNT On the closing date, a portion of the proceeds from the sale of the certificates will be deposited in a capitalized interest account. The capitalized interest account shall be maintained with and in the name of the trustee on behalf of the trust a portion of the proceeds of the sale of the certificates. The amount deposited therein will be used by the trustee on the Payment Dates in ________ 200__, ________ 200__ and ________, 200__ to cover shortfalls in interest on the certificates that may arise as a result of interest shortfalls on the certificates during the funding period. Any amounts remaining in the capitalized interest account at the end of the funding period which are not needed to cover shortfalls on the Payment Date in ________ 200__ are required to be paid directly to the seller.] The capitalization interest account shall not be an asset of the REMIC. All reinvestment earnings on the capitalized interest account shall be owned by, and be taxable to, the seller.] REPORTS TO CERTIFICATEHOLDERS Concurrently with each distribution to the certificateholders, the trustee will forward to each certificateholder a statement (based solely on information received from the servicer) setting forth among other items with respect to each Payment Date: (1) the aggregate amount of the distribution to each class of certificateholders on such Payment Date; (2) the amount of distribution set forth in paragraph (1) above in respect of interest and any Class Interest Carryover Shortfall, and the amount of any Class Interest Carryover Shortfall remaining; (3) the amount of distribution set forth in paragraph (1) above in respect of principal and the Class A Principal Carryover Shortfall, and any remaining Class A Principal Carryover Shortfall; (4) the amount of Excess Spread and the amount applied as to a distribution on the certificates; (5) the Guaranteed Principal Amount, if any, for such Payment Date; (6) the amount paid under the Policy for such Payment Date in respect of tile Class Interest Distribution to each class of certificates; (7) the servicing fee; (8) the pool balance, as of the close of business on the last day of the preceding Due Period; (9) the Aggregate Class A Principal Balance after giving effect to payments allocated to principal above; (10) the amount of overcollateralization as of the close of business on the Payment Date, after giving effect to distributions of principal on that Payment Date; S-28 (11) the number and aggregate principal balances of the mortgage loans as to which the minimum monthly payment is delinquent for 30-59 days, 60-89 days and 90 or more days, respectively, as of the end of the preceding Due Period; (12) the book value of any real estate which is acquired by the trust through foreclosure or of deed in lieu of foreclosure; (13) the aggregate amount of prepayments received on the mortgage loans during the previous Due Period; and (14) the weighted average loan rate on the mortgage loans as of the first day of tile month prior to the Payment Date. In the case of information furnished pursuant to clauses (2) and (3) above, the amounts shall be expressed as a dollar amount per certificate with a $1,000 denomination. Within 60 days after the end of each calendar year, the trustee will forward to each person, if requested in writing by such person, who was a certificateholder during the prior calendar year a statement containing the information set forth in clauses (2) and (3) above aggregated for such calendar year. LAST SCHEDULED PAYMENT DATE The last scheduled Payment Date for each class of offered certificates is as follows: Class A-1 certificates, ; and Class A-2 certificates, . It is expected that the actual last Payment Date for each class of offered certificates will occur significantly earlier than the last scheduled Payment Dates. Such last scheduled Payment Dates are based on a [ ]% prepayment assumption with no payments of Distributable Excess Spread and the assumptions set forth above under "Prepayment and Yield Considerations -- Weighted Average Lives". COLLECTION AND OTHER SERVICING PROCEDURES ON MORTGAGE LOANS The servicer will make reasonable efforts to collect all payments called for under the mortgage loans and will, consistent with the pooling and servicing agreement, follow such collection procedures as it follows from time to time with respect to the loans in its servicing portfolio comparable to the mortgage loans. Consistent with the above, the servicer may in its discretion waive any late payment charge or any assumption or other fee or charge that may be collected in the ordinary course of servicing the mortgage loans. With respect to the mortgage loans, the servicer may arrange with a borrower a schedule for the payment of interest due and unpaid for a period; provided, that any such arrangement is consistent with the servicer's policies with respect to the mortgage loans it owns or services. HAZARD INSURANCE The servicer will cause to be maintained for each mortgage loan and each property acquired upon foreclosure, or by deed in lieu of foreclosure, hazard insurance with extended coverage in an amount which is at least equal to the lesser of - the outstanding principal balance on the mortgage loan and any related senior lien(s); and - the maximum insurable value of the improvements securing the mortgage loan. Generally, if the mortgaged property is located in a federally designated flood area, the hazard insurance to be maintained for the mortgage loan shall include flood insurance in such amounts as are required under applicable guidelines of the Federal Flood Emergency Act. Any amounts collected by the servicer under any such policies will be deposited in the Collection Account, net of certain amounts as indicated in the pooling and servicing agreement. The servicer shall be under no obligation to require that any mortgagor maintain earthquake or other additional insurance; and shall be under no obligation itself to maintain any such additional insurance on property acquired, other than pursuant to applicable laws and regulations. If the S-29 servicer obtains and maintains a blanket policy consistent with prudent industry standards insuring against hazard losses on all of the mortgage loans in an aggregate amount prudent under industry standards, it shall conclusively be deemed to have satisfied its obligations and if there shall have been a loss which would have been covered by such policy, deposit in the Collection Account, as the case may be, the amount not otherwise payable under the blanket policy because of any deductible clause. REALIZATION UPON DEFAULTED MORTGAGE LOANS The servicer will foreclose upon or otherwise comparably convert to ownership mortgaged properties securing such of the mortgage loans as come into default when, in accordance with applicable servicing procedures under the pooling and servicing agreement, no satisfactory arrangements can be made for the collection of delinquent payment. In connection with such foreclosure or other conversion, the servicer will follow such practices as it deems necessary or advisable and as are in keeping with its general subordinate mortgage servicing activities; provided the servicer will not be required to expend its own funds in connection with foreclosure or other conversion, correction of default on a related senior mortgage loan or restoration of any property unless, in its sole judgment, such foreclosure, correction or restoration will increase Net Liquidation Proceeds. the servicer will be reimbursed out of Liquidation Proceeds for advances of its own funds as liquidation expenses before any Net Liquidation Proceeds are distributed to the certificateholders. SERVICING COMPENSATION AND PAYMENT OF EXPENSES With respect to each Due Period, the servicer will receive from interest collections in respect of the mortgage loans a portion of such interest collections as a monthly servicing fee in the amount equal to [ ]% per annum, or the servicing fee rate, on the aggregate principal balances of the mortgage loans as of the first day of the related Due Period. All assumption fees, late payment charges and other fees and charges, to the extent collected from borrowers, will be retained by the servicer as additional servicing compensation. The servicer will pay certain ongoing expenses associated with the trust and incurred by it in connection with its responsibilities under the pooling and servicing agreement. In addition, the servicer will be entitled to reimbursement for certain expenses incurred by it in connection with defaulted mortgage loans and in connection with the restoration of mortgaged properties, such right of reimbursement being prior to the rights of certificateholders to receive any related Net Liquidation Proceeds. EVIDENCE AS TO COMPLIANCE The pooling and servicing agreement provides for delivery on or before March 31 of each year, beginning on March 31, [year], to the indenture trustee and the insurer of an annual statement signed by an officer of the servicer to the effect that the servicer has fulfilled its material obligations under the pooling and servicing agreement throughout the preceding fiscal year, except as specified in such statement. On or before March 31 of each year, beginning March 31, [year], the servicer will furnish a report prepared by a firm of nationally recognized independent public accountants (who may also render other services to the servicer or the depositor) to the trustee, the Insurer and the rating agencies to the effect that such firm has examined certain documents and the records relating to servicing of the mortgage loans under the pooling and servicing agreement and that, on the basis of such examination, such firm believes that such servicing was conducted in compliance with the pooling and servicing agreement except for (a) such exceptions as such firm believes to be immaterial and (b) such other exceptions as shall be set forth in such report. S-30 CERTAIN MATTERS REGARDING THE DEPOSITOR AND SERVICER The pooling and servicing agreement provides that the servicer may not resign from its obligations and duties thereunder: - unless such duties and obligations are no longer permissible under applicable law or are in material conflict by reason of applicable law with any other activities of a type and nature presently carried on by it or its subsidiaries or affiliates or - upon the satisfaction of the following conditions; - the servicer has proposed a successor servicer to the trustee and the Insurer in writing and such proposed successor servicer is reasonably acceptable to the trustee and the Insurer; and - the rating agencies have confirmed to the trustee and the Insurer that the appointment of such proposed successor servicer as the servicer will not result in the reduction or withdrawal of the then current rating of the certificates. No such resignation will become effective until the trustee or a successor servicer has assumed the servicer's obligations and duties under the pooling and servicing agreement. The servicer may perform any of its duties and obligations under the pooling and servicing agreement through one or more subservicers or delegates, which may be affiliates of the servicer. Notwithstanding any such arrangement, the servicer will remain liable and obligated to the trustee and the certificateholders for the servicer's duties and obligations under the pooling and servicing agreement, without any diminution of such duties and obligations and as if the servicer itself were performing such duties and obligations. Under the pooling and servicing agreement, the depositor will indemnify an injured party for the entire amount of any losses, claims, damages or liabilities arising out of or based on the pooling and servicing agreement (other than losses resulting from defaults under the mortgage loans). The pooling and servicing agreement provides that neither the depositor nor the servicer nor their directors, officers, employees or agents will be under any other liability to the trust, the trustee, the certificateholders, the Insurer or any other person for any action taken or for refraining from taking any action pursuant to the pooling and servicing agreement. However, neither the depositor nor the servicer will be protected against any liability which would otherwise be imposed by reason of willful misconduct, bad faith or gross negligence of the depositor or the servicer in the performance of its duties under the pooling and servicing agreement or by reason of reckless disregard of its obligations thereunder. In addition, the pooling and servicing agreement provides that the servicer will not be under any obligation to appear in, prosecute or defend any legal action which is not incidental to its servicing responsibilities under the pooling and servicing agreement and which in its opinion may expose it to any expense or liability. The servicer may, in its sole discretion, undertake any such legal action which it may deem necessary or desirable with respect to the pooling and servicing agreement and the rights and duties of the parties thereto and the interest of the certificateholders and the Insurer thereunder. Any corporation into which the servicer may be merged or consolidated, or any corporation resulting from any merger, conversion or consolidation to which the servicer shall be a party, or any corporation succeeding to the business of the servicer shall be the successor of the servicer hereunder, without the execution or filing of any paper or any further act on the part of any of the parties. EVENTS OF DEFAULT Events of Default will consist of: (1) any failure by the servicer to deposit in the Collection Account any deposit required to be made under the pooling and servicing agreement or to make any payment required to be made under the Insurance Agreement, which failure continues unremedied for two Business Days after written notice is given of that failure to the servicer by the trustee, or to the servicer and the trustee by the Insurer or Class A certificateholders evidencing an aggregate, of at least 25% of the voting rights; S-31 (2) any failure by the servicer duly to observe or perform in any material respect any other of its covenants or agreements in the pooling and servicing agreement which, in each case, materially and adversely affects the interests of the Class A certificateholders or the Insurer and continues unremedied for 60 days after the written notice is given of such failure to the servicer by the trustee, or to the servicer and the trustee by the Insurer or Class A certificateholders evidencing an aggregate of at least 25% of the voting rights; (3) any Insolvency Event which includes certain events of insolvency, readjustment of debt, marshalling of assets and liabilities or similar proceedings relating to the servicer and certain actions by the servicer indicating insolvency, reorganization or inability to pay its obligations; or (4) any Event of Default, as defined in the Insurance Agreement, has occurred and is continuing. Under certain other circumstances, the Insurer may deliver written notice to the servicer terminating all the rights and obligations of the servicer under the pooling and servicing agreement. Notwithstanding the foregoing, a delay in or failure of performance referred to under clause (1) above for a period of five Business Days or under clause (2) above for a period of 60 days, shall not constitute an Event of Default if such delay or failure could not be prevented by the exercise of reasonable diligence by the servicer and the delay or failure was caused by an act of God or other similar occurrence. Upon the occurrence of any such event, the servicer shall not be relieved from using its best efforts to perform its obligations in a timely manner in accordance with the terms of the pooling and servicing agreement and the servicer shall provide the trustee, the depositor, the Insurer and the Class A certificateholders prompt notice of such failure or delay by it, together with a description of its efforts to so perform its obligations. RIGHTS UPON AN EVENT OF DEFAULT So long as an Event of Default remains unremedied, either (1) the trustee, or Class A certificateholders evidencing an aggregate of at least 51% of the voting rights, in each case with the consent of the Insurer, or (2) the Insurer may terminate all of the rights and obligations of the servicer under the pooling and servicing agreement and in and to the mortgage loans. In these circumstances, the trustee will succeed to all the responsibilities, duties and liabilities of the servicer under the pooling and servicing agreement and will be entitled to similar compensation arrangements. In the event that the trustee would be obligated to Succeed the servicer but is unwilling or unable so to act, it may appoint, or petition a court of competent jurisdiction for the appointment of, a housing and home finance institution or other mortgage loan or home equity loan servicer with all licenses and permits required to perform its obligations under the pooling and servicing agreement. The appointed servicer must have a net worth of at least $[ ] and must be acceptable to the Insurer to act as successor to the servicer under the pooling and servicing agreement. Pending such appointment, the trustee will be obligated to act as servicer unless prohibited by law. The successor will be entitled to receive the same compensation that the servicer would otherwise have received (or such lesser compensation as the trustee and such successor may agree). A receiver or conservator for the servicer may be empowered to prevent the termination and replacement of the servicer if the only Event of Default that has occurred is an Insolvency Event. AMENDMENT The pooling and servicing agreement may be amended from time to time by the depositor, the servicer and the trustee and with the consent of the Insurer, but without the consent of the Class A certificateholders, to dire any ambiguity, to correct or supplement any provisions therein which may be inconsistent with any other provisions of the pooling and servicing agreement, to add to the duties of the depositor or the servicer or to add or amend any provisions of the pooling and servicing agreement as required by the rating agencies in order to maintain or improve any rating of the Class A certificates (it being understood that, after obtaining the ratings in effect on the Closing Date, neither the depositor, the trustee nor the servicer is obligated to obtain, maintain, Or improve any such rating) or to add any other provisions with respect to matters or questions arising under the pooling and servicing agreement or the Policy which shall not be inconsistent with the provisions of the pooling and servicing agreement or to comply with any requirement imposed by the code; S-32 provided that such action will not, as evidenced by an opinion of counsel, adversely affect in any material respect the interests of any certificateholder or the Insurer; provided, that any such amendment will not be deemed to materially and adversely affect tile Class A certificateholders and no such opinion will be required to be delivered if the person requesting such amendment obtains a letter from the rating agencies stating that such amendment would not result in a downgrading of the then current rating of the Class A certificates, without regard to the Policy. The pooling and servicing agreement may also be amended from time to time by the depositor, the servicer, and the trustee, with the consent of Class A certificateholders evidencing an aggregate of at least 51% of the voting rights and the Insurer for the purpose of adding any provisions to or changing in any manner or eliminating any of the provisions of the pooling and servicing agreement or of modifying in any manner the rights of the Class A certificateholders; provided that no such amendment will: - reduce in any manner the amount of, or delay the timing of, collections of payments on the Class A certificates or distributions or payments under the Policy which are required to be made on any Class A certificate without the consent of the holder of such Class A certificate; - reduce the percentage required to consent to any such amendment, without the consent of the holders of all Class A certificates then outstanding; or - adversely affect in any material respect the interest of the Insurer. TERMINATION; PURCHASE OF MORTGAGE LOANS The trust will terminate on the Payment Date following the later of (A) payment in full of all amounts owing to the Insurer unless the Insurer shall otherwise consent and (B) the earliest of (1) the Payment Date on which the Aggregate Class A Principal Balance has been reduced to zero, (2) the final payment or other liquidation of the last mortgage loan in the trust, (3) the optional purchase by the servicer of the mortgage loans, and (4) the Payment Date in [ ] on which date the Policy will be available to pay the outstanding principal balance of the Class A certificates. Subject to provisions in the pooling and servicing agreement regarding a plan of complete liquidation, the servicer may, at its option, terminate the pooling and servicing agreement on any date on which the pool balance is less than 5% of the sum of the Cut-Off Date pool balance by purchasing, on the next succeeding Payment Date, all of the outstanding mortgage loans at a price equal to the sum of the outstanding pool balance (subject to reduction as provided in the pooling and servicing agreement if the purchase price is based in part on the appraised value of any REO Property included in the trust and that appraised value is less than the Principal Balance of the mortgage loan) and accrued and unpaid interest thereon at the weighted average of the loan rates through the end of the Due Period preceding the final Payment Date together with all amounts due and owing to the Insurer. The purchase, shall be accomplished by deposit into the Distribution Account of the purchase price specified above. VOTING RIGHTS Under the pooling and servicing agreement, the voting rights (the "Voting Rights") will be allocated to the Class A certificates among the classes in proportion to their respective Class Principal Balances. Voting rights allocated to a class of certificates will be further allocated among the certificates of that class on the basis of their respective percentage interests. [So long as no Insurer Default is continuing, the Insurer will be entitled to exercise the voting rights of the Class A certificates]. THE TRUSTEE [Trustee], has been named trustee pursuant to the pooling and servicing agreement. The trustee may have normal banking relationships with the depositor and the servicer. S-33 USE OF PROCEEDS The net proceeds to be received from the sale of the certificates will be applied by the depositor towards the purchase of the mortgage loans. FEDERAL INCOME TAX CONSEQUENCES Investors may wish to review the material set forth in this section together with the information in the section "Federal Income Tax Consequences" in the prospectus. For federal income tax purposes, the trust estate [(exclusive of the rights in respect of the additional collateral)] will consist of a pool of assets with respect to which an election will be made to treat such pool as a "real estate mortgage investment conduit" ("REMIC") for federal income tax purposes. The Class A and Class B Certificates will be designated as "regular interests" in the REMIC and the Class R Certificates will represent the "residual interest" in the [upper tier/lower tier] REMIC. Accordingly, prospective investors should review the section entitled [REMICs] under "Federal Income Tax Consequences" in the prospectus. The Class A and Class B Certificates may be treated as having been issued with original issue discount. The prepayment assumption that will be used for purposes of computing original issue discount, if any, for federal income tax purposes is a CPR of [ ]%. No representation is made that the mortgage loans will, in fact, prepay at this or any other rate. PREPAYMENT AND YIELD CONSIDERATIONS GENERAL The weighted average life of, and, if purchased at other than par, the effective yield of each Class of Class A Certificates will be affected by the rate and timing of payments of principal on the Mortgage Loans in the Pool relating to such Class (including, for this purpose, prepayments and amounts received by virtue of refinancings and liquidations of Mortgage Loans due to defaults, casualties, condemnations and repurchases, whether optional or required, by the Depositor), the amount and timing of delinquencies and defaults by Mortgagors in the related Pool, as well as by the application of Accelerated Principal Payments (as defined herein) on the Class A Certificates. Such yield may be adversely affected by a higher or lower than anticipated rate of principal payments (including prepayments) on the Mortgage Loans in the Pool relating to such Class. The rate of principal payments on such Mortgage Loans will in turn be affected by the amortization schedules of the Mortgage Loans in such Pool, the rate and timing of prepayments thereon by the Mortgagors, the enforcement (or lack of enforcement) of "due-on-sale" clauses, liquidations of defaulted Mortgage Loans in such Pool and optional or required repurchases of Mortgage Loans in such Pool as described herein. The timing of changes in the rate of prepayments, liquidations and repurchases of the Mortgage Loans may, and the timing of losses could, significantly affect the yield to an investor, even if the average rate of principal payments experienced over time is consistent with an investor's expectation. Since the rate and timing of principal payments on the Mortgage Loans in each Pool will depend on future events and on a variety of factors (as described more fully herein), no assurance can be given as to such rate or the timing of prepayments on the related Class of Class A Certificates. The Mortgage Loans generally may be prepaid in full or in part at any time. The prepayment experience with respect to the Mortgage Loans will affect the weighted average life of each Class of Class A Certificates. The actual rate of prepayments on pools of mortgage loans is influenced by a variety of economic, tax, geographic, demographic, social, legal and other factors and has fluctuated considerably in recent years. In addition, the rate of prepayments may differ among pools of mortgage loans at any time because of specific factors relating to the mortgage loans in the particular pool, including, among other things, the age of the mortgage loans, the geographic locations of the properties securing the loans and the extent of the mortgagors' equity in such properties, and changes in the mortgagors' housing needs, job transfers and unemployment. S-34 NO REPRESENTATION IS MADE AS TO THE RATE OF PRINCIPAL PAYMENTS ON THE MORTGAGE LOANS IN ANY POOL, OR AS TO THE YIELD TO MATURITY OF ANY CLASS OF CLASS A CERTIFICATES. AN INVESTOR IS URGED TO MAKE AN INVESTMENT DECISION WITH RESPECT TO THE CLASS A NOTES BASED ON THE ANTICIPATED YIELD TO MATURITY OF SUCH CLASS A CERTIFICATE RESULTING FROM ITS PRICE AND SUCH INVESTOR'S OWN DETERMINATION AS TO ANTICIPATED MORTGAGE LOAN PREPAYMENT RATES. PROSPECTIVE INVESTORS ARE URGED TO ANALYZE FULLY THE EFFECT OF MORTGAGE LOAN PREPAYMENTS FOR THE RELATED POOL AND MARKET CONDITIONS ON THE YIELD AND VALUE OF THE RELATED CLASS OF CLASS A CERTIFICATES, BEFORE ACQUIRING ANY CLASS A CERTIFICATES. IN PARTICULAR, INVESTORS THAT ARE REQUIRED TO PERFORM PERIODIC VALUATIONS ON THEIR INVESTMENT PORTFOLIOS SHOULD CONSIDER THE EFFECT OF SUCH FLUCTUATIONS IN VALUE. IN ADDITION, INVESTORS SHOULD CAREFULLY CONSIDER THE FACTORS DISCUSSED UNDER "RISK FACTORS -- PREPAYMENT CONSIDERATIONS" HEREIN. The terms of the Class A Certificates provide for the amortization of the Class A Certificates into two periods, the Managed Amortization Period (as defined herein) and the Rapid Amortization Period (as defined herein), which affects the rate and timing of the payment of principal on the Class A Certificates. Payments of principal to Holders of the Class A Certificates may reduce the percentage of the related Pool Balance (as defined herein) represented by the related Certificate principal balance. This may occur during the Managed Amortization Period but this is especially true during the Rapid Amortization Period. In addition, the Holders of the Class A Certificates may receive a payment of Excess Cashflow (as defined herein) as an Accelerated Principal Payment on any Payment Date on which the Specified Overcollateralization Amount (as defined herein) for the related Class of Class A Certificates exceeds the Overcollateralization Amount for the related Class A Certificates. The "OVERCOLLATERALIZATION AMOUNT" with respect to each Class of Class A Certificates and the related Pool is equal to the amount, if any, by which the related Pool Balance exceeds the outstanding principal balance for the related Class of Class A Certificates. The Insurer will require, based upon the terms and conditions hereinafter described, that the Overcollateralization Amount with respect to each Class of Class A Certificates be maintained at the Specified Overcollateralization Amount with respect to such Class. The Sale and Servicing Agreement allows the Trust, but subject to the satisfaction of certain terms specified in the Sale and Servicing Agreement, and upon notice to the Rating Agencies and the Insurer, to remove Mortgage Loans from either Pool held by the Trust at any time during the life of the Trust so long as the related Overcollateralization Amount (after giving effect to such removal) exceeds what is then the related Specified Overcollateralization Amount. Such removals may affect the rate at which principal is distributed to the Holders of the Class A Certificates by reducing the overall balance of Mortgage Loans in the related Pool and thus the amount of related Principal Collections (as defined herein). As with fixed-rate obligations generally, the rate of prepayment on a pool of mortgage loans with fixed rates is affected by prevailing market rates for mortgage loans of a comparable term and risk level. When the market interest rate is below the mortgage coupon, Mortgagors may have an increased incentive to refinance their mortgage loans. Depending on prevailing market rates, the future outlook for market rates and economic conditions generally, some Mortgagors may sell or refinance mortgaged properties in order to realize their equity in the properties, to meet cash flow needs or to make other investments. The rate of prepayment on the Mortgage Loans cannot be predicted. Neither the Servicer nor the Depositor is aware of any relevant studies or statistics on the rate of prepayment of such Mortgage Loans. All of the Mortgage Loans contain "due-on-sale" provisions and the Servicer intends to enforce such provisions, unless such enforcement is not permitted by applicable law. The enforcement of a "due-on-sale" provision will have the same effect as a prepayment of the related Mortgage Loan. EFFECT OF OVERCOLLATERALIZATION FEATURE Because all or a portion of the Excess Cashflow (as defined below) with respect to each Pool may be applied as an Accelerated Principal Payment in reduction of the outstanding principal balance of the related Class of Class A Certificates, the weighted average life of such Class of Class A Certificates will also be influenced by the amount of such Excess Cashflow so applied. "EXCESS CASHFLOW" with respect to a Payment Date and a Class of Class A Certificates means the amount on deposit in the Collection Account in respect of S-35 Available Funds for the related Pool during the related Collection Period, available after making the distributions with respect to such Class specified in clauses (i) through (vi) under the caption "Description of the Class A Certificates -- Priority of Distributions" on such Payment Date. Because Excess Cashflow attributable to the overcollateralization feature is derived, in part, from interest collections on the Mortgage Loans in the related Pool and will be applied to reduce the outstanding principal balance of each Class of Class A Certificates, the aggregate payments in reduction of the outstanding principal balance of each Class of Class A Certificates on a Payment Date will usually be greater than the aggregate amount of Principal Collections (including prepayments) on the Mortgage Loans in the related Pool payable during the related Collection Period until the Specified Overcollateralization Amount with respect to such Class is reached. As a consequence, Excess Cashflow available for payment in reduction of the outstanding principal balance of the related Class of Class A Certificates will increase in proportion to such outstanding principal balance over time, to the extent such Excess Cashflow is not applied to offset losses on the Mortgage Loans in the related Pool. Accelerated Principal Payments will be paid on each Class of Class A Certificates in reduction of the principal balance of such Class on each Payment Date if the then-applicable Specified Overcollateralization Amount with respect to such Class exceeds the related Overcollateralization Amount on such Payment Date. If a Class A Certificate is purchased at other than par, its yield to maturity will be affected by the rate at which Accelerated Principal Payments are paid to the related Certificateholder. If the actual rate of Accelerated Principal Payments on a Class of Class A Certificates applied in reduction of the outstanding principal balance of such Class is slower than the rate anticipated by an investor who purchases such Class A Certificate at a discount, the actual yield to such investor will be lower than such investor's anticipated yield. If the actual rate of Accelerated Principal Payments applied in reduction of the outstanding principal balance of a Class of Class A Certificates is faster than the rate anticipated by an investor who purchases such Class A Certificate at a premium, the actual yield to such investor will be lower than such investor's anticipated yield. The amount of Excess Cashflow with respect to any Pool which is available to fund Accelerated Principal Payments on any Payment Date will be affected by, among other things, the actual amount of interest received, collected or recovered in respect of the Mortgage Loans in such Pool during the related Collection Period and such amount will be influenced by changes in the weighted average of the Loan Rates resulting from prepayment and liquidations of Mortgage Loans in such Pool. The amount of Accelerated Principal Payments paid to each Class of Class A Certificates and applied to the outstanding principal balance of such Class on each Payment Date will be based on the related Specified Overcollateralization Amount of such Class. The "ACCELERATED PRINCIPAL PAYMENT" will equal (i) for any Payment Date through the related Spread Holiday Termination Date, the lesser of (A) % of the Excess Cashflow with respect to the related Pool and (B) the amount required to increase the related Overcollateralization Amount to the related Specified Overcollateralization Amount applicable to such Payment Date and (ii) on each succeeding Payment Date, the lesser of (A) the Excess Cashflow with respect to the related Pool and (B) the amount required to increase the related Overcollateralization Amount to the related Specified Overcollateralization Amount applicable to such Payment Date. The Indenture generally provides that the Specified Overcollateralization Amount may, with respect to each Class, over time, decrease or increase, subject to certain floors, caps and triggers, including triggers that allow such Specified Overcollateralization Amount to decrease or "step down" or increase or "step up" based on the performance of the Mortgage Loans in the related Pool under certain tests specified in the Indenture based on delinquency or loss rates. Any increase in the Specified Overcollateralization Amount with respect to each Class of Class A Certificates may result in an accelerated amortization of such Class until such Specified Overcollateralization Amount is reached. Conversely, any decrease in the Specified Overcollateralization Amount with respect to each Class of Class A Certificates may result in a decelerated amortization of such Class. The "SPREAD HOLIDAY TERMINATION DATE" with respect to each Class of Class A Certificates is the th Payment Date. [CLASS A-1 DECREMENT TABLES] S-36 [CLASS A-2 DECREMENT TABLES] INFORMATION REPORTING AND BACKUP WITHHOLDING The trustee will furnish or make available, within a reasonable time after the end of each calendar year, to each person who held a class [A] certificate at any time during this year, the information required by applicable rules to assist the holders in preparing their federal income tax returns, or to enable holders to make the information available to beneficial owners or financial intermediaries that hold the certificates on behalf of beneficial owners. In particular, this information will include a statement of the adjusted issue price of the class [A] certificate at the beginning of each accrual period. In addition, the reports will include information necessary to compute the accrual of any market discount that may arise upon secondary trading of class [A] certificates. Distributions of interest and principal as well as distributions of proceeds from the sale of the class [A] certificates, may be subject to the backup withholding tax under section 3406 of the code at a rate of 31% if the recipients of these distributions fail to furnish to the payor information, including their taxpayer identification numbers, or otherwise fail to establish an exemption from this 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 distributions that is required to supply information but does not do so in the proper manner. STATE TAXES The depositor makes no representations regarding the tax consequences of purchase, ownership or disposition of the class [A] certificates and Supplemental Interest Amounts under tax laws of any state. Investors considering an investment in the class [A] certificates and Supplemental Interest Amounts may wish to consult their own tax advisors regarding these tax consequences. All investors should consult their own tax advisors regarding the federal, state, local or foreign tax consequences of the purchase, ownership and disposition of the class [A] certificates and the Supplemental Interest Amounts. ERISA CONSIDERATIONS Any Plan fiduciary which proposes to cause a Plan to acquire any of the offered certificates should consult with its counsel with respect to the potential consequences under ERISA and the code of the Plan's acquisition and ownership of such certificates. The DOL has issued to the Underwriter an individual prohibited transaction exemption, Prohibited Transaction Exemption - , which generally exempts from the application of certain prohibited transaction provisions of ERISA and the code transactions relating to the initial purchase, the holding and the subsequent resale by Plans of certificates representing a beneficial ownership interest in a trust, the assets of which consists of obligations, including home equity loans, that bear interest or are purchased at a discount and are secured by single-family residential real property and/or multi-family residential real property. The Underwriter's exemption will apply to the initial purchase, the holding and the subsequent resale of the offered certified by a Plan, provided that certain conditions (certain of which are described in the prospectus) are satisfied. The Underwriter believes that all conditions of the exemption, other than those within the control of the investors, will be met. Any Plan fiduciary considering whether to purchase any offered certificates on behalf of a Plan should consult with its counsel regarding the applicability of the fiduciary responsibility and prohibited transaction provisions of ERISA and the code to such investment. Before purchasing any offered certificates, a Plan fiduciary should make its own determination as to the availability of the exemptive relief provided in the Underwriter's exemption. Moreover, a Plan fiduciary should determine whether, under the general fiduciary standards of investment prudence and diversification, an investment in offered certificates is appropriate for the Plan, taking into account the overall investment policy of the Plan and the composition of the Plan's S-37 investment portfolio. The sale of offered certificates to a Plan is in no respect a representation by the Depositor or the Underwriter that this investment meets all relevant legal requirements for investments by Plans generally or by any particular Plan or that this investment is appropriate for Plans generally or any particular Plan. LEGAL INVESTMENT CONSIDERATIONS The offered certificates will not constitute "mortgage related securities" for purposes of the Secondary Mortgage Market Enhancement Act of 1984 ("SMMEA"). Institutions whose investment activities are subject to review by federal or state regulatory authorities should consult with their counsel or the applicable authorities to determine whether an investment in the offered certificates complies with applicable guidelines, policy statements or restrictions. See "Legal Investment" in the prospectus. UNDERWRITING Subject to the terms and conditions set forth in the underwriting agreement, dated , between the depositor and the underwriter, the depositor has agreed to sell to the underwriter and the underwriter has agreed to purchase from the depositor the Class A certificates. Distributions of the offered certificates will be made from time to time in negotiated transactions or otherwise at varying prices to be determined at the time of sale. Proceeds to the depositor from the sale of the offered certificates will be approximately $ , plus accrued interest, before deducting expenses payable by the depositor, estimated to be $ in the aggregate. In connection with the purchase and sale of the offered certificates, the underwriter may be deemed to have received compensation from the depositor in the form of underwriting discounts. The depositor has been advised by the underwriter that it presently intends to make a market in the offered certificates; however, it is not obligated to do so, any market-making may be discontinued at any time, and there can be no assurance that an active public market for the offered certificates will develop. The underwriting agreement provides that the depositor will indemnify the underwriter against certain civil liabilities, including liabilities under the Securities Act of 1993, as amended. EXPERTS [ ] LEGAL MATTERS Certain legal matters with respect to the Class A certificates will be passed upon for the depositor by [ ], and for the underwriter by . RATINGS The Class A certificates must receive ratings of " " by [First Rating Agency] and " " by [Second Rating Agency] prior to their issuance. A securities rating addresses the likelihood of the receipt by a certificateholder of distributions on the mortgage loans. The rating takes into consideration the characteristics of the mortgage loans and the structural, legal and tax aspects for the certificates. However, the ratings on the certificates do not constitute statements regarding the likelihood or frequency of prepayments on the mortgage loans or the possibility that certificateholders might realize a lower than anticipated yield. S-38 The ratings assigned to the certificates will depend primarily upon the financial strength of the Insurer. Any reduction in a rating assigned to the claims-paying ability of the Insurer below the ratings initially assigned to the certificates may result in a corresponding reduction of the ratings assigned to the certificates. A securities 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 securities rating should be evaluated independently of similar ratings on different securities. S-39 INDEX OF DEFINED TERMS
PAGE ---- Accelerated Principal Payment............................... 38 Certificate Owners.......................................... 45 Class A Principal Carryover Shortfall....................... 52 Class A Principal Distribution.............................. 52 Class Monthly Interest Distributable Amount................. 52 Code........................................................ 46 Combined Loan-to-Value Ratio................................ 22 Company..................................................... 14 Credit Limit................................................ 22 Credit Limit Utilization Rate............................... 22 Credit Line Agreements...................................... 21 Credit Scores............................................... 27, 33 Distributable Excess Spread................................. 51 DTC......................................................... 45 Eligible Investments........................................ 47 Euroclear................................................... 45 Excess Cashflow............................................. 37 Excess Spread............................................... 54 Index Rate.................................................. 21 Insurer..................................................... 14 Loan Agreements............................................. 21 Loan Rate................................................... 21 Margin...................................................... 21 Monthly Advance............................................. 49 Mortgage Notes.............................................. 21 Mortgagor................................................... 22 Overcollateralization Amount................................ 36 Policy...................................................... 44 Pool I Balance.............................................. 22 Pool I Closed End Balance................................... 22 Pool I HELOC Balance........................................ 22 Pool II Balance............................................. 28 Pool II Closed End Balance.................................. 28 Pool II HELOC Balance....................................... 28 Prepayment Assumptions...................................... 40, 42 Related Documents........................................... 45 Second Mortgage Ratio....................................... 22 Servicer.................................................... 14 Servicing Advance........................................... 49 SMMEA....................................................... 66 Depositor................................................... 20 Spread Holiday Termination Date............................. 39
S-40
PAGE ---- Substitution Adjustment..................................... 46 Underwriter................................................. 14 Underwriting Standards...................................... 17 Voting Rights............................................... 62
S-41 ANNEX I: INSURER'S AUDITED FINANCIAL STATEMENTS [ATTACHED TO PROSPECTUS SUPPLEMENT IF NOT INCORPORATED BY REFERENCE] A-I-1 ANNEX II: CLEARANCE, SETTLEMENT AND TAX DOCUMENTATION PROCEDURES Except in limited circumstances, the Class A Certificates will be available only in book-entry form. Investors in the securities may hold the securities through any of DTC, Clearstream or Euroclear. The Class A Certificates will be tradable as home market instruments in both the European and U.S. domestic markets. Initial settlement and all secondary trades will settle in same-day funds. Secondary market trading between investors 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, which is 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 securities will be effected on a delivery-against-payment basis through the respective Depositaries of Clearstream and Euroclear and as DTC participants. Non-U.S. holders of global securities will be subject to U.S. withholding taxes unless the holders meet a number of requirements and deliver appropriate U.S. tax documents to the securities clearing organizations or their participants. INITIAL SETTLEMENT All Class A Certificates will be held in book-entry form by DTC in the name of Cede & Co. as nominee of DTC. Investors' interests in the securities will be represented through financial institutions acting on their behalf as direct and indirect participants in DTC. As a result, Clearstream and Euroclear will hold positions on behalf of their participants through their relevant depository which in turn will hold these positions in their accounts as DTC participants. Investors electing to hold their securities 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 securities through Clearstream or Euroclear accounts will follow the settlement procedures applicable to conventional eurobonds, except that there will be no temporary security and no lock-up or restricted period. Securities will be credited to the securities custody accounts on the settlement date against payment in same-day funds. SECONDARY MARKET TRADING Since the purchaser determines the place of delivery, it is important to establish at the time of the trade where both the purchaser's and seller's accounts are located to ensure that settlement can be made on the desired value date. TRADING BETWEEN DTC PARTICIPANTS Secondary market trading between DTC participants will be settled using the procedures applicable to asset-back securities issues in same-day funds. TRADING BETWEEN CLEARSTREAM 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. A-II-1 TRADING BETWEEN DTC, SELLER AND CLEARSTREAM OR EUROCLEAR PARTICIPANTS When Class A Certificates 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 depository, as the case may be, to receive the securities against payment. Payment will include interest accrued on the Class A Certificates from and including the last coupon distribution date to and excluding the settlement date, on the basis of the actual number of days in the 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 depository to the DTC participant's account against delivery of the Class A Certificates. After settlement has been completed, the Class A Certificates will be credited to the respective clearing system and by the clearing system, in accordance with its usual procedures, to the Clearstream participant's or Euroclear participant's account. The securities credit will appear the next day, European time and the cash debt will be back-valued to, and the interest on the global securities will accrue from, the value date, which would be the preceding day when settlement occurred in New York. If settlement is not completed on the intended value date and 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 securities 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 drawn upon to finance settlement. Under this procedure, Clearstream participants or Euroclear participants purchasing Class A Certificates wold incur overdraft charges for one day, assuming they cleared the overdraft when the securities were credited to their accounts. However, interest on the Class A Certificates would accrue from the value date. Therefore, in many cases the investment income on the global securities earned during that one-day period may substantially reduce or offset the amount of the 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 securities to the respective European depository for the benefit of Clearstream participants or Euroclear participants. The sale proceeds will be available to the DTC seller on the settlement date. Thus, to the DTC participants a cross-market transaction will settle no differently than a trade between two DTC participants. TRADING BETWEEN CLEARSTREAM OR EUROCLEAR SELLER AND DTC PURCHASER Due to time zone differences in their favor, Clearstream participants and Euroclear participants may employ their customary procedures for transactions in which securities are to be transferred by the respective clearing system, through the respective depository, to a DTC participant. The seller will send instructions to Clearstream or Euroclear through a Clearstream participant or Euroclear participant at least one business day prior to settlement. In these cases Clearstream or Euroclear will instruct the respective depository, as appropriate, to credit the Class A Certificates to the DTC participant's account against payment. Payment will include interest accrued on the securities from and including the last interest payment to and excluding the settlement date on the basis of the actual number of days in the accrual period and a year assumed to consist of 360 days. For transactions settling on the 31st of the month, payment will include interest accrued to and excluding the first day of the following month. The payment will then be reflected in the account of 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. In the event that the Clearstream A-II-2 participant or Euroclear participant has a line of credit with its respective clearing system and elects 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 and 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 securities from DTC participants for delivery to Clearstream participants or Euroclear participants may wish to 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: - 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; - borrowing the Class A Certificates in the U.S. from a DTC participant no later than one day prior to settlement, which would give the Class A Certificates sufficient time to be reflected in their Clearstream or Euroclear account in order to settle the sale side of the trade; or - 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 Class A Certificates holding securities through Clearstream or Euroclear, or through DTC if the holder has an address outside the U.S., will be subject to the 30% U.S. withholding tax that generally applies to payments of interest, including original issue discount, on registered debt issued by U.S. persons, unless: (1) each clearing system, bank or other financial institution that holds customers' securities in the ordinary course of its trade or business in the chain of intermediaries between the beneficial owner and the U.S. entity required to withhold tax complies with applicable certification requirements and (2) the beneficial owner takes one of the steps described below to obtain an exemption or reduced tax rate. This summary does not deal with all aspects of U.S. federal income tax withholding that may be relevant to foreign holders of the securities as well as the application of the withholding regulations. Prospective investors are urged to consult their own tax advisors for specific advice regarding their holding and disposing of the Class A Certificates. EXEMPTION FOR NON-U.S. PERSONS Beneficial owners of global securities that are non-U.S. persons, as defined below, generally 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. EXEMPTION FOR NON-U.S. PERSONS WITH EFFECTIVELY CONNECTED INCOME 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, Certificate of Foreign Person's Claim for Exemption From Withholding on Income Effectively Connected With the Conduct of a Trade or Business in the United States. A-II-3 EXEMPTION OR REDUCED RATE FOR NON-U.S. PERSONS RESIDENT IN TREATY COUNTRIES 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 Owner for United States Tax Withholding. Form W-8BEN may be filed by the security holders or their authorized agents. 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 Under the existing rules, the beneficial owner of a global security or his agent files the appropriate form by submitting it to the person through whom it holds, the clearing agency, in the case of persons holding directly on the books of the clearing agency. A form W-8BEN on which the beneficial owner of a global security provides a U.S. taxpayer identification number generally remains in effect until a change in circumstances causes any of the information on the form to be incorrect. If the information shown on Form W-8BEN changes, a new Form W-8BEN must be filed within 30 days of the change. Form W-8BEN on which a U.S. taxpayer identification is not provided and a Form W-8ECI generally remain in effect for the calendar years, absent a change in circumstances causing any information on the form to be incorrect. A U.S. PERSON is: (1) a citizen or resident of the United States; (2) a corporation, partnership or other entity organized in or under the laws of the United States or any political subdivision thereof; (3) an estate that is subject to U.S. federal income tax regardless of the source of its income; or (4) a trust if a court within the United States can exercise primary supervision over its administration and at least one United States fiduciary has the authority to control all substantial decisions of the trust. A NON-U.S. PERSON is any person who is not a U.S. person. A-II-4 ------------------------------------------------------ ------------------------------------------------------ NO DEALER, SALESMAN OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE DEPOSITOR OR THE UNDERWRITER. THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS DOES NOT CONSTITUTE AN OFFER OF ANY SECURITIES OTHER THAN THOSE TO WHICH THEY RELATE OR AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, TO ANY PERSON IN ANY JURISDICTION WHERE SUCH AN OFFER OR SOLICITATION WOULD BE UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THEIR RESPECTIVE DATES. --------------------- TABLE OF CONTENTS
PAGE ---- Prospectus Supplement Summary............................................ S-4 Risk Factors....................................... S-8 The Insurer........................................ S-9 The Depositor...................................... S-9 Description of the Mortgage Loans.................. S-9 Servicing of the Mortgage Loans.................... S-17 Description of the Certificates.................... S-19 Use of Proceeds.................................... S-34 Certain Federal Income Tax Consequences............ S-34 Prepayment and Yield Considerations................ S-34 State Taxes........................................ S-37 ERISA Considerations............................... S-37 Legal Investment Considerations.................... S-38 Underwriting....................................... S-38 Experts............................................ S-38 Legal Matters...................................... S-38 Ratings............................................ S-38 Index of Defined Terms............................. S-40 Annex I: Insurer's Audited Financial Statements.... A-I-1 Annex II: Clearance, Settlement and Tax Documentation Procedures.......................... A-II-1 Prospectus Summary............................................ 4 Risk Factors....................................... 8 The Depositor...................................... 13 The Trust.......................................... 13 Use of Proceeds.................................... 27 Loan Program....................................... 27 Description of the Securities...................... 31 Credit Enhancement................................. 46 Yield and Prepayment Considerations................ 52 The Agreements..................................... 54 Certain Legal Aspects of the Loans................. 71 Federal Income Tax Consequences.................... 82 State Tax Considerations........................... 101 ERISA Considerations............................... 102 Legal Investment................................... 108 Method of Distribution............................. 110 Legal Matters...................................... 111 Financial Information.............................. 111 Available Information.............................. 111 Incorporation of Certain Documents by Reference.... 112 Rating............................................. 112 Index of Defined Terms............................. 114
------------------------------------------------------ ------------------------------------------------------ ------------------------------------------------------ ------------------------------------------------------ SEQUOIA MORTGAGE TRUST 200 $ CLASS A-1 VARIABLE RATE ASSET-BACKED CERTIFICATES $ CLASS A-2 VARIABLE RATE ASSET-BACKED CERTIFICATES MORTGAGE LOAN ASSET-BACKED CERTIFICATES SERIES 200 [LOGO] [DEPOSITOR] ------------------------------------------- PROSPECTUS SUPPLEMENT ------------------------------------------- [UNDERWRITER] [UNDERWRITER'S LOGO] $ ------------------------------------------------------ ------------------------------------------------------ PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION. Set forth below is an estimate of the amount of fees and expenses (other than underwriting discounts and commissions) to be incurred in connection with the issuance and distribution of the Offered Securities. SEC Filing Fee.............................................. $ 145,236 Trustee's Fees and Expenses*................................ 75,000 Legal Fees and Expenses*.................................... 325,000 Accounting Fees and Expenses*............................... 108,000 Printing and Engraving Expenses*............................ 175,000 Blue Sky Qualification and Legal Investment Fees and Expenses*................................................. 8,000 Rating Agency Fees*......................................... 625,000 Miscellaneous*.............................................. 4,500 ---------- TOTAL............................................. $1,465,736 ==========
- --------------- * Estimated in accordance with Item 511 of Regulation S-K. ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS. INDEMNIFICATION. Under the laws which govern the organization of the registrant, each co-registrant has the power and in some instances may be required to provide an agent, including an officer or director, who was or is a party or is threatened to be made a party to certain proceedings, with indemnification against certain expenses, judgments, fines, settlements and other amounts under certain circumstances. Each co-registrant's Amended and Restated Certificate of Incorporation and By-Laws provide for indemnification of directors and officers of the co-registrant to the fullest extent permitted by the laws which govern its organization. The form of the Underwriting Agreement, filed as Exhibit 1.1 to this Registration Statement, provides that the co-registrant will indemnify and reimburse the underwriter(s) and each controlling person of the underwriter(s) with respect to certain expenses and liabilities, including liabilities under the 1933 Act or other federal or state regulations or under the common law, which arise out of or are based on certain material misstatements or omissions in the Registration Statement. In addition, the Underwriting Agreement provides that the underwriter(s) will similarly indemnify and reimburse the co-registrant with respect to certain material misstatements or omissions in the Registration Statement which are based on certain written information furnished by the underwriter(s) for use in connection with the preparation of the Registration Statement. INSURANCE. As permitted under the laws which govern the organization of each co-registrant, each co-registrant's Certificate of Incorporation permits the board of directors to purchase and maintain insurance on behalf of the co-registrant's agents, including its officers and directors, against any liability asserted against them in such co-capacity or arising out of such agents' status as such, whether or not such co-registrant would have the power to indemnify them against such liability under applicable law. II-1 ITEM 16. EXHIBITS. 1.1 -- Form of Underwriting Agreement.* 3.1a -- Restated Certificate of Incorporation of Sequoia Mortgage Funding Corporation.** 3.1b -- Restated Certificate of Incorporation of Sequoia Residential Funding, Inc.** 4.1.1 -- Form of Indenture (Debt Bond form) in substantially the form to be entered into between the Issuer and the Bond Trustee.* 4.1.2 -- Form of Indenture (REMIC Bond form) in substantially the form to be entered into between the Issuer and the Bond Trustee.* 4.1.3 -- Form of Indenture (for Rapid Amortization Event) in substantially the form to be entered into between the Issuer and the Bond Trustee. 4.2 -- Form of Deposit Trust Agreement.* 4.3 -- Form of Master Servicing Agreement.* 4.4 -- Form of Pooling and Servicing Agreement.** 4.5 -- Sale and Servicing Agreement. 5.1 -- Opinion of Tobin & Tobin with respect to validity. 8.1 -- Opinion of Chapman and Cutler LLP with respect to tax matters. 23.1 -- Consent of Tobin & Tobin (included in Exhibit 5.1). 23.2 -- Consent of Chapman and Cutler LLP (included in Exhibit 8.1). 24.1 -- Powers of Attorney (included on pages II-4 and II-5). 25.1 -- Statement of Eligibility and Qualification of Trustee under the Trust Indenture Act of 1939 (to be filed pursuant to Section 305(b)(2) of the Trust Indenture Act of 1939).
- --------------- * Incorporated by reference to the correspondingly numbered exhibit to the Registration Statement on Form S-3 (333-22681) filed by Co-registrant Sequoia Mortgage Funding Corporation. ** Incorporated by reference to the correspondingly numbered exhibit to the Registration Statement on Form S-3 (333-90772) filed by the Co-registrants. ITEM 17. UNDERTAKINGS. A. Undertaking in respect of indemnification Insofar as indemnification for liabilities arising under the 1933 Act may be permitted to directors, officers and controlling persons of each co-registrant pursuant to the provisions described above in Item 15, or otherwise, each co-registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the co-registrant will, unless in the opinion of their counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question of whether such indemnification by them is against public policy as expressed in the 1933 Act and will be governed by the final adjudication of such issue. B. Undertaking pursuant to Rule 415. Each co-registrant hereby undertakes: (1) To file, during any period in which offers or sales are being made, a post-effective amendment to this Registration Statement: (i) to include any prospectus required by Section 10(a)(3) of the Securities Act of 1933; II-2 (ii) to reflect in the Prospectus any facts or events arising after the effective date of the Registration Statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the Registration Statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high end of the estimated maximum offering range may be reflected in the form of prospectus filed with the Commission pursuant to Rule 424(b) if, in the aggregate the changes in volume and price represent on more than a 20% change in the maximum aggregate offering price set forth in the "Calculation of Registration Fee" table in the effective registration statement. (iii) to include any material information with respect to the plan of distribution not previously disclosed in the Registration Statement or any material change of such information in the Registration Statement; provided, however, that paragraphs (i) and (ii) do not apply if the information required to be included in the post-effective amendment is contained in periodic reports filed by the Issuer pursuant to Section 13 or Section 15(d) of the Securities Exchange Act of 1934 that are incorporated by reference in the Registration Statement. (2) That, for the purpose of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. (3) To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering. C. Undertaking pursuant to Rule 430A. Each co-registrant hereby undertakes: (1) For purposes of determining any liability under the Securities Act of 1933, the information omitted from the form of prospectus filed as part of a registration statement in Reliance upon Rule 430A and contained in the form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective. (2) For the purpose of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. D. Undertaking regarding documents incorporated by reference. Each co-registrant hereby undertakes that, for purposes of determining any liability under the Securities Act of 1933, each filing of the co-registrant's annual report pursuant to section 13(a) or section 15(d) of the Securities Exchange Act of 1934 (and, where applicable, each filing of an employee benefit plan's annual report pursuant to section 15(d) of the Securities Exchange Act of 1934) that is incorporated by reference in the registration statement shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. E. Undertaking regarding trust indenture qualification. Each co-registrant hereby undertakes to file an application for the purpose of determining the eligibility of the trustee to act under subsection (a) of section 310 of the Trust Indenture Act ("Act") in accordance with the rules and regulations prescribed by the Commission under section 305(b)(2) of the Act. II-3 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, each co-registrant certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form S-3 and has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Mill Valley, State of California on the 6th day of May, 2004. SEQUOIA MORTGAGE FUNDING CORPORATION SEQUOIA RESIDENTIAL FUNDING, INC. By /s/ DOUGLAS B. HANSEN By /s/ DOUGLAS B. HANSEN ------------------------------------------ ------------------------------------------ Douglas B. Hansen Douglas B. Hansen President President
Each co-registrant reasonably believes that the security ratings to be assigned to the securities registered hereunder will make the securities "investment grade securities" pursuant to Transaction Requirement B.2 of Form S-3, prior to the sale of such securities. POWERS OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned Directors and Officers of Sequoia Residential Funding, Inc., a Delaware corporation, hereby constitute and appoint, George E. Bull III, Douglas B. Hansen and Harold F. Zagunis, each with full power of substitution and resubstitution, their true and lawful attorneys and agents to sign the names of the undersigned Directors and Officers in the capacities indicated below to the registration statement to which this Power of Attorney is attached as an exhibit, and all amendments (including post-effective amendments) and supplements thereto, and all instruments or documents filed as a part thereof or in connection therewith, and to file the supplements thereto, and all instruments or documents filed as a part thereof or in connection therewith, and to file the same, with all exhibits thereto, and all other instruments or documents in connection therewith, with the Securities and Exchange Commission; and each of the undersigned hereby ratifies and confirms all that said attorneys, agents or any of them shall do or cause to be done by virtue thereof. Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed below by the following persons in the capacities and on the dates indicated.
SIGNATURE TITLE DATE --------- ----- ---- /s/ GEORGE E. BULL III Chairman of the Board of Directors May 6, 2004 ------------------------------------------------ (Principal Executive Officer) George E. Bull III /s/ DOUGLAS B. HANSEN President and Director May 6, 2004 ------------------------------------------------ (Principal Financial Officer) Douglas B. Hansen /s/ HAROLD F. ZAGUNIS Treasurer, Secretary and Director May 6, 2004 ------------------------------------------------ (Principal Accounting Officer) Harold F. Zagunis /s/ JOSEPH DAHER Director May 6, 2004 ------------------------------------------------ Joseph Daher /s/ HENRY PILGER Director May 6, 2004 ------------------------------------------------ Henry Pilger
II-4 KNOW ALL MEN BY THESE PRESENTS, that the undersigned Directors and Officers of Sequoia Mortgage Funding Corporation, a Delaware corporation, hereby constitute and appoint George E. Bull III, Douglas B. Hansen and Harold F. Zagunis, each with full power of substitution and resubstitution, their true and lawful attorneys and agents to sign the names of the undersigned Directors and Officers in the capacities indicated below to the registration statement to which this Power of Attorney is attached as an exhibit, and all amendments (including post-effective amendments) and supplements thereto, and all instruments or documents filed as a part thereof or in connection therewith, and to file the supplements thereto, and all instruments or documents filed as a part thereof or in connection therewith, and to file the same, with all exhibits thereto, and all other instruments or documents in connection therewith, with the Securities and Exchange Commission; and each of the undersigned hereby ratifies and confirms all that said attorneys, agents or any of them shall do or cause to be done by virtue thereof. Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed below by the following persons in the capacities and on the dates indicated.
SIGNATURE TITLE DATE --------- ----- ---- /s/ GEORGE E. BULL III Chairman of the Board of Directors May 6, 2004 ------------------------------------------------ (Principal Executive Officer) George E. Bull III /s/ DOUGLAS B. HANSEN President and Director May 6, 2004 ------------------------------------------------ (Principal Financial Officer) Douglas B. Hansen /s/ HAROLD F. ZAGUNIS Treasurer, Secretary and Director May 6, 2004 ------------------------------------------------ (Principal Accounting Officer) Harold F. Zagunis /s/ JOHN CONNOLLY Director May 6, 2004 ------------------------------------------------ John Connolly IV /s/ CRAIG A. SEVERANCE Director May 6, 2004 ------------------------------------------------ Craig A. Severance
II-5 EXHIBIT INDEX
EXHIBIT - ------- 1.1 -- Form of Underwriting Agreement.* 3.1a -- Restated Certificate of Incorporation of Sequoia Mortgage Funding Corporation.** 3.1b -- Restated Certificate of Incorporation of Sequoia Residential Funding, Inc.** 4.1.1 -- Form of Indenture (Debt Bond form) in substantially the form to be entered into between the Issuer and the Bond Trustee.* 4.1.2 -- Form of Indenture (REMIC Bond form) in substantially the form to be entered into between the Issuer and the Bond Trustee.* 4.1.3 -- Form of Indenture (for Rapid Amortization Event) in substantially the form to be entered into between the Issuer and the Bond Trustee. 4.2 -- Form of Deposit Trust Agreement.* 4.3 -- Form of Master Servicing Agreement.* 4.4 -- Form of Pooling and Servicing Agreement.** 4.5 -- Sale and Servicing Agreement. 5.1 -- Opinion of Tobin & Tobin with respect to validity. 8.1 -- Opinion of Chapman and Cutler LLP with respect to tax matters. 23.1 -- Consent of Tobin & Tobin (included in Exhibit 5.1). 23.2 -- Consent of Chapman and Cutler LLP (included in Exhibit 8.1). 24.1 -- Powers of Attorney (included on pages II-4 and II-5). 25.1 -- Statement of Eligibility and Qualification of Trustee under the Trust Indenture Act of 1939 (to be filed pursuant to Section 305(b)(2) of the Trust Indenture Act of 1939).
- --------------- * Incorporated by reference to the correspondingly numbered exhibit to the Registration Statement on Form S-3 (333-22681) filed by Co-registrant Sequoia Mortgage Funding Corporation. ** Incorporated by reference to the correspondingly numbered exhibit to the Registration Statement on Form S-3 (333-90772) filed by the Co-registrants. EX-4.1.3 2 f98626exv4w1w3.txt EXHIBIT 4.1.3 EXHIBIT 4.1.3 ================================================================================ SEQUOIA MORTGAGE TRUST 200_-_ Collateralized Mortgage Bonds INDENTURE Dated as of _______, 200_ [INDENTURE TRUSTEE] Indenture Trustee ================================================================================ TABLE OF CONTENTS
Page ---- ARTICLE I Definitions and Incorporation by Reference............................................................. 2 SECTION 1.1. Definitions................................................................................ 2 SECTION 1.2. Incorporation by Reference of the Trust Indenture Act...................................... 2 SECTION 1.3. Rules of Construction...................................................................... 3 SECTION 1.4. Action by or Consent of Bondholders and Residual Certificateholders........................ 3 SECTION 1.5. Conflict with TIA.......................................................................... 3 ARTICLE II The Bonds............................................................................................. 4 SECTION 2.1. Form....................................................................................... 4 SECTION 2.2. Execution, Authentication and Delivery..................................................... 4 SECTION 2.3. Registration; Registration of Transfer and Exchange........................................ 4 SECTION 2.4. Mutilated, Destroyed, Lost or Stolen Bonds................................................. 6 SECTION 2.5. Persons Deemed Owners...................................................................... 7 SECTION 2.6. Payment of Principal and Interest; Defaulted Interest...................................... 7 SECTION 2.7. Cancellation............................................................................... 8 SECTION 2.8. Release of Collateral...................................................................... 8 SECTION 2.9. Book-Entry Bonds........................................................................... 8 SECTION 2.10. Notices to Clearing Agency................................................................. 9 SECTION 2.11. Definitive Bonds........................................................................... 9 ARTICLE III Covenants; Representations and Warranties of the Issuer.............................................. 10 SECTION 3.1. Payment of Principal and Interest.......................................................... 10 SECTION 3.2. Maintenance of Office or Agency............................................................ 10 SECTION 3.3. Money for Payments to be Held in Trust..................................................... 10 SECTION 3.4. Existence.................................................................................. 11 SECTION 3.5. Protection of Trust Property............................................................... 11 SECTION 3.6. Opinions as to Trust Property.............................................................. 12 SECTION 3.7. Performance of Obligations; Servicing of Mortgage Loans.................................... 13 SECTION 3.8. Negative Covenants......................................................................... 14 SECTION 3.9. Annual Statement as to Compliance.......................................................... 14 SECTION 3.10. Issuer May Not Consolidate or Transfer Assets.............................................. 15 SECTION 3.11. No Other Business.......................................................................... 15 SECTION 3.12. No Borrowing............................................................................... 15 SECTION 3.13. Servicer's Obligations..................................................................... 15 SECTION 3.14. Guarantees, Loans, Advances and Other Liabilities.......................................... 15 SECTION 3.15. Capital Expenditures....................................................................... 15 SECTION 3.16. Compliance with Laws....................................................................... 15 SECTION 3.17. Restricted Payments........................................................................ 16 SECTION 3.18. Notice of Rapid Amortization Events and Events of Servicing Termination.................... 16 SECTION 3.19. Further Instruments and Acts............................................................... 16
i SECTION 3.20. Amendments of Sale and Servicing Agreement and Trust Agreement............................. 16 SECTION 3.21. Income Tax Characterization................................................................ 16 SECTION 3.22. Representations and Warranties of the Issuer Regarding the Lien of the Indenture Trustee... 16 ARTICLE IV Satisfaction and Discharge............................................................................ 17 SECTION 4.1. Satisfaction and Discharge of Indenture.................................................... 17 SECTION 4.2. Application of Trust Money................................................................. 18 SECTION 4.3. Repayment of Monies Held by Bond Paying Agent.............................................. 18 ARTICLE V Remedies............................................................................................... 18 SECTION 5.1. Remedies................................................................................... 18 SECTION 5.2. Limitation of Suits........................................................................ 19 SECTION 5.3. Unconditional Rights of Bondholders To Receive Principal and Interest...................... 19 SECTION 5.4. Restoration of Rights and Remedies......................................................... 20 SECTION 5.5. Rights and Remedies Cumulative............................................................. 20 SECTION 5.6. Delay or Omission Not a Waiver............................................................. 20 SECTION 5.7. Control by Insurer and Bondholders......................................................... 20 SECTION 5.8. Undertaking for Costs...................................................................... 20 SECTION 5.9. Waiver of Stay or Extension Laws........................................................... 21 SECTION 5.10. Action on Bonds............................................................................ 21 SECTION 5.11. Performance and Enforcement of Certain Obligations......................................... 21 SECTION 5.12. Subrogation................................................................................ 22 SECTION 5.13. Preference Claims.......................................................................... 22 SECTION 5.14. Bondholder Rights.......................................................................... 23 SECTION 5.15. Insurer's Rights Regarding Actions, Proceedings or Investigations.......................... 23 ARTICLE VI The Indenture Trustee................................................................................. 24 SECTION 6.1. Duties of Indenture Trustee................................................................ 24 SECTION 6.2. Rights of Indenture Trustee................................................................ 26 SECTION 6.3. Individual Rights of Indenture Trustee..................................................... 27 SECTION 6.4. Indenture Trustee's Disclaimer............................................................. 27 SECTION 6.5. Notice of Rapid Amortization Events and Events of Servicing Termination.................... 27 SECTION 6.6. Reports by Indenture Trustee to Holders.................................................... 27 SECTION 6.7. Compensation and Indemnity................................................................. 28 SECTION 6.8. Replacement of Indenture Trustee........................................................... 28 SECTION 6.9. Successor Indenture Trustee by Merger...................................................... 30 SECTION 6.10. Appointment of Co-Indenture Trustee or Separate Indenture Trustee.......................... 30 SECTION 6.11. Eligibility; Disqualification.............................................................. 32 SECTION 6.12. Preferential Collection of Claims Against Issuer........................................... 32 SECTION 6.13. Appointment and Powers..................................................................... 32
ii SECTION 6.14. Performance of Duties...................................................................... 32 SECTION 6.15. Limitation on Liability.................................................................... 32 SECTION 6.16. Reliance Upon Documents.................................................................... 33 SECTION 6.17. Representations and Warranties of the Indenture Trustee.................................... 33 SECTION 6.18. Waiver of Setoffs.......................................................................... 33 SECTION 6.19. Control by the Controlling Party........................................................... 33 SECTION 6.20. Indenture Trustee May Enforce Claims Without Possession of Bonds........................... 34 SECTION 6.21. Suits for Enforcement...................................................................... 34 SECTION 6.22. Mortgagor Claims........................................................................... 34 ARTICLE VII Bondholders' Lists and Reports....................................................................... 35 SECTION 7.1. Issuer To Furnish To Indenture Trustee Names and Addresses of Bondholders.................. 35 SECTION 7.2. Preservation of Information; Communications to Bondholders................................. 35 SECTION 7.3. Reports by Issuer.......................................................................... 35 SECTION 7.4. Reports by Indenture Trustee............................................................... 36 ARTICLE VIII Payments and Statements to Bondholders and Residual Bondholders; Accounts, Disbursements and Releases............................................................................... 36 SECTION 8.1. Collection of Money........................................................................ 36 SECTION 8.2. Release of Trust Property.................................................................. 37 SECTION 8.3. Establishment of Accounts.................................................................. 37 SECTION 8.4. The Policy................................................................................. 37 SECTION 8.5. [Reserved]................................................................................. 38 SECTION 8.6. [Reserved]................................................................................. 38 SECTION 8.7. Priority of Distributions.................................................................. 38 SECTION 8.8. Statements to Bondholders.................................................................. 40 SECTION 8.9. Indenture Trustee Annual Certification..................................................... 42 SECTION 8.10. Rights of Bondholders and Residual Certificateholders...................................... 42 SECTION 8.11. Opinion of Counsel......................................................................... 42 ARTICLE IX Supplemental Indentures............................................................................... 43 SECTION 9.1. Supplemental Indentures Without Consent of Bondholders..................................... 43 SECTION 9.2. Supplemental Indentures with Consent of Bondholders........................................ 44 SECTION 9.3. Execution of Supplemental Indentures....................................................... 45 SECTION 9.4. Effect of Supplemental Indenture........................................................... 45 SECTION 9.5. Reference in Bonds to Conformity With Trust Indenture Act.................................. 46 SECTION 9.6. Reference in Bonds to Supplemental Indentures.............................................. 46 ARTICLE X Redemption of Bonds.................................................................................... 46 SECTION 10.1. Redemption................................................................................. 46 SECTION 10.2. Surrender of Bonds......................................................................... 46 SECTION 10.3. Form of Redemption Notice.................................................................. 47 SECTION 10.4. Bonds Payable on Redemption Date........................................................... 48
iii ARTICLE XI Miscellaneous......................................................................................... 48 SECTION 11.1. Compliance Certificates and Opinions, etc.................................................. 48 SECTION 11.2. Form of Documents Delivered to Indenture Trustee........................................... 49 SECTION 11.3. Acts of Bondholders........................................................................ 50 SECTION 11.4. Notices, etc., to Indenture Trustee, Issuer, Insurer and Rating Agencies................... 50 SECTION 11.5. Notices to Bondholders; Waiver............................................................. 51 SECTION 11.6. Alternate Payment and Notice Provisions.................................................... 52 SECTION 11.7. Conflict with Trust Indenture Act.......................................................... 52 SECTION 11.8. Effect of Headings and Table of Contents................................................... 52 SECTION 11.9. Successors and Assigns..................................................................... 52 SECTION 11.10. Separability............................................................................... 52 SECTION 11.11. Benefits of Indenture...................................................................... 52 SECTION 11.12. Legal Holidays............................................................................. 53 SECTION 11.13. GOVERNING LAW.............................................................................. 53 SECTION 11.14. Counterparts............................................................................... 53 SECTION 11.15. Recording of Indenture..................................................................... 53 SECTION 11.16. Trust Obligation........................................................................... 53 SECTION 11.17. No Petition................................................................................ 53 SECTION 11.18. Inspection................................................................................. 54 SECTION 11.19. Limitation of Liability.................................................................... 54 ARTICLE XII Rapid Amortization Events............................................................................ 54 SECTION 12.1. Rapid Amortization Events.................................................................. 54 ANNEX A - Defined Terms EXHIBIT A - Form of Class A Bond EXHIBIT B - Form of Opinion of Counsel EXHIBIT C - Form of Certification to be Provided by the Manager to the Indenture Trustee
iv INDENTURE, dated as of _______, 200_ (the "Indenture"), between SEQUOIA MORTGAGE TRUST 200_-_, a Delaware statutory trust (the "Issuer"), and [INDENTURE TRUSTEE], as trustee (the "Indenture Trustee"). Each party agrees as follows for the benefit of the other party and for the equal and ratable benefit of the Holders of the Issuer's Collateralized Mortgage Bonds (the "Bonds") As security for the payment and performance by the Issuer of its obligations under this Indenture and the Bonds, the Issuer has agreed to assign the Collateral (as defined below) to the Indenture Trustee on behalf of the Bondholders and the Insurer. [Insurer] (the "Insurer") has issued and delivered a financial guaranty insurance policy for the Bonds, dated the Closing Date (the "Policy"), pursuant to which the Insurer guarantees the Insured Amounts and Preference Amount (as defined in the Policy). As an inducement to the Insurer to issue and deliver the Policy, the Issuer and the Insurer have executed and delivered the Insurance and Indemnity Agreement, dated as of _______, 200_ (as amended from time to time, the "Insurance Agreement"), among the Insurer, the Issuer, [________________], [______________] and the Indenture Trustee. As an additional inducement to the Insurer to issue the Policy, and as security for the performance by the Issuer of the Insurer Issuer Secured Obligations and as security for the performance by the Issuer of the Indenture Trustee Issuer Secured Obligations, the Issuer has agreed to grant and assign the Collateral (as defined below) to the Indenture Trustee for the benefit of the Issuer Secured Parties, as their respective interests may appear. GRANTING CLAUSE The Issuer hereby Grants to the Indenture Trustee at the Closing Date, for the benefit of the Issuer Secured Parties all of the Issuer's right, title and interest in and to: (i) a pool (the "Pool") of certain adjustable rate home equity revolving credit line loans ("HELOC Mortgage Loans") (including any Additional Balances related thereto) and second lien closed-end loans ("Closed End Mortgage Loans") (the "Mortgage Loans") in each case as set forth in Exhibit A to the Sale and Servicing Agreement; (ii) the collections in respect of the Mortgage Loans after the Cut-Off Date; (iii) property that secured a Mortgage Loan that has been acquired by foreclosure or deed in lieu of foreclosure; (iv) rights of the Depositor under hazard insurance policies covering the Mortgaged Properties; (v) amounts on deposit from time to time in the Collection Account; (vi) all rights under the Purchase Agreement assigned to the Issuer (including all representations and warranties of the Seller contained therein) and all rights of the Issuer under the Sale and Servicing Agreement; (vii) the Policy (solely for the benefit of the Bondholders); and (viii) any and all proceeds of the foregoing (the items set forth in (i) through (vii) above, the "Collateral"). The foregoing Grant is made in trust to the Indenture Trustee, for the benefit first, of the Holders of the Bonds, and second, for the benefit of the Insurer. The Indenture Trustee hereby acknowledges such Grant, accepts the trusts under this Indenture in accordance with the provisions of this Indenture and agrees to perform its duties required in this Indenture to the best of its ability to the end that the interests of such parties, recognizing the priorities of their respective interests may be adequately and effectively protected. The Indenture Trustee hereby agrees that it will hold the Policy in trust and that it will hold any proceeds of any claim made upon the Policy solely for the use and the benefit of the Bondholders in accordance with the terms hereof and the terms of the Policy. Neither the Indenture Trustee nor the Issuer assumes or shall assume any obligation under any Credit Line Agreement that provides for the funding of future Draws to the Mortgagor thereunder, and neither the Indenture Trustee nor the Issuer shall be obligated or permitted to fund any such future Draws. ARTICLE I Definitions and Incorporation by Reference SECTION 1.1. Definitions. Except as otherwise specified herein, the following terms have the respective meanings set forth in Annex A to this Indenture. SECTION 1.2. Incorporation by Reference of the Trust Indenture Act. Whenever this Indenture refers to a provision of the Trust Indenture Act ("TIA"), the provision is incorporated by reference in and made a part of this Indenture. The following TIA terms used in this Indenture have the following meanings: "Commission" means the Securities and Exchange Commission. 2 "indenture securities" means the Bonds. "indenture security holder" means a Holder of a Bond. "indenture to be qualified" means this Indenture. "Indenture Trustee" or "institutional trustee" means the Indenture Trustee. "obligor" on the indenture securities means the Issuer. All other TIA terms used in this Indenture that are defined by the TIA, or defined by Commission rule have the meaning assigned to them by such definitions. SECTION 1.3. Rules of Construction. Unless the context otherwise requires: (i) a term has the meaning assigned to it; (ii) an accounting term not otherwise defined has the meaning assigned to it in accordance with generally accepted accounting principles as in effect from time to time; (iii) "or" is not exclusive; (iv) "including" means including without limitation; and (v) words in the singular include the plural and words in the plural include the singular. SECTION 1.4. Action by or Consent of Bondholders and Residual Certificateholders. Whenever any provision of this Indenture refers to action to be taken, or consented to, by Bondholders or Residual Certificateholders, such provision shall be deemed to refer to the Bondholder or Residual Certificateholder, as the case may be, of record as of the Record Date immediately preceding the date on which such action is to be taken, or consent given, by Bondholders or Residual Certificateholders. Solely for the purposes of any action to be taken, or consented to, by Bondholders or Residual Certificateholders, any Bond or Residual Certificate registered in the name of [Servicer] or any Affiliate thereof shall be deemed not to be outstanding; provided, however, that, solely for the purpose of determining whether the Indenture Trustee or the Owner Trustee is entitled to rely upon any such action or consent, only Bonds or Residual Certificates which the Owner Trustee or the Indenture Trustee, respectively, knows to be so owned shall be so disregarded. SECTION 1.5. Conflict with TIA. If any provision hereof limits, qualifies or conflicts with a provision of the TIA that is required under the TIA to be part of and govern this Indenture, the latter provision shall control and all provisions required by the TIA are hereby incorporated by reference. If any provision of this Indenture modifies or excludes any provision of the TIA that may be so modified or excluded, the latter provisions shall be deemed to apply to this Indenture as so modified or to be excluded, as the case may be. 3 ARTICLE II The Bonds SECTION 2.1. Form. The Class A Bonds, together with the Indenture Trustee's certificate of authentication, shall be in substantially the form set forth in Exhibit A hereto, with such appropriate insertions, omissions, substitutions and other variations as are required or permitted by this Indenture and may have such letters, numbers or other marks of identification and such legends or endorsements placed thereon as may, consistently herewith, be determined by the officers executing such Bonds, as evidenced by their execution of the Bonds. Any portion of the text of any Bonds may be set forth on the reverse thereof, with an appropriate reference thereto on the face of the Bond. Each Bond shall be dated the date of its authentication. The terms of the Bonds set forth in Exhibit A are part of the terms of this Indenture. SECTION 2.2. Execution, Authentication and Delivery. The Bonds shall be executed on behalf of the Issuer by any of its Authorized Officers. The signature of any such Authorized Officer on the Bonds may be original or facsimile. Bonds bearing the original or facsimile signature of individuals who were at any time Authorized Officers of the Issuer shall bind the Issuer, notwithstanding that such individuals or any of them have ceased to hold such offices prior to the authentication and delivery of such Bonds or did not hold such offices at the date of such Bonds. The Indenture Trustee shall authenticate and deliver Class A Bonds for original issue in the aggregate principal amount of $_____________. The Class A Bonds outstanding at any time may not exceed such amounts. Each Bond shall be dated the date of its authentication. The Bonds shall be issuable as registered Bonds in the minimum denomination of $1,000 and in integral multiples of $1,000 in excess thereof. No Bond shall be entitled to any benefit under this Indenture or be valid or obligatory for any purpose, unless there appears attached to such Bond a certificate of authentication substantially in the form provided for herein executed by the Indenture Trustee by the manual signature of one of its authorized signatories, and such certificate attached to any Bonds shall be conclusive evidence, and the only evidence, that such Bonds have been duly authenticated and delivered hereunder. Subject to Section 2.11, the Bonds shall be Book Entry Bonds. SECTION 2.3. Registration; Registration of Transfer and Exchange. The Issuer shall cause to be kept a register (the "Bond Register") in which, subject to such reasonable regulations as it may prescribe, the Issuer shall provide for the registration of Bonds and the registration of transfers of Bonds. The Indenture Trustee shall be "Bond Registrar" for the purpose of registering Bonds and transfers of Bonds as herein provided. Upon any resignation of any Bond Registrar, the Issuer shall promptly appoint a successor or, if it elects not to make such an appointment, assume the duties of Bond Registrar. 4 If a Person other than the Indenture Trustee is appointed by the Issuer as Bond Registrar, the Issuer will give the Indenture Trustee and the Insurer prompt written notice of the appointment of such Bond Registrar and of the location, and any change in the location, of the Bond Register, and the Indenture Trustee and the Insurer shall have the right to inspect the Bond Register at all reasonable times and to obtain copies thereof. The Indenture Trustee shall have the right to rely upon a certificate executed on behalf of the Bond Registrar by an Authorized Officer thereof as to the names and addresses of the Holders of the Bonds and the principal amounts and number of such Bonds. Upon surrender for registration or transfer of any Bond at the office or agency of the Issuer to be maintained as provided in Section 3.2, and if the requirements of Section 8-401(1) of the UCC are met, the Issuer shall execute or cause the Indenture Trustee to authenticate one or more new Bonds, in any authorized denominations, of the same class and a like aggregate principal amount. A Bondholder may also obtain from the Indenture Trustee, in the name of the designated transferee or transferees one or more new Bonds, in any authorized denominations, of the same class and a like aggregate principal amount. Such requirements shall not be deemed to create a duty in the Indenture Trustee to monitor the compliance by the Issuer with Section 8-401 of the UCC. At the option of the Holder, Bonds may be exchanged for other Bonds in any authorized denominations, of the same class and a like aggregate principal amount, upon surrender of the Bonds to be exchanged at such office or agency. Whenever any Bonds are so surrendered for exchange, and if the requirements of Section 8-401(1) of the UCC are met, the Issuer shall execute and upon its request the Indenture Trustee shall authenticate the Bonds which the Bondholder making the exchange is entitled to receive. Such requirements shall not be deemed to create a duty in the Indenture Trustee to monitor the compliance by the Issuer with Section 8-401 of the UCC. All Bonds issued upon any registration of transfer or exchange of Bonds shall be the valid obligations of the Issuer, evidencing the same debt, and entitled to the same benefits under this Indenture, as the Bonds surrendered upon such registration of transfer or exchange. Every Bond presented or surrendered for registration of transfer or exchange shall be (i) duly endorsed by, or be accompanied by a written instrument of transfer in the form attached to Exhibit A, duly executed by the Holder thereof or such Holder's attorney duly authorized in writing, with such signature guaranteed by an "eligible guarantor institution" meeting the requirements of the Bond Registrar all in accordance with the Exchange Act, and (ii) accompanied by such other documents as the Bond Registrar may require. No service charge shall be made to a Holder for any registration of transfer or exchange of Bonds, but the Bond Registrar may require payment of a sum sufficient to cover any tax or other governmental charge that may be imposed in connection with any registration of transfer or exchange of Bonds, other than exchanges pursuant to Section 2.4 or 9.6 not involving any transfer. The Bond Registrar shall not register the transfer of a Definitive Bond unless the Indenture Trustee has received a representation letter (in form and substance satisfactory to the 5 Indenture Trustee) from the prospective transferee to the effect that either (a) such transferee is not an employee benefit plan (as defined in Section 3(3) of ERISA) that is subject to the provisions of Title I of ERISA or a plan (as defined in Section 4975(e)(1) of the Code) that is subject to Section 4975 of the Code (each, a "Benefit Plan") and is not acting on behalf of or investing the assets of a Benefit Plan or (b) the acquisition and continued holding of such Bond by the transferee will be covered by a U.S. Department of Labor prohibited transaction class exemption. Each Bond Owner, by acceptance of a beneficial interest in a Book-Entry Bond, will be deemed to make one of the foregoing representations. SECTION 2.4. Mutilated, Destroyed, Lost or Stolen Bonds. If (i) any mutilated Bond is surrendered to the Bond Registrar, or the Bond Registrar receives evidence to its satisfaction of the destruction, loss or theft of any Bond, and (ii) there is delivered to the Indenture Trustee and the Insurer such security or indemnity as may be required by it to hold the Issuer, the Indenture Trustee and the Insurer harmless, then, in the absence of notice to the Issuer, the Bond Registrar or the Indenture Trustee that such Bond has been acquired by a bona fide purchaser, and provided that the requirements of Section 8-405 of the UCC are met, the Issuer shall execute and upon its request the Indenture Trustee shall authenticate and deliver, in exchange for or in lieu of any such mutilated, destroyed, lost or stolen Bond, a replacement Bond (such requirement shall not be deemed to create a duty in the Indenture Trustee to monitor the compliance by the Issuer with Section 8-405); provided, however, that if any such destroyed, lost or stolen Bond, but not a mutilated Bond, shall have become or within seven days shall be due and payable, or shall have been called for redemption, the Issuer may, instead of issuing a replacement Bond, direct the Indenture Trustee, in writing, to pay such destroyed, lost or stolen Bond when so due or payable or upon the Redemption Date without surrender thereof. If, after the delivery of such replacement Bond or payment of a destroyed, lost or stolen Bond pursuant to the proviso to the preceding sentence, a bona fide purchaser of the original Bond in lieu of which such replacement Bond was issued presents for payment such original Bond, the Issuer, the Indenture Trustee and the Insurer shall be entitled to recover such replacement Bond (or such payment) from the Person to whom it was delivered or any Person taking such replacement Bond from such Person to whom such replacement Bond was delivered or any assignee of such Person, except a bona fide purchaser, and shall be entitled to recover upon the security or indemnity provided therefor to the extent of any loss, damage, cost or expense incurred by the Issuer, the Indenture Trustee or the Insurer in connection therewith. Upon the issuance of any replacement Bond under this Section, the Issuer may require the payment by the Holder of such Bond of a sum sufficient to cover any tax or other governmental charge that may be imposed in relation thereto and any other reasonable expenses (including the fees and expenses of the Indenture Trustee) connected therewith. Every replacement Bond issued pursuant to this Section in replacement of any mutilated, destroyed, lost or stolen Bond shall constitute an original additional contractual obligation of the Issuer, whether or not the mutilated, destroyed, lost or stolen Bond shall be at any time enforceable by anyone, and shall be entitled to all the benefits of this Indenture equally and proportionately with any and all other Bonds duly issued hereunder. 6 The provisions of this Section are exclusive and shall preclude (to the extent lawful) all other rights and remedies with respect to the replacement or payment of mutilated, destroyed, lost or stolen Bonds. SECTION 2.5. Persons Deemed Owners. Prior to due presentment for registration of transfer of any Bond, the Issuer, the Indenture Trustee and the Insurer and any agent of the Issuer, the Indenture Trustee and the Insurer may treat the Person in whose name any Bond is registered (as of the Record Date) as the owner of such Bond for the purpose of receiving payments of principal of and interest, if any, on such Bond and for all other purposes whatsoever, whether or not such Bond be overdue, and none of the Issuer, the Insurer, the Indenture Trustee nor any agent of the Issuer, the Insurer or the Indenture Trustee shall be affected by notice to the contrary. SECTION 2.6. Payment of Principal and Interest; Defaulted Interest. (a) The Bonds shall accrue interest as provided herein, and such amount shall be payable on each Payment Date as specified herein. Any installment of interest or principal, if any, payable on any Bond which is punctually paid or duly provided for by the Issuer on the applicable Payment Date shall be paid to the Person in whose name such Bond (or one or more Predecessor Bonds) is registered on the Record Date, by check mailed first-class, postage prepaid, to such Person's address as it appears on the Bond Register on such Record Date, except that, unless Definitive Bonds have been issued pursuant to Section 2.11, with respect to Bonds registered on the Record Date in the name of the nominee of the Clearing Agency (initially, such nominee to be Cede & Co.), payment will be made by wire transfer in immediately available funds to the account designated by such nominee and except for the final installment of principal payable with respect to such Bond on a Payment Date or on the Final Scheduled Payment Date (and except for the Redemption Price for any Bond called for redemption pursuant to Section 10.1) which shall be payable as provided below. The funds represented by any such checks returned undelivered shall be held in accordance with Section 3.3. (b) Upon written notice from the Issuer, the Indenture Trustee shall notify the Person in whose name a Bond is registered at the close of business on the Record Date preceding the Payment Date on which the Issuer expects that the final installment of principal of and interest on such Bond will be paid. Such notice shall be mailed or transmitted by facsimile prior to such final Payment Date and shall specify that such final installment will be payable only upon presentation and surrender of such Bond and shall specify the place where such Bond may be presented and surrendered for payment of such installment. Notices in connection with redemptions of Bonds shall be mailed to Bondholders as provided in Section 10.2. (c) If the Issuer defaults in a payment of interest on the Bonds, the Issuer shall pay defaulted interest (plus interest on such defaulted interest to the extent lawful) at the applicable Bond Rate to the extent lawful. The Issuer may pay such defaulted interest to the Persons who are Bondholders on a subsequent special Record Date, which date shall be at least five Business Days prior to the Payment Date. The Issuer shall fix or cause to be fixed any such special Record Date and Payment Date, and, at least 15 days before any such special Record Date, the Issuer shall mail to each Bondholder, the Insurer and the Indenture Trustee a notice that states the special Record Date, the Payment Date and the amount of defaulted interest to be paid. 7 (d) Promptly following the date on which all principal of and interest on the Bonds has been paid in full and the Bonds have been surrendered to the Indenture Trustee, the Indenture Trustee shall, upon written notice from the Servicer of the amounts, if any, that the Insurer has paid in respect of the Bonds under the Policy or otherwise which has not been reimbursed to the Insurer, deliver such surrendered Bonds to the Insurer to the extent not previously canceled or destroyed. SECTION 2.7. Cancellation. Subject to Section 2.6(d), all Bonds surrendered for payment, registration of transfer, exchange or redemption shall, if surrendered to any Person other than the Indenture Trustee, be delivered to the Indenture Trustee and shall be promptly canceled by the Indenture Trustee. Subject to Section 2.6(d), the Issuer may at any time deliver to the Indenture Trustee for cancellation any Bonds previously authenticated and delivered hereunder which the Issuer may have acquired in any manner whatsoever, and all Bonds so delivered shall be promptly canceled by the Indenture Trustee. No Bonds shall be authenticated in lieu of or in exchange for any Bonds canceled as provided in this Section, except as expressly permitted by this Indenture. Subject to Section 2.6(d), all canceled Bonds may be held or disposed of by the Indenture Trustee in accordance with its standard retention or disposal policy as in effect at the time unless the Issuer shall direct by an Issuer Order that they be returned to it; provided that such Issuer Order is timely and the Bonds have not been previously disposed of by the Indenture Trustee. SECTION 2.8. Release of Collateral. The Indenture Trustee shall, on or after the Termination Date, release any remaining portion of the Trust Property from the lien created by this Indenture and deposit in the Collection Account any funds then on deposit in any other Account. The Indenture Trustee shall release property from the lien created by this Indenture pursuant to this Section 2.8 only upon receipt of an Issuer Request by it accompanied by an Officer's Certificate and an Opinion of Counsel (which shall also be addressed to the Insurer) and (if required by the TIA) Independent Certificates in accordance with TIA Sections 314(c) and 314(d)(1) meeting the applicable requirements of Section 11.1. SECTION 2.9. Book-Entry Bonds. The Bonds, upon original issuance, will be issued in the form of typewritten Bonds representing the Book-Entry Bonds, to be delivered to The Depository Trust Company or its custodian, the initial Clearing Agency, by, or on behalf of, the Issuer. Such Bonds shall initially be registered on the Bond Register in the name of Cede & Co., the nominee of the initial Clearing Agency, and no Bond Owner will receive a Definitive Bond representing such Bond Owner's interest in such Bond, except as provided in Section 2.11. Unless and until definitive, fully registered Bonds (the "Definitive Bonds") have been issued to Bond Owners pursuant to Section 2.11: (i) the provisions of this Section shall be in full force and effect; (ii) the Bond Registrar and the Indenture Trustee shall be entitled to deal with the Clearing Agency for all purposes of this Indenture (including the payment of principal of and interest on the Bonds and the giving of instructions or directions hereunder) as the sole Holder of the Bonds, and shall have no obligation to the Bond Owners; 8 (iii) to the extent that the provisions of this Section conflict with any other provisions of this Indenture, the provisions of this Section shall control; (iv) the rights of Bond Owners shall be exercised only through the Clearing Agency and shall be limited to those established by law and agreements between such Bond Owners and the Clearing Agency and/or the Clearing Agency Participants. Unless and until Definitive Bonds are issued pursuant to Section 2.11, the initial Clearing Agency will make book-entry transfers among the Clearing Agency Participants and receive and transmit payments of principal of and interest on the Bonds to such Clearing Agency Participants; (v) whenever this Indenture requires or permits actions to be taken based upon instructions or directions of Holders of Bonds evidencing a specified percentage of the Outstanding Amount of the Bonds, the Clearing Agency shall be deemed to represent such percentage only to the extent that it has received instructions to such effect from Bond Owners and/or Clearing Agency Participants owning or representing, respectively, such required percentage of the beneficial interest in the Bonds and has delivered such instructions to the Indenture Trustee; and (vi) Bond Owners may receive copies of any reports sent to Bondholders pursuant to this Indenture, upon written request, together with a certification that they are Bond Owners and payment of reproduction and postage expenses associated with the distribution of such reports, from the Indenture Trustee at the Corporate Trust Office. SECTION 2.10. Notices to Clearing Agency. Whenever a notice or other communication to the Bondholders is required under this Indenture, unless and until Definitive Bonds shall have been issued to Bond Owners pursuant to Section 2.11, the Indenture Trustee shall give all such notices and communications specified herein to be given to Holders of the Bonds to the Clearing Agency, and shall have no obligation to the Bond Owners. SECTION 2.11. Definitive Bonds. If (i) the Servicer advises the Indenture Trustee in writing that the Clearing Agency is no longer willing or able to properly discharge its responsibilities with respect to the Bonds, and the Servicer is unable to locate a qualified successor, (ii) the Servicer at its option advises the Indenture Trustee in writing that it elects to terminate the book-entry system through the Clearing Agency or (iii) after the occurrence of a Rapid Amortization Event, Bond Owners representing beneficial interests aggregating at least a majority of the Outstanding Amount of the Bonds advise the Indenture Trustee through the Clearing Agency in writing that the continuation of a book entry system through the Clearing Agency is no longer in the best interests of the Bond Owners, then the Clearing Agency shall notify all Bond Owners and the Indenture Trustee of the occurrence of any such event and of the availability of Definitive Bonds to Bond Owners requesting the same. Upon surrender to the Indenture Trustee of the typewritten Bond or Bonds representing the Book-Entry Bonds by the Clearing Agency, accompanied by registration instructions, the Issuer shall execute and the Indenture Trustee shall authenticate the Definitive Bonds in accordance with the instructions of the Clearing Agency. None of the Issuer, the Bond Registrar or the Indenture Trustee shall be liable for any delay in delivery of such instructions and may conclusively rely on, and shall be 9 protected in relying on, such instructions. Upon the issuance of Definitive Bonds, the Indenture Trustee shall recognize the Holders of the Definitive Bonds as Bondholders. ARTICLE III Covenants; Representations and Warranties of the Issuer SECTION 3.1. Payment of Principal and Interest. The Issuer will duly and punctually pay the principal of and interest on the Bonds in accordance with the terms of the Bonds and this Indenture. The Bonds shall be debt obligations of the Trust and shall be limited in right of payment to amounts available from the Trust as provided in this Indenture and the Trust shall not otherwise be liable for payments on the Bonds. No person shall be personally liable for any amounts payable under the Bonds. Amounts properly withheld under the Code by any Person from a payment to any Bondholder of interest and/or principal shall be considered as having been paid by the Issuer to such Bondholder for all purposes of this Indenture. SECTION 3.2. Maintenance of Office or Agency. The Issuer will maintain in [___________], an office or agency where Bonds may be surrendered for registration, transfer or exchange of the Bonds, and where notices and demands to or upon the Issuer in respect of the Bonds and this Indenture may be served. The Issuer hereby initially appoints the Indenture Trustee to serve as its agent for the foregoing purposes. The Issuer will give prompt written notice to the Indenture Trustee of the location, and of any change in the location, of any such office or agency. If at any time the Issuer shall fail to maintain any such office or agency or shall fail to furnish the Indenture Trustee with the address thereof, such surrenders, notices and demands may be made or served at the Corporate Trust Office, and the Issuer hereby appoints the Indenture Trustee as its agent to receive all such surrenders, notices and demands. SECTION 3.3. Money for Payments to be Held in Trust. The Issuer will cause each Bond Paying Agent other than the Indenture Trustee to execute and deliver to the Indenture Trustee and the Insurer an instrument in which such Bond Paying Agent shall agree with the Indenture Trustee (and if the Indenture Trustee acts as Bond Paying Agent, it hereby so agrees), subject to the provisions of this Section, that such Bond Paying Agent will: (i) hold all sums held by it for the payment of amounts due with respect to the Bonds in trust for the benefit of the Persons entitled thereto until such sums shall be paid to such Persons or otherwise disposed of as herein provided and pay such sums to such Persons as herein provided; (ii) give the Indenture Trustee and the Insurer written notice of any default by the Issuer (or any other obligor upon the Bonds) of which it has actual knowledge in the making of any payment required to be made with respect to the Bonds; (iii) at any time during the continuance of any such default, upon the written request of the Indenture Trustee with the consent of the Insurer, if the Insurer is the Controlling Party, forthwith pay to the Indenture Trustee all sums so held in trust by such Bond Paying Agent; 10 (iv) immediately resign as a Bond Paying Agent and forthwith pay to the Indenture Trustee all sums held by it in trust for the payment of Bonds if at any time it ceases to meet the standards required to be met by a Bond Paying Agent at the time of its appointment; and (v) comply with all requirements of the Code with respect to the withholding from any payments made by it on any Bonds of any applicable withholding taxes imposed thereon and with respect to any applicable reporting requirements in connection therewith. The Issuer may at any time, for the purpose of obtaining the satisfaction and discharge of this Indenture or for any other purpose, by Issuer Order direct any Bond Paying Agent to pay to the Indenture Trustee all sums held in trust by such Bond Paying Agent, such sums to be held by the Indenture Trustee upon the same trusts as those upon which the sums were held by such Bond Paying Agent; and upon such a payment by any Bond Paying Agent to the Indenture Trustee, such Bond Paying Agent shall be released from all further liability with respect to such money. Subject to applicable laws with respect to the escheat of funds, any money held by the Indenture Trustee or any Bond Paying Agent in trust for the payment of any amount due with respect to any Bond and remaining unclaimed for two years after such amount has become due and payable shall be discharged from such trust and be paid to the Issuer, with the prior consent of the Insurer, on Issuer Request, and shall be deposited by the Indenture Trustee in the Collection Account; and the Holder of such Bond shall thereafter, as an unsecured general creditor, look only to the Issuer for payment thereof (but only to the extent of the amounts so paid to the Issuer), and all liability of the Indenture Trustee, the Insurer or such Bond Paying Agent with respect to such trust money shall thereupon cease; provided, however, that if such money or any portion thereof had been previously deposited by the Insurer with the Indenture Trustee for the payment of principal or interest on the Bonds, to the extent any amounts are owing to the Insurer, such amounts shall be paid promptly to the Insurer upon receipt of a written request by the Insurer to such effect. SECTION 3.4. Existence. The Issuer will keep in full effect its existence, rights and franchises as a statutory trust under the laws of the State of Delaware (unless it becomes, or any successor Issuer hereunder is or becomes, organized under the laws of any other state or of the United States of America, in which case the Issuer will keep in full effect its existence, rights and franchises under the laws of such other jurisdiction) and will obtain and preserve its qualification to do business in each jurisdiction in which such qualification is or shall be necessary to protect the validity and enforceability of this Indenture, the Trust Property, the Bonds, and each other instrument or agreement included in the Trust Property. SECTION 3.5. Protection of Trust Property. The Issuer intends the security interest granted pursuant to this Indenture in favor of the Issuer Secured Parties to be prior to all other liens in respect of the Trust Property and the Issuer shall take all actions necessary to obtain and maintain, in favor of the Indenture Trustee, for the benefit of the Issuer Secured Parties, a first lien on and a first priority, perfected security interest in the Trust Property. The Issuer will from time to time prepare (or shall cause to be prepared), execute and deliver all such 11 supplements and amendments hereto and all such financing statements, continuation statements, instruments of further assurance and other instruments, and will take such other action necessary or advisable to: (i) Grant more effectively all or any portion of the Trust Property; (ii) maintain or preserve the lien and security interest (and the priority thereof) in favor of the Indenture Trustee for the benefit of the Issuer Secured Parties created by this Indenture or carry out more effectively the purposes hereof; (iii) perfect, publish notice of or protect the validity of any Grant made or to be made by this Indenture; (iv) enforce any of the Collateral; (v) preserve and defend title to the Trust Property and the rights of the Indenture Trustee in such Trust Property against the claims of all persons and parties; and (vi) pay all taxes or assessments levied or assessed upon the Trust Property when due. The Issuer hereby designates the Indenture Trustee its agent and attorney-in-fact to execute any financing statement, continuation statement or other instrument required pursuant to this Section; provided that, such designation shall not be deemed to create a duty in the Indenture Trustee to monitor the compliance of the Issuer with respect to its duties under this Section 3.5 or the adequacy of any financing statement, continuation statement or other instrument prepared by the Issuer. SECTION 3.6. Opinions as to Trust Property. (a) On the Closing Date, the Issuer shall furnish to the Indenture Trustee and the Insurer an Opinion of Counsel in the form of Exhibit B hereto, stating that, in the opinion of such counsel, such actions have been taken with respect to the recording and filing of this Indenture, any indentures supplemental hereto, and any other requisite documents, and with respect to the execution and filing of any financing statements and continuation statements, as are necessary to perfect and make effective the first priority lien and security interest in favor of the Indenture Trustee, for the benefit of the Issuer Secured Parties, created by this Indenture, subject to the exceptions and qualifications set forth in such Opinion of Counsel. (b) Within 90 days after the beginning of each calendar year, beginning in 200_, the Issuer shall furnish to the Indenture Trustee and the Insurer, an Opinion of Counsel either stating that, in the opinion of such counsel, such actions have been taken with respect to the recording, filing, re-recording and refiling of this Indenture, any indentures supplemental hereto and any other requisite documents and with respect to the execution and filing of any financing statements and continuation statements as are necessary to maintain the lien and security interest created by this Indenture and reciting the details of such action or stating that in the opinion of such counsel, no such action is necessary to maintain such lien and security 12 interest. Such Opinion of Counsel shall also describe the recording, filing, re-recording and refiling of this Indenture, any indentures supplemental hereto and any other requisite documents and the execution and filing of any financing statements and continuation statements that will, in the opinion of such counsel, be required to maintain the lien and security interest of this Indenture. SECTION 3.7. Performance of Obligations; Servicing of Mortgage Loans. (a) The Issuer will not take any action and will use its best efforts not to permit any action to be taken by others that would release any Person from any of such Person's material covenants or obligations under any instrument or agreement included in the Trust Property or that would result in the amendment, hypothecation, subordination, termination or discharge of, or impair the validity or effectiveness of, any such instrument or agreement, except as ordered by any bankruptcy or other court or as expressly provided in this Indenture, the Basic Documents or such other instrument or agreement. (b) The Issuer may contract with other Persons acceptable to the Insurer to assist it in performing its duties under this Indenture, and any performance of such duties by a Person identified to the Indenture Trustee and the Insurer in an Officer's Certificate of the Issuer shall be deemed to be action taken by the Issuer. Initially, the Issuer has contracted with the Servicer to assist the Issuer in performing its duties under this Indenture. (c) The Issuer will punctually perform and observe all of its obligations and agreements contained in this Indenture, the Basic Documents and in the instruments and agreements included in the Trust Property, including, but not limited to, preparing (or causing to be prepared) and filing (or causing to be filed) all UCC financing statements and continuation statements required to be filed by the terms of this Indenture and the Sale and Servicing Agreement in accordance with and within the time periods provided for herein and therein. Except as otherwise expressly provided therein, the Issuer shall not waive, amend, modify, supplement or terminate any Basic Document or any provision thereof without the consent of the Indenture Trustee and the Insurer. (d) If a Responsible Officer of the Owner Trustee shall have actual knowledge of the occurrence of an Event of Servicing Termination under the Sale and Servicing Agreement, the Issuer shall promptly notify the Indenture Trustee, the Insurer and the Rating Agencies thereof in accordance with Section 11.4, and shall specify in such notice the action, if any, the Issuer is taking at the direction of the Controlling Party in respect of such default. If an Event of Servicing Termination shall arise from the failure of the Servicer to perform any of its duties or obligations under the Sale and Servicing Agreement with respect to the Mortgage Loans, the Issuer shall take all reasonable steps available to it to remedy such failure. (e) The Issuer agrees that it will not waive timely performance or observance by the Servicer or the Depositor of their respective duties under the Basic Documents (x) without the prior consent of the Insurer or (y) if the effect thereof would adversely affect the Holders of the Bonds. 13 SECTION 3.8. Negative Covenants. So long as any Bonds are Outstanding, the Issuer shall not: (i) except as expressly permitted by this Indenture or the Basic Documents, sell, transfer, exchange or otherwise dispose of any of the properties or assets of the Issuer, including those included in the Trust Property (but excluding any Mortgage Loans removed from the Pool pursuant to Section 2.07 of the Sale and Servicing Agreement), without the consent of the Insurer (which consent may not be unreasonably withheld) provided, that if an Insurer Default has occurred and is continuing the Bondholders representing 66-2/3% of the Outstanding Amount may direct the Indenture Trustee to sell or dispose of the Trust Property. (ii) claim any credit on, or make any deduction from the principal or interest payable in respect of, the Bonds (other than amounts properly withheld from such payments under the Code) or assert any claim against any present or former Bondholder by reason of the payment of the taxes levied or assessed upon any part of the Trust Property; or (iii) (A) permit the validity or effectiveness of this Indenture to be impaired, or permit the lien in favor of the Indenture Trustee created by this Indenture to be amended, hypothecated, subordinated, terminated or discharged, or permit any Person to be released from any covenants or obligations with respect to the Bonds under this Indenture except as may be expressly permitted hereby, (B) permit any lien, charge, excise, claim, security interest, mortgage or other encumbrance (other than the lien of this Indenture) to be created on or extend to or otherwise arise upon or burden the Trust Property or any part thereof or any interest therein or the proceeds thereof (other than tax liens, mechanics' liens and other liens that arise by operation of law, in each case on a Mortgaged Property and arising solely as a result of an action or omission of the related obligor), (C) permit the lien of this Indenture not to constitute a valid first priority (other than with respect to any such tax, mechanics' or other lien) security interest in the Trust Property or (D) amend, modify or fail to comply with the provisions of the Basic Documents without the prior written consent of the Insurer, which consent may not be unreasonably withheld. SECTION 3.9. Annual Statement as to Compliance. The Issuer will deliver to the Indenture Trustee and the Insurer, within 90 days after the end of each fiscal year of the Issuer (commencing with the fiscal year ended _______, 200_) and otherwise in compliance with the requirements of TIA Section 314(a)(4), an Officer's Certificate stating, as to the Authorized Officer signing such Officer's Certificate, that (i) a review of the activities of the Issuer during such year and of performance under this Indenture has been made under such Authorized Officer's supervision; and (ii) to the best of such Authorized Officer's knowledge, based on such review, the Issuer has complied with all conditions and covenants under this Indenture throughout such year, or, if there has been a default in the compliance of any such 14 condition or covenant, specifying each such default known to such Authorized Officer and the nature and status thereof. SECTION 3.10. Issuer May Not Consolidate or Transfer Assets. (a) The Issuer may not consolidate or merge with or into any other Person. (b) Except as otherwise provided in the Sale and Servicing Agreement, the Issuer shall not convey or transfer all or substantially all of its properties or assets, including those included in the Trust Property, to any Person. SECTION 3.11. No Other Business. The Issuer shall not engage in any business other than purchasing, owning, selling and managing the Mortgage Loans and other assets in the manner contemplated by this Indenture and the Basic Documents and activities incidental thereto. SECTION 3.12. No Borrowing. The Issuer shall not issue, incur, assume, guarantee or otherwise become liable, directly or indirectly, for any Indebtedness or any certificates of beneficial interest except for (i) the Residual Certificates, (ii) the Bonds, (iii) obligations owing from time to time to the Insurer under the Insurance Agreement and (iv) any other indebtedness permitted by or arising under the Basic Documents, except that the Issuer shall not incur any indebtedness that would cause it, or any portion thereof, to be treated as a "taxable mortgage pool" under Section 7701 of the Code. The proceeds of the Bonds and the Residual Certificates shall be used exclusively to fund the Issuer's purchase of the Mortgage Loans and the other assets specified in the Sale and Servicing Agreement and to pay the Issuer's organizational, transactional and start-up expenses. SECTION 3.13. Servicer's Obligations. The Issuer shall cause the Servicer to comply with Sections 3.09, 3.10 and 4.01 of the Sale and Servicing Agreement and Section 8.6 herein. SECTION 3.14. Guarantees, Loans, Advances and Other Liabilities. Except as contemplated by the Sale and Servicing Agreement or this Indenture, the Issuer shall not make any loan or advance or credit to, or guarantee (directly or indirectly or by an instrument having the effect of assuring another's payment or performance on any obligation or capability of so doing or otherwise), endorse or otherwise become contingently liable, directly or indirectly, in connection with the obligations, stocks or dividends of, or own, purchase, repurchase or acquire (or agree contingently to do so) any stock, obligations, assets or securities of, or any other interest in, or make any capital contribution to, any other Person. SECTION 3.15. Capital Expenditures. The Issuer shall not make any expenditure (by long-term or operating lease or otherwise) for capital assets (either realty or personalty). SECTION 3.16. Compliance with Laws. The Issuer shall comply with the requirements of all applicable laws, the non-compliance with which would, individually or in the aggregate, materially and adversely affect the ability of the Issuer to perform its obligations under the Bonds, this Indenture or any Basic Document. 15 SECTION 3.17. Restricted Payments. The Issuer shall not, directly or indirectly, (i) pay any dividend or make any distribution (by reduction of capital or otherwise), whether in cash, property, securities or a combination thereof, to the Owner Trustee or any owner of a beneficial interest in the Issuer or otherwise with respect to any ownership or equity interest or security in or of the Issuer or to the Servicer, (ii) redeem, purchase, retire or otherwise acquire for value any such ownership or equity interest or security or (iii) set aside or otherwise segregate any amounts for any such purpose; provided, however, that the Issuer may make, or cause to be made, distributions to the Servicer, the Owner Trustee, the Insurer, the Indenture Trustee and the Bondholders as permitted by, and to the extent funds are available for such purpose under, the Sale and Servicing Agreement, this Indenture, or Trust Agreement. The Issuer will not, directly or indirectly, make payments to or distributions from the Collection Account except in accordance with this Indenture and the Basic Documents. SECTION 3.18. Notice of Rapid Amortization Events and Events of Servicing Termination. Upon a Responsible Officer of the Owner Trustee having actual knowledge thereof, the Issuer agrees to give the Indenture Trustee, the Insurer and the Rating Agencies prompt written notice of each Rapid Amortization Event hereunder or Event of Servicing Termination under the Sale and Servicing Agreement. SECTION 3.19. Further Instruments and Acts. Upon request of the Indenture Trustee or the Insurer, the Issuer will execute and deliver such further instruments and do such further acts as may be reasonably necessary or proper to carry out more effectively the purpose of this Indenture. SECTION 3.20. Amendments of Sale and Servicing Agreement and Trust Agreement. The Issuer shall not agree to any amendment to Section 9.01 of the Sale and Servicing Agreement or Section 12.1 of the Trust Agreement to eliminate the requirements thereunder that the Indenture Trustee, the Insurer or the Holders of the Bonds consent to amendments thereto as provided therein. SECTION 3.21. Income Tax Characterization. For purposes of federal income, state and local income and franchise and any other income taxes, the Issuer and the Bondholders will treat the Bonds as indebtedness of the Depositor and hereby instruct the Indenture Trustee to treat the Bonds as indebtedness of the Depositor for federal and state tax reporting purposes. SECTION 3.22. Representations and Warranties of the Issuer Regarding the Lien of the Indenture Trustee. With respect to the Collateral, the Issuer represents and warrants that, as of the Closing Date: (i) This Indenture creates a valid and continuing security interest (as such term is defined in the UCC) in the Collateral in favor of the Indenture Trustee, which security interest is prior to all other liens, and is enforceable as such against creditors of and purchasers from the Issuer; (ii) The Mortgage Notes constitute "instruments" within the meaning of the UCC; 16 (iii) The Issuer owns or will own and has or will have good title to the Collateral free and clear of any lien, claim or encumbrance of any Person; (iv) The Issuer has or will have received all consents and approvals required by the terms of the Mortgage Loans to the pledge of the Mortgage Loans hereunder to the Indenture Trustee; (v) All original executed copies of each Mortgage Loan have been or will be delivered to the Custodian or the Indenture Trustee; (vi) The Issuer has or will have received a written acknowledgement from the Custodian or the Indenture Trustee that the Custodian or Indenture Trustee is holding the Mortgage Loans solely on behalf and for the benefit of the Indenture Trustee on behalf of the Bondholders; (vii) Other than the security interest granted to the Indenture Trustee pursuant to this Indenture, the Issuer has not pledged, assigned, sold, granted a security interest in, or otherwise conveyed any of the Collateral. The Issuer has not authorized the filing of and is not aware of any financing statement against the Issuer that includes a description of any of the Collateral other than a financing statement relating to the security interest granted to the Indenture Trustee hereunder or that has been terminated. The Issuer is not aware of any judgment or tax lien filings against the Issuer; and (viii) None of the Mortgage Notes has or will have any marks or notations indicating that it has been pledged, assigned or otherwise conveyed to any Person other than the Indenture Trustee. ARTICLE IV Satisfaction and Discharge SECTION 4.1. Satisfaction and Discharge of Indenture. Upon payment in full to the Insurer of amounts due to the Insurer and on the Bonds, this Indenture shall cease to be of further effect with respect to the Bonds except as to (i) the rights of registration of transfer and exchange, (ii) substitution of mutilated, destroyed, lost or stolen Bonds, (iii) the rights of Bondholders to receive payments of principal thereof and interest thereon, (iv) Sections 3.3, 3.4, 3.5, 3.8, 3.10, 3.12, 3.13, 3.20 and 3.21, (v) the rights, obligations and immunities of the Indenture Trustee hereunder (including the rights of the Indenture Trustee under Section 6.7 and the obligations of the Indenture Trustee under Section 4.2) and (vi) the rights of Bondholders and the Insurer as beneficiaries hereof with respect to the property so deposited with the Indenture Trustee payable to all or any of them, and the Indenture Trustee, on demand of and at the expense of the Issuer, shall execute proper instruments acknowledging satisfaction and discharge of this Indenture with respect to the Bonds, when either (1) all Bonds theretofore authenticated and delivered (other than (i) Bonds that have been destroyed, lost or stolen and that have been replaced or paid as provided in Section 4.5 of the Trust Agreement and (ii) Bonds for which payment money has theretofore 17 been deposited in trust or segregated and held in trust by the Issuer and thereafter repaid to the Issuer or discharged from such trust, as provided in Section 3.3) have been delivered to the Indenture Trustee for cancellation and the Policy has terminated and been returned to the Insurer for cancellation and all amounts owing to the Insurer have been paid in full; or (2) all Bonds not theretofore delivered to the Indenture Trustee for cancellation have become due and payable, and (A) the Issuer has irrevocably deposited or caused to be irrevocably deposited with the Indenture Trustee cash or direct obligations of or obligations guaranteed by the United States of America (which will mature prior to the date such amounts are payable), in trust for such purpose, in an amount sufficient to pay and discharge the entire indebtedness on the Bonds, in each case to the extent not theretofore delivered to the Indenture Trustee for cancellation when due on the Final Scheduled Payment Date or Redemption Date (if Bonds shall have been called for redemption pursuant to Section 10.1), as the case may be; (B) the Issuer has paid or caused to be paid all Insurer Issuer Secured Obligations and all Indenture Trustee Issuer Secured Obligations; and (C) the Issuer has delivered to the Indenture Trustee and the Insurer an Officer's Certificate, an Opinion of Counsel and, if required by the TIA, the Indenture Trustee or the Insurer, an Independent Certificate from a firm of certified public accountants, each meeting the applicable requirements of Section 11.1(a) and each stating that all conditions precedent herein provided relating to the satisfaction and discharge of this Indenture have been complied with. SECTION 4.2. Application of Trust Money. All monies deposited with the Indenture Trustee pursuant to Section 4.1 hereof shall be held in trust and applied by it, in accordance with the provisions of the Bonds and this Indenture, to the payment, either directly or through any Bond Paying Agent, as the Indenture Trustee may determine, to the Holders of the particular Bonds for the payment or redemption of which such monies have been deposited with the Indenture Trustee, of all sums due and to become due thereon for principal and interest and to the Insurer for the payment of any amounts due to it under the Basic Documents. SECTION 4.3. Repayment of Monies Held by Bond Paying Agent. In connection with the satisfaction and discharge of this Indenture with respect to the Bonds, all monies then held by any Bond Paying Agent other than the Indenture Trustee under the provisions of this Indenture with respect to such Bonds shall, upon demand of the Issuer, be paid to the Indenture Trustee to be held and applied according to Section 3.3 and thereupon such Bond Paying Agent shall be released from all further liability with respect to such monies. ARTICLE V Remedies SECTION 5.1. Remedies. If a Rapid Amortization Event as described in Article XII shall have occurred and be continuing, the Bondholders shall be entitled on each Payment Date to an amount equal to the Maximum Principal Payment payable during such Rapid 18 Amortization Period. The rights contained in this Article V are in addition to any rights which the Bondholders possess pursuant to Article XII. SECTION 5.2. Limitation of Suits. No Holder of any Bond shall have any right to institute any proceeding, judicial or otherwise, with respect to this Indenture, or for the appointment of a receiver or trustee, or for any other remedy hereunder, unless: (i) such Holder has previously given written notice to the Indenture Trustee of a continuing Rapid Amortization Event; (ii) the Holders of not less than 50% of the Outstanding Amount of the related Bonds have made written request to the Indenture Trustee to institute such proceeding with respect to the Bonds in respect of such Rapid Amortization Event in its own name as Indenture Trustee hereunder; (iii) such Holder or Holders have offered to the Indenture Trustee indemnity reasonably satisfactory to it against the costs, expenses and liabilities to be incurred in complying with such request; (iv) the Indenture Trustee for 60 days after its receipt of such notice, request and offer of indemnity has failed to institute such proceedings; (v) no direction inconsistent with such written request has been given to the Indenture Trustee during such 60-day period by the Holders of a majority of the Outstanding Amount of the Bonds; and (vi) an Insurer Default shall have occurred and be continuing; it being understood and intended that no Holders of Bonds shall have any right in any manner whatsoever by virtue of, or by availing of, any provision of this Indenture to affect, disturb or prejudice the rights of any other Holders of Bonds or to obtain or to seek to obtain priority or preference over any other Holders or to enforce any right under this Indenture, except in the manner herein provided. In the event the Indenture Trustee shall receive conflicting or inconsistent requests and indemnity from two or more groups of Holders of Bonds, each representing less than a majority of the Outstanding Amount of the Bonds, the Indenture Trustee in its sole discretion may determine what action, if any, shall be taken, notwithstanding any other provisions of this Indenture. SECTION 5.3. Unconditional Rights of Bondholders To Receive Principal and Interest. Notwithstanding any other provisions in this Indenture, the Holder of any Bond shall have the right, which is absolute and unconditional, to receive payment of the principal of and interest, if any, on such Bond on or after the respective due dates thereof expressed in such Bond or in this Indenture (or, in the case of redemption, on or after the Redemption Date) and to institute suit for the enforcement of any such payment, and such right shall not be impaired without the consent of such Holder. 19 SECTION 5.4. Restoration of Rights and Remedies. If the Indenture Trustee or any Bondholder has instituted any proceeding to enforce any right or remedy under this Indenture and such proceeding has been discontinued or abandoned for any reason, then and in every such case the Issuer, the Insurer, the Indenture Trustee and the Bondholders shall, subject to any determination in such proceeding, be restored severally and respectively to their former positions hereunder, and thereafter all rights and remedies of the Indenture Trustee, the Insurer and the Bondholders shall continue as though no such proceeding had been instituted. SECTION 5.5. Rights and Remedies Cumulative. No right or remedy herein conferred upon or reserved to the Controlling Party or to the related Bondholders is intended to be exclusive of any other right or remedy, and every right and remedy shall, to the extent permitted by law, be cumulative and in addition to every other right and remedy given hereunder or now or hereafter existing at law or in equity or otherwise. The assertion or employment of any right or remedy hereunder, or otherwise, shall not prevent the concurrent assertion or employment of any other appropriate right or remedy. SECTION 5.6. Delay or Omission Not a Waiver. No delay or omission of the Indenture Trustee, the Insurer or any Holder of any Bond to exercise any right or remedy accruing upon any Rapid Amortization Event shall impair any such right or remedy or constitute a waiver of any such Rapid Amortization Event or an acquiescence therein. Every right and remedy given by this Article V or by law to the Indenture Trustee, the Insurer or to the Bondholders may be exercised from time to time, and as often as may be deemed expedient, by the Indenture Trustee, the Insurer or by the Bondholders, as the case may be. SECTION 5.7. Control by Insurer and Bondholders. The Insurer (or, if an Insurer Default shall have occurred and is continuing, Holders of a majority of the Outstanding Amount of the related Bonds) shall have the right to direct the time, method and place of conducting any proceeding for any remedy available to the Indenture Trustee pursuant to Section 12.1 hereof with respect to the Bonds or exercising any trust or power conferred on the Indenture Trustee; provided that: (i) such direction shall not be in conflict with any rule of law or with this Indenture; (ii) the Indenture Trustee may take any other action deemed proper by the Indenture Trustee that is not inconsistent with such direction; provided, however, that, subject to Section 6.1, the Indenture Trustee need not take any action that it determines might involve it in liability or might materially adversely affect the rights of any Bondholders not consenting to such action. SECTION 5.8. Undertaking for Costs. All parties to this Indenture agree, and each Holder of any Bond by such Holder's acceptance thereof shall be deemed to have agreed, that any court may in its discretion require, in any suit for the enforcement of any right or remedy under this Indenture, or in any suit against the Indenture Trustee for any action taken, suffered or omitted by it as Indenture Trustee, the filing by any party litigant in such suit of an undertaking to pay the costs of such suit, and that such court may in its discretion assess 20 reasonable costs, including reasonable attorneys' fees and expenses, against any party litigant in such suit, having due regard to the merits and good faith of the claims or defenses made by such party litigant; but the provisions of this Section shall not apply to (a) any suit instituted by the Indenture Trustee, (b) any suit instituted by the Insurer, any Bondholder, or group of Bondholders with the prior written consent of the Insurer (so long as no Insurer Default has occurred), in each case holding in the aggregate more than 10% of the Outstanding Amount of the Bonds or (c) any suit instituted by any Bondholder for the enforcement of the payment of principal of or interest on any Bond on or after the respective due dates expressed in such Bond and in this Indenture (or, in the case of redemption, on or after the Redemption Date). SECTION 5.9. Waiver of Stay or Extension Laws. The Issuer covenants (to the extent that it may lawfully do so) that it will not at any time insist upon, or plead or in any manner whatsoever, claim or take the benefit or advantage of, any stay or extension law wherever enacted, now or at any time hereafter in force, that may affect the covenants or the performance of this Indenture; and the Issuer (to the extent that it may lawfully do so) hereby expressly waives all benefit or advantage of any such law, and covenants that it will not hinder, delay or impede the execution of any power herein granted to the Indenture Trustee, but will suffer and permit the execution of every such power as though no such law had been enacted. SECTION 5.10. Action on Bonds. The Indenture Trustee's right to seek and recover judgment on the Bonds or under this Indenture shall not be affected by the seeking, obtaining or application of any other relief under or with respect to this Indenture. Neither the lien of this Indenture nor any rights or remedies of the Indenture Trustee, the Insurer or the Bondholders shall be impaired by the recovery of any judgment by the Indenture Trustee or the Insurer against the Issuer or by the levy of any execution under such judgment upon any portion of the Trust Property or upon any of the assets of the Issuer. SECTION 5.11. Performance and Enforcement of Certain Obligations. (a) Promptly following a request from the Indenture Trustee (at the direction of the Insurer) to do so and at the Servicer's expense, the Issuer agrees to take all such lawful action as the Indenture Trustee may request to compel or secure the performance and observance by the Depositor and the Servicer, as applicable, of each of their obligations to the Issuer under or in connection with the Sale and Servicing Agreement in accordance with the terms thereof, and to exercise any and all rights, remedies, powers and privileges lawfully available to the Issuer under or in connection with the Sale and Servicing Agreement to the extent and in the manner directed by the Indenture Trustee, including the transmission of notices of default on the part of the Depositor or the Servicer thereunder and the institution of legal or administrative actions or proceedings to compel or secure performance by the Depositor or the Servicer of each of their obligations under the Sale and Servicing Agreement. (b) If a Rapid Amortization Event has occurred and is continuing, the Indenture Trustee, with the consent of the Insurer, may, and, at the written direction of the Insurer (or, if (i) an Insurer Default has occurred and is continuing or (ii) a Rapid Amortization Event described in clause (g) of Section 12.1 has occurred and is continuing, the Holders of 66-2/3% of the Outstanding Amount of the Bonds) shall, exercise all rights, remedies, powers, privileges and claims of the Issuer against the Depositor or the Servicer under or in connection 21 with the Sale and Servicing Agreement, including the right or power to take any action to compel or secure performance or observance by the Depositor or the Servicer of each of their obligations to the Issuer thereunder and to give any consent, request, notice, direction, approval, extension or waiver under the Sale and Servicing Agreement, and any right of the Issuer to take such action shall be suspended. SECTION 5.12. Subrogation. The Indenture Trustee shall receive as attorney-in-fact of each Bondholder any Insured Amounts or Preference Amounts from the Insurer pursuant to the Policy. Any and all Insured Amounts and Preference Amounts disbursed by the Indenture Trustee from claims made under the Policy shall not be considered payment by the Issuer, and shall not discharge the obligations of the Issuer with respect thereto. The Insurer shall, to the extent it makes any payment with respect to the Bonds, become subrogated to the rights of the recipient of such payments to the extent of such payments. Subject to and conditioned upon any payment with respect to the Bonds by or on behalf of the Insurer, the Indenture Trustee shall assign to the Insurer all rights to the payment of interest or principal with respect to the Bonds which are then due for payment to the extent of all payments made by the Insurer. SECTION 5.13. Preference Claims. (a) In the event that the Indenture Trustee has received a certified copy of an order of the appropriate court that any Insured Amount on a Bond has been avoided in whole or in part as a preference payment under applicable bankruptcy law, the Indenture Trustee shall so notify the Insurer, shall comply with the provisions of the Policy to obtain payment by the Insurer of such avoided payment, and shall, at the time it provides notice to the Insurer, notify Holders of the Bonds by mail that, in the event that any Bondholder's payment is so recoverable, such Bondholder will be entitled to payment pursuant to the terms of the Policy. The Indenture Trustee shall furnish to the Insurer at its written request, the requested records it holds in its possession evidencing the payments of principal of and interest on Bonds, if any, which have been made by the Indenture Trustee and subsequently recovered from Bondholders and the dates on which such payments were made. Pursuant to the terms of the Policy, the Insurer will make such payment on behalf of the related Bondholder to the receiver, conservator, debtor-in-possession or trustee in bankruptcy named in the final order of the court exercising jurisdiction on behalf of the Bondholders and not to the Indenture Trustee, any Bondholder directly (unless such Bondholder has returned principal or interest paid on the Bonds to such receiver or trustee in bankruptcy, in which case the Insurer shall make such payment to the Indenture Trustee for payment to such Bondholder in accordance with the terms of the Policy). (b) The Indenture Trustee shall promptly notify the Insurer of any proceeding or the institution of any action (of which the Indenture Trustee has actual knowledge) seeking the avoidance as a preferential transfer under applicable bankruptcy, insolvency, receivership, rehabilitation or similar law (a "Preference Claim") of any distribution made with respect to the Bonds. Each Holder, by its purchase of Bonds, and the Indenture Trustee hereby agree that so long as an Insurer Default shall not have occurred and be continuing, the Insurer may at any time during the continuation of any proceeding relating to a Preference Claim direct all matters relating to such Preference Claim, including, without limitation, (i) the direction of any appeal of any order relating to any Preference Claim and (ii) the posting of any surety, supersedes or 22 performance bond pending any such appeal at the expense of the Insurer, but subject to reimbursement as provided in the Insurance Agreement. In addition, and without limitation of the foregoing, as set forth in Section 5.12, the Insurer shall be subrogated to, and each Bondholder and the Indenture Trustee hereby delegate and assign, to the fullest extent permitted by law, the rights of the Indenture Trustee and each Bondholder in the conduct of any proceeding with respect to a Preference Claim, including, without limitation, all rights of any party to an adversary proceeding action with respect to any court order issued in connection with any such Preference Claim. All actions taken under this Section 5.13(b) by the Indenture Trustee shall be taken in accordance with the terms of the Policy. SECTION 5.14. Bondholder Rights. Each Bondholder by the acceptance of its Bond agrees that, so long as no Insurer Default has occurred and is continuing, the Insurer shall be treated by the Issuer, the Seller, the Depositor, the Servicer, the Owner Trustee and the Indenture Trustee as if the Insurer were the Holder of the Bond for the purpose of the giving of any consent, the making of any direction or the exercise of any voting or other control rights otherwise given to the Bondholder hereunder without any further consent of the Bondholder. So long as no Insurer Default has occurred and is continuing, the Bondholders may only exercise such rights with the consent of the Insurer. SECTION 5.15. Insurer's Rights Regarding Actions, Proceedings or Investigations. Until all Bonds have been paid in full, all amounts owed to the Insurer have been paid in full, the Insurance Agreement has terminated and the Policy has been returned to the Insurer for cancellation, the following provisions shall apply: (a) Notwithstanding anything contained herein or in the other Basic Documents to the contrary, the Insurer shall have the right to participate in, to direct the enforcement or defense of, and, at the Insurer's sole option, to institute or assume the defense of, any action, proceeding or investigation that could adversely affect the Issuer, the Collateral, the Trust Property or the rights or obligations of the Insurer hereunder or under the Policy or the Basic Documents, including (without limitation) any insolvency or bankruptcy proceeding in respect of the Servicer, the Seller, the Depositor, the Issuer or any affiliate thereof. Following notice to the Indenture Trustee, the Insurer shall have exclusive right to determine, in its sole discretion, the actions necessary to preserve and protect the Issuer, the Collateral, and the Trust Property. All costs and expenses of the Insurer in connection with such action, proceeding or investigation, including (without limitation) any judgment or settlement entered into affecting the Insurer or the Insurer's interests, shall be included in the Reimbursement Amount. (b) In connection with any action, proceeding or investigation that could adversely affect the Issuer, the Collateral, the Trust Property or the rights or obligations of the Insurer hereunder or under the Policy or the Basic Documents, including (without limitation) any insolvency or bankruptcy proceeding in respect of the Servicer, the Seller, the Depositor, the Issuer or any affiliate thereof, the Indenture Trustee hereby agrees to cooperate with, and to take such action as directed by, the Insurer, including (without limitation) entering into such agreements and settlements as the Insurer shall direct, in its sole discretion, without the consent of any Bondholder. 23 (c) The Indenture Trustee hereby agrees to provide to the Insurer prompt written notice of any action, proceeding or investigation that names the Issuer or the Indenture Trustee as a party or that could adversely affect the Issuer, the Collateral, the Trust Property or the rights or obligations of the Insurer hereunder or under the Policy or the Basic Documents, including (without limitation) any insolvency or bankruptcy proceeding in respect of the Servicer, the Seller, the Depositor, the Trust or any affiliate thereof. (d) Notwithstanding anything contained herein or in any of the other Basic Documents to the contrary, the Indenture Trustee shall not, without the Insurer's prior written consent or unless directed by the Insurer, undertake or join any litigation or agree to any settlement of any action, proceeding or investigation affecting the Issuer, the Collateral, the Trust Property or the rights or obligations of the Insurer hereunder or under the Policy or the Basic Documents. (e) Each Bondholder, by acceptance of its Bond, and the Indenture Trustee agree that the Insurer shall have such rights as set forth in this Section, which are in addition to any rights of the Insurer pursuant to the other provisions of the Basic Documents, that the rights set forth in this Section may be exercised by the Insurer, in its sole discretion, without the need for the consent or approval of any Bondholder or the Indenture Trustee, notwithstanding any other provision contained herein or in any of the other Basic Documents, and that nothing contained in this Section shall be deemed to be an obligation of the Insurer to exercise any of the rights provided for herein. ARTICLE VI The Indenture Trustee SECTION 6.1. Duties of Indenture Trustee. (a) If a Rapid Amortization Event has occurred and is continuing, the Indenture Trustee shall exercise the rights and powers vested in it by this Indenture and the Basic Documents and use the same degree of care and skill in its exercise as a prudent person would exercise or use under the circumstances in the conduct of such person's own affairs; provided, however, that if the Indenture Trustee is acting as Servicer, it shall use the same degree of care and skill as is required of the Servicer under the Sale and Servicing Agreement. (b) Except during the continuance of a Rapid Amortization Event (i) the Indenture Trustee undertakes to perform such duties and only such duties as are specifically set forth in this Indenture and no implied covenants or obligations shall be read into this Indenture against the Indenture Trustee; and (ii) in the absence of bad faith on its part, the Indenture Trustee may conclusively rely, as to the truth of the statements and the correctness of the opinions expressed therein, upon certificates or opinions furnished to the Indenture Trustee and conforming to the requirements of this Indenture; however, the Indenture Trustee shall examine the certificates and opinions to determine whether or not they conform on their face to the requirements of this Indenture. 24 (c) The Indenture Trustee may not be relieved from liability for its own negligent action, its own negligent failure to act or its own willful misconduct, except that: (i) this paragraph does not limit the effect of paragraph (b) of this Section; (ii) the Indenture Trustee shall not be liable for any error of judgment made in good faith by a Responsible Officer unless it is proved that the Indenture Trustee was negligent in ascertaining the pertinent facts; (iii) the Indenture Trustee shall not be liable with respect to any action it takes or omits to take in good faith in accordance with a direction received by it pursuant to Section 5.12; and (iv) the Indenture Trustee shall not be charged with knowledge of any failure by the Servicer to comply with the obligations of the Servicer referred to in clause (ii) of Section 6.01 of the Sale and Servicing Agreement unless a Responsible Officer of the Indenture Trustee at the Corporate Trust Office obtains actual knowledge of such failure or occurrence or the Indenture Trustee receives written notice of such failure or occurrence from the Servicer, the Insurer or the Holders of Bonds evidencing more than 50% of the Outstanding Amount. (d) The Indenture Trustee shall not be liable for interest on any money received by it except as the Indenture Trustee may agree in writing with the Issuer. (e) No provision of this Indenture shall require the Indenture Trustee to expend or risk its own funds or otherwise incur financial liability in the performance of any of its duties hereunder or in the exercise of any of its rights or powers, if it shall have reasonable grounds to believe that repayment of such funds or indemnity reasonably satisfactory to it against such risk or liability is not reasonably assured to it. (f) Every provision of this Indenture relating to the conduct or affecting the liability of or affording protection to the Indenture Trustee shall be subject to the provisions of this Section and to the provisions of the TIA. (g) The Indenture Trustee shall, upon three Business Days' prior written notice to the Indenture Trustee, permit any representative of the Insurer, during the Indenture Trustee's normal business hours, to examine all books of account, records, reports and other papers of the Indenture Trustee relating to the Bonds, to make copies and extracts (at the expense of the party requesting such copies or extracts) therefrom and to discuss the Indenture Trustee's affairs and actions, as such affairs and actions relate to the Indenture Trustee's duties with respect to the Bonds, with the Indenture Trustee's officers and employees responsible for carrying out the Indenture Trustee's duties with respect to the Bonds. (h) The Indenture Trustee shall, and hereby agrees that it will, perform all of the obligations and duties required of it under the Sale and Servicing Agreement. 25 (i) The Indenture Trustee shall, and hereby agrees that it will, hold the Policy in trust, and will hold any proceeds of any claim on the Policy in trust solely for the use and benefit of the Bondholders. (j) In no event shall [Indenture Trustee], in any of its capacities hereunder, be deemed to have assumed any duties of the Owner Trustee under the Delaware Business Trust Statute, common law, or the Trust Agreement. SECTION 6.2. Rights of Indenture Trustee. (a) The Indenture Trustee may conclusively rely on any document reasonably believed by it to be genuine and to have been signed or presented by the proper person. The Indenture Trustee need not investigate any fact or matter stated in the document. (b) Before the Indenture Trustee acts or refrains from acting, it may require an Officer's Certificate or an Opinion of Counsel. The Indenture Trustee shall not be liable for any action it takes or omits to take in good faith in reliance on the Officer's Certificate or Opinion of Counsel. (c) The Indenture Trustee may execute any of the trusts or powers hereunder or perform any duties hereunder either directly or by or through agents or attorneys or a custodian or nominee and the Indenture Trustee shall not be liable for the negligence of such agents, attorneys, custodians or nominees appointed (i) with due care and (ii) with the consent of the Insurer. (d) The Indenture Trustee shall not be liable for any action it takes or omits to take in good faith which it believes to be authorized or within its rights or powers; provided, however, that the Indenture Trustee's conduct does not constitute willful misconduct, negligence or bad faith. (e) The Indenture Trustee may consult with counsel of its selection, and the advice or opinion of counsel with respect to legal matters relating to this Indenture and the Bonds shall be full and complete authorization and protection from liability in respect to any action taken, omitted or suffered by it hereunder in good faith and in accordance with the advice or opinion of such counsel. (f) The Indenture Trustee shall be under no obligation to institute, conduct or defend any litigation under this Indenture or in relation to this Indenture, at the request, order or direction of any of the Holders of Bonds or the Controlling Party, pursuant to the provisions of this Indenture, unless such Holders of Bonds or the Controlling Party shall have offered to the Indenture Trustee security or indemnity reasonably satisfactory to it against the costs, expenses and liabilities that may be incurred therein or thereby; provided, however, that the Indenture Trustee shall, upon the occurrence of a Rapid Amortization Event or Event of Servicing Termination as defined in the Sale and Servicing Agreement (that has not been cured or waived), exercise the rights and powers vested in it by this Indenture or the Sale and Servicing Agreement with reasonable care and skill. 26 (g) The Indenture Trustee shall not be bound to make any investigation into the facts or matters stated in any resolution, certificate, statement, instrument, opinion, report, notice, request, consent, order, approval, bond or other paper or document, unless requested in writing to do so by the Insurer or by the Holders of Bonds evidencing not less than 25% of the Outstanding Amount thereof; provided, however, that if the payment within a reasonable time to the Indenture Trustee of the costs, expenses or liabilities likely to be incurred by it in the making of such investigation is, in the opinion of the Indenture Trustee, not reasonably assured to the Indenture Trustee by the security afforded to it by the terms of this Indenture or the Sale and Servicing Agreement, the Indenture Trustee may require indemnity reasonably satisfactory to it against such cost, expense or liability as a condition to so proceeding; the reasonable expense of every such examination shall be paid by the Person making such request, or, if paid by the Indenture Trustee shall be reimbursed by the Person making such request upon demand. (h) The Indenture Trustee shall not be accountable, shall have no liability and makes no representation as to any acts or omissions hereunder of the Servicer until such time as the Indenture Trustee may be required to act as Servicer. SECTION 6.3. Individual Rights of Indenture Trustee. The Indenture Trustee in its individual or any other capacity may become the owner or pledgee of Bonds and may otherwise deal with the Issuer or its Affiliates with the same rights it would have if it were not Indenture Trustee. Any Bond Paying Agent, Bond Registrar, co-registrar or co-paying agent may do the same with like rights. However, the Indenture Trustee must comply with Sections 6.11 and 6.12. SECTION 6.4. Indenture Trustee's Disclaimer. The Indenture Trustee shall not be responsible for and makes no representation as to the validity or adequacy of this Indenture, the Trust Property or the Bonds, it shall not be accountable for the Issuer's use of the proceeds from the Bonds, and it shall not be responsible for any statement of the Issuer in the Indenture or in any document issued in connection with the sale of the Bonds or in the Bonds other than the Indenture Trustee's certificate of authentication. SECTION 6.5. Notice of Rapid Amortization Events and Events of Servicing Termination. If a Rapid Amortization Period or an Event of Servicing Termination occurs and is continuing and if it is either known by, or written notice of the existence thereof has been delivered to, a Responsible Officer of the Indenture Trustee, the Indenture Trustee shall (i) promptly mail to the Insurer notice of such event, and (ii) within 90 days after such knowledge or notice occurs, mail to each Bondholder notice of such event. Except in the case of a default in payment of principal of or interest on any Bond, the Indenture Trustee may withhold the notice to the Bondholders if and so long as one of its Responsible Officers in good faith determines that withholding the notice is in the interests of Bondholders; provided that the Indenture Trustee shall not withhold any such notice to the Insurer. SECTION 6.6. Reports by Indenture Trustee to Holders. Upon written request, the Bond Paying Agent or the Servicer shall on behalf of the Issuer deliver to each Bondholder such information as may be reasonably required to enable such Holder to prepare its federal and state income tax returns required by law. 27 SECTION 6.7. Compensation and Indemnity. (a) Pursuant to Section 8.7 and subject to Section 6.10 herein, the Issuer shall, or shall cause the Servicer to, pay to the Indenture Trustee from time to time compensation as agreed to in writing between the Servicer and the Indenture Trustee for its services. The Indenture Trustee's compensation shall not be limited by any law on compensation of a trustee of an express trust. The Issuer shall or shall cause the Servicer to reimburse the Indenture Trustee for all reasonable out-of-pocket expenses incurred or made by it, including costs of collection, in addition to the compensation for its services. Such expenses shall include the reasonable compensation and expenses, disbursements and advances of the Indenture Trustee's agents, counsel, accountants and experts. The Issuer shall or shall cause the Servicer to indemnify the Indenture Trustee and its respective officers, directors, employees and agents against any and all loss, liability or expense (including attorneys' fees and expenses) incurred by each of them in connection with the acceptance or the administration of this trust and the performance of its duties hereunder or under any other Basic Document. The Indenture Trustee shall notify the Issuer and the Servicer promptly of any claim for which it may seek indemnity. Failure by the Indenture Trustee to so notify the Issuer and the Servicer shall not relieve the Issuer of its obligations hereunder or the Servicer of its obligations under Article VIII of the Sale and Servicing Agreement. The Issuer shall or shall cause the Servicer to defend the claim, the Indenture Trustee may have separate counsel and the Issuer shall or shall cause the Servicer to pay the fees and expenses of such counsel. Neither the Issuer nor the Servicer need reimburse any expense or indemnify against any loss, liability or expense incurred by the Indenture Trustee through the Indenture Trustee's own willful misconduct, negligence or bad faith. (b) The Issuer's payment obligations to the Indenture Trustee pursuant to this Section shall survive the discharge of this Indenture. Notwithstanding anything else set forth in this Indenture or the Basic Documents, the Indenture Trustee agrees that the obligations of the Issuer (but not the Servicer) to the Indenture Trustee hereunder and under the Basic Documents shall be recourse to the Trust Property only and specifically shall not be recourse to the assets of the Issuer or any Bondholder. In addition, the Indenture Trustee agrees that its recourse to the Issuer, the Trust Property and the Depositor shall be limited to the right to receive the distributions referred to in Section 8.7 herein. SECTION 6.8. Replacement of Indenture Trustee. The Indenture Trustee may resign at any time by so notifying the Issuer and the Insurer by written notice. Upon receiving such notice of resignation, the Issuer shall promptly appoint a successor Indenture Trustee (approved in writing by the Insurer, so long as such approval is not unreasonably withheld) by written instrument, in duplicate, one copy of such instrument shall be delivered to the resigning Indenture Trustee (who shall deliver a copy to the Servicer and the Insurer) and one copy to the successor Indenture Trustee; provided, however, that any such successor Indenture Trustee shall be subject to the prior written approval of the Servicer. The Issuer may, and at the request of the Insurer shall, remove the Indenture Trustee, if: (i) the Indenture Trustee fails to comply with Section 6.11; (ii) a court having jurisdiction in the premises in respect of the Indenture Trustee in an involuntary case or proceeding under federal or state banking or 28 bankruptcy laws, as now or hereafter constituted, or any other applicable federal or state bankruptcy, insolvency or other similar law, shall have entered a decree or order granting relief or appointing a receiver, liquidator, assignee, custodian, trustee, conservator, sequestrator (or similar official) for the Indenture Trustee or for any substantial part of the Indenture Trustee's property, or ordering the winding-up or liquidation of the Indenture Trustee's affairs; (iii) an involuntary case under the federal bankruptcy laws, as now or hereafter in effect, or another present or future federal or state bankruptcy, insolvency or similar law is commenced with respect to the Indenture Trustee and such case is not dismissed within 60 days; (iv) the Indenture Trustee commences a voluntary case under any federal or state banking or bankruptcy laws, as now or hereafter constituted, or any other applicable federal or state bankruptcy, insolvency or other similar law, or consents to the appointment of or taking possession by a receiver, liquidator, assignee, custodian, trustee, conservator, sequestrator (or other similar official) for the Indenture Trustee or for any substantial part of the Indenture Trustee's property, or makes any assignment for the benefit of creditors or fails generally to pay its debts as such debts become due or takes any corporate action in furtherance of any of the foregoing; (v) the Indenture Trustee otherwise becomes incapable of acting; or (vi) the Indenture Trustee materially breaches any covenant or obligation under the Basic Documents. Additionally, the Issuer shall remove the Indenture Trustee at the request of the Insurer. If the Indenture Trustee resigns or is removed or if a vacancy exists in the office of Indenture Trustee for any reason (the Indenture Trustee in such event being referred to herein as the retiring Indenture Trustee), the Issuer shall promptly appoint a successor Indenture Trustee acceptable to the Insurer. If the Issuer fails to appoint such a successor Indenture Trustee, the Insurer may appoint a successor Indenture Trustee. A successor Indenture Trustee shall deliver a written acceptance of its appointment to the retiring Indenture Trustee, to the Insurer and to the Issuer. Thereupon the resignation or removal of the retiring Indenture Trustee shall become effective, and the successor Indenture Trustee shall have all the rights, powers and duties of the retiring Indenture Trustee under this Indenture. The successor Indenture Trustee shall mail a notice of its succession to Bondholders. The retiring Indenture Trustee shall promptly transfer all property held by it as Indenture Trustee to the successor Indenture Trustee. If a successor Indenture Trustee does not take office within 30 days after the retiring Indenture Trustee resigns or is removed, the retiring Indenture Trustee, the Issuer, the Insurer, or the Holders of a majority in Outstanding Amount of the Bonds may, at the expense of the Servicer, petition any court of competent jurisdiction for the appointment of a successor Indenture Trustee acceptable to the Insurer. 29 If the Indenture Trustee fails to comply with Section 6.11, any Bondholder may petition any court of competent jurisdiction for the removal of the Indenture Trustee and the appointment of a successor Indenture Trustee acceptable to the Insurer. Any resignation or removal of the Indenture Trustee and appointment of a successor Indenture Trustee pursuant to any of the provisions of this Section shall not become effective until acceptance of appointment by the successor Indenture Trustee pursuant to Section 6.8 and payment of all fees and expenses owed to the outgoing Indenture Trustee. Notwithstanding the replacement of the Indenture Trustee pursuant to this Section, the Issuer's and the Servicer's indemnity obligations under Section 6.7 shall continue for the benefit of the retiring Indenture Trustee and the Servicer shall pay any amounts owing to the Indenture Trustee. SECTION 6.9. Successor Indenture Trustee by Merger. If the Indenture Trustee consolidates with, merges or converts into, or transfers all or substantially all of its corporate trust business or assets to, another corporation or banking association, the resulting, surviving or transferee corporation without any further act shall be the successor Indenture Trustee, provided that such entity meets the requirements of Section 6.11 hereunder and is otherwise acceptable to the Insurer (unless an Insurer Default has occurred and is continuing). The Indenture Trustee shall provide Insurer and the Servicer with at least 30 days notice of any such transaction. In case at the time such successor or successors by merger, conversion or consolidation to the Indenture Trustee shall succeed to the trusts created by this Indenture any of the Bonds shall have been authenticated but not delivered, any such successor to the Indenture Trustee may adopt the certificate of authentication of any predecessor trustee, and deliver such Bonds so authenticated; and in case at that time any of the Bonds shall not have been authenticated, any successor to the Indenture Trustee may authenticate such Bonds either in the name of any predecessor hereunder or in the name of the successor to the Indenture Trustee; and in all such cases such certificates shall have the full force which it is anywhere in the Bonds or in this Indenture. SECTION 6.10. Appointment of Co-Indenture Trustee or Separate Indenture Trustee. (a) Notwithstanding any other provisions of this Indenture, at any time, for the purpose of meeting any legal requirement of any jurisdiction in which any part of the Trust may at the time be located, the Indenture Trustee, with the consent of the Insurer, shall have the power and may execute and deliver all instruments to appoint one or more Persons to act as a co-trustee or co-trustees, or separate trustee or separate trustees, of all or any part of the Trust, and to vest in such Person or Persons, in such capacity and for the benefit of the Bondholders, such title to the Trust, or any part hereof, and, subject to the other provisions of this Section, such powers, duties, obligations, rights and trusts as the Indenture Trustee may consider necessary or desirable. 30 (b) Every separate trustee and co-trustee shall, to the extent permitted by law, be appointed and act subject to the following provisions and conditions: (i) all rights, powers, duties and obligations conferred or imposed upon the Indenture Trustee shall be conferred or imposed upon and exercised or performed by the Indenture Trustee and such separate trustee or co-trustee jointly (it being understood that such separate trustee or co-trustee is not authorized to act separately without the Indenture Trustee joining in such act), except to the extent that under any law of any jurisdiction in which any particular act or acts are to be performed the Indenture Trustee shall be incompetent or unqualified to perform such act or acts, in which event such rights, powers, duties and obligations (including the holding of title to the Trust or any portion thereof in any such jurisdiction) shall be exercised and performed singly by such separate trustee or co-trustee, but solely at the direction of the Indenture Trustee; (ii) no trustee hereunder shall be personally liable by reason of any act or omission of any other trustee hereunder, including acts or omissions of predecessor or successor trustees; and (iii) the Indenture Trustee and the Servicer acting jointly may at any time accept the resignation of or remove any separate trustee or co-trustee except that following the occurrence of an Event of Servicing Termination, the Indenture Trustee acting alone may accept the resignation of or remove any separate trustee or co-trustee. (c) Any notice, request or other writing given to the Indenture Trustee shall be deemed to have been given to each of the then separate trustees and co-trustees, as effectively as if given to each of them. Every instrument appointing any separate trustee or co-trustee shall refer to this Indenture and the conditions of this Article VI. Each separate trustee and co-trustee, upon its acceptance of the trusts conferred, shall be vested with the estates or property specified in its instrument of appointment, either jointly with the Indenture Trustee or separately, as may be provided therein, subject to all the provisions of this Indenture, specifically including every provision of this Indenture relating to the conduct of, affecting the liability of, or affording protection to, the Indenture Trustee. Every such instrument shall be filed with the Indenture Trustee. (d) Any separate trustee or co-trustee may at any time constitute the Indenture Trustee, its agent or attorney-in-fact with full power and authority, to the extent not prohibited by law, to do any lawful act under or in respect of this Indenture on its behalf and in its name. If any separate trustee or co-trustee shall die, dissolve, become insolvent, become incapable of acting, resign or be removed, all of its estates, properties, rights, remedies and trusts shall vest in and be exercised by the Indenture Trustee, to the extent permitted by law, without the appointment of a new or successor trustee. (e) The Servicer shall be responsible for the fees of any co-trustee or separate trustee appointed hereunder. 31 SECTION 6.11. Eligibility; Disqualification. The Indenture Trustee shall at all times satisfy the requirements of TIA Section 310(a). The Indenture Trustee shall have a combined capital and surplus of at least $50,000,000 as set forth in its most recent published annual report of condition. The Indenture Trustee shall provide copies of such reports to the Insurer upon request. The Indenture Trustee shall comply with TIA Section 310(b), including the optional provision permitted by the second sentence of TIA Section 310(b)(9); provided, however, that there shall be excluded from the operation of TIA Section 310(b)(1) any indenture or indentures under which other securities of the Issuer are outstanding if the requirements for such exclusion set forth in TIA Section 310(b)(1) are met. SECTION 6.12. Preferential Collection of Claims Against Issuer. The Indenture Trustee shall comply with TIA Section 311(a), excluding any creditor relationship listed in TIA Section 311(b). An Indenture Trustee who has resigned or been removed shall be subject to TIA Section 311(a) to the extent indicated. SECTION 6.13. Appointment and Powers. Subject to the terms and conditions hereof, each of the Issuer Secured Parties hereby appoints [Indenture Trustee] as the Indenture Trustee with respect to the Collateral, and [Indenture Trustee] hereby accepts such appointment and agrees to act as Indenture Trustee with respect to the Trust Property for the Issuer Secured Parties, to maintain custody and possession of such Trust Property (except as otherwise provided hereunder) and to perform the other duties of the Indenture Trustee in accordance with the provisions of this Indenture and the other Basic Documents. Each Issuer Secured Party hereby authorizes the Indenture Trustee to take such action on its behalf, and to exercise such rights, remedies, powers and privileges hereunder, as the Controlling Party may direct and as are specifically authorized to be exercised by the Indenture Trustee by the terms hereof, together with such actions, rights, remedies, powers and privileges as are reasonably incidental thereto. The Indenture Trustee shall act upon and in compliance with the written instructions delivered to it pursuant to this Indenture promptly following receipt of such written instructions; provided that the Indenture Trustee shall not act in accordance with any instructions (i) which are not authorized by, or in violation of the provisions of, this Indenture or (ii) for which the Indenture Trustee has not received reasonable indemnity. Receipt of such instructions shall not be a condition to the exercise by the Indenture Trustee of its express duties hereunder, except where this Indenture provides that the Indenture Trustee is permitted to act only following and in accordance with such instructions. SECTION 6.14. Performance of Duties. The Indenture Trustee shall have no duties or responsibilities except those expressly set forth in this Indenture and the other Basic Documents to which the Indenture Trustee is a party or as directed by the Controlling Party in accordance with this Indenture. The Indenture Trustee shall not be required to take any discretionary actions hereunder except at the written direction and with the indemnification of the Controlling Party. The Indenture Trustee shall, and hereby agrees that it will, perform all of the duties and obligations required of it under the Sale and Servicing Agreement. SECTION 6.15. Limitation on Liability. Neither the Indenture Trustee nor any of its directors, officers, employees and agents shall be liable for any action taken or omitted to be taken by it or them hereunder, or in connection herewith, except that the Indenture Trustee shall be liable for its negligence, bad faith or willful misconduct; nor shall the Indenture Trustee 32 be responsible for the validity, effectiveness, value, sufficiency or enforceability against the Issuer of this Indenture or any of the Trust Property (or any part thereof). SECTION 6.16. Reliance Upon Documents. In the absence of negligence, bad faith or willful misconduct on its part, the Indenture Trustee shall be entitled to conclusively rely on any communication, instrument, paper or other document reasonably believed by it to be genuine and correct and to have been signed or sent by the proper Person or Persons and shall have no liability in acting, or omitting to act, where such action or omission to act is in reasonable reliance upon any statement or opinion contained in any such document or instrument. SECTION 6.17. Representations and Warranties of the Indenture Trustee. The Indenture Trustee represents and warrants to the Issuer and to each Issuer Secured Party as follows: (a) Due Organization. The Indenture Trustee is a __________ banking corporation, duly organized, validly existing and in good standing under the laws of the State of __________ and is duly authorized and licensed under applicable law to conduct its business as presently conducted. (b) Corporate Power. The Indenture Trustee has all requisite right, power and authority to execute and deliver this Indenture and to perform all of its duties as the Indenture Trustee hereunder. (c) Due Authorization. The execution and delivery by the Indenture Trustee of this Indenture and the other Basic Documents to which it is a party, and the performance by the Indenture Trustee of its duties hereunder and thereunder, have been duly authorized by all necessary corporate proceedings, are required for the valid execution and delivery by the Indenture Trustee, or the performance by the Indenture Trustee, of this Indenture and such other Basic Documents. (d) Valid and Binding Indenture. The Indenture Trustee has duly executed and delivered this Indenture and each other Basic Document to which it is a party, and each of this Indenture and each such other Basic Document constitutes the legal, valid and binding obligation of the Indenture Trustee, enforceable against the Indenture Trustee in accordance with its terms, except as (i) such enforceability may be limited by bankruptcy, insolvency, reorganization and similar laws relating to or affecting the enforcement of creditors' rights generally and (ii) the availability of equitable remedies may be limited by equitable principles of general applicability. SECTION 6.18. Waiver of Setoffs. The Indenture Trustee hereby expressly waives any and all rights of setoff that the Indenture Trustee may otherwise at any time have under applicable law with respect to any Account and agrees that amounts in the Accounts shall at all times be held and applied solely in accordance with the provisions hereof. SECTION 6.19. Control by the Controlling Party. The Indenture Trustee shall comply with notices and instructions given by the Issuer only if accompanied by the written 33 consent of the Controlling Party. The Indenture Trustee shall act upon and comply with notices and instructions given by the Controlling Party alone. SECTION 6.20. Indenture Trustee May Enforce Claims Without Possession of Bonds. All rights of action and claims under this Indenture or the Bonds may be prosecuted and enforced by the Indenture Trustee without the possession of any of the Bonds or the production thereof in any proceeding relating thereto, and such proceeding instituted by the Indenture Trustee shall be brought in its own name or in its capacity as Indenture Trustee. Any recovery of judgment shall, after provision for the payment of the reasonable compensation, expenses, disbursement and advances of the Indenture Trustee, its agents and counsel, be for the ratable benefit of the Bondholders in respect of which such judgment has been recovered. SECTION 6.21. Suits for Enforcement. In case an Event of Servicing Termination or other default by the Servicer or the Depositor hereunder shall occur and be continuing, the Controlling Party may proceed to protect and enforce its rights and the rights of the Bondholders under this Indenture by a suit, action or proceeding in equity or at law or otherwise, whether for the specific performance of any covenant or agreement contained in this Indenture or in aid of the execution of any power granted in this Indenture or for the enforcement of any other legal, equitable or other remedy, as the Indenture Trustee, being advised by counsel, shall deem most effectual to protect and enforce any of the rights of the Indenture Trustee and the Bondholders. SECTION 6.22. Mortgagor Claims. In connection with any offset defenses, or affirmative claim for recovery, asserted in legal actions brought by Mortgagors under one or more Mortgage Loans based upon provisions therein or upon other rights or remedies arising from any requirements of law applicable to the Mortgage Loans: (a) The Indenture Trustee is the holder of the Mortgage Loans only as trustee on behalf of the holders of the Bonds and the Insurer, and not as a principal or in any individual or personal capacity. (b) The Indenture Trustee shall not be personally liable for, or obligated to pay Mortgagors, any affirmative claims asserted thereby, or responsible to holders of the Bonds for any offset defense amounts applied against Mortgage Loan payments, pursuant to such legal actions. (c) The Indenture Trustee will pay, solely from the Trust Estate, affirmative claims for recovery by Mortgagors only pursuant to final judicial orders or judgments, or judicially-approved settlement agreements, resulting from such legal actions. (d) The Indenture Trustee will comply with judicial orders and judgments which require its actions or cooperation in connection with Mortgagors' legal actions to recover affirmative claims against holders of the Bonds. (e) The Indenture Trustee will cooperate with and assist the Servicer, the Insurer, the Issuer, the Depositor, or holders of the Bonds in their defense of legal actions by Mortgagors to recover affirmative claims if such cooperation and assistance is not contrary to the interests of the Indenture Trustee as a party to such legal actions and if the Indenture Trustee is 34 satisfactorily indemnified for all liability, costs and expenses (including attorneys' fees and expenses) arising therefrom. (f) The Issuer and Servicer hereby agree to indemnify, hold harmless and defend the Indenture Trustee from and against any and all liability, loss, costs and expenses (including attorneys' fees and expenses) of the Indenture Trustee resulting from any affirmative claims for recovery asserted or collected by Mortgagors under the Mortgage Loans. ARTICLE VII Bondholders' Lists and Reports SECTION 7.1. Issuer To Furnish To Indenture Trustee Names and Addresses of Bondholders. The Issuer will furnish or cause to be furnished to the Indenture Trustee (a) not more than five days after the earlier of (i) each Record Date and (ii) three months after the last Record Date, a list, in such form as the Indenture Trustee may reasonably require, of the names and addresses of the Holders as of such Record Date, (b) at such other times as the Indenture Trustee may request in writing, within 30 days after receipt by the Issuer of any such request, a list of similar form and content as of a date not more than 10 days prior to the time such list is furnished; provided, however, that so long as the Indenture Trustee is the Bond Registrar, no such list shall be required to be furnished. The Indenture Trustee or, if the Indenture Trustee is not the Bond Registrar, the Issuer shall furnish to the Insurer or the Issuer in writing upon their written request and at such other times as the Insurer or the Issuer may request a copy of the list. SECTION 7.2. Preservation of Information; Communications to Bondholders. (a) The Indenture Trustee shall preserve, in as current a form as is reasonably practicable, the names and addresses of the Holders contained in the most recent list furnished to the Indenture Trustee as provided in Section 7.1 and the names and addresses of Holders received by the Indenture Trustee in its capacity as Bond Registrar. The Indenture Trustee may destroy any list furnished to it as provided in such Section 7.1 upon receipt of a new list so furnished. (b) Bondholders may communicate with other Bondholders with respect to their rights under this Indenture or under the Bonds. (c) The Issuer, the Indenture Trustee and the Bond Registrar shall have the protection of TIA ss. 312(c). SECTION 7.3. Reports by Issuer. (a) The Issuer shall: (i) file with the Indenture Trustee (with a copy to the Insurer), within 15 days after the Issuer is required to file the same with the Commission, copies of the annual reports and copies of the information, documents and other reports (or copies of such portions of any of the foregoing as the Commission may from time to time by rules 35 and regulations prescribe) which the Issuer may be required to file with the Commission pursuant to Section 13 or 15(d) of the Exchange Act; (ii) file with the Indenture Trustee and the Commission in accordance with rules and regulations prescribed from time to time by the Commission such additional information, documents and reports with respect to compliance by the Issuer with the conditions and covenants of this Indenture as may be required from time to time by such rules and regulations; and (iii) supply to the Indenture Trustee (and the Indenture Trustee shall transmit by mail to all Bondholders described in TIA Section 313(c)) (with a copy to the Insurer) such summaries of any information, documents and reports required to be filed by the Issuer pursuant to clauses (i) and (ii) of this Section 7.3(a) as may be required by rules and regulations prescribed from time to time by the Commission. (b) Unless the Issuer otherwise determines, the fiscal year of the Issuer shall end on December 31 of each year. SECTION 7.4. Reports by Indenture Trustee. If required by TIA Section 313(a), within 60 days after each _______, beginning with _______, 200_, the Indenture Trustee shall mail to each Bondholder (with a copy to the Insurer) as required by TIA Section 313(c) a brief report dated as of such date that complies with TIA ss. 313(a). The Indenture Trustee also shall comply with TIA Section 313(b). A copy of each report at the time of its mailing to Bondholders shall be filed by the Indenture Trustee with the Commission and each stock exchange, if any, on which the Bonds are listed. The Issuer shall notify the Indenture Trustee if and when the Bonds are listed on any stock exchange or the delisting thereof. ARTICLE VIII Payments and Statements to Bondholders and Residual Bondholders; Accounts, Disbursements and Releases SECTION 8.1. Collection of Money. Except as otherwise expressly provided herein, the Indenture Trustee may demand payment or delivery of, and shall receive and collect, directly and without intervention or assistance of any fiscal agent or other intermediary, all money and other property payable to or receivable by the Indenture Trustee pursuant to this Indenture and the Sale and Servicing Agreement. The Indenture Trustee shall apply all such money received by it as provided in this Indenture and the Sale and Servicing Agreement. Except as otherwise expressly provided in this Indenture or in the Sale and Servicing Agreement, if any default occurs in the making of any payment or performance under any agreement or instrument that is part of the Trust Property, the Indenture Trustee may, with the consent of the Insurer (so long as no Insurer Default has occurred and is continuing), or shall at the direction of the Insurer (so long as no Insurer Default has occurred and is continuing), take such action as may be appropriate to enforce such payment or performance, including the institution and prosecution of appropriate proceedings. 36 SECTION 8.2. Release of Trust Property. (a) Subject to Section 8.10 and the payment of its fees and expenses pursuant to Section 6.7, the Indenture Trustee may, and when required by the Issuer and the provisions of this Indenture shall, execute instruments to release property from the lien of this Indenture, in a manner and under circumstances that are not inconsistent with the provisions of this Indenture or the Sale and Servicing Agreement. In the event that the fair value of property to be released from the lien of this Indenture on any date, together with the fair value of property previously released during the then-current calendar year, equals or exceeds 10% of the Bond Principal Balance, in addition to all other actions required to be taken pursuant to this Indenture, the Sale and Servicing Agreement or otherwise in connection with such release, an Independent Certificate in accordance with TIA Sections 314(c) and 314(d)(1) meeting the applicable requirements of Section 11.1 shall also be delivered to the Indenture Trustee. No party relying upon an instrument executed by the Indenture Trustee as provided in this Article VIII shall be bound to ascertain the Indenture Trustee's authority, inquire into the satisfaction of any conditions precedent or see to the application of any monies. (b) The Indenture Trustee shall, at such time as there are no Bonds outstanding and all sums due the Indenture Trustee pursuant to Section 6.7, and to the Insurer pursuant to the Insurance Agreement have been paid and the Policy has been cancelled and returned to the Insurer, release any remaining portion of the Trust Property that secured the Bonds from the lien of this Indenture and release to the Issuer or any other Person entitled thereto any funds then on deposit in the Accounts. The Indenture Trustee shall release property from the lien of this Indenture pursuant to this Section 8.2(b) only upon receipt by the Indenture Trustee and the Insurer of an Issuer Request accompanied by an Officer's Certificate, an Opinion of Counsel and (if required by the TIA) Independent Certificates in accordance with TIA Sections 314(c) and 314(d)(1) meeting the applicable requirements of Section 11.1. SECTION 8.3. Establishment of Accounts. The Depositor shall cause to be established, and the Indenture Trustee shall maintain, at the Corporate Trust Office of the Indenture Trustee, a Collection Account and a Policy Payment Account (which account maybe a sub-account of the Collection Account) to be held by the Indenture Trustee in the name of the Trust for the benefit of the Bondholders and the Insurer, as their interests may appear. Each account shall be an Eligible Account. In addition, the Depositor shall be permitted to withdraw amounts from the Collection Account from time to time as described in Section 3.03 of the Sale and Servicing Agreement. SECTION 8.4. The Policy. (a) By the close of business on the Business Day preceding each Determination Date the Indenture Trustee shall determine from the Servicing Certificate with respect to the immediately following Payment Date, the Deficiency Amount, if any. (b) If the Indenture Trustee determines pursuant to paragraph (a) above that a Deficiency Amount would exist, the Indenture Trustee shall complete a Notice in the form of Exhibit A to the Policy and submit such notice to the Insurer no later than 12:00 noon New York 37 City time on the related Determination Date preceding such Payment Date as a claim for the payment of an Insured Amount in an amount equal to the Deficiency Amount. (c) The Indenture Trustee shall establish an Eligible Account (which may be a sub-account of the Collection Account) for the benefit of the Bondholders and the Insurer referred to herein as the "Policy Payment Account" over which the Indenture Trustee shall have exclusive control and sole right of withdrawal. The Indenture Trustee shall deposit upon receipt any amount paid under the Policy into the Policy Payment Account and distribute such amount only for purposes of payment to the Bondholders of the Insured Amount for which a claim was made and such amount may not be applied to satisfy any costs, expenses or liabilities of the Depositor, the Servicer, the Indenture Trustee or the Trust. Amounts paid under the Policy, to the extent needed to pay the Insured Amount, shall be disbursed by the Indenture Trustee to the Bondholders in accordance with Section 8.7(b). It shall not be necessary for such payments to be made by check or wire transfers separate from checks or wire transfers used to pay the Insured Amount with other funds available to make such payment. However, the amount of any payment of principal or interest on the Bonds to be paid from funds transferred from the Policy Payment Account shall be noted as provided in subsection (d) of this Section 8.4 in the Bond Register and in the Indenture Trustee's Statement to Bondholders. Funds held in the Policy Payment Account shall not be invested. Any funds remaining in the Policy Payment Account on the first Business Day following a Payment Date shall be returned to the Insurer pursuant to the written instructions of the Insurer by the end of such Business Day. (d) The Indenture Trustee shall keep a complete and accurate record of the amount of interest and principal paid in respect of any Bond from moneys received under the Policy. The Insurer shall have the right to inspect such records at reasonable times during normal business hours upon one (1) Business Day's prior written notice to the Indenture Trustee. (e) The Indenture Trustee shall, upon retirement of the Bonds, furnish to the Insurer a notice of such retirement, and, upon retirement of the Bonds, and, upon retirement of the Bonds and the expiration of the term of the Policy surrender the Policy to the Insurer for cancellation. SECTION 8.5. [Reserved] SECTION 8.6. [Reserved] SECTION 8.7. Priority of Distributions. (a) The Indenture Trustee shall deposit to the Collection Account, without duplication, upon receipt, (i) any payments related to the Class A Bonds made pursuant to the Policy, (ii) the proceeds of any liquidation of the assets of the Trust and (iii) Interest Collections and Principal Collections remitted by the Servicer, together with any Substitution Amounts, and any Loan Purchase Price amounts received by the Indenture Trustee. (b) With respect to the Collection Account, on each Payment Date, the Indenture Trustee shall make the following allocations, disbursements and transfers in the following order of priority, and each such allocation, transfer and disbursement shall be treated 38 as having occurred only after all preceding allocations, transfers and disbursements have occurred: (i) to the Indenture Trustee, the Trustee Fee then due; (ii) from amounts on deposit therein, the Premium Amount with respect to the Class A Bonds to the Insurer for such Payment Date (iii) from amounts then on deposit therein, to the Class A Bondholders, the Interest Payment Amount for such Payment; (iv) on each Payment Date during the Managed Amortization Period, from amounts then on deposit therein, to the Depositor, the portion of Additional Balance Contributed Amount for such Payment Date related to HELOC Mortgage Loans; (v) from amounts then on deposit therein, to the Class A Bondholders as a distribution of principal, the Principal Payment Amount for such Payment Date; (vi) from amounts then on deposit therein, to the Class A Bondholders, as a distribution of principal, the Overcollateralization Deficit for such Payment Date; (vii) from amounts then on deposit therein, to the Insurer, the Reimbursement Amount, if any, then due to it; (viii) from amounts then on deposit therein, the Excess Cashflow with respect to the Class A Bonds shall be applied to the extent necessary to fund the full amount of the Accelerated Principal Payment; (ix) from amounts then on deposit, pari passu (a) to the Servicer, reimbursement for amounts reimbursable to the Servicer pursuant to Section 3.03 and Section 5.03 of the Sale and Servicing Agreement to the extent not previously reimbursed and (b) to the Indenture Trustee, up to a maximum of $5,000 on any Payment Date to pay certain amounts that may be required to be paid to the Indenture Trustee with respect to its or the Custodian's preparation and recording of assignments of mortgages (which amounts were not previously paid pursuant to clause (i) or reimbursed pursuant to the Sale and Servicing Agreement); (x) from amounts then on deposit therein, the current Deferred Interest with respect to the Class A Bonds and any unpaid Deferred Interest from prior Payment Dates with interest thereon at the Formula Bond Rate; (xi) to the Indenture Trustee, all remaining amounts due and owing to the Indenture Trustee pursuant to the Basic Documents and not otherwise paid pursuant to clause (i) or (ix); (xii) to the Manager of the Trust, the Management Fee then due and any amount due and owing to the Manager pursuant to Section 5(b) of the Management Agreement; and 39 (xiii) to the Residual Certificateholders, any amounts remaining on deposit in the Collection Account. SECTION 8.8. Statements to Bondholders. The Indenture Trustee (based upon information received from the Servicer) will make available via its internet website on each Payment Date concurrently with each distribution to the Bondholders, to the Servicer, the Bondholders and the Insurer a statement setting forth among other items with respect to the Bonds: (i) the amount being distributed to the Bonds; (ii) the amount of interest included in such distribution and the Bond Rate; (iii) the amount, if any, of overdue accrued interest included in such distribution (and the amount of interest thereon); (iv) the amount, if any, of the remaining overdue accrued interest after giving effect to such distribution; (v) the amount, if any, of principal included in such distribution; (vi) the Servicing Fee for such Payment Date; (vii) the related principal balance, after giving effect to such distribution; (viii) the related initial Pool Balance and the related Pool Balance as of the end of the preceding Collection Period; (ix) the number and aggregate Principal Balance of Mortgage Loans that were (A) delinquent (exclusive of Mortgage Loans in bankruptcy or foreclosure or properties acquired by the Trust by deed in lieu of foreclosure) (1) 30 to 59 days, (2) 60 to 89 days, (3) 90 to 119 days, (4) 120 to 149 days, (5) 150 to 179 days, (6) 180 to 269 days and (7) 270 or more days, (B) in foreclosure, (C) in bankruptcy and (D) properties acquired by the Trust by deed in lieu of foreclosure; (x) (A) cumulative losses as a percentage of original Pool Balance, (B) cumulative losses as a percentage of current Pool Balance and (C) the twelve-month rolling average of cumulative losses as a percentage of original Pool Balance; (xi) the three-month rolling average of Mortgage Loans that are 60 days or more delinquent; (xii) the book value of any real estate which is acquired by the Trust through foreclosure or grant of deed in lieu of foreclosure; (xiii) the amount of any draws on the Policy;; 40 (xiv) whether the related Payment Date will fall during the Managed Amortization Period or the Rapid Amortization Period; (xv) whether a Rapid Amortization Event has occurred during the related Collection Period; (xvi) the amount, if any, of any Relief Act Shortfalls incurred during the related Collection Period; (xvii) the outstanding principal balance of the three Mortgage Loans in with the largest outstanding principal balance; (xviii) whether an Event of Servicing Termination or an Insurer Default has occurred; (xix) the amount, if any, of Additional Balances created during the related Collection Period; (xx) whether the Managed Amortization Period has ended and the Rapid Amortization Period has begun; (xxi) the Specified Overcollateralization Amount; (xxii) the Overcollateralization Amount, after giving effect to payments on such Payment Date; (xxiii) the amount of any servicing advances made by the Servicer during the related Collection Period; and (xxiv) the amount, if any, of interest shortfalls relating to prepayments during the related Collection Period. In the case of information furnished pursuant to clauses (ii), (iii), (iv) and (v) above, the amounts shall be expressed as a dollar amount per Class A Bond with a $1,000 denomination. The Indenture Trustee will make the reports referred to above (and, at its option, any additional files containing the same information in an alternative format) available each month to Bondholders, the Insurer, the Depositor and the Servicer via the Indenture Trustee's internet website, which is presently located at www.mbsreporting.com. Any such persons that are unable to use this website are entitled to have a paper copy of such information sent to them via facsimile by faxing a request to the Indenture Trustee at (212) 815-3986. If the Insurer requests a paper copy of such information, a paper copy shall be sent to the Insurer each month without the need for any additional request. The Indenture Trustee shall have the right to change the manner in which the reports referred to in this section are distributed in order to make such distribution more convenient and/or more accessible to the Bondholders, the Insurer, the Depositor and the Servicer. The Indenture Trustee will provide timely and adequate notification to all such parties regarding any such change to the method of distribution of the reports. 41 Each report provided to the Insurer (either via the Indenture Trustee's website or a paper copy) pursuant to this Section 8.8 shall additionally report: (a) the total amount of funds received as Insured Amounts or Preference Amounts for such Payment Date, separately stating the portions used to pay principal and interest components of the Deficiency Amount; (b) the cumulative amount of Insured Amounts or Preference Amounts paid by the Insurer through such Payment Date; and (c) other information as the Insurer may reasonably request from time to time. Within 60 days after the end of each calendar year, the Servicer shall prepare or cause to be prepared and shall forward to the Indenture Trustee the information set forth in clauses (i) and (ii) above aggregated for such calendar year. Such obligation of the Servicer shall be deemed to have been satisfied to the extent that substantially comparable information shall be provided by the Servicer or a Bond Paying Agent pursuant to any requirements of the Code. SECTION 8.9. Indenture Trustee Annual Certification. On or before January 31 of each year, the Manager, on behalf of the Trust, shall provide the Indenture Trustee with a written notice listing all Payment Date reports to Bondholders with respect to Payment Dates occurring in the prior calendar year that were included in a Form 8-K filing pursuant to Section 3.14 of the Sale and Servicing Agreement; provided that if no Form 10-K is required to be filed for such prior calendar year, no written notice shall be required. No later than March 15 of each year in which such written notice is provided by the Manager to the Indenture Trustee, the Indenture Trustee shall sign a certification (in the form attached hereto as Exhibit C) for the benefit of the Person(s) signing the Form 10-K Certification, regarding certain aspects of the Form 10-K Certification. SECTION 8.10. Rights of Bondholders and Residual Certificateholders. The Bonds shall represent obligations of the Trust, each representing interests in or secured by the Trust Property, including the Collection Account and the right to receive Interest Collections, Principal Collections, if any, and other amounts at the times and in the amounts specified in this Indenture and the Residual Certificates shall represent a beneficial interest in the Trust (other than the Policy). SECTION 8.11. Opinion of Counsel. The Indenture Trustee and the Insurer shall receive at least seven days' notice when requested by the Issuer to take any action pursuant to Section 8.2(a), accompanied by copies of any instruments involved, and the Indenture Trustee shall also require as a condition to such action, an Opinion of Counsel (addressed to the Indenture Trustee and to the Insurer), stating the legal effect of any such action, outlining the steps required to complete the same, and concluding that all conditions precedent to the taking of such action have been complied with and such action will not materially and adversely impair the security for the Bonds or the rights of the Bondholders or the Insurer in contravention of the provisions of this Indenture; provided, however, that such Opinion of Counsel shall not be required to express an opinion as to the fair value of the Trust Property. Counsel rendering any such opinion may rely, without independent investigation, on the accuracy and validity of any certificate or other instrument delivered to the Indenture Trustee in connection with any such action. 42 ARTICLE IX Supplemental Indentures SECTION 9.1. Supplemental Indentures Without Consent of Bondholders. (a) Without the consent of the Holders of any Bonds but with the consent of the Insurer, as evidenced to the Indenture Trustee, the parties hereto, when authorized by an Issuer Order, at any time and from time to time, may enter into one or more indentures supplemental hereto (which shall conform to the provisions of the TIA as in force at the date of the execution thereof), in form satisfactory to the Indenture Trustee and the Insurer, for any of the following purposes: (i) to correct or amplify the description of any property at any time subject to the lien of this Indenture, or better to assure, convey and confirm unto the Indenture Trustee any property subject or required to be subjected to the lien of this Indenture, or to subject to the lien of this Indenture additional property; (ii) to evidence the succession, in compliance with the applicable provisions hereof, of another person to the Issuer, and the assumption by any such successor of the covenants of the Issuer herein and in the Bonds contained; (iii) to add to the covenants of the Issuer, for the benefit of the Holders of the Bonds, or to surrender any right or power herein conferred upon the Issuer; (iv) to convey, transfer, assign, mortgage or pledge any property to or with the Indenture Trustee; (v) to cure any ambiguity, to correct or supplement any provision herein or in any supplemental indenture which may be inconsistent with any other provision herein or in any supplemental indenture or to make any other provisions with respect to matters or questions arising under this Indenture or in any supplemental indenture; provided that such action shall not adversely affect the interests of the Holders of the Bonds; or (vi) to evidence and provide for the acceptance of the appointment hereunder by a successor trustee with respect to the Bonds and to add to or change any of the provisions of this Indenture as shall be necessary to facilitate the administration of the trusts hereunder by more than one trustee, pursuant to the requirements of Article VI. (vii) to modify, eliminate or add to the provisions of this Indenture to such extent as shall be necessary to effect the qualification of the Indenture under the TIA or under any similar federal statue hereafter enacted and to add to this Indenture such other provisions as may be expressly required by the TIA. The Indenture Trustee is hereby authorized to join in the execution of any such supplemental indenture and to make any further appropriate agreements and stipulations that may be therein contained. 43 (b) The parties hereto, when authorized by an Issuer Order, may, also without the consent of any of the Holders of the Bonds but with the prior written consent of the Insurer and with prior notice to the Rating Agencies by the Issuer, as evidenced to the Indenture Trustee, enter into an indenture or indentures supplemental hereto for the purpose of adding any provisions to, or changing in any manner or eliminating any of the provisions of, this Indenture or of modifying in any manner the rights of the Holders of the Bonds under this Indenture; provided, however, that such action shall not, as evidenced by an Opinion of Counsel, adversely affect in any material respect the interests of any Bondholder. SECTION 9.2. Supplemental Indentures with Consent of Bondholders. The parties hereto, when authorized by an Issuer Order, also may, with prior notice to the Rating Agencies, with the consent of the Insurer and with the consent of the Holders of not less than a majority of the Outstanding Amount of the Bonds, by Act of such Holders delivered to the parties hereto, enter into an indenture or indentures supplemental hereto for the purpose of adding any provisions to, or changing in any manner or eliminating any of the provisions of, this Indenture or of modifying in any manner the rights of the Holders of the Bonds under this Indenture; provided, however, that, subject to the express rights of the Insurer under the Basic Documents, no such supplemental indenture shall, without the consent of the Holder of each Outstanding Bonds affected thereby: (i) change the date of payment of any installment of principal of or interest on any Bond, or reduce the principal amount thereof, the interest rate thereon or the Redemption Price with respect thereto, change the provision of this Indenture relating to the application of collections on, or the proceeds of the sale of, the Trust Property to payment of principal of or interest on the Bonds, or change any place of payment where, or the coin or currency in which, any Bond or the interest thereon is payable; (ii) impair the right to institute suit for the enforcement of the provisions of this Indenture requiring the application of funds available therefor, as provided in Article V, to the payment of any such amount due on the Bonds on or after the respective due dates thereof (or, in the case of redemption, on or after the Redemption Date); (iii) reduce the percentage of the Outstanding Amount of the Bonds, the consent of the Holders of which is required for any such supplemental indenture, or the consent of the Holders of which is required for any waiver of compliance with certain provisions of this Indenture or certain defaults hereunder and their consequences provided for in this Indenture; (iv) modify or alter the provisions of the proviso to the definition of the term "Outstanding"; (v) reduce the percentage of the Outstanding Amount of the Bonds required to direct the Indenture Trustee to direct the Issuer to sell or liquidate the Trust Property pursuant to Section 5.4; 44 (vi) modify any provision of this Section except to increase any percentage specified herein or to provide that certain additional provisions of this Indenture or the Basic Documents cannot be modified or waived without the consent of the Holder of each Outstanding Bond affected thereby; (vii) modify any of the provisions of this Indenture in such manner as to affect the calculation of the amount of any payment of interest or principal due on any Bond on any Payment Date (including the calculation of any of the individual components of such calculation); or (viii) permit the creation of any lien ranking prior to or on a parity with the lien of this Indenture with respect to any part of the Trust Property or, except as otherwise permitted or contemplated herein or in any of the Basic Documents, terminate the lien of this Indenture on any property at any time subject hereto or deprive the Holder of any Bond of the security provided by the lien of this Indenture. The Indenture Trustee may conclusively rely as to whether or not any Bonds would be adversely affected by any supplemental indenture upon receipt of an Opinion of Counsel addressed and delivered to the Indenture Trustee and the Insurer to that effect and any such determination shall be conclusive upon the Holders of all Bonds, whether theretofore or thereafter authenticated and delivered hereunder. The Indenture Trustee shall not be liable for relying on such Opinion of Counsel in good faith. It shall not be necessary for any Act of Bondholders under this Section to approve the particular form of any proposed supplemental indenture, but it shall be sufficient if such Act shall approve the substance thereof. Promptly after the execution by the parties hereto of any supplemental indenture pursuant to this Section, the Indenture Trustee shall mail to the Holders of the Bonds to which such amendment or supplemental indenture relates a notice setting forth in general terms the substance of such supplemental indenture. Any failure of the Indenture Trustee to mail such notice, or any defect therein, shall not, however, in any way impair or affect the validity of any such supplemental indenture. SECTION 9.3. Execution of Supplemental Indentures. In executing, or permitting the additional trusts created by, any supplemental indenture permitted by this Article IX or the modifications thereby of the trusts created by this Indenture, the Indenture Trustee and the Insurer shall be entitled to receive, and subject to Sections 6.1 and 6.2, shall be fully protected in relying upon, an Opinion of Counsel (and, if requested, an Officer's Bond) stating that the execution of such supplemental indenture is authorized or permitted by this Indenture. The Indenture Trustee may, but shall not be obligated to, enter into any such supplemental indenture that affects the Indenture Trustee's own rights, duties, liabilities or immunities under this Indenture or otherwise. SECTION 9.4. Effect of Supplemental Indenture. Upon the execution of any supplemental indenture pursuant to the provisions hereof, this Indenture shall be and be deemed to be modified and amended in accordance therewith with respect to the Bonds affected thereby, 45 and the respective rights, limitations of rights, obligations, duties, liabilities and immunities under this Indenture of the Indenture Trustee, the Issuer and the Holders of the Bonds shall thereafter be determined, exercised and enforced hereunder subject in all respects to such modifications and amendments, and all the terms and conditions of any such supplemental indenture shall be and be deemed to be part of the terms and conditions of this Indenture for any and all purposes. SECTION 9.5. Reference in Bonds to Conformity With Trust Indenture Act. Every amendment of this Indenture and every supplemental indenture executed pursuant to this Article IX shall conform to the requirements of the TIA as then in effect so long as this Indenture shall then be qualified under the TIA. SECTION 9.6. Reference in Bonds to Supplemental Indentures. Bonds authenticated and delivered after the execution of any supplemental indenture pursuant to this Article IX may, and if required by the Indenture Trustee shall, bear a notation in form approved by the Indenture Trustee as to any matter provided for in such supplemental indenture. If the Issuer or the Indenture Trustee shall so determine, new Bonds so modified as to conform, in the opinion of the Indenture Trustee and the Issuer, to any such supplemental indenture may be prepared and executed by the Issuer and authenticated and delivered by the Indenture Trustee in exchange for Outstanding Bonds. ARTICLE X Redemption of Bonds SECTION 10.1. Redemption. The Bonds are subject to redemption in whole, but not in part, at the direction of the Depositor pursuant to Section 7.01(b) of the Sale and Servicing Agreement, on any Payment Date on which the Depositor exercises its option to transfer the Trust Property pursuant to said Section 7.01(b), for a purchase price equal to the Redemption Price. The Servicer or the Issuer shall furnish the Insurer notice of such redemption not later than 35 days prior to the Redemption Date. If the Bonds are to be redeemed pursuant to this Section 10.1, the Servicer or the Issuer shall furnish notice of such election to the Indenture Trustee not later than 35 days prior to the Redemption Date and the Issuer shall deposit or undertake to deposit on or prior to the Redemption Date with the Indenture Trustee in the Collection Account the Redemption Price of such Bonds whereupon all such Bonds shall be due and payable on the Redemption Date upon the furnishing of a notice complying with Section 10.2 (unless the Issuer shall default in the deposit of the Redemption Price). SECTION 10.2. Surrender of Bonds. (a) Notice of any termination, specifying the Payment Date (which shall be a date that would otherwise be a Payment Date) upon which the Bondholders may surrender their Bonds to the Indenture Trustee for payment of the final distribution and cancellation, shall be given promptly by the Indenture Trustee (upon receipt of written directions from the Depositor, if the Depositor is exercising its right to transfer of the Mortgage Loans, given not later than the first day of the month preceding the month of such final distribution) to the Insurer and to the Servicer and by letter to Bondholders mailed not earlier than the 15th day and not later than the 46 25th day of the month next preceding the month of such final distribution specifying (i) the Payment Date upon which final distribution of the Bonds will be made upon presentation and surrender of Bonds at the office or agency of the Indenture Trustee therein designated, (ii) the amount of any such final distribution and (iii) that the Record Date otherwise applicable to such Payment Date is not applicable, distributions being made only upon presentation and surrender of the Bonds at the office or agency of the Indenture Trustee therein specified. In the event written directions are delivered by the Depositor to the Indenture Trustee as described in the preceding sentence, the Depositor shall deposit in the Collection Account on or before the Payment Date for such final distribution in immediately available funds an amount which, when added to the funds on deposit in the Collection Account that are payable to the Bondholders, will be equal to the retransfer amount for the Mortgage Loans computed as above provided, together with all amounts due and owing to the Insurer for unpaid premiums and unreimbursed draws on the Policy and all other amounts due and owing to the Insurer pursuant to the Insurance Agreement, together with interest thereon as provided under the Insurance Agreement. (b) Upon presentation and surrender of the Bonds, the Indenture Trustee shall cause to be distributed to the Holders of Bonds on the Payment Date for such final distribution, in proportion to the Percentage Interests of their respective Bonds and to the extent that funds are available for such purpose, the amount required to be distributed to Bondholders pursuant to Section 10.1 of this Indenture for such Payment Date. The distribution on such final Payment Date pursuant to a retransfer pursuant to Section 7.01(a)(B)(i) of the Sale and Servicing Agreement shall be in lieu of the distribution otherwise required to be made on such Payment Date in respect of the Bonds. On the final Payment Date prior to having made the distributions called for above, the Indenture Trustee shall, based upon the information set forth in the Servicing Certificate for such Payment Date, withdraw from the Collection Account and remit to the Insurer the lesser of (x) the amount available for distribution on such final Payment Date, net of any portion thereof necessary to pay the amounts described in clauses (i) and (ii) above and (y) the unpaid amounts due and owing to the Insurer for unpaid premiums and unreimbursed draws on the Policy and all other amounts due and owing to the Insurer pursuant to the Insurance Agreement, together with interest thereon as provided under the Insurance Agreement. (c) In the event that all of the Bondholders shall not surrender their Bonds for final payment and cancellation on or before such final Payment Date, the Indenture Trustee shall on such date cause all funds in the Collection Account not distributed in final distribution to Bondholders to be withdrawn therefrom and credited to the remaining Bondholders by depositing such funds in a separate escrow account for the benefit of such Bondholders and the Depositor (if the Depositor has exercised its right to transfer the Mortgage Loans) or the Indenture Trustee (in any other case) and shall give a second written notice to the remaining Bondholders to surrender their Bonds for cancellation and receive the final distribution with respect thereto. If within one year after the second notice all the Bonds shall not have been surrendered for cancellation, the Indenture Trustee may take appropriate steps, or may appoint an agent to take appropriate steps, to contact the remaining Bondholders concerning surrender of their Bonds, and the cost thereof shall be paid out of the funds on deposit in such escrow account. SECTION 10.3. Form of Redemption Notice. Notice of redemption supplied to the Indenture Trustee by the Depositor under Section 10.1 shall be given by the Indenture 47 Trustee by facsimile or by first-class mail, postage prepaid, transmitted or mailed prior to the applicable Redemption Date to each Holder of Bonds of record, as of the close of business on the date which is not less than 5 days prior to the applicable Redemption Date, at such Holder's address appearing in the Bond Register. All notices of redemption shall state: (i) the Redemption Date; (ii) the Redemption Price; (iii) that the Record Date otherwise applicable to such Redemption Date is not applicable and that payments shall be made only upon presentation and surrender of such Bonds at the place where such Bonds are to be surrendered for payment of the Redemption Price (which shall be the office or agency of the Issuer to be maintained as provided in Section 3.2); and (iv) that interest on the Bonds shall cease to accrue on the Redemption Date. Notice of redemption of the Bonds shall be given by the Indenture Trustee in the name and at the expense of the Issuer. Failure to give notice of redemption, or any defect therein, to any Holder of any Bond shall not impair or affect the validity of the redemption of any other Bond. SECTION 10.4. Bonds Payable on Redemption Date. The Bonds to be redeemed shall, following notice of redemption as required by Section 10.2, on the Redemption Date become due and payable at the Redemption Price and (unless the Issuer shall default in the payment of the Redemption Price) no interest shall accrue on the Redemption Price for any period after the date to which accrued interest is calculated for purposes of calculating the Redemption Price. ARTICLE XI Miscellaneous SECTION 11.1. Compliance Certificates and Opinions, etc. Upon any application or request by the Issuer to the Indenture Trustee to take any action under any provision of this Indenture, the Issuer shall furnish to the Indenture Trustee and to the Insurer if the application or request is made to the Indenture Trustee (i) an Officer's Certificate stating that all conditions precedent, if any, provided for in this Indenture relating to the proposed action have been complied with, (ii) an Opinion of Counsel stating that in the opinion of such counsel all such conditions precedent, if any, have been complied with and (iii) (if required by the TIA or any provision of this Agreement) an Independent Certificate from a firm of certified public accountants meeting the applicable requirements of this Section, except that, in the case of any such application or request as to which the furnishing of such documents is specifically required by any provision of this Indenture, no additional certificate or opinion need be furnished. 48 Every certificate or opinion with respect to compliance with a condition or covenant provided for in this Indenture shall include: (i) a statement that each signatory of such certificate or opinion has read or has caused to be read such covenant or condition and the definitions herein relating thereto; (ii) a brief statement as to the nature and scope of the examination or investigation upon which the statements or opinions contained in such certificate or opinion are based; (iii) a statement that, in the opinion of each such signatory, such signatory has made such examination or investigation as is necessary to enable such signatory to express an informed opinion as to whether or not such covenant or condition has been complied with; and (iv) a statement as to whether, in the opinion of each such signatory such condition or covenant has been complied with. SECTION 11.2. Form of Documents Delivered to Indenture Trustee. In any case where several matters are required to be certified by, or covered by an opinion of, any specified Person, it is not necessary that all such matters be certified by, or covered by the opinion of, only one such Person, or that they be so certified or covered by only one document, but one such Person may certify or give an opinion with respect to some matters and one or more other such Persons as to other matters, and any such Person may certify or give an opinion as to such matters in one or several documents. Any certificate or opinion of an Authorized Officer of the Issuer may be based, insofar as it relates to legal matters, upon a certificate or opinion of, or representations by, counsel, unless such officer knows, or in the exercise of reasonable care should know, that the certificate or opinion or representations with respect to the matters upon which his or her certificate or opinion is based are erroneous. Any such certificate of an Authorized Officer or Opinion of Counsel may be based, insofar as it relates to factual matters, upon a certificate or opinion of, or representations by, an officer or officers of the Servicer, the Depositor or the Issuer, stating that the information with respect to such factual matters is in the possession of the Servicer, the Depositor or the Issuer, unless such counsel knows, or in the exercise of reasonable care should know, that the certificate or opinion or representations with respect to such matters are erroneous. Where any Person is required to make, give or execute two or more applications, requests, consents, certificates, statements, opinions or other instruments under this Indenture, they may, but need not, be consolidated and form one instrument. Whenever in this Indenture, in connection with any application or certificate or report to the Indenture Trustee, it is provided that the Issuer shall deliver any document as a condition of the granting of such application, or as evidence of the Issuer's compliance with any term hereof, it is intended that the truth and accuracy, at the time of the granting of such application or at the effective date of such certificate or report (as the case may be), of the facts 49 and opinions stated in such document shall in such case be conditions precedent to the right of the Issuer to have such application granted or to the sufficiency of such certificate or report. The foregoing shall not, however, be construed to affect the Indenture Trustee's right to conclusively rely upon the truth and accuracy of any statement or opinion contained in any such document as provided in Article VI. SECTION 11.3. Acts of Bondholders. (a) Any request, demand, authorization, direction, notice, consent, waiver or other action provided by this Indenture to be given or taken by Bondholders may be embodied in and evidenced by one or more instruments of substantially similar tenor signed by such Bondholders in person or by agents duly appointed in writing; and except as herein otherwise expressly provided such action shall become effective when such instrument or instruments are delivered to the Indenture Trustee, and, where it is hereby expressly required, to the Issuer. Such instrument or instruments (and the action embodied therein and evidenced thereby) are herein sometimes referred to as the "Act" of the Bondholders signing such instrument or instruments. Proof of execution of any such instrument or of a writing appointing any such agent shall be sufficient for any purpose of this Indenture and (subject to Section 6.1) conclusive in favor of the Indenture Trustee and the Issuer, if made in the manner provided in this Section. (b) The fact and date of the execution by any person of any such instrument or writing may be proved in any customary manner of the Indenture Trustee. (c) The ownership of Bonds shall be proved by the Bond Register. (d) Any request, demand, authorization, direction, notice, consent, waiver or other action by the Holder of any Bonds shall bind the Holder of every Bond issued upon the registration thereof or in exchange therefor or in lieu thereof, in respect of anything done, omitted or suffered to be done by the Indenture Trustee or the Issuer in reliance thereon, whether or not notation of such action is made upon such Bond. SECTION 11.4. Notices, etc., to Indenture Trustee, Issuer, Insurer and Rating Agencies. Any request, demand, authorization, direction, notice, consent, waiver or Act of Bondholders or other documents provided or permitted by this Indenture to be made upon, given or furnished to or filed with: (a) The Indenture Trustee by any Bondholder or by the Issuer shall be sufficient for every purpose hereunder if personally delivered, delivered by overnight courier or mailed first-class and shall be deemed to have been duly given upon receipt to the Indenture Trustee at its Corporate Trust Office and any notice delivered by facsimile shall be addressed to the Corporate Trust Office, telecopy number (____) ____-____, or (b) The Issuer by the Indenture Trustee or by any Bondholder shall be sufficient for every purpose hereunder if personally delivered, delivered by facsimile or overnight courier or mailed first class, and shall deemed to have been duly given upon receipt to the Issuer addressed to: Sequoia Mortgage Trust 200_-_, in care of [Owner Trustee], [Owner Trustee's Address], or at any other address previously furnished in writing to the Indenture 50 Trustee by Issuer. The Issuer shall promptly transmit any notice received by it from the Bondholders to the Indenture Trustee. (c) The Insurer by the Issuer or the Indenture Trustee shall be sufficient for any purpose hereunder if in writing and mailed by first-class mail personally delivered or telecopied to the recipient as follows: To the Insurer: [Insurer] [Insurer's Address] Telecopy: (____) ____-_____ Notices required to be given to the Rating Agencies by the Issuer, the Indenture Trustee or the Owner Trustee shall be in writing, personally delivered, delivered by overnight courier or first class or via facsimile to (i) in the case of [First Rating Agency], at the following address: [First Rating Agency's Address], Fax No: (___) ____-_____ and (ii) in the case of [Second Rating Agency], at the following address: [Second Rating Agency's Address], Fax No: (___) ____-_____; or as to each of the foregoing, at such other address as shall be designated by written notice to the other parties. SECTION 11.5. Notices to Bondholders; Waiver. Where this Indenture provides for notice to Bondholders of any event, such notice shall be sufficiently given (unless otherwise herein expressly provided) if in writing and mailed, first-class, postage prepaid to each Bondholder affected by such event (and in all cases, the Insurer shall receive notice), at his address as it appears on the Bond Register, not later than the latest date, and not earlier than the earliest date, prescribed for the giving of such notice. In any case where notice to Bondholders is given by mail, neither the failure to mail such notice nor any defect in any notice so mailed to any particular Bondholder shall affect the sufficiency of such notice with respect to other Bondholders, and any notice that is mailed in the manner herein provided shall conclusively be presumed to have been duly given. Where this Indenture provides for notice in any manner, such notice may be waived in writing by any Person entitled to receive such notice, either before or after the event, and such waiver shall be the equivalent of such notice. Waivers of notice by Bondholders shall be filed with the Indenture Trustee but such filing shall not be a condition precedent to the validity of any action taken in reliance upon such a waiver. In case, by reason of the suspension of regular mail service as a result of a strike, work stoppage or similar activity, it shall be impractical to mail notice of any event to Bondholders when such notice is required to be given pursuant to any provision of this Indenture, then any manner of giving such notice as shall be satisfactory to the Indenture Trustee shall be deemed to be a sufficient giving of such notice. Where this Indenture provides for notice to the Rating Agencies, failure to give such notice shall not affect any other rights or obligations created hereunder. 51 SECTION 11.6. Alternate Payment and Notice Provisions. Notwithstanding any provision of this Indenture or any of the Bonds to the contrary, the Issuer may enter into any agreement with any Holder of a Bond providing for a method of payment, or notice by the Indenture Trustee or any Bond Paying Agent to such Holder, that is different from the methods provided for in this Indenture for such payments or notices, provided that such methods are reasonable and consented to by the Indenture Trustee (which consent shall not be unreasonably withheld). The Issuer will furnish to the Indenture Trustee a copy of each such agreement and the Indenture Trustee will cause payments to be made and notices to be given in accordance with such agreements. SECTION 11.7. Conflict with Trust Indenture Act. If any provision hereof limits, qualifies or conflicts with another provision hereof that is required to be included in this indenture by any of the provisions of the TIA, such required provision shall control. The provisions of TIA Sections 310 through 317 that impose duties on any person (including the provisions automatically deemed included herein unless expressly excluded by this Indenture) are a part of and govern this Indenture, whether or not physically contained herein. SECTION 11.8. Effect of Headings and Table of Contents. The Article and Section headings herein and the Table of Contents are for convenience only and shall not affect the construction hereof. Notwithstanding anything to the contrary contained in this Indenture or any document delivered herewith, all persons may disclose to any and all persons, without limitation of any kind, the federal income tax treatment of the Bonds, any fact relevant to understanding the federal tax treatment of the Bonds, and all materials of any kind (including opinions or other tax analyses) relating to such federal tax treatment. SECTION 11.9. Successors and Assigns. All covenants and agreements in this Indenture and the Bonds by the Issuer shall bind its successors and assigns, whether so expressed or not. All agreements of the Indenture Trustee in this Indenture shall bind its successors. SECTION 11.10. Separability. In case any provision in this Indenture or in the Bonds shall be invalid, illegal or unenforceable, the validity, legality, and enforceability of the remaining provisions shall not in any way be affected or impaired thereby. SECTION 11.11. Benefits of Indenture. The Insurer and its successors and assigns shall be third-party beneficiaries to the provisions of this Indenture, and shall be entitled to rely upon and directly to enforce such provisions of this Indenture. Nothing in this Indenture or in the Bonds, express or implied, shall give to any Person, other than the parties hereto and their successors hereunder, the Insurer, and the Bondholders, and any other party secured hereunder, and any other person with an ownership interest in any part of the Trust Property, any benefit or any legal or equitable right, remedy or claim under this Indenture. The Insurer may disclaim any of its rights and powers under this Indenture (in which case the Indenture Trustee may exercise such rights or powers hereunder), but not its duties and obligations under the Policy upon delivery of a written notice to the Indenture Trustee. 52 SECTION 11.12. Legal Holidays. In any case where the date on which any payment is due shall not be a Business Day, then (notwithstanding any other provision of the Bonds or this Indenture) payment need not be made on such date, but may be made on the next succeeding Business Day with the same force and effect as if made on the date on which nominally due, and no interest shall accrue for the period from and after any such nominal date. SECTION 11.13. GOVERNING LAW. THIS INDENTURE SHALL BE CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, WITHOUT REFERENCE TO ITS CONFLICT OF LAW PROVISIONS (OTHER THAN SECTIONS 5-1401 AND 5-1402 OF THE NEW YORK GENERAL OBLIGATIONS LAW), AND THE OBLIGATIONS, RIGHTS AND REMEDIES OF THE PARTIES HEREUNDER SHALL BE DETERMINED IN ACCORDANCE WITH SUCH LAWS . SECTION 11.14. Counterparts. This Indenture may be executed in any number of counterparts, each of which so executed shall be deemed to be an original, but all such counterparts shall together constitute but one and the same instrument. SECTION 11.15. Recording of Indenture. If this Indenture is subject to recording in any appropriate public recording offices, such recording is to be effected by the Issuer and at its expense accompanied by an Opinion of Counsel (which may be counsel to the Trust or any other counsel reasonably acceptable to the Indenture Trustee and the Insurer) to the effect that such recording is necessary either for the protection of the Bondholders or any other person secured hereunder or for the enforcement of any right or remedy granted to the Indenture Trustee under this Indenture. SECTION 11.16. Trust Obligation. No recourse may be taken, directly or indirectly, with respect to the obligations of the Issuer, the Depositor, the Servicer, the Owner Trustee or the Indenture Trustee on the Bonds or under this Indenture or any Bond or other writing delivered in connection herewith or therewith, against (i) the Depositor, the Servicer, the Indenture Trustee or the Owner Trustee in its individual capacity, (ii) any owner of a beneficial interest in the Issuer or (iii) any partner, owner, beneficiary, agent, officer, director, employee or agent of the Depositor, the Servicer, the Indenture Trustee or the Owner Trustee in its individual capacity, any holder of a beneficial interest in the Issuer, the Depositor, the Servicer, the Owner Trustee or the Indenture Trustee or of any successor or assign of the Depositor, the Servicer, the Indenture Trustee or the Owner Trustee in its individual capacity, except as any such Person may have expressly agreed (it being understood that the Indenture Trustee and the Owner Trustee have no such obligations in their individual capacity) and except that any such owner or beneficiary shall be fully liable, to the extent provided by applicable law, for any unpaid consideration for stock, unpaid capital contribution or failure to pay any installment or call owing to such entity. For all purposes of this Indenture, in the performance of any duties or obligations of the Issuer hereunder, the Owner Trustee shall be subject to, and entitled to the benefits of, the terms and provisions of Articles VI, VII and VIII of the Trust Agreement. SECTION 11.17. No Petition. The Indenture Trustee, by entering into this Indenture, and each Bondholder, by accepting a Bond, hereby covenant and agree that they will not at any time institute against the Depositor, or the Issuer, or join in any institution against the Depositor, or the Issuer of, any bankruptcy, reorganization, arrangement, insolvency or 53 liquidation proceedings, or other proceedings under any United States Federal or state bankruptcy or similar law in connection with any obligations relating to the Bonds, this Indenture or any of the Basic Documents. SECTION 11.18. Inspection. The Issuer agrees that, on reasonable prior notice, it will permit any representative of the Indenture Trustee or of the Insurer, during the Issuer's normal business hours, to examine all the books of account, records, reports, and other papers of the Issuer, to make copies and extracts therefrom, to cause such books to be audited by independent certified public accountants, and to discuss the Issuer's affairs, finances and accounts with the Issuer's officers, employees, and independent certified public accountants, all at such reasonable times and as often as may be reasonably requested. The Indenture Trustee shall and shall cause its representatives to hold in confidence all such information except to the extent disclosure may be required by law (and all reasonable applications for confidential treatment are unavailing) and except to the extent that the Indenture Trustee may reasonably determine that such disclosure is consistent with its Obligations hereunder. SECTION 11.19. Limitation of Liability. It is expressly understood and agreed by the parties hereto that (a) this Indenture is executed and delivered by [Owner Trustee], not individually or personally but solely as Owner Trustee of the Issuer under the Trust Agreement, in the exercise of the powers and authority conferred and vested in it, (b) each of the representations, undertakings and agreements herein made on the part of the Issuer is made and intended not as personal representations, undertakings and agreements by [Owner Trustee] but is made and intended for the purpose for binding only the Issuer, (c) nothing herein contained shall be construed as creating any liability on [Owner Trustee] individually or personally, to perform any covenant either expressed or implied contained herein, all such liability, if any, being expressly waived by the parties to this Indenture and by any person claiming by, through or under them and (d) under no circumstances shall [Owner Trustee] be personally liable for the payment of any indebtedness or expenses of the Issuer or be liable for the breach or failure of any obligation, representation, warranty or covenant made or undertaking by the Issuer under this Indenture or any related documents. ARTICLE XII Rapid Amortization Events SECTION 12.1. Rapid Amortization Events. The following shall constitute Rapid Amortization Events with respect to the Bonds: (a) failure on the part of the Issuer, the Depositor or the Servicer, as the case may be, (i) to make any payment or deposit required by the terms of this Indenture, the Sale and Servicing Agreement or the Insurance Agreement, within two Business Days after notification that such payment or deposit is required to be made, or (ii) to observe or perform in any material respect the covenants or agreements of the Issuer, the Depositor or the Servicer, as the case may be, set forth in the Sale and Servicing Agreement or the Insurance Agreement or this Indenture, as the case may be, and which, in the case of clause (ii), continues unremedied for a period of 60 days after the date on which written notice of such failure, requiring the same to be remedied, shall have been given to the Issuer, the Depositor or the Servicer, as the case may be, by the 54 Indenture Trustee, or to the Issuer, the Depositor or the Servicer, as the case may be, and the Indenture Trustee by the Insurer or Holders of Bonds evidencing more than 50% of the Outstanding Amount; (b) any representation or warranty made by the Issuer, the Depositor or the Servicer, as the case may be, in this Indenture, the Sale and Servicing Agreement or the Insurance Agreement shall prove to have been incorrect in any material respect when made, as a result of which the interests of the Bondholders or the Insurer are materially and adversely affected and which continues to be incorrect in any material respect and continues to affect materially and adversely the interests of the Bondholders or the Insurer for a period of 60 days after the date on which written notice of such failure, requiring the same to be remedied, shall have been given to the Issuer, the Depositor or the Servicer, as the case may be, by the Indenture Trustee, or to the Issuer, the Depositor or the Servicer, as the case may be, and the Indenture Trustee by either the Insurer or the Holders of Bonds evidencing more than 50% of the Outstanding Amount; provided, however, that with respect to any such representation or warranty made with respect to the related Mortgage Loans, a Rapid Amortization Event pursuant to this subparagraph (b) shall not be deemed to have occurred hereunder if the Servicer or the Depositor has accepted retransfer of such related Mortgage Loan or related Mortgage Loans during such period (or such longer period not to exceed an additional 60 days as the Indenture Trustee may specify with the consent of the Insurer) in accordance with the provisions hereof; (c) the Servicer, the Depositor or the Issuer or any of their Subsidiaries o r Affiliates shall voluntarily go into liquidation, consent to the appointment of a conservator or receiver or liquidator or similar person in any insolvency, readjustment of debt, marshalling of assets and liabilities or similar proceedings of or relating to the Servicer, the Depositor or the Trust or of or relating to all or substantially all of such Person's property, or a decree or order of a court or agency or supervisory authority having jurisdiction in the premises for the appointment of a conservator, receiver, liquidator or similar person in any insolvency, readjustment of debt, marshalling of assets and liabilities or similar proceedings, or for the winding-up or liquidation of its affairs, shall have been entered against the Servicer, the Depositor of the Trust and such decree or order shall have remained in force undischarged or unstayed for a period of 30 days; or the Servicer, the Depositor or the Trust shall admit in writing its inability to pay its debts generally as they become due, file a petition to take advantage of any applicable insolvency or reorganization statute, make an assignment for the benefit of its creditors or voluntarily suspend payment of its obligations; (d) the Issuer becomes subject to regulation by the Securities and Exchange Commission as an investment company within the meaning of the Investment Company Act of 1940, as amended; (e) any draw is made under the Policy with respect to any Class; (f) an Event of Servicing Termination has occurred; (g) a default in the payment of any Deferred Interest on the Class A Bonds on the Final Maturity Date; and 55 (h) default in the payment of any interest, principal or any installment of principal on the Bonds when the same becomes due and payable, and such default continues for a period of five Business Days. In the case of any event described in clauses (a) through (h) above, a Rapid Amortization Event will be deemed to have occurred only if, after the applicable grace period, if any, described in the Indenture or Sale and Servicing Agreement, any of the Indenture Trustee or Holders holding Class A Bonds evidencing more than 50% of the outstanding principal balance of the Class A Bonds, in each case with the prior written consent of the Insurer (so long as no Insurer Default has occurred and is continuing or unless a Rapid Amortization Event described in clause (g) above has occurred) or the Insurer (so long as no Insurer Default has occurred and is continuing), by written notice to the Trust, the Insurer, the Depositor, and the Servicer (and to the Indenture Trustee, if given by the Bondholders or the Insurer) declare that a Rapid Amortization Event has occurred as of the date of such notice. If so directed by the Insurer, so long as no Insurer Default has occurred and is continuing, the Indenture Trustee will and the Insurer (so long as no Insurer Default has occurred and is continuing) or Holders holding Class A Bonds evidencing more than 50% of the outstanding principal balance of the Class A Bonds (if a Rapid Amortization Event described in clause (g) above has occurred) shall have the right to direct the Indenture Trustee to sell, dispose of or otherwise liquidate the Trust Property with respect to the Mortgage Loans in a commercially reasonable manner and on commercially reasonable terms. So long as no Event of Servicing Termination has occurred and is continuing, any such sale, disposal or liquidation will be "servicing retained" by the Servicer. With respect to the Bonds, the net proceeds of such sale will be paid (i) first, to the Holders of the Bonds insofar as may be necessary to reduce the principal balance of such Class, together with all accrued and unpaid interest due thereon, to zero, (ii) second, to reimburse the Insurer to the extent of unreimbursed draws under the Policy and other amounts owing to the Insurer, and (iii) third, to the Residual Certificateholder. In addition to the consequences of a Rapid Amortization Event discussed above, if the Depositor voluntarily files a bankruptcy petition or goes into liquidation or any person is appointed a receiver or bankruptcy trustee of the Depositor, on the day of any such filing or appointment no further Additional Balances will be transferred to the Trust and the Depositor will promptly give notice to the Indenture Trustee and the Insurer of any such filing or appointment. Within 15 days, the Indenture Trustee notify the Holders of the Bonds of the occurrence of such event. 56 IN WITNESS WHEREOF, the Issuer and the Indenture Trustee have caused this Indenture to be duly executed by their respective officers, hereunto duly authorized, all as of the day and year first above written. SEQUOIA MORTGAGE TRUST 200_-_ By: [OWNER TRUSTEE], not in its individual capacity but solely as Owner Trustee By: _______________________________________ Name: Title: [INDENTURE TRUSTEE], not in its individual capacity but solely as Indenture Trustee By: _______________________________________ Name: Title: [ANNEX A - Defined Terms] EXHIBIT A [Form of Bond] SEQUOIA MORTGAGE TRUST 200_-_ CLASS A BOND REGISTERED $____________ No. A-1 CUSIP NO. ____________ Unless this Class A Bond is presented by an authorized representative of The Depository Trust Company, a New York corporation ("DTC"), to the Issuer or its agent for registration of transfer, exchange or payment, and any Class A Bond issued is registered in the name of Cede & Co. or in such other name as is requested by an authorized representative of DTC (and any payment is made to Cede & Co. or to such other entity as is requested by an authorized representative of DTC), ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL inasmuch as the registered owner hereof, Cede & Co., has an interest herein. THE PRINCIPAL OF THIS CLASS A BOND IS PAYABLE IN INSTALLMENTS AS SET FORTH HEREIN. ACCORDINGLY, THE OUTSTANDING PRINCIPAL AMOUNT OF THIS CLASS A BOND AT ANY TIME MAY BE LESS THAN THE AMOUNT SHOWN ON THE FACE HEREOF. SEQUOIA MORTGAGE TRUST 200_-_ COLLATERALIZED MORTGAGE BONDS Sequoia Mortgage Trust 200_-_, a statutory trust organized and existing under the laws of the State of Delaware (herein referred to as the "Issuer"), for value received, hereby promises to pay to CEDE & CO., or registered assigns, the principal sum of ________________________ MILLION DOLLARS ($____________), such amount payable on each Payment Date in an amount equal to the result obtained by multiplying (i) a fraction the numerator of which is $_____________ and the denominator of which is $_____________ by (ii) the aggregate amount, if any, payable from the Collection Account in respect of principal on the Class A Bonds pursuant to Section 8.7 of the Indenture; provided, however, that the entire unpaid principal amount of this Class A Bond shall be due and payable on the Payment Date in _______ 20__ (the "Final Scheduled Payment Date"). The Issuer will pay interest on this Bond at the rate per annum provided in the Indenture on each Payment Date on the principal amount of this Class A Bond outstanding on the preceding Payment Date (after giving effect to all payments of principal made on the preceding Payment Date). Interest on this Class A Bond will accrue for each Payment Date from the most recent Payment Date on which interest has been paid to but excluding such Payment Date or, if no interest has yet been paid, from ______, 200_. Interest will be computed on the basis of the actual number of days elapsed in a 360-day year. Such principal of and interest on this Class A Bond shall be paid in the manner specified on the reverse hereof. The principal of and interest on this Class A Bond are payable in such coin or currency of the United States of America as at the time of payment is legal tender for payment of public and private debts. All payments made by the Issuer with respect to this Class A Bond shall be applied first to interest due and payable on this Class A Bond as provided above and then to the unpaid principal of this Class A Bond. The Bonds are entitled to the benefits of a financial guaranty insurance policy (the "Policy") issued by [Insurer] (the "Insurer"), pursuant to which the Insurer has unconditionally guaranteed payments of the Insured Amounts with respect to the Class A Bonds on each Payment Date and Preference Amounts, all as more fully set forth in the Policy. For purposes of federal income, state and local income and franchise and any other income taxes, the Issuer will treat the Bonds as indebtedness of the Depositor and hereby instructs the Indenture Trustee to treat the Bonds as indebtedness of the Depositor for federal and state tax reporting purposes. Each Bondholder by acceptance of a Bond (and each owner of a beneficial interest in a Bond by acceptance of such beneficial interest) agrees to treat the Bonds for federal income, state and local income and franchise and any other income taxes as indebtedness of the Depositor. Each Bondholder or Bond Owner, by acceptance of this Class A Bond or, in the case of a Bond Owner, a beneficial interest in a Bond, covenants and agrees that no recourse may be taken, directly or indirectly, with respect to the obligations of the Issuer, the Owner Trustee or the Indenture Trustee on the Class A Bonds or under the Indenture or any certificate or other writing delivered in connection therewith, against (i) the Depositor, the Servicer, the Indenture A-1-2 Trustee, or the Owner Trustee in its individual capacity, (ii) any owner of a beneficial interest in the Issuer or (iii) any owner, beneficiary, agent, officer, director or employee of the Depositor, the Servicer, the Indenture Trustee, or the Owner Trustee in its individual capacity, any holder of a beneficial interest in the Issuer, the Depositor, the Servicer, the Owner Trustee or the Indenture Trustee or of any successor or assign of the Depositor, the Servicer, the Indenture Trustee, or the Owner Trustee in its individual capacity, except as any such Person may have expressly agreed (it being understood that the Indenture Trustee and the Owner Trustee have no such obligations in their individual capacity) and except that any such owner or beneficiary shall be fully liable, to the extent provided by applicable law, for any unpaid consideration for stock, unpaid capital contribution or failure to pay any installment or call owing to such entity. Reference is made to the further provisions of this Class A Bond set forth on the reverse hereof, which shall have the same effect as though fully set forth on the face of this Class A Bond. Unless the certificate of authentication hereon has been executed by the Indenture Trustee whose name appears below by manual signature, this Class A Bond shall not be entitled to any benefit under the Indenture referred to on the reverse hereof, or be valid or obligatory for any purpose. This Class A Bond is one of a duly authorized issue of Bonds of the Issuer, designated as its Collateralized Mortgage Bonds (herein called the "Class A Bonds"), all issued under an Indenture dated as of _______, 200_ (such agreement, as supplemented or amended, is herein called the "Indenture"), between the Issuer and [Indenture Trustee], as Indenture Trustee (the "Indenture Trustee"), which term includes any successor Indenture Trustee under the Indenture. All terms used in this Class A Bond that are defined in the Indenture, as supplemented or amended, shall have the meanings assigned to them in or pursuant to the Indenture, as so supplemented or amended. If any such terms are not defined in the Indenture, as supplemented or amended, then such terms shall have the meanings assigned to them in or pursuant to the Trust Agreement dated as of _______, 200_ (such trust agreement, as supplemented or amended is herein called the "Trust Agreement"), between Sequoia Mortgage Funding Corporation, as Depositor, and [Owner Trustee], as Owner Trustee (the "Owner Trustee," which term includes any successor Owner Trustee under the Trust Agreement), as so supplemented or amended. The Class A Bonds are and will be secured by the collateral pledged as security therefor as provided in the Indenture. Principal of the Class A Bonds will be payable on each Payment Date in an amount described in the Indenture. "Payment Date" means the fifteenth day of each month, or, if any such date is not a Business Day, the next succeeding Business Day, commencing _____, 200_. The term "Payment Date," shall be deemed to include the Final Scheduled Payment Date. As described above, the entire unpaid principal amount of this Class A Bond shall be due and payable on the earlier of the Final Scheduled Payment Date and the Redemption A-1-3 Date, if any, pursuant to Section 10.1 of the Indenture. Notwithstanding the foregoing, on the date on which a Rapid Amortization Period as described in Section 5.1(a) shall have occurred and be continuing and, in the limited instances specified in the Indenture, the Holders representing more than 50% of the Outstanding Amount of the Class A Bonds, with the prior written consent of the Insurer (so long as there is no continuing Insurer Default) shall have the right among others to direct the Indenture Trustee to sell or liquidate the Mortgage Loans as provided in Section 12.1 of the Indenture and pay such amounts to the Holders of the Class A Bonds. All principal payments on the Class A Bonds shall be made pro rata to the Holders of the Class A Bonds entitled thereto. Payments of interest on this Class A Bond due and payable on each Payment Date, together with the installment of principal, if any, to the extent not in full payment of this Class A Bond, shall be made by check mailed to the Person whose name appears as the Holder of this Class A Bond (or one or more Predecessor Bonds) on the Bond Register as of the close of business on each Record Date, except that with respect to Class A Bond registered on the Record Date in the name of the nominee of the Clearing Agency (initially, such nominee to be Cede & Co.), payments will be made by wire transfer in immediately available funds to the account designated by such nominee. Such checks shall be mailed to the Person entitled thereto at the address of such Person as it appears on the Bond Register as of the applicable Record Date without requiring that this Bond be submitted for notation of payment. Any reduction in the principal amount of this Bond (or any one or more Predecessor Bonds) effected by any payments made on any Payment Date shall be binding upon all future Holders of this Class A Bond and of any Class A Bond issued upon the registration of transfer hereof or in exchange hereof or in lieu hereof, whether or not noted hereon. If funds are expected to be available, as provided in the Indenture, for payment in full of the then remaining unpaid principal amount of this Class A Bond on a Payment Date, then the Indenture Trustee, in the name of and on behalf of the Issuer, will notify the Person who was the Holder hereof as of the Record Date preceding such Payment Date by notice mailed prior to such Payment Date and the amount then due and payable shall be payable only upon presentation and surrender of this Class A Bond at the office designated by the Indenture Trustee for such purposes located in The City of ________. The Issuer shall pay interest on overdue installments of interest at the Class A-1 Interest Rate to the extent lawful. As provided in the Indenture, the Class A Bonds may be redeemed pursuant to Section 10.1 of the Indenture, in whole, but not in part, at the option of the Depositor (with the consent of the Insurer under certain circumstances), on any Payment Date after the Payment Date on which the Bond Principal Balance is less than or equal to 10% of the Pool Balance, after taking into account all distributions made on such Payment Date. As provided in the Indenture and subject to certain limitations set forth therein, the transfer of this Class A Bond may be registered on the Bond Register upon surrender of this Class A Bond for registration of transfer at the office or agency designated by the Issuer pursuant to the Indenture, (i) duly endorsed by, or accompanied by a written instrument of transfer in form satisfactory to the Indenture Trustee duly executed by, the Holder hereof or his attorney duly authorized in writing, with such signature guaranteed by an "eligible guarantor institution" meeting the requirements of the Bond Registrar which requirements include membership or A-1-4 participation in Bonds Transfer Agents Medallion Program ("Stamp") or such other "signature guarantee program" as may be determined by the Registrar in addition to, or in substitution for, Stamp, all in accordance with the Exchange Act, and (ii) accompanied by such other documents as the Indenture Trustee may require, and thereupon one or more new Bonds of authorized denominations and in the same aggregate principal amount will be issued to the designated transferee or transferees. No service charge will be charged for any registration of transfer or exchange of this Class A Bond, but the transferor may be required to pay a sum sufficient to cover any tax or other governmental charge that may be imposed in connection with any such registration of transfer or exchange. Each Bondholder or Bond Owner, by acceptance of a Bond or, in the case of a Bond Owner, a beneficial interest in a Bond covenants and agrees that no recourse may be taken, directly or indirectly, with respect to the obligations of the Issuer, the Owner Trustee or the Indenture Trustee on the Bonds or under the Indenture or any certificate or other writing delivered in connection therewith, against (i) the Depositor, the Servicer, the Indenture Trustee or the Owner Trustee in its individual capacity, (ii) any owner of a beneficial interest in the Issuer or (iii) any owner, beneficiary, agent, officer, director or employee of the Depositor, the Servicer, the Indenture Trustee or the Owner Trustee in its individual capacity, any holder of a beneficial interest in the Issuer, the Depositor, the Servicer, the Owner Trustee or the Indenture Trustee or of any successor or assign of the Depositor, the Servicer, the Indenture Trustee or the Owner Trustee in its individual capacity, except as any such Person may have expressly agreed (it being understood that the Indenture Trustee and the Owner Trustee have no such obligations in their individual capacity) and except that any such owner or beneficiary shall be fully liable, to the extent provided by applicable law, for any unpaid consideration for stock, unpaid capital contribution or failure to pay any installment or call owing to such entity. Each Bondholder or Bond Owner, by acceptance of a Bond or, in the case of a Bond Owner, a beneficial interest in a Bond covenants and agrees that by accepting the benefits of the Indenture and the Trust Agreement that such Bondholder will not at any time institute against the Depositor, or the Issuer or join in any institution against the Depositor, or the Issuer of, any bankruptcy, reorganization, arrangement, insolvency or liquidation proceedings, or other proceedings, under any United States Federal or state bankruptcy or similar law in connection with any obligations relating to the Bonds, the Trust Agreement, the Indenture or the Basic Documents. Prior to the due presentment for registration of transfer of this Bond, the Issuer, the Indenture Trustee and the Insurer and any agent of the Issuer, the Indenture Trustee or the Insurer may treat the Person in whose name this Bond (as of the day of determination or as of such other date as may be specified in the Indenture) is registered as the owner hereof for all purposes, whether or not this Bond be overdue, and neither the Issuer, the Indenture Trustee nor any such agent shall be affected by notice to the contrary. The Indenture permits, with certain exceptions as therein provided, the amendment thereof and the modification of the rights and obligations of the Issuer and the rights of the Holders of the Bond under the Indenture at any time by the Issuer with the consent of the Insurer and of the Holders of Bonds representing a majority of the Outstanding Amount of all Bonds at the time Outstanding. Any such consent or waiver by the Holder of this Bond (or any A-1-5 one of more Predecessor Bonds) shall be conclusive and binding upon such Holder and upon all future Holders of this Bond and of any Bond issued upon the registration of transfer hereof or in exchange hereof or in lieu hereof whether or not notation of such consent or waiver is made upon this Bond. The Indenture also permits the Indenture Trustee to amend or waive certain terms and conditions set forth in the Indenture without the consent of Holders of the Bonds issued thereunder but with the consent of the Insurer. The term "Issuer" as used in this Bond includes any successor to the Issuer under the Indenture or the Trust Agreement. The Class A Bonds are issuable only in registered form in denominations as provided in the Indenture, subject to certain limitations therein set forth. This Bond, the Trust Agreement and the Indenture shall be construed in accordance with the laws of the State of New York, without reference to its conflict of law provisions, and the obligations, rights and remedies of the parties hereunder and thereunder shall be determined in accordance with such laws. No reference herein to the Trust Agreement or the Indenture and no provision of this Bond, the Trust Agreement or of the Indenture shall alter or impair the obligation of the Issuer, which is absolute and unconditional, to pay the principal of and interest on this Bond at the times, place, and rate, and in the coin or currency herein prescribed. Anything herein to the contrary notwithstanding, except as expressly provided in the Trust Agreement, the Indenture or the Basic Documents, neither [Owner Trustee] in its individual capacity, any owner of a beneficial interest in the Issuer, nor any of their respective beneficiaries, agents, officers, directors, employees or successors or assigns shall be personally liable for, nor shall recourse be had to any of them for, the payment of principal of or interest on, or performance of, or omission to perform, any of the covenants, obligations or indemnifications contained in this Bond or the Indenture, it being expressly understood that said covenants, obligations and indemnifications have been made by the Issuer for the sole purposes of binding the interests of the Issuer in the assets of the Issuer. The Holder of this Bond by the acceptance hereof agrees that except as expressly provided in the Indenture or the Basic Documents in the case of a Rapid Amortization Event with respect to the Class A Bonds under the Indenture, the Holder shall have no claim against any of the foregoing for any deficiency, loss or claim therefrom; provided, however, that nothing contained herein shall be taken to prevent recourse to, and enforcement against, the assets of the Issuer for any and all liabilities, obligations and undertakings contained in the Indenture or in this Bond. A-1-6 IN WITNESS WHEREOF, the Issuer has caused this instrument to be signed, manually or in facsimile, by its Authorized Officer. Date: _______, 200_ SEQUOIA MORTGAGE TRUST 200_-_ By: [Owner Trustee], not in its individual capacity but solely as Owner Trustee By: ____________________________________ Name: Title: A-1-7 INDENTURE TRUSTEE'S CERTIFICATE OF AUTHENTICATION This is one of the Bonds designated above and referred to in the within-mentioned Indenture. Date: ________, 200_ [Indenture Trustee], not in its individual capacity but solely as Indenture Trustee By: ____________________________________ Authorized Signatory A-1-8 EXHIBIT B FORM OF OPINION OF COUNSEL B-1 EXHIBIT C FORM OF CERTIFICATION TO BE PROVIDED TO SEQUOIA MORTGAGE TRUST 200_-_ BY THE INDENTURE TRUSTEE Sequoia Mortgage Trust 200_-_ (the "Trust") Collateralized Mortgage Bonds I, ______________________, a _____________________ of [Indenture Trustee], as Indenture Trustee for the Trust, hereby certify to Sequoia Mortgage Funding Corporation (the "Depositor"), and its offices, directions and affiliates, and with the knowledge and intent that they will rely upon this certification that: 1. The Depositor has caused it to be provided to the Indenture Trustee a written notice listing all of the monthly distribution reports that were prepared by the Indenture Trustee and that will be included in the Depositor's Form 10-K for the Trust's fiscal year ending on ___________. I have reviewed each of such distribution reports. 2. Based on my knowledge, the information in these distribution reports prepared by the Indenture Trustee, taken as a whole, does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading as of the last day of the period covered by that annual report. 3. Based on my knowledge, the distribution information required to be provided by the Indenture Trustee under the Indenture, dated as of _______, 200_, the Trust and the Indenture Trustee is included in these reports. [SIGNATURE PAGE IMMEDIATELY FOLLOWS] C-1 [INDENTURE TRUSTEE] as Indenture Trustee Dated:________________ By: ___________________________________ Name: Title: C-2 ANNEX A - DEFINED TERMS Accelerated Principal Payment: With respect to any Payment Date a payment received as a payment of principal by the Bondholders, for the purpose of increasing the related Overcollateralization Amount, and to be paid from the Excess Cashflow, and equal to for any Payment Date the lesser of (x) the amount of the Excess Cashflow and (y) the Overcollateralization Deficiency Amount. Act: As defined in Section 11.3(a) of the Indenture. Additional Balance: As to the HELOC Mortgage Loans and any date of determination, the aggregate amount of all Draws conveyed to the Issuer with respect to such Pool pursuant to Section 2.01 of the Sale and Servicing Agreement. Additional Balance Contributed Amount: As to any Payment Date, the difference, if any, between (a) the aggregate excess, if any, for all prior Payment Dates of (i) the aggregate principal amount of all Additional Balances created during the Collection Period relating to each such Payment Date over (ii) Principal Collections relating to such Payment Date, and (b) the aggregate Additional Balance Contributed Amounts paid to the Depositor on all prior Payment Dates pursuant to Section 8.7(d)(iv) of the Indenture. Affiliate: With respect to any specified Person, any other Person controlling, controlled by or under common control with such Person. For the purposes of this definition, "control" means the power to direct the management and policies of a Person, directly or indirectly, whether through ownership of voting securities, by contract or otherwise; and the terms "controlling" and "controlled" have meanings correlative to the foregoing. Appraised Value: As to any Mortgaged Property, the value established by either a full appraisal or a drive by inspection of such Mortgaged Property made to establish compliance with the underwriting criteria then in effect in connection with the application for the Mortgage Loan secured by such Mortgaged Property. Assignment of Mortgage: With respect to any Mortgage, an assignment, notice of transfer or equivalent instrument, in recordable form, sufficient under the laws of the jurisdiction in which the related Mortgaged Property is located to reflect the sale of the Mortgage to the Indenture Trustee, which assignment, notice of transfer or equivalent instrument may be in the form of one or more blanket assignments covering the Mortgage Loans secured by Mortgaged Properties located in the same jurisdiction, to the extent permitted by applicable law. Authorized Newspaper: A newspaper of general circulation in the Borough of Manhattan, The City of New York, printed in the English language and customarily published on each Business Day, whether or not published on Saturdays, Sundays and holidays. Authorized Officer: With respect to the Issuer and the Servicer, any officer or agent acting pursuant to a power of attorney of the Owner Trustee or the Servicer, respectively, who is authorized to act for the Owner Trustee or the Servicer, respectively, in matters relating to the Issuer and the Servicer, respectively, and who is identified on the list of Authorized Officers delivered by each of the Owner Trustee and the Servicer, respectively, to the Indenture Trustee on the Closing Date (as such lists may be modified or supplemented from time to time thereafter). Available Funds: With respect to any Payment Date, the amount then on deposit in the Collection Account, after taking into account the deposits thereto made pursuant to Section 8.7(a) of the Indenture, if any (exclusive of the amount of any related Insured Amount or Preference Amount then on deposit in the Policy Payment Account). Basic Documents: The Indenture, the Bonds, the Residual Certificate, the Certificate of Trust, the Trust Agreement, the Sale and Servicing Agreement, the Purchase Agreement, the Indemnification Agreement, the Management Agreement, the Insurance Agreement, and the Policy. BBA: The British Bankers' Association. BIF: The Bank Insurance Fund, as from time to time constituted, created under the Financial Institutions Reform, Recovery and Enhancement Act of 1989, or if at any time after the execution of this instrument the Bank Insurance Fund is not existing and performing duties now assigned to it, the body performing such duties on such date. Billing Cycle: With respect to any Mortgage Loan and Collection Period, the billing period specified in the related Loan Agreement and with respect to which amounts billed are received during such Collection Period. Bond: A Class A Bond, but not any Residual Certificate. Bondholder or Holder: Any Holder of a Class A Bond whose name is registered on the Bond Register. Bondholders: Any Holder of a Class A Bond. Bond Owner: With respect to a Book-Entry Bond, the Person who is the owner of such Book-Entry Bond, with respect to a Definitive Bond, the registered owner of such Definitive Bond. Bond Paying Agent: The Indenture Trustee or any other Person that meets the eligibility standards for the Indenture Trustee specified in Section 6.11 of the Indenture and is authorized by the Issuer to make payments to and distributions from the Collection Account, including payment of principal of or interest on the Bonds on behalf of the Issuer. Bond Principal Balance: With respect to the Class A Bonds and as of any time of determination, the Original Bond Principal Balance, less any amounts actually distributed as principal to the Class A Bonds on all prior Payment Dates. Bond Register: As defined in Section 2.3 of the Indenture. Bond Registrar: As defined in Section 2.3 of the Indenture. 2 Book-Entry Bonds: A beneficial interest in the Bonds, ownership and transfers of which shall be made through book entries by a Clearing Agency as described in Section 2.9 of the Indenture. Business Day: Any day other than (i) a Saturday or Sunday, (ii) a day on which banking institutions in the state of New York, the state of California or the state in which the Corporate Trust Office is located are required or authorized by law or executive order to be closed or (iii) a day on which the Insurer is closed. Certificate of Trust: The certificate of trust of the Issuer substantially in the form of Exhibit C to the Trust Agreement. Class A Bond: Any Bond designated as a "Class A Collateralized Mortgage Bond" on the face thereof in substantially the form of Exhibit A-1 to the Indenture. Class A Bond Rate: (A) For the first Interest Accrual Period, ______% and (B) for any Interest Accrual Period thereafter, the lesser of the Class A Formula Bond Rate and the Maximum Rate. Clearing Agency: An organization registered as a "clearing agency" pursuant to Section 17A of the Exchange Act. Clearing Agency Participant: A broker, dealer, bank, other financial institution or other Person for whom from time to time a Clearing Agency effects book-entry transfers and pledges of securities deposited with the Clearing Agency. Closed-End Mortgage Loans: Mortgage Loans consisting solely of fixed-rate closed-end second lien residential mortgage loans under the Mortgage Notes. Closed-End Principal Balance: As to any Closed-End Mortgage Loan, other than a Liquidated Mortgage Loan, and as of any date, the Cut-Off Date Principal Balance minus all collections credited as principal against the Closed-End Principal Balance of such Closed-End Mortgage Loan in accordance with the related Mortgage Note prior to such day. Closing Date: ________, 200_. Code: The Internal Revenue Code of 1986, as amended from time to time. Collateral: As defined in the Granting Clause of the Indenture. Collection Account: That account designated as the "Collection Account" and established pursuant to Section 8.3 of the Indenture. Collection Period: With respect to any Payment Date and any Mortgage Loans, the calendar month preceding such Payment Date. Combined Loan-to-Value Ratio: (i) With respect to any HELOC Mortgage Loan as of any date, the percentage equivalent of a fraction, the numerator of which is the sum of (A) 3 the Credit Limit and (B) the outstanding principal balance as of the date of application for the related credit line (or as of any subsequent date, if any, as of which such outstanding principal balance may be determined in connection with an increase in the Credit Limit for such HELOC Mortgage Loan) of any mortgage loan or mortgage loans that are senior in priority to the HELOC Mortgage Loan and which are secured by the same Mortgaged Property and the denominator of which is (C) the Appraised Value of the related Mortgaged Property as set forth in the Mortgage File as of the date of the appraisal or on such subsequent date, if any, or (D) in the case of a Mortgaged Property purchased within one year of the date of execution of the related Credit Line Agreement, the lesser of (x) the Appraised Value of the related Mortgaged Property as set forth in the loan files as of the date of the appraisal and (y) the purchase price of such Mortgaged Property and (ii) with respect to any Closed-End Mortgage Loan as of any date, the percentage equivalent of a fraction, the numerator of which is the sum of (A) the original principal balance of the Closed-End Mortgage Loan and (B) any outstanding principal balances of mortgage loans senior to such Closed-End Mortgage Loan (calculated at the date of application for the Closed-End Mortgage Loan) and the denominator of which is (C) the Appraised Value of the related Mortgaged Property as set forth in the Mortgage File as of the date of the appraisal or (D) in the case of a Mortgaged Property purchased within one year of the origination of the related Closed-End Mortgage Loan, the lesser of (x) the Appraised Value of the related Mortgaged Property as set forth in the Mortgage Files as of the date of the appraisal and (y) the purchase price of such Mortgaged Property. Company: [________________] or any successor thereto. Controlling Party: The Insurer, so long as no Insurer Default shall have occurred and be continuing, and the Indenture Trustee, for so long as an Insurer Default shall have occurred and is continuing. Corporate Trust Office: With respect to (i) the Indenture Trustee, the principal corporate trust office of the Indenture Trustee at which at any particular time its corporate trust business shall be administered, which office at date of the execution of the Indenture is located at c/o [Indenture Trustee's Address] and (ii) the Owner Trustee, the principal corporate trust office of the Owner Trustee located at [Owner Trustee's Address], or at such other address as the Owner Trustee may designate by notice to the Bondholders and the Depositor, or the principal corporate trust office of any successor Owner Trustee (the address of which the successor owner trustee will notify the Bondholders and the Depositor). Credit Limit: As to any HELOC Mortgage Loan, the maximum principal balance permitted under the terms of the related Credit Line Agreement. Credit Limit Utilization Rate: As to any HELOC Mortgage Loan, the percentage equivalent of a fraction the numerator of which is the related HELOC Principal Balance and the denominator of which is the related Credit Limit. Credit Line Agreement: With respect to any HELOC Mortgage Loan, the related home equity line of credit agreement and promissory note executed by the related Mortgagor and any amendment or modification thereof. 4 Credit Scores: With respect to the Mortgage Loans, statistical credit scores obtained by mortgage lenders in connection with the loan application to help assess a borrower's creditworthiness. Custodian: [Custodian], or any replacement Custodian named by the Indenture Trustee and approved by the Insurer on prior written notice to the Servicer, the Depositor, the Issuer and the Insurer. Cut-Off Date: __________, 200_. Cut-Off Date Principal Balance: With respect to any Mortgage Loan, the unpaid principal balance thereof as of the Cut-Off Date. Default: Any occurrence that is, or with notice or the lapse of time or both would become, a Rapid Amortization Event. Defective Mortgage Loan: A Mortgage Loan subject to retransfer pursuant to Section 2.03 or 2.05 of the Sale and Servicing Agreement. Deferred Interest: With respect to the Class A Bonds and any Payment Date, the excess, if any, of interest due at the Class A Formula Bond Rate over interest due at the Class A Bond Rate. Deficiency Amount: With respect to the Class A Bonds and (1) any Payment Date, the excess, if any, of (a) the sum of (i) the Interest Payment Amount (excluding any Relief Act Shortfalls, any interest shortfalls resulting from prepayments on the Mortgage Loans, and any Deferred Interest) and (ii) the Overcollateralization Deficit (which prior to the twenty-fourth Payment Date shall be deemed to be zero for purposes of the Policy) over (b) the Total Available Funds and (2) on the Final Scheduled Payment Date, the outstanding principal balance of the Class A Bonds then outstanding, after taking into account all payments to be made to such Class A Bonds on that date. Definitive Bonds: As defined in Section 2.11 of the Indenture. Delinquent: A Mortgage Loan is "delinquent" if any payment due thereon is not made by the close of business on the day such payment is scheduled to be due. A Mortgage Loan is "30 days delinquent" if such payment has not been received by the close of business on the corresponding day of the month immediately succeeding the month in which such payment was due, or, if there is no such corresponding day (e.g., as when a 30-day month follows a 31-day month in which a payment was due on the 31st day of such month) then on the last day of such immediately succeeding month. Similarly for "60 days delinquent," "90 days delinquent" and so on. 5 Depositor: Sequoia Mortgage Funding Corporation, a Delaware corporation, or its successors-in-interest. Depository: The initial Depository shall be The Depository Trust Company, the nominee of which is Cede & Co., as the registered Holder of Class A Bonds evidencing $______________ in initial aggregate principal amount of the Class A Bonds. The Depository shall at all times be a "clearing corporation" as defined in Section 8-102(5) of the UCC of the State of New York. Depository Participant: A broker, dealer, bank or other financial institution or other Person for whom from time to time the Depository effects book-entry transfers and pledges of securities deposited with the Depository. Designated Telerate Page: The Dow Jones Telerate Service page 3750, or such other page as may replace page 3750 on that service or such other service as may be nominated by the BBA as the information vendor for the purpose of displaying the BBA's "Interest Settlement Rates" for deposits in U.S. dollars. Determination Date: With respect to any Payment Date, the fourth Business Day prior to such Payment Date or such earlier day as shall be designated by the Insurer and the Indenture Trustee. Draw: With respect to any HELOC Mortgage Loan, an additional borrowing by the Mortgagor subsequent to the Cut-Off Date in accordance with the related Credit Line Agreement. Draw Period: With respect to any HELOC Mortgage Loan, the period of time specified in the related Credit Line Agreement whereby a Mortgagor may make a Draw under the related Credit Line Agreement, not to exceed five or fifteen years (as applicable) unless extended pursuant to such Credit Line Agreement and the Sale and Servicing Agreement, such extension to be limited by the provisions set forth in Section 2.04 of the Sale and Servicing Agreement. 6 Eligible Account: A segregated account that is (i) maintained with a depository institution whose short-term debt obligations at the time of any deposit therein have the highest short-term debt rating by the Rating Agencies, (ii) one or more accounts maintained with a depository institution whose long-term unsecured debt rating by the Rating Agencies is at least AA- and whose accounts are fully insured by either the Savings Association Insurance Fund or the Bank Insurance Fund of the Federal Deposit Insurance Corporation established by such fund, (iii) a segregated trust account maintained with the Indenture Trustee in its fiduciary capacity, or (iv) otherwise acceptable to each Rating Agency and the Insurer as evidenced by a letter from each Rating Agency and the Insurer to the Indenture Trustee, without reduction or withdrawal of their then current ratings of the Class A Bonds without regard to the Policy. Eligible Investments: One or more of the following (excluding any callable investments purchased at a premium): (i) direct obligations of, or obligations fully guaranteed as to timely payment of principal and interest by, the United States or any agency or instrumentality thereof, provided that such obligations are backed by the full faith and credit of the United States; (ii) repurchase agreements on obligations specified in clause (i) maturing not more than 30 days from the date of acquisition thereof, provided that (a) the short-term unsecured debt obligations of the party agreeing to repurchase such obligations are at the time rated by each Rating Agency in its highest short-term rating category (which is A-1+ for Standard and Poor's and P-1 for Moody's), (b) the obligations must be valued daily at current market price plus accrued interest, (c) the obligations, pursuant to such evaluation, must be equal, at all times, to ____% of the cash transferred to the Indenture Trustee in exchange for the obligations and (d) the obligations must be delivered to the Indenture Trustee or, if the Indenture Trustee is supplying the obligations, to an agent for the Indenture Trustee, in such a manner as to accomplish perfection of a security interest in the obligations by possession of certificated securities; (iii) certificates of deposit, time deposits and bankers' acceptances (which, if Moody's is a Rating Agency, shall each have an original maturity of not more than 90 days and, in the case of bankers' acceptances, shall in no event have an original maturity of more than 365 days) of any U.S. depository institution or trust company incorporated under the laws of the United States or any state thereof and subject to supervision and examination by federal and/or state banking authorities, provided that the unsecured short-term debt obligations of such depository institution or trust company at the date of acquisition thereof have been rated by each of Standard & Poor's and Moody's in its highest unsecured short-term debt rating category; (iv) commercial paper (having original maturities of not more than 270 days) of any corporation incorporated under the laws of the United States or any state thereof which on the date of acquisition has been rated by Standard & Poor's and Moody's in their highest short-term debt rating categories; 7 (v) short-term investment funds ("STIFS") sponsored by any trust company or national banking association incorporated under the laws of the United States or any state thereof which on the date of acquisition has been rated by Standard & Poor's and Moody's in their respective highest applicable rating category; (vi) interests in any money market fund which at the date of acquisition of the interests in such fund and throughout the time such interests are held in such fund has a rating of Aaa by Moody's and either AAAm AAAm-G by Standard & Poor's or such lower rating as will not result in the qualification, downgrading or withdrawal of the then-current rating assigned to the Bonds by each Rating Agency without regard to the Policy; and (vii) other obligations or securities that are acceptable to each Rating Agency and the Insurer as an Eligible Investment hereunder and will not result in a reduction in the then current rating of the Bonds without regard to the Policy, as evidenced by a letter to such effect from such Rating Agency and the Insurer and with respect to which the Servicer has received confirmation that, for tax purposes, the investment complies with the last clause of this definition; provided that no instrument described hereunder shall evidence either the right to receive (a) only interest with respect to the obligations underlying such instrument or (b) both principal and interest payments derived from obligations underlying such instrument and the interest and principal payments with respect to such instrument provided a yield to maturity at par greater than ____% of the yield to maturity at par of the underlying obligations; and provided, further, that (x) no instrument described hereunder may be purchased at a price greater than par if such instrument may be prepaid or called at a price less than its purchase price prior to its stated maturity and (y) all Eligible Investments shall mature no later than the next Payment Date. Eligible Substitute Mortgage Loan: A Mortgage Loan substituted by the Depositor, with the consent of the Insurer, for a Defective Mortgage Loan which must, on the date of such substitution, (i) have an outstanding Principal Balance (or, in the case of a substitution of more than one Mortgage Loan for a Defective Mortgage Loan, an aggregate Principal Balance), equal to or less than the Principal Balance of the Defective Mortgage Loan as of the applicable Cut-Off Date; (ii) except for HELOC Mortgage Loans still in their teaser period, have a Loan Rate not less than the Loan Rate of the Defective Mortgage Loan and not more than ____% in excess of the Loan Rate of such Defective HELOC Mortgage Loan; (iii) for HELOC Mortgage Loans, have a Loan Rate based on the same Index as the Defective Mortgage Loan with adjustments to such Loan Rate made on the same date on which the Defective HELOC Mortgage Loan's interest rate adjusts; (iv) for HELOC Mortgage Loans, have a Margin that is not less than the Margin of the Defective HELOC Mortgage Loan and not more than 100 basis points higher than the Margin for the Defective HELOC Mortgage Loan; (v) have a mortgage of the same or higher level of priority as the Defective Mortgage Loan at the time such Mortgage Loan was transferred to the Trust; (vi) have a remaining term to maturity not more than ____ months earlier and not more than ____ months later than the remaining term to maturity of the Defective Mortgage Loan; (vii) comply with each representation and warranty as to the Mortgage Loans set forth in the Sale and Servicing Agreement (deemed to be made as of the date of substitution); (viii) have an original Combined Loan-to-Value Ratio not greater than 8 that of the Defective Mortgage Loan; and (ix) have a Credit Score greater than or equal to the Credit Score of the Defective Mortgage Loan at the time such Mortgage Loan was transferred to the Trust; (x) the related Mortgaged Property is not an investment property (unless the Mortgaged Property related to the Defective Mortgage Loan was an investment property); (xi) the related Mortgaged Property is not a second home (unless the Mortgaged Property related to the Defective Mortgage Loan was a second home); (xii) the Combined Loan-to-Value Ratio is not greater than 100%; and (xiii) in the case of HELOC Mortgage Loans, are no longer in its teaser period. ERISA: Employee Retirement Income Security Act of 1974, as amended. Event of Servicing Termination: As defined in Section 6.01 of the Sale and Servicing Agreement. Event of Termination: As defined in Article IX of the Purchase Agreement. Excess Cashflow: With respect to any Payment Date, the Available Funds for such Payment Date which remain on deposit in the Collection Account after taking into account the distributions listed in clauses (i) through (vii) of Section 8.7(b) of the Indenture on such Payment Date. Excess Spread Amount: With respect to any Payment Date, the fraction, expressed as a percentage, equal to (x) (i) 12 multiplied by (ii) the sum of the Available Funds for the related Payment Date which remain on deposit in the Collection Account after taking into account the distributions listed in clauses (i) through (vii) of Section 8.7(d) of the Indenture with respect to such Payment Date divided by (y) the Pool Balance as of such Payment Date. Exchange Act: The Securities Exchange Act of 1934, as amended. FDIC: The Federal Deposit Insurance Corporation or any successor thereto. Final Scheduled Payment Date: For the Class A Bonds, the Payment Date in _______ 20__, in each case whereby the related Bondholders shall be entitled to receive a payment of principal in an amount equal to the respective outstanding Bond Principal Balance and any accrued and unpaid interest thereon. Foreclosure Profit: With respect to a Liquidated Mortgage Loan, the amount, if any, by which (i) the aggregate of its Net Liquidation Proceeds exceeds (ii) the related Principal Balance (plus accrued and unpaid interest thereon at the applicable Loan Rate from the date interest was last paid through the last day in the related Collection Period) of such Liquidated Mortgage Loan immediately prior to the final recovery of its Liquidation Proceeds. Formula Bond Rate: For any Interest Accrual Period, (x) with respect to any Payment Date which occurs on or prior to the Optional Redemption Date, LIBOR plus ____% per annum and (y) for any Payment Date thereafter, LIBOR plus ____% per annum. GAAP: Generally accepted accounting principles, consistently applied. 9 Grant: Mortgage, pledge, bargain, sell, warrant, alienate, remise, release, convey, assign, transfer, create, grant a lien upon and a security interest in and right of set-off against, deposit, set over and confirm pursuant to the Indenture. A Grant of the Collateral or of any other agreement or instrument shall include all rights, powers and options (but none of the obligations) of the Granting party thereunder, including the immediate and continuing right to claim for, collect, receive and give receipt for principal and interest payments in respect of the Collateral and all other monies payable thereunder, to give and receive notices and other communications, to make waivers or other agreements, to exercise all rights and options, to bring proceedings in the name of the Granting party or otherwise and generally to do and receive anything that the Granting party is or may be entitled to do or receive thereunder or with respect thereto. Gross Margin: As to any HELOC Mortgage Loans, the percentage set forth as the "Gross Margin" for such HELOC Mortgage Loans on Exhibit A to the Sale and Servicing Agreement. HELOC Mortgage Loans: Mortgage Loans consisting solely of adjustable-rate home equity revolving credit line loans under the Credit Line Agreements. HELOC Principal Balance: As to any HELOC Mortgage Loan, other than a Liquidated Mortgage Loan, and as of any date, the related Cut-Off Date Principal Balance, plus (i) any Additional Balance in respect of such HELOC Mortgage Loan, minus (ii) all collections credited as principal against the HELOC Principal Balance of any such HELOC Mortgage Loan in accordance with the related Credit Line Agreement prior to such day. Holder or Bondholder: The Person in whose name a Bond is registered on the Bond Register. Indebtedness: With respect to any Person at any time, (a) indebtedness or liability of such Person for borrowed money whether or not evidenced by bonds, debentures, notes or other instruments, or for the deferred purchase price of property or services (including trade obligations); (b) obligations of such Person as lessee under leases which should have been or should be, in accordance with generally accepted accounting principles, recorded as capital leases; (c) current liabilities of such Person in respect of funding vested benefits under plans covered by Title IV of ERISA; (d) obligations issued for or liabilities incurred on the account of such Person; (e) obligations or liabilities of such Person arising under acceptance facilities; (f) obligations of such Person under any guarantees, endorsements (other than for collection or deposit in the ordinary course of business) and other contingent obligations to purchase, to provide funds for payment, to supply funds to invest in any Person or otherwise to assure a creditor against loss; (g) obligations of such Person secured by any lien on property or assets of such Person, whether or not the obligations have been assumed by such Person; or (h) obligations of such Person under any interest rate or currency exchange agreement. Indemnification Agreement: The Indemnification Agreement, dated as of _______, 200_, by and among the Insurer and [Underwriter] as underwriter. Indenture: The Indenture, dated as of ________, 200_, by and between the Issuer and the Indenture Trustee, as the same may be amended and supplemented from time to time. 10 Indenture Trustee: [Indenture Trustee], not in its individual capacity but as indenture trustee under the Indenture, or any successor indenture trustee under the Indenture. Indenture Trustee Issuer Secured Obligations: All amounts and obligations which the Issuer may at any time owe to the Indenture Trustee for the benefit of the Bondholders under the Indenture or the Bonds. Independent: When used with respect to any specified Person, that the Person (a) is in fact independent of the Issuer, any other obligor upon the Bonds, the Depositor and any Affiliate of any of the foregoing Persons, (b) does not have any direct financial interest or any material indirect financial interest in the Issuer, any such other obligor, the Depositor or any Affiliate of any of the foregoing Persons and (c) is not connected with the Issuer, any such other obligor, the Depositor or any Affiliate of any of the foregoing Persons as an officer, employee, promoter, underwriter, trustee, partner, director or Person performing similar functions. Independent Certificate: A certificate, verification report or opinion to be delivered to the Indenture Trustee and the Insurer under the circumstances described in, and otherwise complying with, the applicable requirements of Section 11.1 of the Indenture, prepared by an Independent appraiser or other expert appointed pursuant to an Issuer Order and approved by the Indenture Trustee and the Insurer in the exercise of reasonable care, and such opinion or certificate shall state that the signer has read the definition of "Independent" in the Indenture and that the signer is Independent within the meaning thereof. Index: With respect to each Interest Rate Adjustment Date for a HELOC Mortgage Loan, the highest "prime rate" as published in the "Money Rates" table of The Wall Street Journal as of the last business day of the previous Billing Cycle. Initial Pool Balance: $_______________. Insurance Agreement: The Insurance Agreement, dated as of ________, 200_, by and among the Insurer, the Seller, the Servicer, the Depositor and the Indenture Trustee. Insurance Policy: Any hazard, title or primary mortgage insurance policy relating to a Mortgage Loan, but shall not include the Policy. Insurance Proceeds: Proceeds paid by any insurer (other than the Insurer) pursuant to any Insurance Policy covering a Mortgage Loan, or amounts required to be paid by the Servicer pursuant to the last sentence of Section 3.04 of the Sale and Servicing Agreement, net of any component thereof (i) covering any expenses incurred by or on behalf of the Servicer in connection with obtaining such proceeds, (ii) that is applied to the restoration or repair of the related Mortgaged Property, (iii) released to the Mortgagor in accordance with the Servicer's normal servicing procedures or (iv) required to be paid to any holder of a mortgage senior to such Mortgage Loan. Insured Amount: As defined in the Policy with respect to the Class A Bonds and as of any Payment Date Insured Payment: As defined in the Policy with respect to the Class A Bonds. 11 Insurer: [Insurer], and any successor thereto. Insurer Default: Any of (i) the failure by the Insurer to make a payment required under the Policy in accordance with the terms thereof, (ii) the voluntary or involuntary filing of a petition or other invocation of the process of any court or government authority for the purpose of commencing or sustaining a case under any federal or state bankruptcy, insolvency or similar law against the Insurer or (iii) the appointing of a receiver, liquidator, assignee, trustee, custodian, sequestrator or other similar official of the Insurer or any substantial part of its property, or ordering the winding up or liquidation of the affairs of the Insurer. Insurer Issuer Secured Obligations: All amounts and obligations which the Issuer may at any time owe to or on behalf of the Insurer under the Indenture, the Insurance Agreement or any other Basic Document. Interest Accrual Period: With respect to any Payment Date, the period from and including the prior Payment Date (or, in the case of the ________ 200_ Payment Date, from and including the Closing Date) to, but excluding, the current Payment Date, with interest being computed on the basis of the actual number of days in such Interest Accrual Period and a 360-day year. Interest Collections: With respect to any Payment Date, the sum of all payments by or on behalf of Mortgagors and any other amounts constituting interest, including the portion of Net Liquidation Proceeds and Insurance Proceeds allocated to interest pursuant to the terms of the related Loan Agreement (net of the applicable servicing fees and excluding the fees or late charges or similar administrative fees paid by Mortgagors), less the related Servicing Fee for the related Collection Period. The terms of the related Loan Agreement shall determine the portion of each payment in respect of such Mortgage Loan that constitutes principal or interest. Interest Determination Date: (i) With respect to any Interest Accrual Period (other than the initial Interest Accrual Period), the second LIBOR Business Day preceding the first day of such Interest Accrual Period and (ii) with respect to the initial Interest Accrual Period, the second LIBOR Business Day preceding the Closing Date. Interest Payment Amount: With respect to the Class A Bonds and any Payment Date, (x) the Class A Bond Rate applicable to such Payment Date multiplied by (y) the Bond Principal Balance immediately prior to such Payment Date multiplied by (z) a fraction, the numerator of which is the actual number of days in the related Interest Accrual Period and the denominator of which is 360. Interest Rate Adjustment Date: With respect to each HELOC Mortgage Loan, any date on which the Loan Rate is adjusted in accordance with the related Credit Line Agreement. Interest Settlement Rates: Those rates which are displayed on the Designated Telerate Page. Issuer or Trust: Sequoia Mortgage Trust 200_-_, a Delaware statutory trust, until a successor replaces it and, thereafter, such successor. 12 Issuer Order and Issuer Request: A written order or request signed in the name of the Issuer by any one of its Authorized Officers and delivered to the Indenture Trustee. Issuer Secured Obligations: The Insurer Issuer Secured Obligations and the Indenture Trustee Issuer Secured Obligations. Issuer Secured Parties: Each of the Indenture Trustee in respect of the Indenture Trustee Issuer Secured Obligations and the Insurer in respect of the Insurer Issuer Secured Obligations. Late Payment Rate: For any Payment Date, the lesser of (a) the greater of (i) the per annum rate of interest publicly announced from time to time by Citibank, N.A. as its prime lending rate (any change in such rate of interest to be effective on the date such change is announced by Citibank, N.A.), plus __% per annum and (ii) the then applicable highest rate of interest on the Class A Bonds and (b) the maximum rate permissible under applicable usury or similar laws limiting interest rates. The Late Payment Rate shall be computed on the basis of the actual number of days elapsed over a year of 360 days. LIBOR: With respect to any Interest Accrual Period, the rate determined by the Indenture Trustee on the related Interest Determination Date appearing on the Designated Telerate Page on that Interest Determination Date based on the Interest Settlement Rate for U.S. dollar deposits of one-month maturity set by the BBA as of the Interest Determination Date. If the BBA's Interest Settlement Rate does not appear on the Designated Telerate Page as of 11:00 a.m. (London time) on such date, or if the Designated Telerate Page is not available on such date, the Indenture Trustee will obtain such rate from the Reuters Monitor Money Rates Service page "LIBOR01" or the Bloomberg L.P. page "BBAM." If such rate is not published for such Interest Determination Date, LIBOR for such date will be the most recently published Interest Settlement Rate. In the event that the BBA no longer sets an Interest Settlement Rate, the Indenture Trustee, with the prior written consent of the Insurer (but only if an Insurer Default shall not have occurred and be continuing), will designate an alternative index that has performed in a manner substantially similar to the BBA's Interest Settlement Rate. LIBOR Business Day: Any day on which banks in London and New York are open for conducting transactions in foreign currency and exchange. Lien: Any mortgage, deed of trust, pledge, conveyance, hypothecation, assignment, participation, deposit arrangement, encumbrance, lien (statutory or other), preference, priority right or interest or other security agreement or preferential arrangement of any kind or nature whatsoever, including, without limitation, any conditional sale or other title retention agreement, any financing lease having substantially the same economic effect as any of the foregoing and the filing of any financing statement under the UCC (other than any such financing statement filed for informational purposes only) or comparable law of any jurisdiction to evidence any of the foregoing; provided, however, that any assignment pursuant to Section 5.02 of the Sale and Servicing Agreement shall not be deemed to constitute a Lien. Lifetime Rate Cap: With respect to each HELOC Mortgage Loan with respect to which the related Mortgage Note provides for a lifetime rate cap, the maximum Loan Rate 13 permitted over the life of such HELOC Mortgage Loan under the terms of the related Credit Line Agreement previously delivered to the Indenture Trustee. Liquidated Mortgage Loan: As to any Payment Date, any Mortgage Loan in respect of which the Servicer has determined, in accordance with the servicing procedures specified in the Sale and Servicing Agreement, as of the end of the related Collection Period, that all Liquidation Proceeds which it expects to recover with respect to the disposition of such Mortgage Loan or the related REO have been recovered. Liquidation Expenses: Out-of-pocket expenses (exclusive of overhead) which are incurred by the Servicer in connection with the liquidation of any Mortgage Loan and not recovered under any Insurance Policy, including, without limitation, legal fees and expenses, any unreimbursed amount expended pursuant to Section 3.06 of the Sale and Servicing Agreement (including, without limitation, amounts advanced to correct defaults on any mortgage loan which is senior to such Mortgage Loan and amounts advanced to keep current or pay off a mortgage loan that is senior to such Mortgage Loan) respecting the related Mortgage Loan and any related and unreimbursed expenditures with respect to real estate property taxes, water or sewer taxes, condominium association dues, property restoration or preservation or insurance against casualty, loss or damage. Liquidation Loss Amounts: With respect to any Payment Date and Mortgage Loan that became a Liquidated Mortgage Loan during the related Collection Period, the unrecovered portion of the related Principal Balance thereof at the end of such Collection Period, after giving effect to the Net Liquidation Proceeds applied in reduction of such Principal Balance. Liquidation Proceeds: Proceeds (including Insurance Proceeds) received in connection with the liquidation of any Mortgage Loan or related REO, whether through trustee's sale, condemnation, foreclosure sale or otherwise. Loan Agreement: Any Credit Line Agreement or Mortgage Note. Loan Purchase Price: With respect to any Mortgage Loan purchased from the Trust pursuant to Section 2.03 or 2.05 of the Sale and Servicing Agreement, an amount equal to the Principal Balance of such Mortgage Loan as of the date of purchase, plus one month's interest on the outstanding Principal Balance thereof as of the beginning of the preceding Collection Period computed at the Loan Rate less the Servicing Fee plus any costs and damages incurred by the Trust in connection with any violation by such Mortgage Loan of any predatory or abusive lending law, together with, without duplication, the aggregate amount of (i) all delinquent interest, all advances made by the Servicer and not subsequently recovered from the related Mortgage Loan and (ii) any Reimbursement Amount related to such Mortgage Loan. Loan Rate: With respect to any HELOC Mortgage Loan and as of any day, the per annum rate of interest applicable under the related Credit Line Agreement to the calculation of interest for such day on the Principal Balance of such HELOC Mortgage Loan. With respect to any Closed-End Mortgage Loan and as of any day, the per annum rate of interest applicable under the related Mortgage Note to the calculation of interest for such day on the Principal Balance of such Closed-End Mortgage Loan. 14 Loan Rate Cap: With respect to each Mortgage Loan, the lesser of (i) the Lifetime Rate Cap, if any, or (ii) the applicable state usury ceiling, if any. Losses: Any and all out-of-pocket losses, claims, damages, liabilities or expenses (including reasonable attorneys' fees and disbursements) directly incurred by any Person specified in the Purchase Agreement, resulting from transactions entered into under the Purchase Agreement (other than liability for taxes). Losses must be accounted for and presented for reimbursement documented in reasonable detail and within a reasonable time. Managed Amortization Period: With respect to the Class A Bonds, the period commencing on the Closing Date and ending on the earlier to occur of (x) the _______ 200_ Payment Date and (y) the Payment Date which immediately precedes the occurrence of a Rapid Amortization Event with respect to the Class A Bonds. Management Agreement: The Management Agreement, dated as of ________, 200_, by and between the Company and the Issuer. Management Fee: $____ per month. Manager: The Person acting in such capacity pursuant to the Management Agreement or its successors or assigns, which shall initially be the Company. Margin: With respect to each HELOC Mortgage Loan, the fixed percentage amount set forth in the related Loan Agreement which amount is added to the Prime Rate in accordance with the terms of the related Loan Agreement to determine the Loan Rate for such HELOC Mortgage Loan, subject to any maximum. Material Adverse Change: A material adverse change in (i) the business, results of operations or properties of the Servicer or (ii) the ability of the Servicer to perform its obligations under the Sale and Servicing Agreement. Maximum Principal Payment: With respect to the Class A Bonds and (i) any Payment Date during the Managed Amortization Period, the Net Principal Collections and (ii) any Payment Date during the Rapid Amortization Period, 100% of the Principal Collections relating to such Payment Date. Maximum Rate: With respect to the Class A Bonds and as to any Interest Accrual Period, the Weighted Average Net Loan Rate of the Mortgage Loans for the Collection Period during which such Interest Accrual Period begins (adjusted to an effective rate reflecting accrued interest calculated on the basis of the actual number of days in the Interest Accrual Period and a year assumed to consist of 360 days). MERS: Mortgage Electronic Registration Systems, Inc., a corporation organized and existing under the laws of the State of Delaware, or any successor thereto. MERS Mortgage Loan: Any Mortgage Loan registered with MERS on the MERS System. 15 MERS System: The system of recording transfers of mortgages electronically maintained by MERS. Minimum Monthly Payment: With respect to any Mortgage Loan and any month, the minimum amount required to be paid by the related Mortgagor in that month. Moody's: Moody's Investors Service, Inc., or its successor in interest. Mortgage: The mortgage, deed of trust or other instrument creating a first or junior lien on an estate in fee simple interest in real property securing a Mortgage Note or Credit Line Agreement. Mortgage File: The mortgage documents listed in Section 2.01(c) to the Sale and Servicing Agreement pertaining to a particular Mortgage Loan and any additional documents required to be added to the Mortgage File pursuant to the Sale and Servicing Agreement. Mortgage Loan Schedule: With respect to any date, the schedule of Mortgage Loans included in the Trust on such date. The schedule of Mortgage Loans as of the Cut-Off Date is the schedule set forth in Exhibit A to the Sale and Servicing Agreement, which schedule sets forth as to each such Mortgage Loan, to the extent applicable, (i) the Cut-Off Date Principal Balance, (ii) the Credit Limit, (iii) the Gross Margin, (iv) the Lifetime Rate Cap, (v) the account number, (vi) the current Loan Rate, (vii) the Combined Loan-to-Value Ratio, (viii) a code specifying the property type, (ix) a code specifying documentation type and (x) a code specifying lien position. The Mortgage Loan Schedule will be deemed to be amended from time to time to reflect Additional Balances and Eligible Substitute Mortgage Loans. Mortgage Loans: Any HELOC Mortgage Loans, including any Additional Balances with respect thereto, as well as any Closed-End Mortgage Loans, that are transferred to the Trust and assigned to the Indenture Trustee pursuant to Sections 2.01 of the Sale and Servicing Agreement, together with the Related Documents, exclusive of mortgage loans that are retransferred to the Depositor or the Servicer from time to time pursuant to Sections 2.03, 2.05 or 2.07 of the Sale and Servicing Agreement as from time to time are held as a part of the Trust. The Mortgage Loans originally so held are identified in the Mortgage Loan Schedule delivered on the Closing Date. The Mortgage Loans shall also include any Eligible Substitute Mortgage Loans substituted by the Depositor for a Defective Mortgage Loan pursuant to Sections 2.03 and 2.05 of the Sale and Servicing Agreement. The term "Mortgage Loan" includes the terms "HELOC Mortgage Loans" and "Closed-End Mortgage Loans." Mortgage Note: The note or other evidence of indebtedness evidencing the indebtedness of a Mortgagor under a Closed-End Mortgage Loan. Mortgaged Property: The underlying property, including any real property and improvements thereon, securing a Mortgage Loan. Mortgagor: The obligor on a Mortgage Note or Credit Line Agreement. 16 Net Liquidation Proceeds: With respect to any Liquidated Mortgage Loan, Liquidation Proceeds net of Liquidation Expenses; provided, that Net Liquidation Proceeds shall not be an amount less than zero. Net Loan Rate: With respect to any Mortgage Loan and as to any day, the Loan Rate (assuming each HELOC Mortgage Loan is fully indexed) less the Servicing Fee Rate, the Premium Percentage and the Trustee Fee Rate. Net Principal Collections: The excess of (x) Principal Collections over (y) the sum of (A) the aggregate amount of all Additional Balances arising during the related Collection Period plus (B) the Additional Balance Contributed Amounts outstanding as of the opening of business on the related Payment Date; provided, however, that in no event will Net Principal Collections be less than zero with respect to any Payment Date. Officer's Certificate: A certificate signed by any Authorized Officer of a Person that complies with the applicable requirements of Section 11.1 of the Indenture. Opinion of Counsel: One or more opinions of counsel who may, except as otherwise expressly provided in the Indenture, be employees of or counsel to the Issuer and, if addressed to the Insurer, satisfactory to such party, and which shall comply with any applicable requirements of Section 11.1 of the Indenture, and if addressed to the Insurer, shall be satisfactory to such party; provided, that any opinion relating to matters of federal, state or local taxation must be provided by independent, outside counsel. Optional Redemption Date: The date on which the Depositor is first able to exercise its right of optional redemption of the Class A Bonds pursuant to Section 10.1 of the Indenture or Section 7.01(b)(i) of the Sale and Servicing Agreement. Original Bond Principal Balance: $_____________. Original Pool Balance: $____________. Outstanding: As of the date of determination, all Bonds theretofore authenticated and delivered under the Indenture except: (i) Bonds theretofore canceled by the Bond Registrar or delivered to the Bond Registrar for cancellation; (ii) Bonds or portions thereof the payment for which money in the necessary amount has been theretofore deposited with the Indenture Trustee or any Bond Paying Agent in trust for the Holders of such Bonds (provided, however, that if such Bonds are to be redeemed, notice of such redemption has been duly given pursuant to the Indenture or provision therefor, satisfactory to the Indenture Trustee); and (iii) Bonds in exchange for or in lieu of other Bonds which have been authenticated and delivered pursuant to the Indenture unless proof satisfactory to the Indenture Trustee is presented that any such Bonds are held by a bona fide purchaser; 17 provided, however, that Bonds which have been paid with proceeds of the Policy shall continue to remain Outstanding for purposes of the Indenture until the Insurer has been paid as subrogee under the Insurance Agreement or the Insurer has been reimbursed pursuant to the Insurance Agreement, as evidenced by a written notice from the Insurer delivered to the Indenture Trustee, and the Insurer shall be deemed to be the Holder thereof to the extent of any payments thereon made by the Insurer; provided, further, that in determining whether the Holders of the requisite Outstanding Amount of the Bonds have given any request, demand, authorization, direction, notice, consent or waiver hereunder or under any Basic Document, Bonds owned by the Issuer, any other obligor upon the Bonds, the Depositor or any Affiliate of any of the foregoing Persons shall be disregarded and deemed not to be Outstanding, except that, in determining whether the Indenture Trustee shall be protected in relying upon any such request, demand, authorization, direction, notice, consent or waiver, only Bonds that a Responsible Officer of the Indenture Trustee either actually knows to be so owned or has received written notice thereof shall be so disregarded. Bonds so owned that have been pledged in good faith may be regarded as Outstanding if the pledgee establishes to the satisfaction of the Indenture Trustee the pledgee's right so to act with respect to such Bonds and that the pledgee is not the Issuer, any other obligor upon the Bonds, the Depositor or any Affiliate of any of the foregoing Persons. Outstanding Amount: With respect to any date of determination, the aggregate Bond Principal Balance of all the Bonds Outstanding as of such date of determination. Overcollateralization Amount: With respect to the Class A Bonds and as of any Payment Date, the excess, if any, of (x) the Pool Balance as of such Payment Date over (y) the Bond Principal Balance as of such Payment Date (after taking into account any reductions to such Bond Principal Balance resulting from payments made pursuant to clauses (v) and (vi) of Section 8.7(b) of the Indenture on such Payment Date). Overcollateralization Deficiency Amount: With respect to the Class A Bonds and any Payment Date, the excess, if any, of (i) the Specified Overcollateralization Amount applicable to such Payment Date over (ii) the Overcollateralization Amount applicable to such Payment Date. Overcollateralization Deficit: With respect to the Class A Bonds and any Payment Date, the amount, if any, by which (i) the aggregate Bond Principal Balance, after taking into account the payment to the Bondholders of all principal from sources other than the Policy on such Payment Date, exceeds (ii) the Pool Balance as of such Payment Date. Overcollateralization Reduction Amount: With respect to the Class A Bonds and any Payment Date, the excess, if any, of (x) the Overcollateralization Amount over (y) the Specified Overcollateralization Amount assuming that the Maximum Principal Payment had been distributed to the Bondholders on such Payment Date. 18 Owner Trustee: [Owner Trustee], not in its individual capacity, but solely as owner trustee under the Trust Agreement, and any successor Owner Trustee thereunder. Owner Trustee Fee: A fee which is separately agreed to between the Servicer and the Owner Trustee and is payable to the Owner Trustee . Owner Trustee Fee Rate: The per annum rate at which the Owner Trustee Fee is calculated. Payment Date: The fifteenth day of each month, or if such day is not a Business Day, then the next Business Day, beginning in the month immediately following the Closing Date. Percentage Interest: As to any Bond, the percentage obtained by dividing the principal denomination of such Bond by the aggregate of the principal denominations of all Bonds. As to any Residual Certificate, the percentage set forth on the face of such Residual Certificate. Person: Any individual, corporation, partnership, joint venture, association, joint-stock company, trust, unincorporated organization or government or any agency or political subdivision thereof. Policy: The financial guaranty insurance policy No. ___________ and any endorsement thereto, with respect to the Class A Bonds, dated ________, 200_, issued by the Insurer to the Indenture Trustee for the benefit of the Bondholders. Policy Payment Account: As defined in Section 8.4(c) of the Indenture. Pool: The pool of Mortgage Loans held by the Issuer including any Eligible Substitute Mortgage Loan delivered in the replacement thereof. Pool Balance: With respect to any date, the aggregate of the Principal Balances of all of the Mortgage Loans as of such date. Pool Delinquency Rate: With respect to any Collection Period, the fraction, expressed as a percentage, equal to (x) the aggregate Principal Balances of all Mortgage Loans that are 90 or more days delinquent (including all foreclosures and REO properties) as of the close of business on the last day of such Collection Period over (y) the Pool Balance as of the close of business on the last day of such Collection Period. Pool Factor: A seven-digit decimal which the Servicer shall compute monthly expressing the related Bond Principal Balance as of each Payment Date (after giving effect to any distribution of principal on such Payment Date) as a proportion of the Original Bond Principal Balance. On the Closing Date, the Pool Factor will be 1.0000000. Thereafter, the Pool Factor shall decline to reflect reductions in the Bond Principal Balance resulting from distributions of principal to the Bonds. 19 Predecessor Bond: With respect to any particular Bond, every previous Bond evidencing all or a portion of the same interest as that evidenced by such particular Bond; and, for the purpose of this definition, any Bond authenticated and delivered under Section 2.4 of the Indenture in lieu of a mutilated, lost, destroyed or stolen Bond shall be deemed to evidence the same debt as the mutilated, lost, destroyed or stolen Bond. Preference Amount: As defined in the Policy. Preference Claim: As defined in Section 5.13(b) of the Indenture. Premium Amount: With respect to the Bonds and as to any Payment Date, the product of (x) the Premium Percentage, (y) the Bond Principal Balance immediately prior to such Payment Date and (z) the fraction, expressed as a percentage, the numerator of which is the number of days elapsed from the last Payment Date to the related Payment Date and the denominator of which is 360. Premium Percentage: As defined in the Insurance Agreement. Prime Rate: The interest rate entitled "Prime Rate" in the published Money Rates table of The Wall Street Journal. Principal Balance: As of any date and with respect to any Mortgage Loan, the HELOC Principal Balance or the Closed-End Principal Balance, as applicable. For purposes of this definition, a Liquidated Mortgage Loan shall be deemed to have a Principal Balance equal to the Principal Balance of the related Mortgage Loan immediately prior to the final recovery of related Liquidation Proceeds and a Principal Balance of zero thereafter. Principal Collections: With respect to any Payment Date, the sum of all payments by or on behalf of Mortgagors and any other amounts constituting principal (including, but not limited to, Substitution Amounts and any portion of Insurance Proceeds, Net Liquidation Proceeds or amounts to be deposited to the Collection Account pursuant to Section 7.01 of the Sale and Servicing Agreement that are applicable to principal, in each case as allocable to principal of the applicable Mortgage Loan, but excluding Foreclosure Profits) collected by the Servicer under the related Mortgage Loans during the related Collection Period. The terms of the related Loan Agreements shall determine the portion of each payment in respect of a Mortgage Loan that constitutes principal or interest. Principal Payment Amount: With respect to the Class A Bonds on any Payment Date, the excess, if any, of (x) the Maximum Principal Payment over (y) the Overcollateralization Reduction Amount. Proceeding: Any suit in equity, action at law or other judicial or administrative proceeding. Purchase Agreement: The Mortgage Loan Purchase Agreement, dated as of ________, 200_, by and between the Company and the Depositor with respect to the Mortgage Loans. 20 Purchased Assets: As defined in Section 2.01 of the Purchase Agreement. Purchase Price: With respect to the Mortgage Loans as of the Cut-Off Date (and any Eligible Substitute Mortgage Loan as of the date delivered), at least 100% of the Principal Balance; with respect to all Additional Balances, at least 100% of the Principal Balance (as such term is used in Section 2.01 of the Purchase Agreement). Purchaser Bond: As defined in Section 10.02 of the Purchase Agreement. Rapid Amortization Event: Any of those "Rapid Amortization Events" described in Section 12.1 of the Indenture. Rapid Amortization Period: With respect to the Class A Bonds, the period which immediately follows the end of the Managed Amortization Period. Rating Agency: [Each of Moody's and Standard & Poor's]. If such agency or a successor is no longer in existence, "Rating Agency" shall be such statistical credit rating agency, or other comparable Person, designated by the Depositor and the Insurer, notice of which designation shall be given to the Indenture Trustee. References in any Basic Document to the highest short term unsecured rating category of a Rating Agency shall means "A-1+" or better in the case of Standard & Poor's and "P-1" or better in the case of Moody's, and in the case of any other Rating Agency shall mean the ratings such other Rating Agency deems equivalent to the foregoing ratings. References in any Basic Document to the highest long-term rating category of a Rating Agency shall mean "AAA" in the case of Standard & Poor's and "Aaa" in the case of Moody's, and in the case of any other Rating Agency, the rating such other Rating Agency deems equivalent to the foregoing ratings. Realized Losses: For any Payment Date will equal the positive difference between (i) the Principal Balances of all Mortgage Loans that were liquidated during the related Collection Period and (ii) the principal portion of Net Liquidation Proceeds of such Mortgage Loans. Recordation Event: Any of (i) the resignation of [____________], as Servicer, (ii) the occurrence of an Event of Servicing Termination, (iii) the occurrence of a bankruptcy, insolvency or foreclosure relating to the Issuer; provided, that any Recordation Event may be waived by the Insurer by its providing written notice of such waiver to the Servicer and the Indenture Trustee; and (iv) at the written request of the Insurer to the Indenture Trustee to record Assignments of Mortgages because the Insurer has determined, in the exercise of its reasonable judgment, that such recordation is necessary to protect the Insurer's interest with respect to such Mortgage Loans because (a) a Material Adverse Change with respect to the Servicer has occurred, (b) the Insurer has been so advised by counsel as a result of a change that occurred after the Closing Date in applicable law or the interpretation thereof or (c) with respect to a particular Mortgage Loan, the insolvency of the related Mortgagor. Record Date: The Business Day immediately preceding the related Payment Date; provided, however, that following the date on which Definitive Bonds are available, the Record Date for the Bonds shall be the last Business Day of the calendar month preceding the month in which the related Payment Date occurs. 21 Redemption Date: In the case of a redemption of any Bonds pursuant to Section 10.1 of the Indenture, the Payment Date specified by the Depositor pursuant to Section 7.01(b) of the Sale and Servicing Agreement. Redemption Price: In the case of a redemption of any Bonds pursuant to Section 10.1 of the Indenture, an amount equal to the unpaid principal amount of the then outstanding principal amount of the Bonds being redeemed, plus accrued and unpaid interest thereon to but excluding the Redemption Date, plus any outstanding, Reimbursement Amount. Reimbursement Amount: As of any Payment Date with respect to the Class A Bonds, the sum of (x)(i) all Insured Payments made pursuant to the Policy by the Insurer and in each case not previously repaid to the Insurer pursuant to Section 8.7(d)(vii) of the Indenture, plus (ii) interest accrued on each such payment made pursuant to the Policy not previously repaid calculated at the Late Payment Rate from the date the Indenture Trustee received the related Insured Payments and (y)(i) any other amounts then due and owing to the Insurer under the Insurance Agreement, plus (ii) interest on such amounts at the Late Payment Rate. Related Documents: As defined in Section 2.01(c) of the Sale and Servicing Agreement. Relief Act Shortfall: Shortfalls in interest collections resulting from the application of the Servicemembers Civil Relief Act, as amended or similar state laws. Removal Date: As defined in Section 2.07 of the Sale and Servicing Agreement. Removal Notice Date: As defined in Section 2.07 of the Sale and Servicing Agreement. REO: A Mortgaged Property acquired by the Servicer or any sub-servicer on behalf of the Trust through foreclosure or deed-in-lieu of foreclosure in connection with a defaulted Mortgage Loan. Repurchase Price: The sum of (a) the outstanding principal balance of the related Mortgage Loan as of such date of repurchase plus (b) any accrued interest as of such date. Residual Certificate: As defined in Section 1.1 of the Trust Agreement. Residual Certificateholder: Holder of the Residual Certificate. Responsible Officer: With respect to the Indenture Trustee or any officer of the Indenture Trustee with direct responsibility for the administration of the Indenture and, also, with respect to a particular matter, any other officer to whom such matter is referred because of such officer's knowledge of and familiarity with the particular subject. SAIF: The Savings Association Insurance Fund, as from time to time constituted, created under the Financial Institutions Reform, Recovery and Enhancement Act of 1989, or if at any time after the execution of the Indenture, the Savings Association Insurance Fund is not existing and performing duties now assigned to it, the body performing such duties on such date. 22 Sale and Servicing Agreement: The Sale and Servicing Agreement, dated as of _________, 200_, by and among the Issuer, the Depositor, the Servicer and the Indenture Trustee, as the same may be amended or supplemented from time to time. SEC: The Securities and Exchange Commission and any successor thereto. Seller: RWT Holdings, Inc., a Delaware corporation, in its capacity as Seller pursuant to the Purchase Agreement. Servicer: [______________], a [_________], any successor thereto and, after its termination or resignation as Servicer, any successor. Servicing Certificate: A certificate completed and executed by a Servicing Officer in accordance with Section 4.01 of the Sale and Servicing Agreement. Servicing Fee: With respect to any Payment Date, the product of (i) one-twelfth of the Servicing Fee Rate and (ii) the aggregate Principal Balance of the Mortgage Loans on the first day of the Collection Period preceding such Payment Date (or at the Cut-Off Date with respect to the first Payment Date). Servicing Fee Rate: ____% per annum. Servicing Officer: Any officer of the Servicer involved in, or responsible for, the administration and servicing of the Mortgage Loan whose name and specimen signature appear on a list of servicing officers furnished to the Indenture Trustee (with a copy to the Insurer) by the Servicer on the Closing Date, as such list may be amended from time to time. Specified Overcollateralization Amount: With respect to any Payment Date, the amount equal to the greater of: (I) the sum of (a) the related Spread Squeeze Amount plus (b) ___% of the Principal Balance of Mortgage Loans which are 180 or more days Delinquent as of the close of business of the last day of the related Collection Period plus (c)(i) prior to the 31st Payment Date, the greater of (x) ____% of the Original Bond Principal Balance and (y) the Step-Up Overcollateralization Amount and (ii) on or after the 31st Payment Date the greater of (x) the lesser of (A) ____% of the Original Bond Principal Balance and (B) ____% of the Pool Balance as of the current Payment Date and (y) the Step-Up Overcollateralization Amount; and (II) the sum of the related Spread Squeeze Amount and ____% of the Original Bond Principal Balance; provided, however, that no reduction in clause (c)(ii) shall occur unless (i) aggregate cumulative Liquidation Loss Amounts with respect to the Pool as a percentage of the Initial Pool Balance are less than ____% and (ii) the Three Month Rolling Delinquency Rate for is less than ____%. Spread Squeeze Amount: As of any Payment Date (A) on or prior to the twelfth Payment Date, $0 and (B) after the twelfth Payment Date, a number equal to the product of (I) two times the positive difference, if any of (x) ____% and (y) the related Spread Squeeze Percentage and (II) the Pool Balance as of such Payment Date. Spread Squeeze Percentage: As of any Payment Date after the twelfth Payment Date, a fraction (expressed as a percentage), the numerator of which is the product of ___ and the related Available Funds for such Payment Date which remain on deposit in the Collection 23 Account after taking into account the distributions listed in clauses (i) through (vii) of Section 8.7(b) of the Indenture with respect to such Payment Date and the denominator of which is the related Pool Balance as of such Payment Date. Standard & Poor's: Standard & Poor's Ratings Services, a division of The McGraw-Hill Companies, Inc., or its successor in interest. Stepdown Date: With respect to the Class A Bonds, the later to occur of (a) the 31st Payment Date and (b) the first Payment Date on which the Pool Balance has been reduced to 50% or less of the Pool Balance as of the Cut-Off Date. Step-Up Overcollateralization Amount: If aggregate cumulative Liquidation Loss Amounts as a percentage of the Original Bond Principal Balance exceed the following percentages on the specified Payment Dates,
Payment Dates Percentage - -------------- ---------- 1st - ___th ____% ___th - ___th ____% ___th - ___th ____% ___th - ___th ____% ___th + ____%
the Step-Up Overcollateralization Amount will equal (a) ____% of the Original Bond Principal Balance, prior to the 31st Payment Date and (b) on or after the 31st Payment Date, the lesser of (x) ____% of the Original Bond Principal Balance and (y) ____% of the Pool Balance as of current Payment Date. Otherwise, the Step-Up Overcollateralization Amount is zero. Substitute Cut-Off Date: With respect to any Eligible Substitute Mortgage Loan, the opening of business on the first day of the calendar month in which such Eligible Substitute Mortgage Loan is conveyed to the Trust. Substitution Amounts: In connection with the delivery of any Eligible Substitute Mortgage Loan, if the outstanding principal amount of such Eligible Substitute Mortgage Loan as of the applicable Substitute Cut-Off Date is less than the related Principal Balance of the Mortgage Loan being replaced as of such Substitute Cut-Off Date, an amount equal to such difference together with accrued and unpaid interest on such amount calculated at the Loan Rate net of the Servicing Fee, if any, of the Mortgage Loan being replaced. Termination Date: The latest of (i) the termination of the Policy and the return of the Policy to the Insurer for cancellation, (ii) the date on which the Insurer shall have received all amounts due and owing to the Insurer under the Insurance Agreement and (iii) the date on which the Indenture Trustee shall have received payment and performance of all Indenture Trustee Issuer Secured Obligations. 24 Three Month Rolling Delinquency Rate: As of any Payment Date beginning with the third Payment Date, a number equal to the average of the related Pool Delinquency Rates for each of the three immediately preceding Collection Periods. Total Available Funds: With respect to any Payment Date, Available Funds (after taking into account the distributions pursuant to clauses (i) and (ii) of Section 8.7(d) of the Indenture for such Payment Date). Transfer Date: With respect to each Eligible Substitute Mortgage Loan, the date on which such Eligible Substitute Mortgage Loan shall have been transferred to the Trust. Trust Agreement: The Trust Agreement, dated as of ________, 200_, by and between the Depositor and the Owner Trustee, as the same may be amended and supplemented from time to time. Trust Property: All property and proceeds conveyed pursuant to Section 2.01 of the Sale and Servicing Agreement, and certain other rights under that Agreement. Trustee Fee: A fee which is separately agreed to between the Servicer and the Indenture Trustee. Trustee Fee Rate: The per annum rate at which the Trustee Fee is calculated. UCC: Unless the context otherwise requires, the Uniform Commercial Code, as in effect in the relevant jurisdiction, as amended from time to time. Weighted Average Net Loan Rate: As to any Collection Period, the average of the daily Net Loan Rate for each Mortgage Loan i for each day during the related Billing Cycle, weighted on the basis of the daily average of the related Principal Balances for each day in such Billing Cycle for each Mortgage Loan as determined by the Servicer in accordance with the Servicer's normal servicing procedures. 25 EX-4.5 3 f98626exv4w5.txt EXHIBIT 4.5 EXHIBIT 4.5 ================================================================================ SEQUOIA MORTGAGE FUNDING CORPORATION, Depositor, [_____________], Servicer, SEQUOIA MORTGAGE TRUST 200_-_, Issuer, and [INDENTURE TRUSTEE], Indenture Trustee ----------------------- SALE AND SERVICING AGREEMENT Dated as of ________, 200_ ---------------------- Collateralized Mortgage Bonds Series 200_-_ ================================================================================ TABLE OF CONTENTS
Page ---- ARTICLE I DEFINITIONS................................................................................ 1 Section 1.01. Definitions................................................................ 1 Section 1.02. Other Definitional Provisions.............................................. 1 Section 1.03. Interest Calculations...................................................... 2 ARTICLE II CONVEYANCE OF MORTGAGE LOANS; ORIGINAL ISSUANCE OF BONDS; TAX TREATMENT................... 2 Section 2.01. Conveyance of Mortgage Loans; Retention of Obligation to Fund Advances Under Credit Line Agreements...................................... 2 Section 2.02. Further Encumbrance of Trust Property...................................... 6 Section 2.03. Acceptance by Indenture Trustee; Certain Substitution of Mortgage Loans.... 7 Section 2.04. Representations and Warranties Regarding the Servicer and the Depositor.... 8 Section 2.05. Representations and Warranties of the Depositor Regarding the Mortgage Loans; Removal of Certain Mortgage Loans.......................... 11 Section 2.06. Covenants of the Depositor................................................. 24 Section 2.07. Removal of Mortgage Loans at Election of Issuer............................ 25 Section 2.08. Execution and Authentication of Bonds...................................... 26 Section 2.09. Tax Treatment.............................................................. 26 Section 2.10. [Reserved]................................................................. 27 ARTICLE III ADMINISTRATION AND SERVICING OF MORTGAGE LOANS........................................... 27 Section 3.01. The Servicer............................................................... 27 Section 3.02. Collection of Certain Mortgage Loan Payments............................... 28 Section 3.03. Withdrawals from the Collection Account.................................... 30 Section 3.04. Maintenance of Hazard Insurance; Property Protection Expenses.............. 31 Section 3.05. Assumption and Modification Agreements..................................... 31 Section 3.06. Realization Upon Defaulted Mortgage Loans; Repurchase of Certain Mortgage Loans..................................................... 32 Section 3.07. Indenture Trustee to Cooperate............................................. 32 Section 3.08. Servicing Compensation; Payment of Certain Expenses by Servicer............ 33 Section 3.09. Annual Statement as to Compliance.......................................... 33 Section 3.10. Annual Servicing Report.................................................... 34 Section 3.11. Annual Opinion of Counsel.................................................. 34 Section 3.12. Access to Certain Documentation and Information Regarding the Mortgage Loans............................................................. 34 Section 3.13. Maintenance of Certain Servicing Insurance Policies........................ 35 Section 3.14. Reports to the SEC......................................................... 35 Section 3.15. Tax Returns................................................................ 36
i Section 3.16. Information Required by the Internal Revenue Service Generally and Reports of Foreclosures and Abandonments of Mortgaged Property......... 36 Section 3.17. Reporting Requirements..................................................... 36 Section 3.18. Matters Relating to MERS Loans............................................. 36 ARTICLE IV SERVICING CERTIFICATE..................................................................... 37 Section 4.01. Servicing Certificate...................................................... 37 Section 4.02. Reserved................................................................... 38 Section 4.03. Reserved................................................................... 38 Section 4.04. Loan Data Remittance Report................................................ 38 Section 4.05. Reserved................................................................... 39 ARTICLE V THE SERVICER AND THE DEPOSITOR............................................................. 39 Section 5.01. Liability of the Servicer and the Depositor................................ 39 Section 5.02. Merger or Consolidation of, or Assumption of the Obligations of, the Servicer or the Depositor.............................................. 39 Section 5.03. Limitation on Liability of the Servicer and Others......................... 39 Section 5.04. Servicer Not to Resign..................................................... 40 Section 5.05. Delegation of Duties....................................................... 40 Section 5.06. Indemnification of the Trust by the Servicer............................... 41 Section 5.07. Indemnification of the Trust by the Depositor.............................. 41 Section 5.08. Limitation on Liability of the Depositor................................... 41 ARTICLE VI SERVICING TERMINATION..................................................................... 42 section 6.01. Events of Servicing Termination............................................ 42 Section 6.02. Indenture Trustee to Act; Appointment of Successor......................... 44 Section 6.03. Notification to Bondholders and Residual Certificateholders................ 45 ARTICLE VII TERMINATION.............................................................................. 46 Section 7.01. Termination................................................................ 46 ARTICLE VIII ADMINISTRATIVE DUTIES OF THE SERVICER................................................... 47 Section 8.01. Administrative Duties...................................................... 47 Section 8.02. Records.................................................................... 49 Section 8.03. Additional Information to be Furnished to the Issuer....................... 49 ARTICLE IX MISCELLANEOUS PROVISIONS.................................................................. 49 Section 9.01. Amendment.................................................................. 49 Section 9.02. Recordation of Agreement................................................... 50 Section 9.03. Limitation on Rights of Bondholders........................................ 51 Section 9.04. Governing Law.............................................................. 51 Section 9.05. Notices.................................................................... 51 Section 9.06. Severability of Provisions................................................. 52 Section 9.07. Assignment................................................................. 52 Section 9.08. Third-Party Beneficiaries.................................................. 52
ii Section 9.09. Counterparts............................................................... 52 Section 9.10. Effect of Headings and Table of Contents................................... 52 Section 9.11. Insurance Agreement........................................................ 52 Section 9.12. Nonpetition Covenant....................................................... 52 EXHIBITS EXHIBIT A: MORTGAGE LOAN SCHEDULE................................................................... A-1 EXHIBIT B: FORM OF OPINION OF COUNSEL............................................................... B-1 EXHIBIT C-1: FORM OF OFFICER'S CERTIFICATE: PERMANENT RELEASE...................................... C-1 EXHIBIT C-2: FORM OF OFFICER'S CERTIFICATE: TEMPORARY RELEASE....................................... C-2 EXHIBIT D: FORM OF CREDIT LINE AGREEMENT............................................................ D-1 EXHIBIT E: FORM OF MORTGAGE NOTE (CLOSED END MORTGAGE LOANS)........................................ E-1 EXHIBIT F: FORM OF CERTIFICATE: LOAN LEVEL REPORTING............................................... F-1
iii SALE AND SERVICING AGREEMENT, dated as of ________, 200_, (the "Agreement") among SEQUOIA MORTGAGE TRUST 200_-_, a Delaware statutory trust (the "Issuer" or "Trust"), SEQUOIA MORTGAGE FUNDING CORPORATION, a Delaware corporation (the "Depositor"), [_____________], a [_______] corporation (the "Servicer"), and [INDENTURE TRUSTEE], as Indenture Trustee (the "Indenture Trustee"). WHEREAS, the Issuer desires to purchase a portfolio of Mortgage Loans arising in connection with Loan Agreements acquired by RWT Holdings, Inc.; WHEREAS, the Depositor has purchased such Mortgage Loans from RWT Holdings, Inc. and is willing to sell such Mortgage Loans to the Issuer; WHEREAS, such Mortgage Loans consist of certain home equity revolving lines of credit (the "HELOC Mortgage Loans") and certain second lien, closed-end mortgage loans (the "Closed End Mortgage Loans"); WHEREAS, the Servicer is willing to service all such Mortgage Loans; NOW, THEREFORE, in consideration of the promises and mutual covenants herein contained, the parties hereto agree as follows: ARTICLE I DEFINITIONS Section 1.01. Definitions. All capitalized terms used in this Agreement and not otherwise defined herein, shall have the meanings assigned thereto in Annex A to the Indenture dated as of ________, 200_, between the Issuer and the Indenture Trustee, as the same may be amended and supplemented from time to time. Section 1.02. Other Definitional Provisions. (a) All terms defined in this Agreement shall have the defined meanings when used in any instrument governed hereby and in any certificate or other document made or delivered pursuant hereto unless otherwise defined therein. (b) As used in this Agreement, in any instrument governed hereby and in any certificate or other document made or delivered pursuant hereto or thereto, accounting terms not defined in this Agreement or in any such instrument, certificate or other document, and accounting terms partly defined in this Agreement or in any such instrument, certificate or other document to the extent not defined, shall have the respective meanings given to them under generally accepted accounting principles as in effect on the date of this Agreement or any such instrument, certificate or other document, as applicable. To the extent that the definitions of accounting terms in this Agreement or in any such instrument, certificate or other document are inconsistent with the meanings of such terms under generally accepted accounting principles, the definitions contained in this Agreement or in any such instrument, certificate or other document shall control. (c) Any agreement, instrument or statute defined or referred to herein or in any instrument or certificate delivered in connection herewith means such agreement, instrument or statute as from time to time amended, modified or supplemented and includes (in the case of agreements or instruments) references to all attachments thereto and instruments incorporated therein; references to a Person are also to its permitted successors and assigns. Section 1.03. Interest Calculations. All calculations of interest hereunder that are made in respect of the Principal Balance of a Mortgage Loan shall be made on a daily basis using a 365-day year. All calculations of interest on the Bonds shall be made on the basis of the actual number of days in an Interest Accrual Period and a year assumed to consist of 360 days. The calculation of the Servicing Fee shall be made on the basis of a 360-day year consisting of twelve 30-day months. All dollar amounts calculated hereunder shall be rounded to the nearest penny with one-half of one penny being rounded down. ARTICLE II CONVEYANCE OF MORTGAGE LOANS; ORIGINAL ISSUANCE OF BONDS; TAX TREATMENT Section 2.01. Conveyance of Mortgage Loans; Retention of Obligation to Fund Advances Under Credit Line Agreements. (a) In consideration of the Issuer's delivery to or upon the order of the Depositor on the Closing Date of the net proceeds from the sale of the Bonds and the Residual Certificates and the other amounts to be distributed from time to time to the Depositor in accordance with the terms of this Agreement, the Depositor, concurrently with the execution and delivery of this Agreement, hereby sells, transfers, assigns, sets over and otherwise conveys to the Issuer, without recourse (subject to Sections 2.03, 2.05 and 2.07), all of its right, title and interest in and to (i) each Mortgage Loan, including its Principal Balance (including any Additional Balances related thereto) and all collections in respect thereof received after the Cut-Off Date (excluding Interest Collection due on or prior to the Cut-Off Date); (ii) property that secured a Mortgage Loan that is acquired by foreclosure or deed in lieu of foreclosure; (iii) all of the Depositor's rights under the Purchase Agreement (including all representations and warranties of the Seller contained therein); (iv) the Depositor's rights under the hazard insurance policies; (v) the Policy; (vi) the Collection Account; and (vii) any proceeds of the foregoing and any other Trust Property and all other assets included or to be included in the Trust for the benefit of Bondholders, the Residual Certificateholders and the Insurer; provided, however, neither the Indenture Trustee nor the Trust assumes or shall assume the obligation under any Credit Line Agreement that provides for the funding of future advances to the Mortgagor thereunder, and neither the Trust nor the Indenture Trustee shall be obligated or permitted to fund any such future advances. With respect to the HELOC Mortgage Loans, Additional Balances shall be part of the related Principal Balance and are hereby transferred to the Trust on the Closing Date pursuant to this Section 2.01, and therefore part of the Trust Property. On or prior to the Closing Date, the Depositor shall cause the Insurer to deliver the Policy to the Indenture Trustee for the benefit of the Bondholders. It is the intention of the Depositor that the transfer and assignment contemplated by this Agreement shall constitute a sale of the Mortgage 2 Loans and other Trust Property from the Depositor to the Issuer and that such sale should constitute a valid transfer and assignment of the Mortgage Loans and other Trust Property to the Issuer and the beneficial interest in and title to the Mortgage Loans and the other Trust Property shall not be part of the Depositor's estate in the event of the filing of a bankruptcy petition by or against the Depositor under any bankruptcy law. In the event that, notwithstanding the intent of the Depositor, the transfer and assignment contemplated hereby is held not to be a sale, this Agreement shall constitute a grant of a security interest in the property referred to in this Section 2.01 for the benefit of the Bondholders, the Residual Certificateholders and the Insurer. To the extent that the fair market value of any Additional Balance is greater than the cash consideration paid by the Issuer for such Additional Balance, the difference between such fair market value and the amount of such cash consideration shall be deemed to be a capital contribution made to the Issuer by the Depositor. To the extent that the Depositor receives cash consideration for the entire fair market value of such Additional Balance on any future date, any corresponding capital contribution that had previously been deemed to have been made to the Issuer by the Depositor shall be deemed to have been redeemed. (b) Each of the Servicer and the Depositor agrees to take or cause to be taken such actions and execute such documents (including, without limitation, the filing of all necessary continuation statements for the UCC-1 financing statements filed in the States of California, and Delaware, respectively, which shall have been filed on or as of the Closing Date) describing the Cut-Off Date Principal Balances and Additional Balances and naming (i) the Servicer as debtor and the Depositor as secured party, and (ii) the Depositor as debtor and the Issuer as secured party and any amendments to UCC-1 financing statements required to reflect a change in the name or corporate structure of the Issuer, the Servicer or the Depositor or the filing of any additional UCC-1 financing statements due to the change in the principal office of the Servicer or the Depositor (within 10 days of any event necessitating such filing) as are necessary to perfect and protect the Bondholders' and the Insurer's interests in each Cut-Off Date Principal Balance and Additional Balance and the proceeds thereof (other than maintaining possession by the Indenture Trustee of the Mortgage Loans and the Mortgage Files). (c) In connection with such transfer and assignment, the Servicer shall deliver to the Custodian on behalf of the Indenture Trustee the following documents or instruments (each a "Related Document" and together for each Mortgage Loan, the "Mortgage File") with respect to each Mortgage Loan on the Closing Date: (i) with respect to any Closed End Mortgage Loan, the original Mortgage Note endorsed in blank or endorsed with the following: "[---Servicer---] to the Sequoia Mortgage Trust 200_-_, by [Indenture Trustee], as trustee, for the Collateralized Mortgage Bonds, Series 200_-_ without recourse", and with respect to any HELOC Mortgage Loan, the original Credit Line Agreement; (ii) for each Mortgage Loan that is not a MERS Mortgage Loan, an unsigned and un-notarized but otherwise complete original Assignment of Mortgage in blank; (iii) (A) for each Mortgage Loan that is not a MERS Mortgage Loan, the original recorded Mortgage or, if in connection with any Mortgage Loan, the original 3 recorded Mortgage with evidence of recording thereon cannot be delivered on or prior to the Closing Date because of a delay caused by the public recording office where such original Mortgage has been delivered for recordation or because such original Mortgage has been lost, the Depositor shall deliver or cause to be delivered to the Indenture Trustee, a true and correct copy of such Mortgage, together with (i) in the case of a delay caused by the public recording office, an Officer's Certificate of the Depositor stating that such original Mortgage has been dispatched to the appropriate public recording official or (ii) in the case of an original Mortgage that has been lost, a certificate by the appropriate county recording office where such Mortgage is recorded, and (B) in the case of each MERS Mortgage Loan, the original Mortgage, noting the presence of the "Mortgage Identification Number" of such MERS Mortgage Loan; (iv) if applicable, the original intervening assignments, if any ("Intervening Assignments"), with evidence of recording thereon, showing a complete chain of title to the Mortgage from the originator to the RWT Holdings, Inc. (and the endorsed in blank in accordance with clause (ii) above) or, if any such original Intervening Assignment has not been returned from the applicable recording office or has been lost, a true and correct copy thereof, together with (i) in the case of a delay caused by the public recording office, an Officer's Certificate of the Depositor stating that such original Intervening Assignment has been dispatched to the appropriate public recording official for recordation or (ii) in the case of an original Intervening Assignment that has been lost, a certificate by the appropriate county recording office where such Mortgage is recorded; (v) either a title policy or guaranty title with respect to the related Mortgaged Property; (vi) the original of any guaranty executed in connection with the Mortgage Note; (vii) the original of each assumption, modification, consolidation or substitution agreement, if any, relating to the Mortgage Loans; and (viii) any security agreement, chattel mortgage or equivalent instrument executed in connection with the Mortgage. The Depositor hereby confirms to the Indenture Trustee that it has caused the portions of the Electronic Ledgers relating to the Mortgage Loans as of the Closing Date to be clearly and unambiguously marked, and has made, or will make, the appropriate entries in its general accounting records to indicate that such Mortgage Loans have been transferred to the Trust. The Servicer hereby confirms to the Indenture Trustee that it has clearly and unambiguously made appropriate entries in its general accounting records indicating that such Mortgage Loans constitute part of the Trust and are serviced by it on behalf of the Trust in accordance with the terms hereof. (d) Notwithstanding the characterization of the Bonds as debt for federal, state and local income and franchise tax purposes, the parties hereto intend to treat the transfer of the Mortgage Loans to the Trust as provided herein as a sale, for certain non-tax purposes, of all the 4 Depositor's right, title and interest in and to the Mortgage Loans, whether now existing or hereafter created, and the other property described above and all proceeds thereof. In the event such transfer is deemed not to be a sale for such purposes, the Depositor grants to the Trust, a security interest in all of such party's right, title and interest in, to and under the Mortgage Loans, whether now existing or hereafter created, and the other property described above and all proceeds thereof; and this Agreement shall constitute a security agreement under applicable law. (e) Within 90 days following delivery of the Mortgage Files to the Custodian on behalf of the Indenture Trustee pursuant to this Section, the Indenture Trustee shall cause the Custodian to review on its behalf or the Indenture Trustee shall review each such Mortgage File to ascertain that all required documents set forth in this Section 2.01 have been executed and received, and that such documents relate to the Mortgage Loans identified on the Mortgage Loan Schedule and in so doing the Custodian on behalf of the Indenture Trustee and/or the Indenture Trustee may rely on the purported due execution and genuineness of any signature thereon. If within such 90-day period the Custodian on behalf of the Indenture Trustee and/or the Indenture Trustee finds any document constituting a part of a Mortgage File not to have been executed or received or to be unrelated to the Mortgage Loans identified in said Mortgage Loan Schedule or, if in the course of its review, the Custodian on behalf of the Indenture Trustee and/or the Indenture Trustee determines that such Mortgage File is otherwise defective in any material respect, the Indenture Trustee shall promptly upon the conclusion of its review or the Custodian's review on its behalf notify the Depositor and the Insurer, and the Depositor shall have a period of 90 days after such notice within which to correct or cure any such defect. Upon the completion of its 90-day review, the Custodian on behalf of the Indenture Trustee and/or the Indenture Trustee shall also notify the Insurer of any Mortgage File with respect to which it has been delivered any items other than the original recorded Mortgage with respect to Section 2.01(c)(iii). Neither the Custodian on behalf of the Indenture Trustee nor the Indenture Trustee shall have any responsibility for reviewing any Mortgage File except as expressly provided in this Section 2.01. In reviewing any Mortgage File pursuant to this Section, the Indenture Trustee and the Custodian on behalf of the Indenture Trustee shall have no responsibility for determining whether any document is valid and binding, whether the text of any assignment or endorsement is in proper or recordable form (except, if applicable, to determine if the Indenture Trustee is the assignee or endorsee), whether any document has been recorded in accordance with the requirements of any applicable jurisdiction, or whether a blanket assignment is permitted in any applicable jurisdiction, whether any Person executing any document is authorized to do so or whether any signature thereon is genuine, but shall only be required to determine whether a document has been executed, that it appears to be what it purports to be, and, where applicable, that it purports to be recorded. Upon its receipt of written notice from the Servicer or the Insurer that a Recordation Event has occurred the Indenture Trustee shall take all necessary steps to prepare and submit for recordation an Assignment of Mortgage (or a blanket Assignment of Mortgage covering multiple Mortgage Loans if the same is permitted in any applicable jurisdiction) at the expense of the Servicer or, if the Servicer fails to pay such amounts or is no longer a party hereto, pursuant to Section 8.7(d)(ix) of the Indenture. 5 (f) The Depositor shall sell, assign, transfer, set over and otherwise convey without recourse to the Indenture Trustee all right, title and interest of the Depositor in and to any Eligible Substitute Mortgage Loan delivered to the Indenture Trustee on behalf of the Trust by the Depositor pursuant to Section 2.03 or Section 2.05 hereof and all its right, title and interest to principal collected and interest accruing on such Eligible Substitute Mortgage Loan on and after the applicable Substitute Cut-Off Date; provided, however, that the Depositor shall reserve and retain all right, title and interest in and to payments of interest due on such Eligible Substitute Mortgage Loan prior to the applicable Substitute Cut-Off Date; provided, further, that neither the Trust nor the Indenture Trustee shall be obligated to fund any future advances to the related Mortgagor under such Eligible Substitute Mortgage Loan. In connection with any transfer and assignment of an Eligible Substitute Mortgage Loan to the Indenture Trustee on behalf of the Trust, the Depositor agrees to cause to be delivered to the Custodian on behalf of the Indenture Trustee the items described in Section 2.01(c) on the date of such transfer and assignment or, if a later delivery time is permitted by Section 2.01(c), then no later than such later delivery time. (g) Each Defective Mortgage Loan that is required to be repurchased or substituted pursuant to the provisions this Agreement or the Purchase Agreement shall, upon such repurchase or substitution in accordance with the provisions hereof, be released from the Trust and from the lien created by the Indenture. As to each Mortgage Loan released from the Trust in connection with the repurchase thereof or the conveyance of an Eligible Substitute Mortgage Loan therefor, the Indenture Trustee will transfer, assign, set over and otherwise convey without recourse, to or upon the order of the Depositor, all of its right, title and interest in and to such released Mortgage Loan and all the Trust's right title and interest to principal collected and interest accruing on such released Mortgage Loan on and after the first day of the calendar month in which such Mortgage Loan is released; provided, however, that the Trust shall reserve and retain all right, title and interest in and to payments of principal and interest collected on such released Mortgage Loan prior to such date. Section 2.02. Further Encumbrance of Trust Property. (a) Immediately upon the conveyance to the Trust by the Depositor of any item of the Trust Property pursuant to Section 2.01, all right, title and interest of the Depositor in and to such item of Trust Property shall terminate, and all such right, title and interest shall vest in the Trust, in accordance with the Trust Agreement and Sections 3802 and 3805 of the Delaware Statutory Trust Act (12 Del. Code, ss. 3801 et seq.). (b) Immediately upon the vesting of the Trust Property in the Trust, the Trust shall have the sole right to pledge or otherwise encumber, such Trust Property. Pursuant to the Indenture and contemporaneously with such property vesting in the Trust pursuant to (a) above, the Trust shall grant a security interest in the Trust Property to secure the repayment of the Issuer Secured Obligations. The Residual Certificates shall represent the beneficial ownership interest in the Trust Property, and the Residual Certificateholders shall be entitled to receive distributions with respect thereto as set forth herein. 6 (c) Prior to the payment in full on the Bonds, the payment of all amounts due to the Insurer under the Insurance Agreement, the termination of the Policy (as defined therein) and the surrender of the Policy by the Indenture Trustee to the Insurer, the Indenture Trustee shall hold the Trust Property on behalf of the Issuer Secured Parties. Following the payment in full of the Bonds and the payment of all amounts due to the Insurer under the Insurance Agreement, and the release and discharge of the Indenture, all covenants of the Issuer under Article III of the Indenture shall, until payment in full of the Residual Certificates, remain as covenants of the Issuer for the benefit of the Residual Certificateholders, enforceable by the Residual Certificateholders to the same extent as such covenants were enforceable by the Insurer and the Bondholders prior to the discharge of the Indenture. Any rights of the Indenture Trustee under Article III of the Indenture, following the discharge of the Indenture, shall vest in the Residual Certificateholders. Section 2.03. Acceptance by Indenture Trustee; Certain Substitution of Mortgage Loans. (a) The Indenture Trustee shall, at such time as there are no Bonds outstanding and all sums due to (i) the Indenture Trustee or any agent or counsel thereof pursuant to the Indenture, (ii) the Indenture Trustee pursuant to this Agreement and (iii) the Insurer pursuant to the Insurance Agreement have been paid, release any remaining portion of the Trust Property to the Depositor. (b) The Issuer hereby acknowledges its receipt of the Policy and the Mortgage Loans, and declares that the Indenture Trustee holds and will hold such instruments, and to the extent that any documents are delivered to it pursuant to Section 2.01, will hold such documents, and all amounts received by it thereunder and hereunder, in trust, upon the terms herein set forth, for the use and benefit of all present and future Bondholders, and the Insurer. If the time to cure any defect in respect of any Mortgage Loan of which the Indenture Trustee or the Insurer has notified the Depositor following the review pursuant to Section 2.01 has expired or if at any time any loss is suffered by the Issuer or the Indenture Trustee on behalf of the Bondholders or the Insurer, in respect of any Mortgage Loan as a result of (i) a defect in any document constituting a part of its Mortgage File or (ii) an Assignment of Mortgage to the Indenture Trustee not having been recorded as required by Section 2.01, then on the next succeeding Business Day, the Depositor shall (i) substitute in lieu of such Mortgage Loan Eligible Substitute Mortgage Loans, and deliver the Substitution Amount applicable thereto to the Servicer for deposit in the Collection Account or (ii) purchase such Mortgage Loan at a purchase price equal to the Loan Purchase Price thereof, which purchase price shall be delivered to the Servicer for deposit in the Collection Account. Upon receipt of any Mortgage Loan or of written notification signed by a Servicing Officer to the effect that the Loan Purchase Price in respect of a Defective Mortgage Loan has been deposited into the Collection Account, then as promptly as practicable, the Indenture Trustee shall execute such documents and instruments of transfer presented by the Depositor, in each case without recourse, representation or warranty, and take such other actions as shall reasonably be requested by the Depositor to effect such transfer by the Trust of such Defective Mortgage Loan pursuant to this Section. It is understood and agreed that the obligation of the Depositor to accept a transfer of a Defective Mortgage Loan and to either convey an Eligible Substitute Mortgage Loan or to make a deposit of any related 7 Loan Purchase Price into the Collection Account shall constitute the sole remedy respecting such defect available to Bondholders and the Indenture Trustee against the Depositor. (c) As to any Eligible Substitute Mortgage Loan, the Depositor shall, if required to deliver any such Eligible Substitute Mortgage Loan, deliver to the Custodian on behalf of the Indenture Trustee with respect to such Eligible Substitute Mortgage Loan such documents and agreements as are required to be held by the Indenture Trustee in accordance with Section 2.01. For any Collection Period during which the Depositor substitutes one or more Eligible Substitute Mortgage Loans, the Servicer shall determine the Substitution Amount which amount shall be deposited by the Depositor in the Collection Account at the time of substitution. All amounts received in respect of the Eligible Substitute Mortgage Loan during the Collection Period in which the circumstances giving rise to such substitution occur shall not be a part of the Trust and shall not be deposited by the Servicer in the Collection Account. All amounts received by the Servicer during the Collection Period in which the circumstances giving rise to such substitution occur in respect of any Defective Mortgage Loan so removed by the Trust shall be deposited by the Servicer in the Collection Account. Upon such substitution, the Eligible Substitute Mortgage Loan shall be subject to the terms of this Agreement in all respects, and the Depositor shall be deemed (i) to have made with respect to such Eligible Substitute Mortgage Loan as of the date of substitution, the covenants, representations and warranties set forth in Section 2.05 and (ii) to have certified that such Mortgage Loan is an Eligible Substitute Mortgage Loan. The procedures applied by the Depositor in selecting each Eligible Substitute Mortgage Loan shall not be materially adverse to the interests of the Indenture Trustee, the Bondholders or the Insurer. The Servicer, promptly following the transfer of a Defective Mortgage Loan from, or an Eligible Substitute Mortgage Loan to, the Trust pursuant to this Section, shall amend the Mortgage Loan Schedule and make appropriate entries in its general account records to reflect such transfer. The Servicer shall, following such transfer, appropriately mark its records to indicate that it is no longer servicing such Mortgage Loan on behalf of the Trust. The Depositor, promptly following such transfer, shall appropriately mark its Electronic Ledger and make appropriate entries in its general account records to reflect such transfer. Section 2.04. Representations and Warranties Regarding the Servicer and the Depositor. (a) The Servicer represents and warrants to the Indenture Trustee and the Insurer that as of the Closing Date. (i) The Servicer is a [________] corporation, validly existing and in good standing under the laws of the State of [________], and has the corporate power to own its assets and to transact the business in which it is currently engaged. The Servicer is duly qualified to do business as a foreign corporation and is in good standing in each jurisdiction in which the character of the business transacted by it or any properties owned or leased by it requires such qualification and in which the failure so to qualify would have a material adverse effect on the business, properties, assets, or condition (financial or other) of the Servicer; 8 (ii) The Servicer has the power and authority to make, execute, deliver and perform this Agreement and all of the transactions contemplated under this Agreement, and has taken all necessary corporate action to authorize the execution, delivery and performance of this Agreement. When executed and delivered, this Agreement will constitute the legal, valid and binding obligation of the Servicer enforceable in accordance with its terms, except as enforcement of such terms may be limited by bankruptcy, insolvency, reorganization, moratorium or other similar laws affecting the enforcement of creditors' rights generally and by the availability of equitable remedies; (iii) The Servicer is not required to obtain the consent of any other party or any consent, license, approval or authorization from, or registration or declaration with, any governmental authority, bureau or agency in connection with the execution, delivery, performance, validity or enforceability of this Agreement, except for such consent, license, approval or authorization, or registration or declaration, as shall have been obtained or filed, as the case may be, prior to the Closing Date; (iv) The execution, delivery and performance of this Agreement by the Servicer will not violate any provision of any existing law or regulation or any order or decree of any court applicable to the Servicer or any provision of the Certificate of Incorporation or Bylaws of the Servicer, or constitute a material breach of any mortgage, Indenture, contract or other agreement to which the Servicer is a party or by which the Servicer may be bound; (v) No litigation or administrative proceeding of or before any court, tribunal or governmental body is currently pending, or to the knowledge of the Servicer threatened, against the Servicer or any of its properties or with respect to this Agreement, or the Bonds; (vi) The Servicer is solvent and will not be rendered insolvent by the transactions described herein and, after giving effect to the transactions described herein, will not be left with an unreasonably small amount of capital with which to engage in the ordinary course of its business and the Servicer does not intend to incur, nor does the Servicer believe that it has incurred, debts beyond its ability to pay as they mature. The Servicer does not contemplate the commencement of insolvency, liquidation or consolidation proceedings or the appointment of a receiver, liquidator, conservator, Indenture Trustee or similar official in respect of the Servicer or any of its respective assets; and (vii) The Servicer is a member of MERS in good standing, and will comply in all material respects with the rules and procedures of MERS in connection with the servicing of the MERS Mortgage Loans for as long as such Mortgage Loans are registered with MERS. The representations and warranties set forth in this Section 2.04(a) shall survive the sale and assignment of the Mortgage Loans to the Trust. Upon discovery of a breach of any representations and warranties which materially and adversely affects the interests of the Bondholders or the Insurer, the person discovering such breach shall give written notice within 9 five (5) days of discovery to the other parties and the Insurer. Within 30 days of its discovery or its receipt of notice of breach, or, with the prior written consent of a Responsible Officer of the Indenture Trustee and the Insurer, such longer period specified in such consent, the Servicer shall cure such breach if such breach is curable and no material adverse effect would result to the Insurer, the Trust or the Bondholders. (b) The Depositor represents and warrants to the Indenture Trustee and the Insurer that as of the Closing Date: (i) The Depositor is a Delaware corporation, validly existing and in good standing under the laws of the State of Delaware, and has the statutory power to own its assets and to transact the business in which it is currently engaged. The Depositor is duly qualified to do business as a foreign corporation and is in good standing in each jurisdiction in which the character of the business transacted by it or any properties owned or leased by it requires such qualification and in which the failure so to qualify would have a material adverse effect on the business, properties, assets, or condition (financial or other) of the Depositor; (ii) The Depositor has the power and authority to make, execute, deliver and perform this Agreement and all of the transactions contemplated under this Agreement, and has taken all necessary corporate action to authorize the execution, delivery and performance of this Agreement. When executed and delivered, this Agreement will constitute the legal, valid and binding obligation of the Depositor enforceable in accordance with its terms, except as enforcement of such terms may be limited by bankruptcy, insolvency, reorganization, moratorium or other similar laws affecting the enforcement of creditors' rights generally and by the availability of equitable remedies; (iii) The Depositor is not required to obtain the consent of any other party or any consent, license, approval or authorization from, or registration or declaration with, any governmental authority, bureau or agency in connection with the execution, delivery, performance, validity or enforceability of this Agreement; (iv) The execution, delivery and performance of this Agreement by the Depositor will not violate any provision of any existing law or regulation or any order or decree of any court applicable to the Depositor or any provision of the certificate of formation or operating agreement of the Depositor, or constitute a material breach of any mortgage, Indenture, contract or other agreement to which the Depositor is a party or by which the Depositor may be bound; (v) No litigation or administrative proceeding of or before any court, tribunal or governmental body is currently pending, or to the knowledge of the Depositor threatened, against the Depositor or any of its properties or with respect to this Agreement or the Bonds; and (vi) The Depositor is solvent and will not be rendered insolvent by the transactions described herein and, after giving effect to the transactions described herein, 10 will not be left with an unreasonably small amount of capital with which to engage in the ordinary course of its business and the Depositor does not intend to incur, nor does the Depositor believe that it has incurred, debts beyond its ability to pay as they mature. The Depositor does not contemplate the commencement of insolvency, liquidation or consolidation proceedings or the appointment of a receiver, liquidator, conservator, Indenture Trustee or similar official in respect of the Depositor or any of its respective assets. The representations and warranties set forth in this Section 2.04(b) shall survive the sale and assignment of the Mortgage Loans to the Trust. Upon discovery of a breach of any representations and warranties which materially and adversely affects the interests of the Bondholders or the Insurer, the person discovering such breach shall give prompt written notice to the other parties, and the Insurer. Within 30 days of its discovery or its receipt of notice of breach, or, with the prior written consent of a Responsible Officer of the Indenture Trustee and the Insurer, such longer period specified in such consent, the Depositor shall cure such breach if such breach is curable and no material adverse effect would result to the Insurer, the Trust or the Bondholders. Section 2.05. Representations and Warranties of the Depositor Regarding the Mortgage Loans; Removal of Certain Mortgage Loans. (a) The Depositor hereby makes the following representations and warranties on which the Issuer is deemed to have relied in acquiring the Mortgage Loans and upon which the Insurer is deemed to rely in issuing the Policy. Such representations and warranties speak as of the execution and delivery of this Agreement, as of the Closing Date with respect to the Mortgage Loans and as of the related Transfer Date with respect to the Eligible Substitute Mortgage Loans, but shall survive the sale, transfer, and assignment of the Mortgage Loans to the Issuer and the pledge thereof to the Indenture Trustee pursuant to the Indenture, (i) As of the Closing Date with respect to the Mortgage Loans and as of the related Transfer Date with respect to any Eligible Substitute Mortgage Loans and with respect to any HELOC Mortgage Loan, as of the date any Additional Balance is created, the information set forth in the Mortgage Loan Schedule for such Mortgage Loans is true and correct in all material respects; (ii) Each Mortgage Loan is being serviced by the Servicer and is being serviced in compliance with applicable law; (iii) The applicable Cut-Off Date Principal Balance has not been assigned or pledged, and the Depositor is the sole owner and holder of such Cut-Off Date Principal Balance free and clear of any and all liens, claims, encumbrances, participation interests, equities, pledges, charges or security interests of any nature, and has full right and authority, under all governmental and regulatory bodies having jurisdiction over the ownership of the applicable Mortgage Loans, to sell, assign or transfer the same pursuant to this Agreement and upon its acquisition of the Mortgage Loans, as of the Closing Date, the Trust will be the sole owner and holder of such Mortgage Loans free and clear of any 11 and all liens claims, encumbrances, participating interests, equities, pledges, charges, or security interests of any nature; (iv) Except with respect to liens released immediately prior to the transfer herein contemplated, each Credit Line Agreement and each Mortgage Note and related Mortgage has not been assigned or pledged and immediately prior to the transfer and assignment herein contemplated, the Depositor held good, marketable and indefeasible title to, and was the sole owner and holder of, each Mortgage Loan subject to no liens, charges, mortgages, claims, participation interests, equities, pledges or security interests of any nature, encumbrances or rights of others (collectively, a "Lien"); the Depositor has full right ---- and authority under all governmental and regulatory bodies having jurisdiction over the Depositor, subject to no interest or participation of, or agreement with, any party, to sell and assign the same pursuant to this Agreement; and immediately upon the transfers and assignments herein contemplated, the Depositor shall have transferred all of its right, title and interest in and to each Mortgage Loan and the Trust will hold good, marketable and indefeasible title to, and be the sole owner of, each Mortgage Loan subject to no Liens; (v) As of the Closing Date with respect to the Mortgage Loans and the applicable Transfer Date with respect to any Eligible Substitute Mortgage Loans, the related Mortgage is a valid, enforceable and subsisting first or second lien, as set forth on the Mortgage Loan Schedule with respect to each related Mortgaged Property, and as of the applicable Cut-Off Date the related Mortgaged Property is free and clear of all encumbrances and liens having priority over the first or second lien, as applicable, of such Mortgage except for liens for (i) real estate taxes and special assessments not yet delinquent; (ii) any first mortgage loan secured by such Mortgaged Property and specified on the Mortgage Loan Schedule; (iii) covenants, conditions and restrictions, rights of way, easements and other matters of public record as of the date of recording that are acceptable to mortgage lending institutions generally or specifically reflected in the appraisals; and (iv) other matters to which like properties are commonly subject which do not materially interfere with the benefits of the security intended to be provided by such Mortgage; (vi) As of and after the Closing Date with respect to the Mortgage Loans and as of and after the applicable Transfer Date with respect to any Eligible Substitute Mortgage Loans, there is no valid right to rescission, offset, defense (including the defense of usury) or counterclaim of any obligor under any Loan Agreement or Mortgage; (vii) As of the Closing Date with respect to the Mortgage Loans and the applicable Transfer Date with respect to any Eligible Substitute Mortgage Loans, there is no delinquent recording or other tax or fee or assessment lien against any related Mortgaged Property; (viii) As of the Closing Date with respect to the Mortgage Loans and the applicable Transfer Date with respect to any Eligible Substitute Mortgage Loans, there is no proceeding pending or threatened for the total or partial condemnation of any 12 Mortgaged Property, nor is such a proceeding currently occurring, and such property is in good repair and is undamaged by waste, fire, earthquake or earth movement, windstorm, flood, other types of water damage, tornado or other casualty, so as to affect adversely the value of the Mortgaged Property as security for the Mortgage Loan or the use for which the premises were intended; (ix) As of the Closing Date with respect to the Mortgage Loans and the applicable Transfer Date with respect to any Eligible Substitute Mortgage Loans, there are no mechanics' or similar liens or claims which have been filed for work, labor or material affecting the related Mortgaged Property which are, or may be, liens prior or equal to the lien of the related Mortgage and no rights are outstanding which could give rise to such liens, except liens which are fully insured against by the title insurance policy or other title protection referred to in clause (xiv); (x) No Minimum Monthly Payment is more than 59 days delinquent (measured on a contractual basis); (xi) As of the Closing Date with respect to the Mortgage Loans and the applicable Transfer Date with respect to any Eligible Substitute Mortgage Loans, for each Mortgage Loan, the related Mortgage File contains each of the documents and instruments specified to be included therein and such Mortgage File has been delivered to the Indenture Trustee; (xii) The related Loan Agreement and the related Mortgage at origination complied in all material respects with applicable local, state and federal laws and regulations, including, without limitation, all applicable predatory and abusive lending laws, usury, truth-in-lending, real estate settlement procedures, consumer credit protection, equal credit opportunity, recording or disclosure laws applicable to the Mortgage Loans, and consummation of the transactions contemplated hereby, including without limitation the receipt of interest, will not involve the violation of such laws; (xiii) On the Closing Date with respect to the Mortgage Loans and to the extent not already included in such filing, on the applicable Transfer Date with respect to any Eligible Substitute Mortgage Loans, the Depositor has filed UCC-1 financing statements with respect to such Mortgage Loans; (xiv) A lender's policy of title insurance, expressClose.com lender master protection program (standard mortgage guaranty) or a commitment (binder) to issue the same or an attorney's certificate or opinion of title was effective on the date of the origination of each mortgage loan and each such policy or certificate or opinion of title is valid and remains in full force and effect; (xv) As of the Closing Date with respect to the Mortgage Loans and the applicable Transfer Date with respect to any Eligible Substitute Mortgage Loans, none of the Mortgaged Properties is a mobile home or a manufactured housing unit; 13 (xvi) As of the Cut-Off Date for the Mortgage Loans no more than approximately ______% of the Mortgage Loans (by Pool Balance) are secured by Mortgaged Properties located in one United States postal zip code; (xvii) The Combined Loan-to-Value Ratio for each Mortgage Loan was not in excess of 100%; (xviii) No selection procedure that identified the Mortgage Loans as being less desirable or valuable than other comparable mortgage loans originated or acquired by the Depositor was utilized in selecting the Mortgage Loans for sale to the Trust; provided, however, that the Mortgage Loans were selected from the pool of mortgage loans originated in connection with the Depositor's mortgage loan origination program; (xix) The Depositor has not transferred the Mortgage Loans to the Trust with any intent to hinder, delay or defraud any of its creditors; (xx) The Minimum Monthly Payment with respect to any Mortgage Loan is not less than the interest accrued at the applicable Loan Rate on the average daily Principal Balance during the interest period relating to the date on which such Minimum Monthly Payment is due; (xxi) As of the Closing Date with respect to the Mortgage Loans and the applicable Transfer Date with respect to any Eligible Substitute Mortgage Loans, each Loan Agreement and each Mortgage Loan is genuine and is a legal, valid, binding and enforceable obligation of the related Mortgagor, except as the enforceability thereof may be limited by the bankruptcy, insolvency or similar laws affecting creditors' rights generally; (xxii) As of the Closing Date with respect to the Mortgage Loans and the applicable Transfer Date with respect to any Eligible Substitute Mortgage Loans, there has been no default, breach, violation or event of acceleration of any senior mortgage loan related to a Mortgaged Property that has not been cured by a party other than the Servicer; (xxiii) The terms of each Mortgage Note and each Mortgage have not been impaired, altered or modified in any respect, except by a written instrument which (if such instrument is secured by real property) has been recorded, if necessary, to protect the interest of the Bondholders and the Insurer and which has been delivered to the Indenture Trustee. The substance of any such alteration or modification is reflected on the related Mortgage Loan Schedule and has been approved by the primary mortgage guaranty insurer, if any; (xxiv) The definition of "prime rate" in each Credit Line Agreement relating to a HELOC Mortgage Loan does not differ materially from the definition in the form of Credit Line Agreement in Exhibit D; (xxv) The weighted average remaining term to maturity of the Mortgage Loans on a contractual basis as of the Cut-Off Date is approximately 210 months. On 14 each date that the Loan Rates relating to HELOC Mortgage Loans have been adjusted, interest rate adjustments on the HELOC Mortgage Loans were made in compliance with the related Mortgages and Credit Line Agreement and applicable law and all required notices of interest rate adjustments were sent to each Mortgagor on a timely basis. Over the term of each HELOC Mortgage Loan, the Loan Rate may not exceed the related Loan Rate Cap, if any. The Loan Rate Cap for each of the HELOC Mortgage Loans is _____%. With respect to the HELOC Mortgage Loans, the margins range between _____% and _____% and the weighted average margin is approximately _____% as of the Cut-Off Date. The Loan Rates on the Mortgage Loans range between _____% and _____%, and the weighted average Loan Rate on the Mortgage Loans is approximately _____%; (xxvi) As of the Closing Date with respect to the Mortgage Loans and the applicable Transfer Date with respect to any Eligible Substitute Mortgage Loans, each Mortgaged Property consists of a single parcel of real property with a one-to-four unit single family residence erected thereon, or an individual condominium unit, planned unit development unit or townhouse; (xxvii) No more than approximately _____% (by Pool Balance) of the Mortgage Loans are secured by real property improved by individual condominium units, planned development units, manufactured housing or two-to-four family residences erected thereon, and approximately ______% (by Pool Balance) of the Mortgage Loans are secured by real property with a one-family residence erected thereon; (xxviii) Each Mortgage Note evidencing a Closed End Mortgage Loan is comprised of one original promissory note and each such promissory note constitutes an "instrument" for purposes of Section 9-102(A)(47) of the UCC. There is no obligation on the part of the Depositor or any other party to make payments in addition to those made by the Mortgagor with respect to the Closed End Mortgage Loans; (xxix) The Credit Limits on the HELOC Mortgage Loans range between $_____ and $______ with an average of approximately $_____. The average Credit Limit Utilization Rate (weighted by Credit Limit) of the HELOC Mortgage Loans is approximately _____%. The Principal Balances on the Mortgage Loans range between approximately $______ and $______ with an average of approximately $______; (xxx) Approximately _____% of the Mortgage Loans are second liens, and either (A) no consent for each Mortgage Loan was required by the holder of the related senior lien, if any, prior to the making of such Mortgage Loan or (B) such consent has been obtained and is contained in the related Mortgage File; (xxxi) This Agreement constitutes a valid transfer and assignment to the Trust of all right, title and interest of the Depositor in and to the Cut-Off Date Principal Balances with respect to the applicable Mortgage Loans, all monies due or to become due with respect thereto and all proceeds of such Cut-Off Date Principal Balances with respect to the Mortgage Loans and such funds as are from time to time deposited in the Collection Account (excluding any investment earnings thereon) and all other property 15 specified in the definition of "Trust" as being part of the corpus of the Trust conveyed to the Trust, and upon payment for the Additional Balances, will constitute a valid transfer and assignment to the Indenture Trustee of all right, title and interest of the Depositor in and to the Additional Balances, all monies due or to become due with respect thereto, and all proceeds of such Additional Balances and all other property specified in the definition of "Trust" relating to the Additional Balances; (xxxii) As of the Closing Date no Mortgage Loan is the subject of foreclosure proceedings and, to the best of the Depositor's knowledge, no obligor of any of the Mortgage Loans has filed for bankruptcy protection. As of the applicable Transfer Date, no Eligible Substitute Mortgage Loan is the subject of foreclosure proceedings and, to the best of the Depositor's knowledge, no obligor of any of the Eligible Substitute Mortgage Loans has filed for bankruptcy protection. (xxxiii) The proceeds of each Closed End Mortgage Loan have been fully disbursed, and there is no obligation on the part of the mortgagee to make future advances thereunder. Any and all requirements as to completion of any on-site or off-site improvements and as to disbursements of any escrow funds therefor have been complied with. All costs, fees and expenses incurred in making or closing or recording such Closed End Mortgage Loans were paid; (xxxiv) Each Mortgage contains customary and enforceable provisions which render the rights and remedies of the holder thereof adequate for the realization against the related Mortgaged Property of the benefits of the security, including (A) in the case of a Mortgage designated as a deed of trust, by trustee's sale and (B) otherwise by judicial foreclosure. Subject to applicable state law, there is no homestead or other exemption available to the Mortgagor which would materially interfere with the rights to sell the Mortgaged Property at a trustee's sale or the right to foreclose upon the related Mortgage; (xxxv) As of the Closing Date with respect to the Mortgage Loans and the applicable Transfer Date with respect to any Eligible Substitute Mortgage Loan, except for events permissible under Section 3.05 of this Agreement, there is no default, breach, violation or event of acceleration existing under any Mortgage or the related Mortgage Note and no event which, with the passage of time or with notice and the expiration of any grace or cure period, would constitute a default, breach, violation or event of acceleration; and the Depositor has not waived any default, breach, violation or event of acceleration; (xxxvi) To the best knowledge of the Depositor, all parties to the Mortgage Note and the Mortgage had legal capacity to execute the Mortgage Note and the Mortgage and each Mortgage Note and Mortgage have been duly and properly executed by such parties; Each Mortgage and Mortgage Note is the legal, valid and binding obligation of the related Mortgagor and is enforceable by the Issuer against the Mortgagor in accordance with its terms, except only as such enforcement may be limited by bankruptcy, insolvency, reorganization, moratorium or other similar laws affecting the enforcement of creditors' rights generally and by law; There is only one originally 16 executed Mortgage Note or Credit Line Agreement and promissory note, as applicable, for each Mortgage Loan; (xxxvii) As of the Cut-Off Date no more than approximately ____% of the Principal Balance of the Mortgage Loans represent Mortgage Loans with respect to which the related Mortgagor had a Credit Score of ___ or less at the time of origination or whose Credit Score was unavailable. (xxxviii) As of the Closing Date with respect to the Mortgage Loans and the applicable Transfer Date with respect to any Eligible Substitute Mortgage Loan, no Mortgagor has been released, in whole or in part, except in connection with an assumption agreement which has been approved by the applicable title insurer (to the extent required by such title insurer) and which is part of the Mortgage File delivered to the Indenture Trustee; (xxxix) At the time of origination of each Mortgage Loan, the related prior lien was not more than 30 days delinquent. Additionally, as of the Closing Date, no senior mortgage loan on the related Mortgaged Property was more than 59 days delinquent; (xl) All required inspections, licenses and certificates with respect to the use and occupancy of all occupied portions of all property securing the Mortgages have been made, obtained or issued, as applicable; (xli) If the improvements securing a Mortgage Loan were in a federally designated special flood hazard area as of the date of origination, flood insurance to the extent required in Section 3.04 covers the related Mortgaged Property (either by coverage under the federal flood insurance program or by coverage by private insurers); (xlii) With respect to each Mortgage Loan, the related prior lien does not provide for negative amortization; (xliii) With respect to each Mortgage Loan, the maturity date of the Mortgage Loan is prior to the maturity date of the related prior lien if such prior lien provides for a balloon payment; (xliv) All amounts received after the Cut-Off Date with respect to the Mortgage Loans to which the Depositor is not entitled will be deposited into the Collection Account within one Business Day after the Closing Date; (xlv) Each Mortgage Loan is secured by a property having an appraised value as of origination of $_________ or less; (xlvi) Except for events permissible under Section 3.05(a)(x) of this Agreement, there are no defaults in complying with the terms of the Mortgage, and either (1) any taxes, governmental assessments, insurance premiums, water, sewer and municipal charges or ground rents which previously became due and owing have been paid, or (2) an escrow of funds has been established in an amount sufficient to pay for every such item which remains unpaid and which has been assessed but is not yet due and 17 payable. There are no defaults in complying with the terms of any senior mortgage on the related Mortgaged Property that have not been cured by anyone other than the Servicer, except for any payment defaults of less than 30 days. Except for payments in the nature of escrow payments, including without limitation, taxes and insurance payments, the Depositor has not advanced funds, or induced, solicited or knowingly received any advance of funds by a party other than the Mortgagor, directly or indirectly, for the payment of any amount required by the Mortgage Note, except for interest accruing from the date of the Mortgage Note or date of disbursement of the Mortgage proceeds, whichever is greater, to the day which precedes by one month the Due Date of the first installment of principal and interest; (xlvii) With respect to each Mortgage Loan, the improvements upon each Mortgaged Property are covered by a valid and existing hazard insurance policy with a carrier generally acceptable to the Servicer that provides for fire and extended coverage representing coverage not less than (a) the Credit Limit of such HELOC Mortgage Loan or (b) the Cut-Off Date Principal Balance of such Closed End Mortgage Loan or (c) the maximum insurable value of the Mortgaged Property; (xlviii) No misrepresentation of a material fact or fraud in respect of the origination, modification or amendment of any Mortgage Loan has taken place on the part of any person, including, without limitation, the related Mortgagor, any appraiser, any builder or developer or any party involved in the origination of such Mortgage Loan; (xlix) With respect to the Mortgage Loans, the terms of the Mortgage Note and the Mortgage have not been impaired, altered or modified in any material respect, except by a written instrument which has been recorded or is in the process of being recorded, if necessary, to protect the interests of the Insurer and the Bondholders and which has been or will be delivered to the Indenture Trustee on behalf of the Trust, no Mortgage has been satisfied, cancelled or rescinded, in whole or in part, and the Mortgaged Property securing the Mortgage has not been released from the lien of the Mortgage, in whole or in part, nor has any instrument been executed that would effect any such release, cancellation or rescission; (l) As of the Cut-Off Date, no Mortgage Loan is more than 59 days delinquent in payment of principal and interest; (li) Except for Mortgage Loans that are delinquent for a time period less than that set forth in (l) above, there is no default, breach, violation or event of acceleration existing under any Mortgage or the related Mortgage Note and no event which, with the passage of time or with notice and the expiration of any grace or cure period, would constitute a default, breach, violation or event of acceleration; and neither the Depositor, nor any other entity involved in originating or servicing a Mortgage Loan, has waived any default, breach, violation or event of acceleration; (lii) None of the Mortgage Loans is a cooperative share mortgage; 18 (liii) Each appraisal of a Mortgage Loan that was used to determine the appraised value of the related Mortgaged Property was conducted generally in accordance with the Depositor's mortgage loan origination program(s) and customary industry standards and included an assessment of the fair market value of the related mortgaged property at the time of the appraisal. The Mortgage File contains an appraisal of the applicable Mortgaged Property; (liv) All individual insurance policies contain a standard mortgagee clause naming the Servicer, its successors and assigns, as mortgagee. All premiums thereon have been paid. Each Mortgage obligates the Mortgagor thereunder to maintain all such insurance at the Mortgagor's cost and expense, and upon the Mortgagor's failure to do so, authorizes the holder of the Mortgage to obtain and maintain such insurance at the Mortgagor's cost and expense and to seek reimbursement therefor from the Mortgagor; (lv) Any advances made after the date of origination of a Mortgage Loan but prior to the Cut-Off Date have been consolidated with the outstanding principal amount secured by the related Mortgage, and the secured principal amount, as consolidated, bears a single interest rate and single repayment term reflected on the Mortgage Loan Schedule. The consolidated principal amount does not exceed the original principal amount of the related Mortgage Loan; (lvi) No improvement located on or being part of any Mortgaged Property is in violation of any applicable zoning law or regulation. All inspections, licenses and certificates required to be made or issued with respect to all occupied portions of each Mortgaged Property and, with respect to the use and occupancy of the same, including, but not limited to, certificates of occupancy and fire underwriting certificates, have been made or obtained from the appropriate authorities and such Mortgaged Property is lawfully occupied under the applicable law and all improvements which were included for the purpose of determining the appraised value of the Mortgaged Property lie wholly within the boundaries and building restriction lines of such property, and no improvements on adjoining property encroach upon the Mortgage Property; (lvii) The proceeds of each fixed rate and balloon Mortgage Loan have been fully disbursed and there is no obligation on the part of the mortgagee to make future advances thereunder and any and all requirements as to completion of any on-site or off-site improvements and as to disbursement of any escrow funds therefor have been complied with. All costs, fees and expenses incurred in making, closing or recording the Mortgage Loans were paid and the Mortgagor is not entitled to any refund of amounts paid or due under the Mortgage Note; (lviii) No Mortgage Loan has a shared appreciation feature, or other contingent interest feature; (lix) All parties which have had any interest in the Mortgage Loan, whether as originator, mortgagee, assignee, pledgee or otherwise, are (or, during the period in which they held and disposed of such interest, were): (A) organized under the laws of such state, or (B) qualified to do business in such state, or (C) federal savings and loan 19 associations or national banks having principal offices in such state, or (D) not doing business in such state so as to require qualification or licensing, or (E) not otherwise required or licensed in such state. To the best of Depositor's knowledge, all parties which have had any interest in the Mortgage Loan were in compliance with any and all applicable licensing requirements of the laws of the state wherein the Mortgaged Property is located or were not required to be licensed in such state; (lx) Each document or instrument in the related Mortgage File is in a form generally acceptable to prudent mortgage lenders that regularly originate or purchase mortgage loans comparable to the Mortgage Loans for sale to prudent investors in the secondary market that invest in mortgage loans such as the Mortgage Loans; (lxi) Each original Mortgage was recorded and all subsequent assignments of the original Mortgage (other than the assignment to the Indenture Trustee) have been recorded in the appropriate jurisdictions wherein such recordation is necessary to perfect the lien thereof as against creditors of the Depositor, or is in the process of being recorded; (lxii) No Mortgage Loan was originated under a buydown plan; (lxiii) No Mortgage Loan is subject to the requirements of the Home Ownership and Equity Protection Act of 1994 ("HOEPA") or is in violation of any state or municipal law comparable to HOEPA; (lxiv) The Servicer for each Mortgage Loan will accurately and fully report its borrower credit files to all three credit repositories in a timely manner; (lxv) No proceeds from any Mortgage Loan were used to purchase single-premium credit insurance policies; (lxvi) No Mortgage Loan has a prepayment penalty term longer than five years after its origination; (lxvii) Each Mortgage Loan conforms, and all Mortgage Loans in the aggregate conform, in all material respects, to the descriptions thereof set forth in the Prospectus Supplement; (lxviii) Each Mortgage Loan was originated on or after ________, 200_; (lxix) The Depositor represents and warrants that the Servicer currently operates or actively participates in an on-going business (A) to originate single family mortgage loans ("Loans"), and/or (B) to make periodic purchases of Loans from originators or sellers, and/or (C) to issue and/or purchase securities or bonds supported by the Loans, a portion of which Loans are made to borrowers who are: (a) low-income families (families with incomes of 80% or less of area median income) living in low-income areas (a census tract or 20 block numbering area in which the median income does not exceed 80 percent of the area median income); or (b) very low-income families (families with incomes of 60% or less of area median income). (lxx) Each Mortgage contains a provision for the acceleration of the payment of the unpaid principal balance of the related Mortgage Loan in the event the related Mortgaged Property is sold or transferred without the prior consent of the mortgagee thereunder; (lxxi) Each Mortgage Loan was originated substantially in accordance with Depositor's underwriting criteria, which conform to the underwriting criteria set forth in the Prospectus Supplement. (lxxii) There exists no violation of any local, state or federal environmental law, rule or regulation in respect of any Mortgaged Property which violation has or could have a material adverse effect on the market value of such Mortgaged Property. Depositor has no knowledge of any pending action or proceeding directly involving any such Mortgaged Property in which compliance with any environmental law, rule or regulation is in issue; and, to the best of Depositor's knowledge, nothing further remains to be done to satisfy in full all requirements of each such law, rule or regulation constituting a prerequisite to the use and enjoyment of any such Mortgaged Property; (lxxiii) The Depositor has caused or will cause to be performed any and all acts required to be performed to preserve the rights and remedies of the Indenture Trustee in any insurance policies applicable to the Mortgage Loans including, without limitation, any necessary notifications of insurers, assignment of policies or interests therein, and establishments of co-insured, joint loss payee and mortgagee rights in favor of the Indenture Trustee; (lxxiv) The related Mortgage Note is not and has not been secured by any collateral, pledged account or other security except the lien of the corresponding Mortgage; (lxxv) There is no obligation on the part of the Depositor or any other party to make payments in addition to those made by the Mortgagor; (lxxvi) With respect to each Mortgage constituting a deed of trust, a trustee, duly qualified under existing law to serve as such, has been properly designated and currently so serves and is named in such Mortgage, and no fees or expenses are or will become payable by the Bondholders or the Trust to the trustee under the deed of trust, except in connection with a trustee's sale after default by the Mortgagor; (lxxvii) Each Mortgagor has executed a statement to the effect that such Mortgagor has received all disclosure materials including the notice of the right of cancellation or rescission required by applicable law with respect to the making of the 21 Mortgage Loan and any waiver of any right of cancellation or rescission exercised by the Mortgagor was in accordance with applicable law and is binding on the Mortgagor; (lxxviii) The security interest created pursuant to Section 2.01 hereof is a valid and continuing security interest (as defined in the UCC) in favor of the Issuer in the property sold, transferred, assigned, set over and otherwise conveyed from the Depositor to the Issuer pursuant to this Agreement, which security interest is prior to all other Liens and is enforceable as such against creditors of and purchasers from the Depositor; (lxxix) The Depositor has not authorized the filing of and is not aware of any financing statements against the Depositor that include a description of collateral covering the property sold, transferred, assigned, set over and otherwise conveyed from the Depositor to the Issuer pursuant to this Agreement other than any financing statement relating to the security interest granted to the Issuer hereunder that has not been terminated; (lxxx) The Depositor is not aware of any judgment or tax lien filings against it; (lxxxi) None of the Mortgage Notes has any marks or notations indicating that they have been pledged, assigned or otherwise conveyed to any Person other than the Issuer; (lxxxii) The pool tape from which the selection of the Mortgage Loans being acquired on the Closing Date was made available to the accountants that are providing a comfort letter to the Insurer in connection with the Prospectus Supplement and with respect to the Mortgage Loans as of the Closing Date, the information on the pool tape was complete and accurate as of its date and included a description of the same Mortgage Loans that are described on the Schedule of Mortgage Loans and the payments due thereunder as of the Closing Date; (lxxxiii) With respect to each Mortgage Loan, the payments required of the related Mortgagor will be such that the Mortgage Loan will fully amortize over its amortization term; and (lxxxiv) The sale, transfer, assignment and conveyance of the Mortgage Loans by the Depositor to the Issuer pursuant to the Sale and Servicing Agreement is not subject to and will not result in any tax, fee or governmental charge payable by the Seller, the Depositor, the Issuer or the Indenture Trustee to any federal, state or local governments ("Transfer Taxes") other than Transfer Taxes which have or will have been paid by the Depositor as due; provided, that in the event that the Trust or the Indenture Trustee receives actual notice of any Transfer Taxes arising out of the transfer, assignment or conveyance of the Mortgage Loans, on written demand by the Issuer or the Indenture Trustee, or upon the Depositor's otherwise being given notice thereof by the Issuer or the Indenture Trustee, the Depositor shall pay, and otherwise indemnify and hold the Issuer, the Indenture Trustee and the Insurer harmless, on an after-tax basis, from and against any and all Transfer Taxes, it being understood that the Bondholders, the Issuer, the 22 Indenture Trustee and the Insurer shall have no obligation to pay any such Transfer Taxes. With respect to the representations and warranties set forth in this Section 2.05 that are made to the best of the Depositor's knowledge or as to which the Depositor has no knowledge, if it is discovered by the Depositor, the Servicer, the Insurer, or a Responsible Officer of the Indenture Trustee that the substance of such representation and warranty is inaccurate and such inaccuracy materially and adversely affects the value of the related Mortgage Loan then, notwithstanding the Depositor's lack of knowledge with respect to the substance of such representation and warranty being inaccurate at the time the representation or warranty was made, such inaccuracy shall be deemed a breach of the applicable representation or warranty. Notwithstanding the foregoing, a breach of any of the representations and warranties set forth in clauses (lxiii) through (lxvi) of this Section 2.05 will be deemed to materially and adversely affect the value of the related Mortgage Loan. (b) It is understood and agreed that the representations and warranties set forth in this Section 2.05 shall survive delivery of the respective Mortgage Files to the Indenture Trustee pursuant to Section 2.01 and the termination of the rights and obligations of the Servicer pursuant to Section 5.04 or 6.02. Upon discovery by the Depositor, the Servicer, the Insurer or a Responsible Officer of the Indenture Trustee of a breach of any of the foregoing representations and warranties, without regard to any limitation set forth therein concerning the knowledge of the Depositor as to the facts stated therein, which materially and adversely affects the interests of the Trust or the Bondholders or the Insurer in the related Mortgage Loans, the party discovering such breach shall give prompt written notice to the other parties and to the Insurer. Within 90 days of its discovery or its receipt of notice of such breach, the Depositor shall use all reasonable efforts to cure such breach or shall, not later than the Business Day next preceding the Payment Date in the month following the Collection Period in which any such cure period expired (or such later date that is acceptable to the Indenture Trustee or the Insurer as evidenced by their written consents), either (a) repurchase such Mortgage Loan from the Trust at the Loan Purchase Price or (b) substitute an Eligible Substitute Mortgage Loan, each in the same manner and subject to the same conditions as set forth in Section 2.03 and the representations and warranties set forth in Section 2.04; provided, however, that the cure for any breach of a representation and warranty relating to the characteristics of the Mortgage Loans in the aggregate shall be a repurchase of or substitution for only the Mortgage Loans necessary to cause such characteristics to be in compliance with the related representation and warranty. Upon accepting such transfer and making any required deposit into the Collection Account or substitution of an Eligible Substitute Mortgage Loans, as the case may be, the Depositor shall be entitled to receive an instrument of assignment or transfer from the Indenture Trustee to the same extent as set forth in Section 2.03 with respect to the transfer of Mortgage Loans under that Section. The Insurer shall be notified of any substitution of an Eligible Substitute Mortgage Loan. It is understood and agreed that the obligation of the Depositor to repurchase a Mortgage Loan as to which a breach has occurred and is continuing and deposit in the Collection Account the Loan Purchase Price or to substitute an Eligible Substitute Mortgage Loan, as the case may be, shall constitute the sole remedy against the Depositor respecting such breach available to Bondholders, the Indenture Trustee on behalf of Bondholders and the Insurer; provided, however, that the Depositor shall defend and indemnify the Indenture Trustee, the Insurer and 23 the Bondholders against all reasonable costs and expenses, and all losses, damages, claims and liabilities, including reasonable fees and expenses of counsel and the amount of any settlement entered into with the consent of the Depositor (such consent not to be unreasonably withheld), which may be asserted against or incurred by any of them as a result of any third-party action arising out of any breach of any such representation and warranty. Notwithstanding the foregoing, with regard to any breach of the representation and warranty set forth in Section 2.05(a)(xxxi), the Depositor shall pay to the Trust the Loan Purchase Price. The Depositor does hereby assign to the Trust the benefits of the representations and warranties made to it with respect to the Mortgage Loans under the Mortgage Loan Purchase Agreement and the Trust may exercise the rights with respect thereto relating to a Mortgage Loan, including the right to require repurchase in the event such Mortgage Loan is not repurchased by the Depositor Section 2.06. Covenants of the Depositor. The Depositor hereby covenants that: (a) Security Interests. The Depositor will not sell, pledge, assign or transfer to any other Person, or grant, create, incur, assume or suffer to exist any Lien on any Mortgage Loans, whether now existing or hereafter created, or any interest therein; the Depositor will notify the Indenture Trustee and the Insurer of the existence of any Lien on any Mortgage Loans immediately upon discovery thereof; and the Depositor will defend the Trust's right, title and interest (including the Trust's security interest) in, to and under the Mortgage Loans, whether now existing or hereafter created, against all claims of third parties claiming through or under the Depositor; provided, however, that nothing in this Section 2.06(a) shall prevent or be deemed to prohibit the Depositor from suffering to exist upon any of the Mortgage Loans any Liens for municipal or other local taxes and other governmental charges if such taxes or governmental charges shall not at the time be due and payable or if the Depositor shall currently be contesting the validity thereof in good faith by appropriate proceedings and shall have set aside on its books adequate reserves with respect thereto. (b) UCC-1 Financing Statements. On the Closing Date with respect to the Mortgage Loans and, to the extent not already included in such filing, on the applicable Transfer Date with respect to any Eligible Substitute Mortgage Loans, the Depositor will file UCC-1 financing statements with respect to such Mortgage Loans. (c) Negative Pledge. The Depositor hereby agrees not to transfer, assign, exchange, pledge, finance, hypothecate, grant a security interest in or otherwise convey the Residual Certificates except in accordance with Sections 5.04 and 6.02 hereof and in accordance with the Insurance Agreement and the Trust Agreement. (d) Downgrading. The Depositor will not engage in any activity which would result in a downgrading or withdrawal of the ratings on the Bonds without regard to the effect of the Policy. (e) Amendment to Certificate of Formation. The Depositor will not amend its certificate of formation without prior written notice to the Indenture Trustee and the Rating 24 Agencies and the prior written consent of the Insurer which consent shall not be unreasonably withheld. (f) Principal Place of Business. The Depositor's principal place of business is in California, and the Depositor will not change its principal place of business without prior written notice to the Indenture Trustee, the Rating Agencies and the Insurer. (g) No Notification of Mortgagors. The Depositor hereby agrees not to notify Mortgagors of the transfer of the Mortgage Loans to the Trust unless required by the terms of the Mortgage Loans or applicable law. Section 2.07. Removal of Mortgage Loans at Election of Issuer. Subject to the conditions set forth below and Section 8.2 of the Indenture, the Issuer may, but shall not be obligated to, require the removal of Mortgage Loans, from time to time, as of the close of business on a Payment Date (each, a "Removal Date"). On the tenth Business Day (the "Removal Notice Date") prior to the Removal Date designated in such notice, the Issuer shall give the Indenture Trustee, the Insurer and the Servicer a notice of the proposed removal that contains a list of the Mortgage Loans in the Pool to be removed. Such removal of Mortgage Loans shall be permitted upon satisfaction of the following conditions: (i) A Rapid Amortization Event shall not have occurred; (ii) On the Removal Date, the Overcollateralization Amount (after giving effect to the removal of the Mortgage Loans proposed to be removed) equals or exceeds the Specified Overcollateralization Amount; (iii) The transfer of such Mortgage Loans on any Removal Date during the Managed Amortization Period shall not, in the reasonable belief of the Depositor, cause a Rapid Amortization Event to occur or an event which with notice or lapse of time or both would constitute such a Rapid Amortization Event and a Rapid Amortization Event has not occurred; (iv) On or before the Removal Date, the Issuer shall have delivered to the Indenture Trustee a revised Mortgage Loan Schedule, reflecting the proposed transfer and the Removal Date, and the Servicer shall have marked the Electronic Ledger to show that the Mortgage Loans removed are no longer included in the Pool; (v) The Seller shall represent and warrant that its selection procedures are random and no selection procedures reasonably believed by the Seller to be adverse to the interests of the Bondholders or the Insurer were utilized in selecting the Mortgage Loans to be removed from the Pool; (vi) In connection with each such removal of Mortgage Loans pursuant to this Section, each Rating Agency shall have received on or prior to the related Removal Notice Date notice of such proposed removal of Mortgage Loans and, prior to the Removal Date, shall have notified the Indenture Trustee and the Insurer in writing that such removal of Mortgage Loans would not result in a reduction or withdrawal of its then current ratings of the Bonds, without regard to the Policy; and 25 (vii) The Issuer shall have delivered to the Indenture Trustee and the Insurer an Officer's Certificate certifying that the items set forth in subparagraphs (i) through (vi), inclusive, have been performed or are true and correct, as the case may be. The Indenture Trustee and the Insurer may conclusively rely on such Officer's Certificate, shall have no duty to make inquiries with regard to the matters set forth therein and shall incur no liability in so relying. (viii) The Insurer shall have been given an opportunity to review any Mortgage Loans proposed to be removed by the Trust. (ix) The Issuer shall have delivered a certificate in the form of Exhibit C-1 hereto to the Indenture Trustee. Upon receiving the requisite information from the Issuer, the Servicer shall perform in a timely manner those acts required of it, as specified above. Upon satisfaction of the above conditions, on the Removal Date the Indenture Trustee shall deliver, or cause to be delivered, to the Issuer the Mortgage File for each Mortgage Loan being so transferred, and the Indenture Trustee shall execute and deliver to the Issuer such other documents prepared by the Issuer as shall be reasonably necessary to remove such Mortgage Loans from the Pool. Any such removal of Mortgage Loans shall be without recourse, representation or warranty by or of the Indenture Trustee or the Trust to the Issuer. The review right given to the Insurer in clause (viii), above, must be completed prior to the Removal Date. Section 2.08. Execution and Authentication of Bonds. The Indenture Trustee, on behalf of the Issuer, has caused to be executed, authenticated and delivered to or upon the order of the Depositor, in exchange for the Issuer, concurrently with the sale, assignment and conveyance to the Indenture Trustee of the Issuer, one Class of Bonds in authorized denominations and the Residual Certificates, evidencing the ownership of the Issuer. Section 2.09. Tax Treatment. It is the intention of the Depositor and the Residual Certificateholders that the Bonds will be indebtedness of the Depositor for federal, state and local income and franchise tax purposes and for purposes of any other tax imposed on or measured by income. The Depositor, the Indenture Trustee and each Bondholder (or Bond Owner) by acceptance of its Bond (or, in the case of a Bond Owner, by virtue of such Bond Owner's acquisition of a beneficial interest therein) agrees to treat the Bonds (or beneficial interest therein), for purposes of federal, state and local income or franchise taxes and any other tax imposed on or measured by income, as indebtedness of the Depositor secured by the assets of the Trust and to report the transactions contemplated by this Agreement on all applicable tax returns in a manner consistent with such treatment. Each Bondholder agrees that it will cause any Bond Owner acquiring an interest in a Bond through it to comply with this Agreement as to treatment of the Bonds as indebtedness for federal, state and local income and franchise tax purposes and for purposes of any other tax imposed on or measured by income. The Indenture Trustee will prepare and file all tax reports required hereunder consistent with this Agreement except as may be required by or provided in Section 3.15. 26 Section 2.10. [Reserved]. ARTICLE III ADMINISTRATION AND SERVICING OF MORTGAGE LOANS Section 3.01. The Servicer. (a) The Servicer is hereby authorized to act as agent for the Trust and in such capacity shall manage, service, administer and make collections on the Mortgage Loans and perform the other actions under this Agreement. The Servicer shall service and administer the Mortgage Loans in a manner consistent with the terms of this Agreement and with general industry practice and shall have full power and authority, acting alone or through a subservicer, to do any and all things in connection with such servicing and administration which it may deem necessary or desirable, it being understood, however, that the Servicer shall at all times remain responsible to the Indenture Trustee, the Bondholders, the Residual Certificateholders and the Insurer for the performance of its duties and obligations hereunder in accordance with the terms hereof. Any amounts received by any subservicer in respect of a Mortgage Loan shall be deemed to have been received by the Servicer whether or not actually received by it. Without limiting the generality of the foregoing, the Servicer shall continue, and is hereby authorized and empowered by the Trust, to execute and deliver, on behalf of the Trust, any and all instruments of satisfaction or cancellation, or of partial or full release or discharge and all other comparable instruments, with respect to the Mortgage Loans and with respect to the Mortgaged Properties and to make deposits to and withdrawals from the Collection Account. The Indenture Trustee and the Owner Trustee shall, upon the written request of a Servicing Officer, furnish the Servicer with any powers of attorney and other documents necessary or appropriate to enable the Servicer to carry out its servicing and administrative duties hereunder and consistent with the Indenture Trustee's internal policies. The Servicer in such capacity may also consent to the placing of a lien senior to that of any Mortgage on the related Mortgaged Property, provided that (i) such Mortgage succeeded to a first lien position after the related Mortgage Loan was conveyed to the Trust and, immediately following the placement of such senior lien, such Mortgage is in a second lien position and the outstanding principal amount of the mortgage loan secured by such subsequent senior lien is no greater than the outstanding principal amount of the senior mortgage loan secured by the Mortgaged Property as of the date the related Mortgage Loan was originated; or (ii) the Mortgage relating to such Mortgage Loan was in a second lien position as of the Cut-Off Date and the new senior lien secures a mortgage loan that refinances an existing first mortgage loan and the outstanding principal amount of the replacement first mortgage loan immediately following such refinancing is not greater than the outstanding principal amount of such existing first mortgage loan at the date of origination of such Mortgage Loan; provided, further, that such senior lien does not secure a note that provides for negative amortization. 27 The Servicer may also, without prior approval from the Rating Agencies or the Insurer, increase the Credit Limits on HELOC Mortgage Loans provided that (i) new appraisals are obtained and the Combined Loan-to-Value Ratios of the HELOC Mortgage Loans after giving effect to such increase are less than or equal to the Combined Loan-to-Value Ratios of the Mortgage Loans as of the Cut-Off Date and (ii) such increases are consistent with the Servicer's credit and collection policies. No material change or departure from the Servicer's credit and collection policies with respect to any Mortgage Loans as in effect as of the Closing Date shall be permitted without the prior written consent of the Insurer. In addition, the Servicer may agree to changes in the terms of a Mortgage Loan at the request of the Mortgagor; provided that (i) such changes do not materially and adversely affect the interests of Bondholders, the Residual Certificateholders or the Insurer, (ii) such changes are consistent with prudent and customary business practice as evidenced by a certificate signed by a Servicing Officer delivered to the Indenture Trustee and the Insurer and (iii) the Rating Agencies and the Insurer are promptly notified of the changes. In addition to the foregoing, the Servicer may solicit Mortgagors to change any other terms of the related Mortgage Loans; provided that such changes (i) do not materially and adversely affect the interest of Bondholders or the Insurer, (ii) are consistent with prudent and customary business practice as evidenced by a certificate signed by a Servicing Officer delivered to the Indenture Trustee and the Insurer and (iii) do not adjust the maturity date of such Mortgage Loan past the date that is six months before the Final Scheduled Payment Date of the Bonds. Nothing herein shall limit the right of the Servicer to solicit Mortgagors with respect to new loans (including mortgage loans) that are not Mortgage Loans. The relationship of the Servicer (and of any successor to the Servicer as servicer under this Agreement) to the Indenture Trustee under this Agreement is intended by the parties to be that of an independent contractor and not that of a joint venturer, partner or agent. (b) In the event that the rights, duties and obligations of the Servicer are terminated hereunder, any successor to the Servicer in its sole discretion may, to the extent permitted by applicable law, terminate the existing subservicer arrangements with any subservicer, without charge, or assume the terminated Servicer's rights under such subservicing arrangements which termination or assumption will not violate the terms of such arrangements. Section 3.02. Collection of Certain Mortgage Loan Payments. (a) Servicer shall make reasonable efforts to collect all payments called for under the terms and provisions of the Mortgage Loans, and shall, to the extent such procedures shall be consistent with this Agreement, follow such collection procedures as it follows with respect to home equity loans in its servicing portfolio comparable to the Mortgage Loans. Consistent with the foregoing, and without limiting the generality of the foregoing, the Servicer may in its discretion (i) waive any late payment charge or any assumption fees or other fees which may be collected in the ordinary course of servicing such Mortgage Loans and (ii) arrange with a Mortgagor a schedule for the payment of interest due and unpaid; provided that such arrangement is consistent with the Servicer's policies with respect to the Mortgage Loans it owns or services; provided, further, that notwithstanding such arrangement such Mortgage Loans will 28 be included in the information regarding delinquent Mortgage Loans set forth in the Servicing Certificate and monthly statement to Bondholders pursuant to Section 4.01. (b) The Servicer shall on the Closing Date deposit into the Collection Account any amounts representing payments on, and any collections in respect of, the Mortgage Loans received after the Cut-Off Date and prior to the Closing Date (exclusive of payments in respect of accrued interest due on or prior to such Cut-Off Date) and thereafter the Servicer, or the Depositor, as the case may be, shall deposit into the Collection Account within one Business Day following receipt thereof the following payments and collections received or made by it (without duplication): (i) all collections on and in respect of the Mortgage Loans; (ii) the amounts, if any, deposited to the Collection Account pursuant to Section 3.04; (iii) Net Liquidation Proceeds; (iv) Insurance Proceeds (including, for this purpose, any amount required to be credited by the Servicer pursuant to the last sentence of Section 3.04 and excluding the portion thereof, if any, that has been applied to the restoration or repair of the related Mortgaged Property or released to the related Mortgagor in accordance with the normal servicing procedures of the Servicer); (v) any amounts required to be deposited therein pursuant to Section 7.01; (vi) any amounts drawn under the Policy pursuant to Section 8.4(f) of the Indenture, but only to be used for the payment of the items specified in Sections 8.7(d)(iii) and (vi) of the Indenture, as applicable; and (vii) the amounts, if any, required to be deposited therein by the Depositor pursuant to Section 2.05(b) hereof; provided, however, that with respect to each Collection Period, the Servicer shall be permitted to retain from payments in respect of interest on the Mortgage Loans, the Servicing Fee for such Collection Period. The foregoing requirements respecting deposits to the Collection Account are exclusive, it being understood that, without limiting the generality of the foregoing, the Servicer need not deposit in the Collection Account amounts representing Foreclosure Profits, fees (including annual fees) or late charge penalties payable by Mortgagors, or amounts received by the Servicer for the accounts of Mortgagors for application towards the payment of taxes, insurance premiums, assessments, excess pay off amounts and similar items. The Servicer shall remit all Foreclosure Profits to the Depositor. The Indenture Trustee shall hold amounts deposited in the Collection Account as Indenture Trustee for the Bondholders and the Insurer. The Servicer shall notify the Indenture Trustee and the Insurer in writing on each Determination Date of the amount of payments and 29 collections in the Collection Account allocable to Interest Collections and Principal Collections for the related Payment Date. Following such notification, the Servicer shall be entitled to withdraw from the Collection Account and retain any amounts that constitute income and gain realized from the investment of such payments and collections. At the written direction of the Servicer, the Indenture Trustee shall invest funds in the Collection Account in Eligible Investments specified in such written direction. All income and gain realized from any investment in Eligible Investments of funds in the Collection Account shall be for the benefit of the Servicer and shall be subject to its withdrawal from time to time. The amount of any losses incurred in respect of the principal amount of any such investments shall be deposited in the Collection Account by the Servicer out of its own funds immediately as realized. In the absence of written direction the Indenture Trustee shall invest funds in the Collection Account as directed by the Depositor. Section 3.03. Withdrawals from the Collection Account. From time to time, withdrawals may be made from the Collection Account by the Servicer or the Indenture Trustee for the following purposes: (i) If not received by the Servicer pursuant to Section 3.02(b), to the Servicer as payment for its Servicing Fee pursuant to Section 3.08; (ii) To pay to the Servicer amounts on deposit in the Collection Account that are not to be included in the distributions and payments pursuant to Section 8.7 of the Indenture to the extent provided by the second to the last and the last paragraph of Section 3.02(b); (iii) To make or to permit the Indenture Trustee to make distributions and payments pursuant to Section 8.7 of the Indenture; (iv) Prior to the Collection Period preceding the commencement of the Rapid Amortization Period, to pay to the Depositor the amount of any Additional Balances related to HELOC Mortgage Loans included in the Pool as and when created during the related Collection Period; provided, that the aggregate amount so paid to the Depositor in respect of Additional Balances with respect to the HELOC Mortgage Loans at any time during any Collection Period shall not exceed the amount of Principal Collections theretofore received for such Collection Period; (v) To pay to the Servicer any Liquidation Expenses not reimbursed prior to the deposit of Net Liquidation Proceeds to the Collection Account; (vi) Upon termination of the Trust, to make any payments required by Section 7.01. If the Servicer deposits in the Collection Account any amount not required to be deposited therein or any amount in respect of payments by Mortgagors made by checks subsequently returned for insufficient funds or other reason for non-payment it may at any time withdraw such amount from the Collection Account, and any such amounts shall not be included 30 in the amounts to be deposited in the Collection Account pursuant to Section 3.02(b), any provision herein to the contrary notwithstanding. Section 3.04. Maintenance of Hazard Insurance; Property Protection Expenses. The Servicer shall cause to be maintained for each Mortgage Loan hazard insurance naming the Servicer or its successors or assigns as loss payee thereunder providing extended coverage in an amount which is at least equal to the lesser of (i) the maximum insurable value of the improvements securing such Mortgage Loan from time to time or (ii) the combined principal balance owing on such Mortgage Loan and any mortgage loan senior to such Mortgage Loan from time to time. The Servicer shall also maintain on property acquired upon foreclosure, or by deed in lieu of foreclosure, hazard insurance with extended coverage in an amount which is at least equal to the lesser of (i) the maximum insurable value from time to time of the improvements which are a part of such property or (ii) the combined principal balance owing on such Mortgage Loan and any mortgage loan senior to such Mortgage Loan at the time of such foreclosure or deed in lieu of foreclosure plus accrued interest and the good-faith estimate of the Servicer of related Liquidation Expenses to be incurred in connection therewith. Amounts collected by the Servicer under any such policies shall be deposited in the Collection Account to the extent called for by Section 3.02. In cases in which any Mortgaged Property is located in a federally designated flood area, the hazard insurance to be maintained for the related Mortgage Loan shall include flood insurance. All such flood insurance shall be in such amounts as are required under applicable guidelines of the Federal Flood Emergency Act. The Servicer shall be under no obligation to require that any Mortgagor maintain earthquake or other additional insurance and shall be under no obligation itself to maintain any such additional insurance on property acquired in respect of a Mortgage Loan, other than pursuant to such applicable laws and regulations as shall at any time be in force and as shall require such additional insurance. If the Servicer shall obtain and maintain a blanket policy consistent with prudent industry standards insuring against hazard losses on all of the Mortgage Loans in an aggregate amount prudent under industry standards, it shall (a) conclusively be deemed to have satisfied its obligations as set forth in the first sentence of this Section 3.04 and (b) if there shall have been a loss which would have been covered by such policy, deposit in the Collection Account without right of reimbursement, as the case may be, the amount not otherwise payable under the blanket policy because of any deductible clause. Section 3.05. Assumption and Modification Agreements. In any case in which a Mortgaged Property has been or is about to be conveyed by the Mortgagor, the Servicer shall exercise its right to accelerate the maturity of such Mortgage Loan consistent with the then current practice of the Servicer and without regard to the inclusion of such Mortgage Loan in the Trust. If it elects not to enforce its right to accelerate or if it is prevented from doing so by applicable law, the Servicer (so long as such action conforms with the underwriting standards generally acceptable in the industry at the time for new origination) is authorized to take or enter into an assumption and modification agreement from or with the Person to whom such Mortgaged Property has been or is about to be conveyed, pursuant to which such Person becomes liable under the Loan Agreement and, to the extent permitted by applicable law, the Mortgagor remains liable thereon. The Servicer shall notify the Indenture Trustee that any assumption and modification agreement has been completed by delivering to the Indenture Trustee an Officer's Certificate signed by a Servicing Officer certifying that such agreement is in compliance with this Section 3.05 and by forwarding to the Indenture Trustee the original copy 31 of such assumption and modification agreement. Any such assumption and modification agreement shall, for all purposes, be considered a part of the related Mortgage File to the same extent as all other documents and instruments constituting a part thereof. No change in the terms of the related Loan Agreement may be made by the Servicer in connection with any such assumption to the extent that such change would not be permitted to be made in respect of the original Loan Agreement pursuant to the fourth paragraph of Section 3.01(a). Any fee collected by the Servicer for entering into any such agreement will be retained by the Servicer as additional servicing compensation. Section 3.06. Realization Upon Defaulted Mortgage Loans; Repurchase of Certain Mortgage Loans. The Servicer shall foreclose upon or otherwise comparably convert to ownership Mortgaged Properties securing such of the Mortgage Loans as come into and continue in default when, in the opinion of the Servicer based upon the practices and procedures referred to in the following sentence, no satisfactory arrangements can be made for collection of delinquent payments pursuant to Section 3.02; provided, that if the Servicer has knowledge or reasonably believes that any Mortgaged Property is affected by hazardous or toxic wastes or substances and that the acquisition of such Mortgaged Property would not be commercially reasonable, then the Servicer will not cause the Trust to acquire title to such Mortgaged Property in a foreclosure or similar proceeding. In connection with such foreclosure or other conversion, the Servicer shall follow such practices (including, in the case of any default on a related senior mortgage loan, the advancing of funds to correct such default) and procedures as it shall deem necessary or advisable and as shall be normal and usual in its general mortgage servicing activities. The foregoing is subject to the proviso that the Servicer shall not incur any Liquidation Expenses or otherwise expend its own funds in connection with any foreclosure or towards the correction of any default on a related senior mortgage loan or restoration of any property unless it shall determine that such expenditure will increase Net Liquidation Proceeds. In the event that title to any Mortgaged Property is acquired in foreclosure or by deed in lieu of foreclosure, the deed or certificate of sale shall be issued to the Indenture Trustee, or to its nominee on behalf of the Trust. Section 3.07. Indenture Trustee to Cooperate. On or before each Payment Date, the Servicer will notify the Indenture Trustee of the payment in full of the Principal Balance of any Mortgage Loan during the preceding Collection Period, which notification shall be by a certification (which certification shall include a statement to the effect that all amounts received in connection with such payment which are required to be deposited in the Collection Account pursuant to Section 3.02 have been so deposited or credited) of a Servicing Officer. Upon any such payment in full, the Servicer is authorized to execute, pursuant to the authorization contained in Section 3.01, if the assignments of Mortgage have been recorded as required hereunder, an instrument of satisfaction regarding the related Mortgage, which instrument of satisfaction shall be recorded by the Servicer if required by applicable law and be delivered to the Person entitled thereto. It is understood and agreed that no expenses incurred in connection with such instrument of satisfaction or transfer shall be reimbursed from amounts deposited in the Collection Account. If the Indenture Trustee is holding the Mortgage Files, from time to time and as appropriate for the servicing or foreclosure of any Mortgage Loan, or in connection with the payment in full of the Principal Balance of any Mortgage Loan, the Indenture Trustee shall, upon request of the Servicer and delivery to the Indenture Trustee of a Request for Release 32 substantially in the form attached hereto as Exhibit C signed by a Servicing Officer, release the related Mortgage File to the Servicer and the Indenture Trustee shall execute such documents, in the forms provided by the Servicer, as shall be necessary to the prosecution of any such proceedings or the taking of other servicing actions. Such trust receipt shall obligate the Servicer to return the Mortgage File to the Indenture Trustee when the need therefor by the Servicer no longer exists unless the Mortgage Loan shall be liquidated, in which case, upon receipt of a certificate of a Servicing Officer similar to that hereinabove specified, the trust receipt shall be released by the Indenture Trustee. In order to facilitate the foreclosure of the Mortgage securing any Mortgage Loan that is in default following recordation of the Assignment of Mortgage in accordance with the provisions hereof, the Indenture Trustee shall, if so requested in writing by the Servicer, execute an appropriate assignment in the form provided to the Indenture Trustee by the Servicer to assign such Mortgage Loan for the purpose of collection to the Servicer or to the related subservicer (any such assignment shall unambiguously indicate that the assignment is for the purpose of collection only), and, upon such assignment, the Servicer will thereupon bring all required actions in its own name and otherwise enforce the terms of the Mortgage Loan and deposit the Net Liquidation Proceeds, exclusive of Foreclosure Profits, received with respect thereto in the Collection Account. In the event that all delinquent payments due under any such Mortgage Loan are paid by the Mortgagor and any other defaults are cured, then the Servicer shall, within two Business Days, reassign such Mortgage Loan to the Indenture Trustee and return the related Mortgage File to the place where it was being maintained. After such reassignment, the Servicer, if requested by such Residual Certificateholders and if offered suitable indemnification and reimbursement for expenses, is authorized to seek a deficiency judgment if permitted by law against the Mortgagor under such Liquidated Mortgage Loan on behalf of the Residual Certificateholders to the extent of any losses on liquidation of any Mortgage Loan. Section 3.08. Servicing Compensation; Payment of Certain Expenses by Servicer. The Servicer shall be entitled to receive the Servicing Fee pursuant to Section 3.03 as compensation for its services in connection with servicing the Mortgage Loans. Moreover, additional servicing compensation in the form of late payment charges or other receipts not required to be deposited in the Collection Account (other than Foreclosure Profits) shall be retained by the Servicer. The Servicer shall be required to pay all expenses incurred by it in connection with its activities hereunder (including payment of all other fees and expenses not expressly stated hereunder to be for the account of the Bondholders and the Residual Certificateholders) and shall not be entitled to reimbursement therefor except as specifically provided herein. Liquidation Expenses are reimbursable to the Servicer solely from related Liquidation Proceeds of the related Mortgage Loan. Section 3.09. Annual Statement as to Compliance. (a) The Servicer will deliver to the Indenture Trustee, the Insurer and the Rating Agencies, on or before __________ of each year, beginning ___________, 200_, an Officer's Certificate stating that (i) a review of the activities of the Servicer during the preceding fiscal year (or such shorter period as is applicable in the case of the first report) and of its performance under this Agreement has been made under such officer's supervision and (ii) to the best of such officer's knowledge, based on such review, the Servicer has fulfilled all of its material 33 obligations under this Agreement throughout such fiscal year, or, if there has been a default in the fulfillment of any such obligation, specifying each such default known to such officer and the nature and status thereof. (b) The Servicer shall deliver to the Indenture Trustee, the Insurer and each of the Rating Agencies, promptly after having obtained knowledge thereof, but in no event later than five Business Days thereafter, written notice by means of an Officer's Certificate of any event which with the giving of notice or the lapse of time or both, would become an Event of Servicing Termination. Section 3.10. Annual Servicing Report. On or before ____________ of each year, beginning ___________, 200_, the Servicer, at its expense, shall cause a firm of nationally recognized independent public accountants (who may also render other services to the Servicer) to furnish a report to the Indenture Trustee, the Insurer and each Rating Agency to the effect that such firm has examined certain documents and records relating to the servicing of mortgage loans during the most recent fiscal year then ended under pooling and servicing agreements (substantially similar to this Agreement, including this Agreement), that such examination was conducted substantially in compliance with the audit guide for audits of non-supervised mortgagees approved by the Department of Housing and Urban Development for use by independent public accountants (to the extent that the procedures in such audit guide are applicable to the servicing obligations set forth in such agreements) and that such examination has disclosed no items of noncompliance with the provisions of this Agreement which, in the opinion of such firm, are material, except for such items of noncompliance as shall be set forth in such report. Section 3.11. Annual Opinion of Counsel. On or before ___________ of each year, beginning ___________, 200_, the Depositor, at its expense, shall deliver to the Indenture Trustee and the Insurer the applicable Opinion of Counsel specified in Exhibit B hereto. Section 3.12. Access to Certain Documentation and Information Regarding the Mortgage Loans. (a) Servicer shall provide to the Indenture Trustee, the Insurer, any Bondholders that are federally insured savings and loan associations, the Office of Thrift Supervision, successor to the Federal Home Loan Bank Board, the FDIC and the supervisory agents and examiners of the Office of Thrift Supervision access to the documentation regarding the Mortgage Loans required by applicable regulations of the Office of Thrift Supervision and the FDIC (acting as operator of the SAIF or the BIF), such access being afforded without charge but only upon reasonable request and during normal business hours at the offices of the Servicer. Nothing in this Section 3.12 shall derogate from the obligation of the Servicer to observe any applicable law prohibiting disclosure of information regarding the Mortgagors and the failure of the Servicer to provide access as provided in this Section 3.12 as a result of such obligation shall not constitute a breach of this Section 3.12. (b) The Servicer shall supply information in such form as the Indenture Trustee shall reasonably request to the Indenture Trustee and the Bond Paying Agent, on or before the start of the Determination Date preceding the related Payment Date, as is required in the Indenture 34 Trustee's reasonable judgment to enable the Bond Paying Agent or the Indenture Trustee, as the case may be, to make required distributions and to furnish the required reports to the Bondholders and to make any claim under the Policy. Section 3.13. Maintenance of Certain Servicing Insurance Policies. The Servicer shall maintain, at its own expense, a blanket fidelity bond (the "Fidelity Bond") and an errors and omissions insurance policy, with broad coverage with financially responsible companies on all officers, employees, or other persons acting in any capacity with regard to the Mortgage Loans to handle funds, money, documents and papers relating to the Mortgage Loans. The Fidelity Bond and errors and omissions insurance policy shall be in the form of the Mortgage Banker's Blanket Bond and shall protect and insure the Servicer against losses, including forgery, theft, embezzlement, fraud, errors and omissions and negligent acts of such persons. Such Fidelity Bond shall also protect and insure the Servicer against losses in connection with the failure to maintain any insurance policies required pursuant to this Agreement and the release or satisfaction of a Mortgage Loan without having obtained payment in full of the indebtedness secured thereby. No provision of this Section 3.13 requiring the Fidelity Bond and errors and omissions insurance policy shall diminish or relieve the Servicer from its duties and obligations as set forth in this Agreement. The minimum coverage under any such bond and insurance policy shall be at least equal to the corresponding amounts required by the Federal Home Loan Mortgage Corporation in the Federal Home Loan Mortgage Corporation's Seller/Servicer's Guide. Upon request of the Indenture Trustee or the Insurer, the Servicer shall cause to be delivered to the Indenture Trustee or the Insurer a certified true copy of the Fidelity Bond and errors and omissions insurance policy and a statement from the surety and the insurer that such Fidelity Bond and errors and omissions insurance policy shall in no event be terminated or materially modified without thirty days' prior written notice to the Indenture Trustee and the Insurer. Section 3.14. Reports to the SEC. Within 15 days after each Payment Date, the Manager shall, on behalf of the Trust and in accordance with industry standards, file with the SEC via the Electronic Data Gathering and Retrieval System (EDGAR), a Form 8-K with a copy of the report of the Bondholders for such Payment Date as an exhibit thereto. Prior to ________, 200_ (and, if applicable, prior to March 30 of each year), the Manager shall, on behalf of the Trust and in accordance with industry standards, file with the SEC via EDGAR a Form 10-K with respect to the Trust. In addition, the Depositor will cause its senior officer in charge of securitization to execute the certification (the "Form 10-K Certification") required pursuant to Rile 13a-14 under the Securities and Exchange Act of 1934, as amended, and file the same with the SEC prior to ________, 200_ (and if applicable, prior to ________ of each year). To the extent any information or exhibits required to be included in the Form 10-K are not available by March 30, the Manager shall, on behalf of the Trust, file one or more amended Form 10-K's to include such missing information or exhibits promptly after receipt thereof by the Manager. Promptly following the first day legally permissible under applicable regulations and interpretations of the SEC, the Manager shall, on behalf of the Trust an in accordance with industry standards, file with the SEC via EDGAR a Form 15 Suspension Notification with respect to the Trust, if applicable. Each of the Servicer, the Depositor and the Indenture Trustee agree to furnish to the Manager promptly, from time to time upon request, such further information, reports and financial statements within its control related to this Agreement and the Mortgage Loans as the Manager reasonable deems appropriate to prepare and file all necessary 35 reports with the SEC. The Manager shall have no responsibility to file any items other than those specified in this section. Section 3.15. Tax Returns. In accordance with Section 2.09 hereof, the Servicer shall prepare and file any federal, state or local income and franchise tax return for the Trust as well as any other applicable return and apply for a taxpayer identification number on behalf of the Trust as provided in Article VI of the Trust Agreement, including, without limitation, forms 1099 and 1065. The Depositor shall treat the Mortgage Loans as its property for all federal, state or local tax purposes and shall report all income earned thereon (including amounts payable as fees to the Servicer) as its income for income tax purposes. In the event the Trust shall be required pursuant to an audit or administrative proceeding or change in applicable regulations to file federal, state or local tax returns, the Servicer shall prepare and file or shall cause to be prepared and filed any tax returns required to be filed by the Trust; the Indenture Trustee shall promptly sign such returns and deliver such returns after signature to the Servicer and such returns shall be filed by the Servicer. The Indenture Trustee shall also prepare or shall cause to be prepared all tax information required by law to be distributed to Bondholders. In no event shall the Indenture Trustee or the Servicer be liable for any liabilities, costs or expenses of the Trust, the Bondholders, the Residual Certificateholders or the Bond Owners arising under any tax law, including, without limitation, federal, state or local income and franchise or excise taxes or any other tax imposed on or measured by income (or any interest or penalty with respect thereto or arising from a failure to comply therewith). Section 3.16. Information Required by the Internal Revenue Service Generally and Reports of Foreclosures and Abandonments of Mortgaged Property. The Servicer shall prepare and deliver all federal and state information reports when and as required by all applicable state and federal income tax laws. In particular, with respect to the requirement under Section 6050J of the Code to the effect that the Servicer shall make reports of foreclosures and abandonments of any mortgaged property for each year beginning in 200_, the Servicer shall file reports relating to each instance occurring during the previous calendar year in which the Servicer (i) on behalf of the Indenture Trustee acquires an interest in any Mortgaged Property through foreclosure or other comparable conversion in full or partial satisfaction of a Mortgage Loan, or (ii) knows or has reason to know that any Mortgaged Property has been abandoned. The reports from the Servicer shall be in form and substance sufficient to meet the reporting requirements imposed by Section 6050J. Section 3.17. Reporting Requirements. For each Mortgage Loan, the Servicer will accurately and fully report its borrower credit files to each of Equifax Credit Information Services, Inc., TransUnion, LLC and Experion Information Solution, Inc. (or their successors) in a timely manner on a monthly basis. Section 3.18. Matters Relating to MERS Loans. (a) The Servicer further is authorized and empowered by the Indenture Trustee and the Insurer, on behalf of the Bondholders, the Insurer and the Indenture Trustee, in its own name or in the name of the subservicer, when the Servicer believes it appropriate in its best judgment to register any Mortgage Loan on the MERS System, or cause the removal from the registration of any Mortgage Loan on the MERS System, to execute and deliver, on behalf of the Indenture 36 Trustee, the Insurer and the Bondholders or any of them, any and all instruments of assignment and other comparable instruments with respect to such assignment or re-recording of a Mortgage in the name of MERS, solely as nominee for the Indenture Trustee and its successors and assigns. (b) In connection with the sale and assignment of any MERS Mortgage Loan by the Depositor to the Issuer, the Depositor agrees that it will cause, at the Depositor's expense, the MERS System to indicate that such Mortgage Loans have been assigned by the Depositor to the Indenture Trustee in accordance with the Indenture for the benefit of the Issuer Secured Parties by including (or deleting, in the case of Mortgage Loans which are repurchased in accordance with this Agreement) in such computer files the information required by the MERS System to identify the series of the Bonds issued in connection with such Mortgage Loans. The Depositor further agrees that it will not, and will not permit the Seller or the Servicer to, and the Seller and the Servicer agree that they will not, alter the information referenced in this paragraph with respect to any Mortgage Loan during the term of this Agreement unless and until such Mortgage Loan is repurchased in accordance with the terms of this Agreement. If at any time pursuant to Section 2.03, 2.05 or 2.07 the Depositor repurchases a Mortgage Loan that is a MERS Mortgage Loan, the Servicer shall either (i) cause MERS to execute and deliver an assignment of the Mortgage in recordable form to transfer the Mortgage from MERS to the Depositor and shall cause such Mortgage to be removed from registration on the MERS System in accordance with MERS' rules and regulations or (ii) cause MERS to designate on the MERS System the Depositor (or any party indicated by the Depositor) as the beneficial holder of such Mortgage Loan. (c) In connection with the termination or resignation of the Servicer hereunder, either (i) the successor Servicer, including the Indenture Trustee if the Indenture Trustee is acting as successor Servicer, shall represent and warrant that it is a member of MERS in good standing and shall agree to comply in all material respects with the rules and procedures of MERS in connection with the servicing of the Mortgage Loans that are registered with MERS, or (ii) the predecessor Servicer shall cooperate with the successor Servicer either (x) in causing MERS to execute and deliver an assignment of Mortgage in recordable form to transfer the Mortgage from MERS to the Indenture Trustee and to execute and deliver such other notices, documents and other instruments as may be necessary or desirable to effect a transfer of such Mortgage Loan or servicing of such Mortgage Loan on the MERS System to the successor Servicer or (y) in causing MERS to designate on the MERS System the successor Servicer as the servicer of such Mortgage Loan. ARTICLE IV SERVICING CERTIFICATE Section 4.01. Servicing Certificate. Not later than seven (7) Business Days prior to the Payment Date, the Servicer shall deliver to the Indenture Trustee, a Servicing Certificate (in written form or the form of computer readable media or such other form as may be agreed to by the Indenture Trustee and the Servicer), together with an Officer's Certificate to the effect that such Servicing Certificate is true and correct in all material respects, stating the related 37 Collection Period, Payment Date, the series number of the Bonds, the date of this Agreement, and: (i) the aggregate amount of collections received on the Mortgage Loans on or prior to the Determination Date in respect of such Collection Period; (ii) the aggregate amount of (a) Interest Collections and (b) Principal Collections for such Collection Period; (iii) the Principal Collections for such Payment Date, separately stating the components thereof; (iv) any accrued and unpaid Servicing Fees for previous Collection Periods and the Servicing Fee for such Collection Period; (v) the Pool Balance as of the end of the preceding Collection Period and as of the end of the second preceding Collection Period; (vi) the aggregate amount of Additional Balances created during the previous Collection Period; (vii) the number and aggregate Principal Balances of Mortgage Loans (A) as to which the Minimum Monthly Payment is delinquent for 30-59 days, 60-89 days, 90-119 days, 120-149 days, 150-179 days and 180 or more days respectively and (B) that have become REO, in each case as of the end of the preceding Collection Period; (C) as to which foreclosure proceedings have been commenced, and (D) in bankruptcy and delinquent as of the close of business on the last day of the calendar month preceding such Distribution Date; (viii) the amount to be paid to the Servicer pursuant to Section 8.7(c)(xi) of the Indenture; (ix) the number and Principal Balances of any Mortgage Loans removed to the Depositor pursuant to Section 2.07; The Indenture Trustee shall conclusively rely upon the information contained in a Servicing Certificate for purposes of making distributions pursuant to Section 8.7 of the Indenture, shall have no duty to inquire into such information and shall have no liability in so relying. The format and content of the Servicing Certificate may be modified by the mutual agreement of the Servicer, the Indenture Trustee and the Insurer. The Servicer shall give notice of any such change to the Rating Agencies. Section 4.02. Reserved. Section 4.03. Reserved. Section 4.04. Loan Data Remittance Report. On the seventh Business Day before each Payment Date (the "Loan Data Remittance Date") by noon Eastern Standard time, the 38 Servicer shall furnish a report (the "Loan Data Remittance Report") in the form attached as Exhibit F to this Agreement to the Insurer and the Indenture Trustee by electronic medium as agreed to by the Servicer, the Indenture Trustee and the Insurer. Section 4.05. [Reserved]. ARTICLE V THE SERVICER AND THE DEPOSITOR Section 5.01. Liability of the Servicer and the Depositor. The Servicer shall be liable in accordance herewith only to the extent of the obligations specifically imposed upon and undertaken by the Servicer herein. The Depositor shall be liable in accordance herewith only to the extent of the obligations specifically imposed upon and undertaken by the Depositor. Section 5.02. Merger or Consolidation of, or Assumption of the Obligations of, the Servicer or the Depositor. Any entity into which the Servicer or the Depositor may be merged or consolidated, or any entity resulting from any merger, conversion or consolidation to which the Servicer or the Depositor shall be a party, or any entity succeeding to the business of the Servicer or the Depositor, shall be the successor of the Servicer or the Depositor, as the case may be, hereunder, without the execution or filing of any paper or any further act on the part of any of the parties hereto, anything herein to the contrary notwithstanding. Section 5.03. Limitation on Liability of the Servicer and Others. Neither the Servicer nor any of the directors or officers or employees or agents of the Servicer shall be under any liability to the Trust or the Bondholders or Residual Certificateholders for any action taken or for refraining from the taking of any action by the Servicer in good faith pursuant to this Agreement, or for errors in judgment; provided, however, that this provision shall not protect the Servicer or any such Person against any breach of representations and warranties made herein, or against any specific liability imposed on the Servicer for a breach of its servicing under this Agreement or against liability which would otherwise be imposed by reason of willful misfeasance, bad faith or negligence in the performance of duties of the Servicer or by reason of reckless disregard of obligations and duties of the Servicer hereunder. The Servicer and any director or officer or employee or agent of the Servicer may rely in good faith on any document of any kind prima facie properly executed and submitted by any Person respecting any matters arising hereunder. The Servicer and any director or officer or employee or agent of the Servicer shall be indemnified by the Trust, in accordance with the priorities set forth in Section 8.7(b) of the Indenture and held harmless against any loss, liability or expense incurred in connection with any legal action relating to this Agreement or the Bonds, other than any loss, liability or expense related to any specific Mortgage Loan (except as any such loss, liability or expense shall be otherwise reimbursable pursuant to this Agreement) and any loss, liability or expense incurred by reason of its willful misfeasance, bad faith or negligence, breach of representations and warranties made herein, or against any specific liability imposed on the Servicer for a breach of its servicing under this Agreement or against in the performance of duties hereunder or by reason of its reckless disregard of obligations and duties hereunder. The Servicer shall not be under any obligation to appear in, prosecute or defend any legal action which is not incidental to duties to service the Mortgage Loans in accordance with this Agreement, and which in its opinion may 39 involve it in any expense or liability; provided, however, that the Servicer may in its sole discretion undertake any such action which it may deem necessary or desirable in respect of this Agreement, and the rights and duties of the parties hereto and the interests of the Bondholders and Residual Certificateholders hereunder. In such event, the reasonable legal expenses and costs of such action and any liability resulting therefrom shall be expenses, costs and liabilities of the Trust and the Servicer shall only be entitled to be reimbursed therefor pursuant to Section 8.7(d)(ix) of the Indenture. The Servicer's right to indemnity or reimbursement pursuant to this Section 5.03 shall survive any resignation or termination of the Servicer pursuant to Section 5.04 or 6.01 with respect to any losses, expenses, costs or liabilities arising prior to such resignation or termination (or arising from events that occurred prior to such resignation or termination). Section 5.04. Servicer Not to Resign. Subject to the provisions of Section 5.02, the Servicer shall not resign from the obligations and duties hereby imposed on it except (i) upon determination that the performance of its obligations or duties hereunder are no longer permissible under applicable law or are in material conflict by reason of applicable law with any other activities carried on by it or its subsidiaries or Affiliates, the other activities of the Servicer so causing such a conflict being of a type and nature carried on by the Servicer or its subsidiaries or Affiliates at the date of this Agreement or (ii) upon satisfaction of the following conditions: (a) the Servicer has proposed a successor servicer to the Indenture Trustee and the Insurer in writing and such proposed successor servicer is reasonably acceptable to the Indenture Trustee; (b) each Rating Agency shall have delivered a letter to the Indenture Trustee and the Insurer prior to the appointment of the successor servicer stating that the proposed appointment of such successor servicer as Servicer hereunder will not result in the qualification, reduction or withdrawal of the then current rating of the Bonds without regard to the Policy; and (c) such proposed successor servicer is reasonably acceptable to the Insurer, as evidenced by a letter from each to the Indenture Trustee; provided, however, that no such resignation by the Servicer shall become effective until the Indenture Trustee or successor servicer designated by the Servicer as provided above shall have assumed the Servicer's responsibilities and obligations hereunder or the Indenture Trustee shall have designated a successor servicer in accordance with Section 6.02. Any such resignation shall not relieve the Servicer of responsibility for any of the obligations specified in Sections 6.01 and 6.02 as obligations that survive the resignation or termination of the Servicer. Any such determination permitting the resignation of the Servicer pursuant to clause (i) above shall be evidenced by an Opinion of Counsel to such effect delivered to the Indenture Trustee and the Insurer. The Servicer shall have no claim (whether by subrogation or otherwise) or other action against any Bondholder or Residual Certificateholder for any amounts paid by the Servicer pursuant to any provision of this Agreement. Section 5.05. Delegation of Duties. In the ordinary course of business, the Servicer at any time may delegate any of its duties hereunder to any Person, including any of its Affiliates, or any subservicer referred to in Section 3.01, who agrees to conduct such duties in accordance with standards comparable to those with which the Servicer complies pursuant to Section 3.01. Such delegation shall not relieve the Servicer of its liabilities and responsibilities with respect to such duties and shall not constitute a resignation within the meaning of Section 5.04. The Servicer's delegation of any of its duties hereunder to any subservicer shall be subject to the prior approval of the Insurer. The Servicer shall terminate its delegation of any of its duties hereunder to any subservicer at the Insurer's reasonable request. 40 Section 5.06. Indemnification of the Trust by the Servicer. The Servicer shall indemnify and hold harmless the Trust, the Owner Trustee and the Indenture Trustee from and against any loss, liability, expense, damage or injury suffered or sustained by reason of the Servicer's activities or omissions in servicing or administering the Mortgage Loans that are not in accordance with this Agreement or breach of representations and warranties made herein, including, but not limited to, any judgment, award, settlement, reasonable attorneys' fees and expenses and other costs or expenses incurred in connection with the defense of any actual or threatened action, proceeding or claim. Any such indemnification, including any amounts the Issuer shall cause the Servicer to pay pursuant to Section 6.7 of the Indenture, shall not be payable from the assets of the Trust. The provisions of this indemnity shall run directly to and be enforceable by an injured party subject to the limitations hereof. The provisions of this Section 5.06 shall survive termination of this Agreement. Section 5.07. Indemnification of the Trust by the Depositor. Notwithstanding anything to the contrary contained herein, the Depositor (i) agrees to be liable directly to the injured party for the entire amount of any losses, claims, damages, liabilities and expenses of the Trust (other than those attributable to a Bondholder as a result of defaults on the Mortgage Loans) to the extent that the Depositor would be liable if the Trust were a partnership under the Delaware Revised Uniform Limited Partnership Act in which the Depositor was a general partner and (ii) shall indemnify and hold harmless the Trust, the Owner Trustee and the Indenture Trustee from and against any loss, liability, expense, damage, claim or injury (other than those attributable to a Bondholder as a result of defaults on the Mortgage Loans) arising out of or based on this Agreement by reason of any acts, omissions, or alleged acts or omissions arising out of activities of the Trust, the Owner Trustee or the Indenture Trustee, or the actions of the Servicer, including, but not limited to, amounts payable to the Servicer pursuant to Section 5.03, any judgment, award, settlement, reasonable attorneys' fees and expenses and other costs or expenses incurred in connection with the defense of any actual or threatened action, proceeding or claim; provided that the Depositor shall not indemnify the Owner Trustee or the Indenture Trustee (but shall indemnify any other injured party) if such loss, liability, expense, damage or injury is due to the Owner Trustee's or the Indenture Trustee's willful misconduct, bad faith or negligence, breach of representations and warranties made herein, or against any specific liability imposed on the Owner Trustee or Indenture Trustee for a breach of its obligations hereunder. The provisions of this indemnity shall run directly to and be enforceable by an injured party subject to the limitations hereof. Section 5.08. Limitation on Liability of the Depositor. None of the directors or officers or employees or agents of the Depositor shall be under any liability to the Trust, the Owner Trustee or the Indenture Trustee, the Bondholders or the Residual Certificateholders, it being expressly understood that all such liability is expressly waived and released as a condition of, and as consideration for, the execution of this Agreement and the issuance of the Bonds; provided, however, that this provision shall not protect any such Person against any liability which would otherwise be imposed by reason of willful misfeasance, bad faith, negligence or breach of representations and warranties made herein, or against any specific liability imposed on such Person in the performance of the duties hereunder. Except as provided in Section 5.07, the Depositor shall not be under any liability to the Trust, the Owner Trustee or the Indenture Trustee or the Bondholders or the Residual Certificateholders for any action taken or for refraining from the taking of any action in its capacity as Depositor pursuant to this Agreement 41 whether arising from express or implied duties under this Agreement; provided, however, that this provision shall not protect the Depositor against any liability which would otherwise be imposed by reason of willful misconduct, bad faith or negligence in the performance of its duties or by reason of reckless disregard of its obligations and duties hereunder. The Depositor and any director or officer or employee or agent of the Depositor may rely in good faith on any document of any kind prima facie properly executed and submitted by any Person respecting any matters arising hereunder. ARTICLE VI Servicing Termination Section 6.01. Events of Servicing Termination. If any one of the following events ("Events of Servicing Termination") shall occur and be continuing: (i) Any failure by the Servicer to deposit in the Collection Account any deposit required to be made under the terms of this Agreement which continues unremedied for a period of one Business Day after the date upon which written notice of such failure shall have been given to the Servicer by the Indenture Trustee or to the Servicer and the Indenture Trustee by the Insurer or Holders of Bonds evidencing more than 25% of the Principal Balance of the Bonds instruct otherwise; or (ii) Failure on the part of the Servicer or the Depositor duly to observe or perform any covenants or agreements of the Servicer or Depositor set forth in the Bonds or in this Agreement, which failure continues unremedied for a period of 15 days after the date on which written notice of such failure, requiring the same to be remedied, and stating that such notice is a "Notice of Default" hereunder, shall have been given to the Servicer by the Indenture Trustee or to the Servicer and the Indenture Trustee by the Insurer or the Holders of Bonds evidencing more than 25% of the Principal Balance of the Bonds; provided, that a failure on the part of the Depositor to perform its obligations under Section 2.03 or 2.05 hereof shall not be subject to the 15 day cure period; (iii) The entry against the Servicer of a decree or order by a court or agency or supervisory authority having jurisdiction in the premises for the appointment of a trustee, conservator, receiver or liquidator in any insolvency, conservatorship, receivership, readjustment of debt, marshalling of assets and liabilities or similar proceedings, or for the winding up or liquidation of its affairs, and the continuance of any such decree or order unstayed and in effect for a period of 60 consecutive days; (iv) The consent by the Servicer to the appointment of a trustee, conservator, receiver or liquidator in any insolvency, conservatorship, receivership, readjustment of debt, marshalling of assets and liabilities or similar proceedings of or relating to the Servicer or of or relating to substantially all of its property; or the Servicer shall admit in writing its inability to pay its debts generally as they become due, file a petition to take advantage of any applicable insolvency or reorganization statute, make an assignment for the benefit of its creditors, or voluntarily suspend payment of its obligations; 42 (v) The entry against the Depositor of a decree or order by a court or agency or supervisory authority having jurisdiction in the premises for the appointment of a trustee, conservator, receiver or liquidator in any insolvency, conservatorship, receivership, readjustment of debt, marshalling of assets and liabilities or similar proceedings, or for the winding up or liquidation of its affairs, and the continuance of any such decree or order unstayed and in effect for a period of 60 consecutive days; (vi) The consent by the Depositor to the appointment of a trustee, conservator, receiver or liquidator in any insolvency, conservatorship, receivership, readjustment of debt, marshalling of assets and liabilities or similar proceedings of or relating to the Depositor or of or relating to substantially all of its property; or the Depositor shall admit in writing its inability to pay its debts generally as they become due, file a petition to take advantage of any applicable insolvency or reorganization statute, make an assignment for the benefit of its creditors, or voluntarily suspend payment of its obligations; (vii) Aggregate Realized Losses over any one twelve-month period exceed _____% of the Initial Pool Balance; (viii) The Three Month Rolling Delinquency Rate exceeds _____%; (ix) Cumulative Realized Losses exceed the following percentage of the Initial Pool Balance on any Payment Date as set forth below:
Cumulative Realized Payment Date Loss Percentage - ------------------- ------------------- 1st through __th ____% ___th through __th ____% __th through __th ____% __st and thereafter ____%
(x) Redwood Trust, Inc. or its affiliates fail to pay any principal amount of at least $1,000,000 when due, subject to the applicable grace period, if any, specified in the agreement or other instrument relating to such debt and shall continue after the applicable grace period if the effect of such event is to accelerate the maturity and repayment of such debt before the stated maturity thereof; (xi) Redwood Trust, Inc. shall no longer own 100% of the Issuer either directly or indirectly; then, and in each and every such case, so long as an Event of Servicing Termination shall not have been remedied by the Servicer, either the Indenture Trustee, the Insurer or the Holders of Bonds evidencing more than 50% of the Outstanding Amount of the Bonds, in each case with the consent of the Insurer, by notice then given in writing to the Servicer (and to the Indenture Trustee if given by the Insurer or the Holders of Bonds) may terminate all of the rights and obligations of the Servicer as servicer under this Agreement. Any such notice to the Servicer 43 shall also be given to each Rating Agency and the Insurer. On or after the receipt by the Servicer of such written notice, all authority and power of the Servicer under this Agreement, whether with respect to the Bonds or the Mortgage Loans or otherwise, shall pass to and be vested in the Indenture Trustee pursuant to and under this Section 6.01; and, without limitation, the Indenture Trustee is hereby authorized and empowered to execute and deliver, on behalf of the Servicer, as attorney-in-fact or otherwise, any and all documents and other instruments, and to do or accomplish all other acts or things necessary or appropriate to effect the purposes of such notice of termination, whether to complete the transfer and endorsement of each Mortgage Loan and related documents, or otherwise. The Servicer agrees to cooperate with the Indenture Trustee in effecting the termination of the responsibilities and rights of the Servicer hereunder, including, without limitation, the transfer to the Indenture Trustee for the administration by it of all cash amounts that shall at the time be held by the Servicer to be deposited by it in the Collection Account, or that have been deposited by the Servicer in the Collection Account or thereafter received by the Servicer with respect to the Mortgage Loans. All reasonable costs and expenses (including attorneys' fees and expenses) incurred in connection with amending this Agreement to reflect such succession as Servicer pursuant to this Section 6.01 shall be paid by the predecessor Servicer (or if the predecessor Servicer is the Indenture Trustee, the initial Servicer) upon presentation of reasonable documentation of such costs and expenses. Notwithstanding the foregoing, a delay in or failure of performance under Section 6.01(i) for a period of one Business Day or under Section 6.01(ii) for a period of 15 days, shall not constitute an Event of Servicing Termination if such delay or failure could not be prevented by the exercise of reasonable diligence by the Servicer and such delay or failure was caused by an act of God or the public enemy, acts of declared or undeclared war, public disorder, rebellion or sabotage, epidemics, landslides, lightning, fire, hurricanes, earthquakes or floods. The preceding sentence shall not relieve the Servicer from using its best efforts to perform its respective obligations in a timely manner in accordance with the terms of this Agreement and the Servicer shall provide the Indenture Trustee, the Depositor, the Insurer and the Bondholders and Residual Certificateholders with an Officer's Certificate giving prompt notice of such failure or delay by it, together with a description of its efforts to so perform its obligations. The Servicer shall immediately notify the Indenture Trustee and the Insurer in writing of any Events of Servicing Termination. Section 6.02. Indenture Trustee to Act; Appointment of Successor. (a) On and after the time the Servicer receives a notice of termination pursuant to Section 6.01 or resigns pursuant to Section 5.04, the Indenture Trustee shall be the successor in all respects to the Servicer in its capacity as servicer under this Agreement and the transactions set forth or provided for herein and shall be subject to all the responsibilities, duties and liabilities relating thereto placed on the Servicer by the terms and provisions hereof. Notwithstanding the above, if the Indenture Trustee becomes the Servicer hereunder, it shall have no responsibility or obligation (i) of repurchase or substitution with respect to any Mortgage Loan, (ii) with respect to any representation or warranty of the Servicer, and (iii) for any act or omission of either a predecessor or successor Servicer other than the Indenture Trustee. As compensation therefor, the Indenture Trustee shall be entitled to such compensation as the Servicer would have been entitled to hereunder if no such notice of termination had been given. In addition, the Indenture Trustee will be entitled to compensation with respect to its 44 expenses in connection with conversion of certain information, documents and record keeping, as provided in Sections 6.7 and 6.8 of the Indenture. Notwithstanding the above, (i) if the Indenture Trustee is unwilling to act as successor Servicer, or (ii) if the Insurer is unwilling to have the Indenture Trustee act as successor Servicer or (iii) if the Indenture Trustee is legally unable so to act, the Indenture Trustee may with the consent of the Insurer (in the situation described in clauses (i) or (ii)) or shall (in the situation described in clause (iii)) appoint or petition a court of competent jurisdiction to appoint, any established housing and home finance institution, bank or other mortgage loan or home equity loan servicer with all licenses and permits required to perform its obligations under this Agreement and having a net worth of not less than $15,000,000 as the successor to the Servicer hereunder in the assumption of all or any part of the responsibilities, duties or liabilities of the Servicer hereunder; provided that any such successor Servicer shall be acceptable to the Insurer, as evidenced by its prior written consent, which consent shall not be unreasonably withheld; and provided, further, that the appointment of any such successor Servicer will not result in the qualification, reduction or withdrawal of the ratings assigned to the Bonds by the Rating Agencies without regard to the Policy. Pending appointment of a successor to the Servicer hereunder, unless the Indenture Trustee is prohibited by law from so acting, the Indenture Trustee shall act in such capacity as hereinabove provided. In connection with such appointment and assumption, the successor shall be entitled to receive compensation out of payments on Mortgage Loans in an amount equal to the compensation which the Servicer would otherwise have received pursuant to Section 3.08 (or such lesser compensation as the Indenture Trustee and such successor shall agree). The Indenture Trustee and such successor shall take such action, consistent with this Agreement, as shall be necessary to effectuate any such succession. (b) Any successor, including the Indenture Trustee, to the Servicer as servicer shall during the term of its service as servicer (i) continue to service and administer the Mortgage Loans for the benefit of the Bondholders, Residual Certificateholders and the Insurer and (ii) maintain in force a policy or policies of insurance covering errors and omissions in the performance of its obligations as Servicer hereunder and a fidelity bond in respect of its officers, employees and agents to the same extent as the Servicer is so required pursuant to Section 3.13. The appointment of a successor Servicer shall not affect any liability of the predecessor Servicer which may have arisen under this Agreement prior to its termination as Servicer (including, without limitation, any deductible under an Insurance Policy pursuant to Section 3.04), nor shall any successor Servicer be liable for any acts or omissions of the predecessor Servicer or for any breach by such Servicer of any of its representations or warranties contained herein. Section 6.03. Notification to Bondholders and Residual Certificateholders. Upon any termination or appointment of a successor to the Servicer pursuant to this Article VI or Section 5.04, the Indenture Trustee shall give prompt written notice thereof to the Bondholders, Residual Certificateholders (at their respective addresses appearing in the Bond Register and in the Residual Certificate Register), the Insurer and each Rating Agency. 45 ARTICLE VII TERMINATION Section 7.01. Termination. (a) The respective obligations and responsibilities of the Servicer, the Depositor and the Indenture Trustee created hereby (other than the obligation of the Indenture Trustee to make certain payments to Bondholders after the final Payment Date and the obligation of the Servicer to send certain notices as hereinafter set forth) shall terminate upon the last action required to be taken by the Indenture Trustee on the final Payment Date pursuant to this Article VII following the later of (A) the Payment Date following payment in full of all amounts owing to the Insurer under the Insurance Agreement and (B) the earliest of (i) the transfer, under the conditions specified in Section 7.01(b), to the Depositor of the Bondholders' interest in each remaining Mortgage Loan and all property acquired in respect of any remaining Mortgage Loans, (ii) the day following the Payment Date on which the distribution made to Bondholders has reduced the Bond Principal Balance to zero and no other amounts are owed to the Bondholders hereunder, and no other amounts are owed to the Insurer pursuant to the Insurance Agreement and Section 8.7 of the Indenture, (iii) the final payment or other liquidation of the last Mortgage Loan remaining in the Trust (including, without limitation, the disposition of the Mortgage Loans pursuant to Section 5.4 of the Indenture) or the disposition of all property acquired upon foreclosure or deed in lieu of foreclosure of any Mortgage Loan and (iv) the Payment Date in _____ 20__; provided, however, that in no event shall the trust created hereby continue beyond the expiration of 21 years from the date of death of the last surviving descendants of Joseph P. Kennedy, the late ambassador of the United States to the Court of St. James, living on the date hereof. Upon termination in accordance with clause (a)(B)(i) of this Section 7.01, the Indenture Trustee shall execute such documents and instruments of transfer presented by the Depositor, in each case without recourse, representation or warranty, and take such other actions as the Depositor may reasonably request to effect the transfer of the Mortgage Loans to the Depositor. (b) Subject to Section 7.01(d), the Depositor shall have the right to effect the transfer to the Depositor of each Mortgage Loan on any Payment Date on or after the Payment Date immediately prior to which the Pool Balance is less than or equal to ten percent (10%) of the Initial Pool Balance. If the Depositor elects to exercise its right it will notify the Issuer, the Servicer, the Indenture Trustee and the Insurer no later than thirty-five (35) days prior to the Payment Date on which the transfer is to take place. The Indenture Trustee will make the transfer on such Payment Date subject to Section 7.01(d) and provided that the Redemption Price for the Bonds has been deposited with it not less than five (5) Business Days prior to such Payment Date. (c) The Depositor, at its expense, shall prepare and deliver to the Indenture Trustee for execution, at the time the related Mortgage Loans are to be released to the Depositor, appropriate documents assigning each such Mortgage Loan from the Indenture Trustee to the Depositor and shall promptly record such assignments. (d) The Depositor shall not exercise its right to repurchase the Mortgage Loans pursuant to Section 7.01(b) hereof if (a) such repurchase would result in a draw on the Policy, 46 without the consent of the Insurer, and (b) any Reimbursement Amount due to the Insurer would not be fully satisfied pursuant to the repurchase. ARTICLE VIII ADMINISTRATIVE DUTIES OF THE SERVICER Section 8.01. Administrative Duties. (a) Duties with Respect to the Indenture. The Servicer shall perform all its duties and the duties of the Issuer under the Indenture. In addition, the Servicer shall consult with the Owner Trustee as the Servicer deems appropriate regarding the duties of the Issuer under the Indenture. The Servicer shall monitor the performance of the Issuer and shall advise the Owner Trustee when action is necessary to comply with the Issuer's duties under the Indenture. The Servicer shall prepare for execution by the Issuer or shall cause the preparation by other appropriate Persons of all such documents, reports, filings, instruments, certificates and opinions as it shall be the duty of the Issuer to prepare, file or deliver pursuant to the Indenture. In furtherance of the foregoing, the Servicer shall take all necessary action that is the duty of the Issuer to take pursuant to the Indenture. (b) Duties with Respect to the Issuer. (i) In addition to the duties of the Servicer set forth in this Agreement or any of the Basic Documents, the Servicer shall perform such calculations and shall prepare for execution by the Issuer or the Owner Trustee or shall cause the preparation by other appropriate Persons of all such documents, reports, filings, instruments, certificates and opinions as it shall be the duty of the Issuer or the Owner Trustee to prepare, file or deliver pursuant to this Agreement or any of the Basic Documents or under state and federal tax and securities laws, and at the request of the Owner Trustee shall take all appropriate action that it is the duty of the Issuer to take pursuant to this Agreement or any of the Basic Documents, including, without limitation, pursuant to Sections 2.6 and 2.11 of the Trust Agreement. In accordance with the directions of the Issuer or the Owner Trustee, the Servicer shall administer, perform or supervise the performance of such other activities in connection with the Mortgage Loans (including the Basic Documents) as are not covered by any of the foregoing provisions and as are expressly requested by the Issuer or the Owner Trustee and are reasonably within the capability of the Servicer. (ii) Notwithstanding anything in this Agreement or any of the Basic Documents to the contrary, the Servicer shall be responsible for promptly notifying the Owner Trustee and the Indenture Trustee and the Insurer in the event that any withholding tax is imposed on the Issuer's payments (or allocations of income) to a Residual Certificateholder (as defined in the Trust Agreement) as contemplated by this Agreement. Any such notice shall be in writing and specify the amount of any withholding tax required to be withheld by the Owner Trustee or the Indenture Trustee pursuant to such provision. 47 (iii) Notwithstanding anything in this Agreement or the Basic Documents to the contrary, the Servicer shall be responsible for performance of the duties of the Issuer or the Depositor set forth in Section 5.1(a), (b), (c) and (d) of the Trust Agreement with respect to, among other things, accounting and reports to Residual Certificateholders (as defined in the Trust Agreement). (iv) The Servicer shall perform the duties of the Depositor specified in Section 11.2 of the Trust Agreement required to be performed in connection with the resignation or removal of the Owner Trustee, and any other duties expressly required to be performed by the Servicer under this Agreement or any of the Basic Documents. (v) In carrying out the foregoing duties or any of its other obligations under this Agreement, the Servicer may enter into transactions with or otherwise deal with any of its Affiliates; provided, however, that the terms of any such transactions or dealings shall be in accordance with any directions received from the Issuer and shall be, in the Servicer's opinion, no less favorable to the Issuer in any material respect. (c) Non-Ministerial Matters. With respect to matters that in the reasonable judgment of the Servicer are non-ministerial, the Servicer shall not take any action pursuant to this Article VIII unless within a reasonable time before the taking of such action, the Servicer shall have notified the Owner Trustee and the Insurer of the proposed action and the Owner Trustee and the Insurer shall not have withheld consent or provided an alternative direction. For the purpose of the preceding sentence, "non-ministerial matters" shall include: (A) the amendment of or any supplement to the Indenture; (B) the initiation of any claim or lawsuit by the Issuer and the compromise of any action, claim or lawsuit brought by or against the Issuer (other than in connection with the collection of the Mortgage Loans); (C) the amendment, change or modification of this Agreement or any of the Basic Documents; (D) the appointment of successor Bond Registrars, successor Paying Agents and successor Indenture Trustees pursuant to the Indenture or the appointment of successor Servicers or the consent to the assignment by the Bond Registrar, Paying Agent or Indenture Trustee of its obligations under the Indenture; and (E) the removal of the Indenture Trustee. (d) Exceptions. Notwithstanding anything to the contrary in this Agreement, except as expressly provided herein or in the other Basic Documents, the Servicer, in its capacity hereunder, shall not be obligated to, and shall not, (1) make any payments to the Bondholders or the Residual Certificateholders under the Basic Documents, (2) sell the Trust Property pursuant to Section 5.4 of the Indenture, (3) take any other action that the Issuer directs the Servicer not to take on its behalf or (4) in connection with its duties hereunder assume any indemnification obligation of any other Person. 48 (e) The Indenture Trustee or any successor Servicer shall not be responsible for any obligations or duties of the Servicer under Section 8.01. Section 8.02. Records. The Servicer shall maintain appropriate books of account and records relating to services performed under this Agreement, which books of account and records shall be accessible for inspection by the Issuer, the Insurer and the Indenture Trustee at any time during normal business hours. Section 8.03. Additional Information to be Furnished to the Issuer. The Servicer shall furnish to the Issuer and the Indenture Trustee from time to time such additional information regarding the Mortgage Loans as the Issuer and the Indenture Trustee shall reasonably request. ARTICLE IX MISCELLANEOUS PROVISIONS Section 9.01. Amendment. This Agreement may be amended from time to time by agreement among the Depositor, the Servicer, and the Indenture Trustee, in each case without notice to or the consent of any of the Bondholders or Residual Certificateholders, but only with the consent of the Insurer (which consent shall not be unreasonably withheld), (i) to cure any ambiguity, (ii) to correct any defective provisions or to correct or supplement any provisions herein that may be inconsistent with any other provisions herein, (iii) to add to the duties of the Depositor or the Servicer, (iv) to add any other provisions with respect to matters or questions arising under this Agreement or the Policy, as the case may be, which shall not be inconsistent with the provisions of this Agreement, (v) to add or amend any provisions of this Agreement as required by any Rating Agency or any other nationally recognized statistical rating organization in order to maintain or improve any rating of the Bonds (it being understood that, after obtaining the ratings in effect on the Closing Date, neither the Indenture Trustee, the Depositor nor the Servicer is obligated to obtain, maintain or improve any such rating) or (vi) to comply with any requirement imposed by the Code; provided, however, that such action shall not, as evidenced by an Opinion of Counsel, materially and adversely affect the interests of any Bondholder, any Residual Certificateholder, or the Insurer; and provided, further, that the amendment shall be deemed not to adversely affect in any material respect the interests of the Bondholders and the Residual Certificateholders and no opinion referred to in the preceding proviso shall be required to be delivered if the Person requesting the amendment obtains a letter from each Rating Agency stating that the amendment would not result in the downgrading or withdrawal of the respective ratings then assigned to the Bonds without regard to the Policy. This Agreement also may be amended from time to time by agreement among the Servicer, the Depositor and the Indenture Trustee, with the consent of the Insurer and the Holders of the Bonds evidencing more than 50% of the Outstanding Amount of the Bonds and the Holders of the Residual Certificates evidencing more than 50% of the percentage interest in the Residual Certificates (which consent of such Holders of Bonds and Residual Certificates given pursuant to this Section 9.01 or pursuant to any other provision of this Agreement shall be conclusive and binding on such Holder and all future Holders of such securities and of any security issued upon the transfer thereof or in exchange thereof or in lieu thereof whether or not 49 notation of such consent is made upon the security) for the purpose of adding any provisions to or changing in any manner or eliminating any of the provisions of this Agreement or of modifying in any manner the rights of the Bondholders or the Residual Certificateholders; provided, however, that no such amendment shall (i) reduce in any manner the amount of, or delay the timing of, payments on the Bonds or distributions or payments under the Policy which are required to be made on any Bond without the consent of the Holder of such Bond or (ii) reduce the aforesaid percentage required to consent to any such amendment, without the consent of the Holders of all then outstanding Bonds and Residual Certificates or (iii) adversely affect in any material respect the interests of the Insurer. Following the execution and delivery of any such amendment hereto or to the Policy, either the Depositor, if the Depositor requested the amendment, or the Servicer, if the Servicer requested the amendment, shall reimburse the Insurer for the reasonable out-of-pocket costs and expenses incurred by each in connection with such amendment. Prior to the execution of any such amendment, the party hereto requesting any such amendment shall furnish written notification of the substance of such amendment to each Rating Agency. In addition, promptly after the execution of any such amendment made with the consent of the Bondholders or the Residual Certificateholders, the Indenture Trustee shall furnish written notification of the substance of such amendment to each Bondholder and Residual Certificateholder and fully executed original counterparts of the instruments effecting such amendment to the Insurer. It shall not be necessary for the consent of Bondholders or Residual Certificateholders under this Section 9.01 to approve the particular form of any proposed amendment or consent, but it shall be sufficient if such consent shall approve the substance thereof. The manner of obtaining such consents and of evidencing the authorization of the execution thereof by Bondholders and Residual Certificateholders shall be subject to such reasonable requirements as the Indenture Trustee may prescribe. In executing any amendment permitted by this Section 9.01, the Indenture Trustee shall be entitled to receive, and shall be fully protected in relying upon, an Opinion of Counsel stating that such amendment is authorized or permitted hereby and that all conditions precedent to the execution and delivery of such amendment have been satisfied. The Indenture Trustee may, but shall not be obligated to, enter into any such amendment which affects the Indenture Trustee's own rights, duties or immunities under this Agreement or otherwise. Section 9.02. Recordation of Agreement. This Agreement is subject to recordation in all appropriate public offices for real property records in all the counties or other comparable jurisdictions in which any or all of the properties subject to the Mortgages are situated, and in any other appropriate public recording office or elsewhere, such recordation to be effected by the Servicer, but only upon direction of Bondholders accompanied by an Opinion of Counsel to the effect that such recordation materially and beneficially affects the interests of Bondholders. The Bondholders requesting such recordation shall bear all costs and expenses of such recordation. The Indenture Trustee shall have no obligation to ascertain whether such recordation so affects the interests of the Bondholders. 50 For the purpose of facilitating the recordation of this Agreement as herein provided and for other purposes, this Agreement may be executed simultaneously in any number of counterparts, each of which counterparts shall be deemed to be an original, and such counterparts shall constitute but one and the same instrument. Section 9.03. Limitation on Rights of Bondholders. No Bondholder shall have any right to vote (except as provided in Sections 6.01, 7.01, and 9.01 herein and Section 5.4 of the Indenture) or in any manner otherwise control the operation and management of the Trust, or the obligations of the parties hereto, nor shall anything herein set forth, or contained in the terms of the Bonds, be construed so as to constitute the Bondholders from time to time as partners or members of an association; nor shall any Bondholder be under any liability to any third person by reason of any action taken by the parties to this Agreement pursuant to any provision hereof. No Bondholder shall have any right by virtue or by availing itself of any provisions of this Agreement to institute any suit, action or proceeding in equity or at law upon or under or with respect to this Agreement, unless such Holder previously shall have given to the Indenture Trustee a written notice of default and of the continuance thereof, as hereinbefore provided, and unless also the Holders of Bonds evidencing more than 50% of the Outstanding Amount of the Bonds shall have made written request upon the Indenture Trustee to institute such action, suit or proceeding in its own name as Indenture Trustee hereunder and shall have offered to the Indenture Trustee such reasonable indemnity as it may require against the costs, expenses and liabilities to be incurred therein or thereby, and the Indenture Trustee, for 60 days after its receipt of such notice, request and offer of indemnity, shall have neglected or refused to institute any such action, suit or proceeding; it being understood and intended, and being expressly covenanted by each Bondholder with every other Bondholder and the Indenture Trustee, that no one or more Holders of Bonds shall have any right in any manner whatever by virtue or by availing itself or themselves of any provisions of this Agreement to affect, disturb or prejudice the rights of the Holders of any other of the Bonds, or to obtain or seek to obtain priority over or preference to any other such Holder, or to enforce any right under this Agreement, except in the manner herein provided and for the equal, ratable and common benefit of all Bondholders. For the protection and enforcement of the provisions of this Section 9.03, each and every Bondholder and the Indenture Trustee shall be entitled to such relief as can be given either at law or in equity. Anything to the contrary notwithstanding, by accepting its Bond, each Bondholder agrees that unless a Insurer Default exists, the Insurer shall have the right to exercise all rights of the Bondholder under this Agreement without any further consent of the Bondholder. Section 9.04. Governing Law. THIS AGREEMENT SHALL BE CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK WITHOUT REFERENCE TO ITS CONFLICT OF LAW PROVISIONS (OTHER THAN SECTIONS 5-1401 AND 5-1402 OF THE NEW YORK GENERAL OBLIGATIONS LAW), AND THE OBLIGATIONS, RIGHTS AND REMEDIES OF THE PARTIES HEREUNDER SHALL BE DETERMINED IN ACCORDANCE WITH SUCH LAWS. Section 9.05. Notices. All demands, notices and communications hereunder shall be in writing and shall be deemed to have been duly given if sent via facsimile (receipt confirmed), personally delivered at or mailed by certified mail, return receipt requested, to (a) in the case of 51 the Depositor, Sequoia Mortgage Funding Corporation, One Belvedere Place, Suite 320, Mill Valley, California 94941, Attention: _________, (b) in the case of the Servicer, [---Servicer---], [insert Servicer's address], Attention: ___________, (c) in the case of the Indenture Trustee, at the Corporate Trust Office, (d) in the case of the Insurer, [Insurer's Address] (telecopy number (___) ____-_____), (e) in the case of [First Rating Agency], [First Rating Agency's Address], and (f) in the case of [Second Rating Agency], [Second Rating Agency's Address], or, as to each party, at such other address as shall be designated by such party in a written notice to each other party. Any notice required or permitted to be mailed to a Bondholder shall be given by first class mail, postage prepaid, at the address of such Holder as shown in the Bond Register. Any notice so mailed within the time prescribed in this Agreement shall be conclusively presumed to have been duly given, whether or not the Bondholder or Residual Certificateholder receives such notice. Any notice or other document required to be delivered or mailed by the Indenture Trustee to any Rating Agency shall be given on a best efforts basis and only as a matter of courtesy and accommodation and the Indenture Trustee shall have no liability for failure to deliver such notice or document to any Rating Agency. Section 9.06. Severability of Provisions. If any one or more of the covenants, agreements, provisions or terms of this Agreement shall be for any reason whatsoever held invalid, then such covenants, agreements, provisions or terms shall be deemed severable from the remaining covenants, agreements, provisions or terms of this Agreement and shall in no way affect the validity or enforceability of the other provisions of this Agreement or of the Bonds or the rights of the Holders thereof. Section 9.07. Assignment. Notwithstanding anything to the contrary contained herein, except as provided in Sections 5.02 and 5.04, this Agreement may not be assigned by the Depositor or the Servicer without the prior written consent of the Insurer and Holders of the Bonds evidencing Percentage Interests aggregating not less than ___%. Section 9.08. Third-Party Beneficiaries. This Agreement will inure to the benefit of and be binding upon the parties hereto, the Residual Certificateholders, the Bond Owners or the Insurer and their respective successors and permitted assigns. Except as otherwise provided in this Agreement, no other Person will have any right or obligation hereunder. Section 9.09. Counterparts. This instrument may be executed in any number of counterparts, each of which so executed shall be deemed to be an original, but all such counterparts shall together constitute but one and the same instrument. Section 9.10. Effect of Headings and Table of Contents. The Article and Section headings herein and the Table of Contents are for convenience only and shall not affect the construction hereof. Section 9.11. Insurance Agreement. The Indenture Trustee is authorized and directed to execute and deliver the Insurance Agreement and to perform the obligations of the Indenture Trustee thereunder. Section 9.12. Nonpetition Covenant. Until one year plus one day shall have elapsed since the termination of the Trust in accordance with Section 7.01, none of the Depositor, the 52 Company, the Servicer, nor the Indenture Trustee shall petition or otherwise invoke the process of any court or government authority for the purpose of commencing or sustaining a case against the Depositor or the Trust under any federal or state bankruptcy, insolvency or similar law or appointing a receiver, liquidator, assignee, Indenture Trustee, custodian, sequestrator or other similar official of the Depositor or the Trust or any substantial part of its property, or ordering the winding up or liquidation of the affairs of the Depositor or the Trust. 53 IN WITNESS WHEREOF, the Depositor, the Servicer and the Indenture Trustee have caused this Agreement to be duly executed by their respective officers all as of the day and year first above written. SEQUOIA MORTGAGE FUNDING CORPORATION, as Depositor By: ________________________________ Name: Title: [________________], as Company and Servicer By: ________________________________ Name: Title: [INDENTURE TRUSTEE], not in its individual capacity but solely as Indenture Trustee By: ________________________________ Name: Title: SEQUOIA MORTGAGE TRUST 200_-_, as Issuer By: [Owner Trustee], not in its individual capacity but solely as Owner Indenture Trustee By: ________________________________ Name: Title: [Sale and Servicing Agreement] State of ________ ) ) ss.: County of ________ ) On the ___th day of _______, 200_ before me, a notary public in and for the State of ________, personally appeared _________________, known to me who, being by me duly sworn, did depose and say that he resides at ______________________; that he is the _____________________ of Sequoia Mortgage Funding Corporation, a Delaware corporation, one of the parties that executed the foregoing instrument; that he knows the seal of said company; that the seal affixed to said instrument is such seal; that it was so affixed by order of the members of said company; and that he signed his name thereto by like order. _______________________________________ Notary Public [Notarial Seal] State of ________ ) ) ss.: County of ________ ) On the ___ day of _________, 200_ before me, a notary public in and for the State of [__________], personally appeared __________, known to me who, being by me duly sworn, did depose and say that he resides at ______________________; that he is the _____________________ of [Owner Trustee], one of the parties that executed the foregoing instrument; that he knows the seal of said corporation; that the seal affixed to said instrument is such corporate seal; that it was so affixed by order of the Board of Directors of said corporation; and that he signed his name thereto by like order. _______________________________________ Notary Public [Notarial Seal] State of___________ ) ) ss.: County of_________ ) On the ____ day of _________, 200_ before me, a notary public in and for the State of ________, personally appeared _____________________, known to me who, being by me duly sworn, did depose and say that he resides at _________________, ____________, ________ _____; that he is the ______________ of [---Servicer---], a [_______] corporation, one of the parties that executed the foregoing instrument; that he knows the seal of said corporation; that the seal affixed to said instrument is such corporate seal; that it was so affixed by order of the Board of Directors of said corporation; and that he signed his name thereto by like order. _______________________________________ Notary Public [Notarial Seal] State of ) ) ss.: County of ) On the ___ day of _________, 200_ before me, a notary public in and for the State of ________, personally appeared _________________, known to me who, being by me duly sworn, did depose and say that he resides at _______________, _______________ _____; that he is the _____________ of [Indenture Trustee], a _____________, one of the parties that executed the foregoing instrument; and that he signed his name thereto by order of the Board of Directors of said corporation. _______________________________________ Notary Public [Notarial Seal] EXHIBIT A MORTGAGE LOAN SCHEDULE [On file with Indenture Trustee] A-1 EXHIBIT B FORM OF OPINION OF COUNSEL WITH RESPECT TO SECTION 3.11 OF THE SALE AND SERVICING AGREEMENT The opinions set forth below may be subject to all the qualifications, assumptions, limitations and exceptions taken or made in the opinions of counsel to the Company delivered on the Closing Date. Unless otherwise indicated, all capitalized terms used herein shall have the meanings ascribed to them in the Sale and Servicing Agreement dated as of ________, 200_ among [---Servicer---] (the "Company" and the "Servicer"), Sequoia Mortgage Funding Corporation (the "Depositor") and [Indenture Trustee], as Indenture Trustee. Terms used but not defined herein shall have the meaning given to such terms in the above-referenced Sale and Servicing Agreement. The Indenture Trustee has a valid perfected first priority security interest with respect to the Depositor's right, title and interest in and to the Mortgage Loans (including all Eligible Substitute Mortgage Loans), subject to the exceptions and qualifications set forth in the Opinion of Counsel attached to the Indenture as Exhibit B. B-1 EXHIBIT C-1 FORM OF OFFICER'S CERTIFICATE REQUEST BY THE SERVICER FOR PERMANENT RELEASE OF MORTGAGE LOANS AND MORTGAGE FILES TO: [Indenture Trustee], as Indenture Trustee [Indenture Trustee's Address] Gentlemen: In connection with the payment in full of the Mortgage Loans held by you as Indenture Trustee, under the Sale and Servicing Agreement dated as of ________, 200_ among [---Servicer---], as Servicer, Sequoia Mortgage Funding Corporation, as Depositor, and you, as Indenture Trustee, the undersigned requests the release of the Mortgage Loans and the Mortgage Files for the Mortgage Loans identified in the schedule attached to this Request. The undersigned hereby certifies that (i) the release of Collateral requested will not impair the security under the Indenture, (ii) any and all payments received on the Mortgage Loans identified in the schedule attached to this Request which are required to be deposited in the Collection Account pursuant to Section 3.02 of such Sale and Servicing Agreement have been so deposited, (iii) the information with respect to such factual matters necessary for us to so certify is in our possession and (iv) I am qualified to make these certifications. [_________________], as Servicer By: ______________________________________ Name: ________________________________ Title: _______________________________ Date: ________________________________ ACKNOWLEDGED BY: [INDENTURE TRUSTEE], as Indenture Trustee By: _____________________________________ Name: _______________________________ Title: ______________________________ Date: _______________________________ C-2-1 EXHIBIT C-2 FORM OF OFFICER'S CERTIFICATE REQUEST BY THE SERVICER FOR TEMPORARY RELEASE OF MORTGAGE LOANS AND MORTGAGE FILES TO: [Indenture Trustee], as Indenture Trustee [Indenture Trustee's Address] Gentlemen: In connection with the administration of the Mortgage Loans held by you as Indenture Trustee, under the Sale and Servicing Agreement dated as of ________, 200_ among [---Servicer---], as Servicer, Sequoia Mortgage Funding Corporation, as Depositor, and you, as Indenture Trustee, the undersigned requests the temporary release of the Mortgage Loans and the related Mortgage Files for the Mortgage Loans identified in the schedule attached to this Request. [__________________], as Servicer By: ______________________________________ Name: ________________________________ Title: _______________________________ Date: ________________________________ ACKNOWLEDGED BY: [INDENTURE TRUSTEE], as Indenture Trustee By: _____________________________________ Name: _______________________________ Title: ______________________________ Date: _______________________________ C-2-1 EXHIBIT D FORM OF CREDIT LINE AGREEMENT D-1 EXHIBIT E FORM OF MORTGAGE NOTE FOR CLOSED END MORTGAGE LOANS EXHIBIT F FORM OF CERTIFICATE: LOAN LEVEL REPORTING DETAIL RECORD FIELDS: FILE NAME: T0##MMYY.LNS
DATA: FIELD T0nnMMYY.LNS Nbr FORMAT DEFINITION - ------------------------------------------------------------------------------------------------------------------- Servicer Loan No. 1 13(X) Unique loan number assigned to the mortgage by the Seller/Servicer - ------------------------------------------------------------------------------------------------------------------- Blank 1(x) - ------------------------------------------------------------------------------------------------------------------- Due Date of Last Paid 2 YYYYMMDD DUE DATE of last full payment received from the borrower. Installment (DDLPI) - ------------------------------------------------------------------------------------------------------------------- Blank 1(x) - ------------------------------------------------------------------------------------------------------------------- Last Payment Received 3 YYYYMMDD RECEIPT DATE of the last fully paid monthly installment of principal, Date (LPRD) interest, and escrow (if any) that was received from the borrower. Bond: Dates of partial payments should not be entered here. {Data is when payment was actually received from the borrower) IF THIS INFORMATION IS NOT AVAILABLE, THEN POPULATE THE FIELD WITH THE DEFAULT VALUE OF 19000101. - ------------------------------------------------------------------------------------------------------------------- Blank 1(x) - ------------------------------------------------------------------------------------------------------------------- Unpaid Principal 4 13.2 Unpaid Principal balance as of the end of the current period Balance (UPB) 100% - ------------------------------------------------------------------------------------------------------------------- Blank 1(x) - ------------------------------------------------------------------------------------------------------------------- Interest Paid 5 13.2 Gross / Coupon Interest payment amount - ------------------------------------------------------------------------------------------------------------------- Blank 1(x) - ------------------------------------------------------------------------------------------------------------------- Principal Paid 6 13.2 Total principal paid down on the mortgage balance. * For approved payment reversals or principal applied incorrectly in a prior cycle the amount of negative principal to bring the mortgage balance in line with the correct UPB reported. - ------------------------------------------------------------------------------------------------------------------- Blank 1(x) - ------------------------------------------------------------------------------------------------------------------- Draw Amount 7 13.2 Total draws made against the line of credit for the current month - ------------------------------------------------------------------------------------------------------------------- Blank 1(x) - -------------------------------------------------------------------------------------------------------------------
DATA: FIELD T0nnMMYY.LNS Nbr FORMAT DEFINITION - ------------------------------------------------------------------------------------------------------------------- Exception Code 8 2(x) This field should contain an exception code only when exception activity occurs for that period, otherwise this field should contain a 0. DEFAULT VALUE IS 0. 40 Inactivate loan, deemed the loan non-recoverable 60 Payoff - mortgage matured 61 Payoff - mortgage prepaid 65 Payoff - mortgage repurchased 69 Payoff - mortgage liquidated 70 Transfer to REO (status change exception) 72 Foreclosure (change of status from Active to Foreclosure) 80 Substituted Loan - Loan is added as a substitute for another loan 81 Reinstated Loan - Loan was previously delinquent, but the borrower has brought it current. 90 Loan Modified - This is an exceptional activity code which is reserved for future use. Modifications typically require repurchase from the trust prior to modifying the loan. - ------------------------------------------------------------------------------------------------------------------- Blank 1(x) - ------------------------------------------------------------------------------------------------------------------- Exception Date 9 YYYYMMDD Date the exception occurred. If an exception has not occurred, this field should contain the default value of 19000101. - ------------------------------------------------------------------------------------------------------------------- Blank 1(x) - ------------------------------------------------------------------------------------------------------------------- Mortgage Note Rate 10 6.3 Rate associated with the borrower's scheduled payment - ------------------------------------------------------------------------------------------------------------------- Blank 1(x) - ------------------------------------------------------------------------------------------------------------------- Mortgage P&I Amount 11 13.2 Principal and interest portion of the borrowers minimum installment. Bond: 100% of the principal and interest amount should be entered in this field, including servicing and guarantee fees. - ------------------------------------------------------------------------------------------------------------------- Blank 1(x) - ------------------------------------------------------------------------------------------------------------------- Realized Losses 12 13.2 Amount of realized losses for that period. This field will also include any supplemental claims or proceeds for loans liquidated in a previous cycle. - ------------------------------------------------------------------------------------------------------------------- Blank 1(x) - ------------------------------------------------------------------------------------------------------------------- Cumulative Principal 13 13.2 Total principal payments advanced by the Servicer and not repaid by Advances the borrower. NOT APPLICABLE--DO NOT REPORT - ------------------------------------------------------------------------------------------------------------------- Blank 1(x) - ------------------------------------------------------------------------------------------------------------------- Interest Advances 14 13.2 Amount of interest payment advanced by the Servicer for that period. NOT APPLICABLE--DO NOT REPORT - ------------------------------------------------------------------------------------------------------------------- Blank 1(x) - ------------------------------------------------------------------------------------------------------------------- Loan Status 15 1(X) Pertains to activity in the prior reporting cycle. 0 - Active 4 - Foreclosure 5 - REO 6 - Closed (PAYOFFS & REPURCHASES) 9 - Bankruptcy (OVERRIDES ACTIVE STATUS) Bond: 30,60 & 90 day delinquency status will be derived from the DDLPI field. - ------------------------------------------------------------------------------------------------------------------- Blank 1(x) - ------------------------------------------------------------------------------------------------------------------- Subservicer No. 16 6 Subservicer ID# - 6 digits - ------------------------------------------------------------------------------------------------------------------- Blank 1(x) - ------------------------------------------------------------------------------------------------------------------- Actual Loan Balance 17 13.2 Actual loan balance outstanding from the borrower. - ------------------------------------------------------------------------------------------------------------------- Blank 1(x) - -------------------------------------------------------------------------------------------------------------------
F-2
DATA: FIELD T0nnMMYY.LNS Nbr FORMAT DEFINITION - ------------------------------------------------------------------------------------------------------------------- Next Interest Rate 18 YYYYMMDD Applies only to ARM loans and reflects the next pending interest rate Change Date adjustment date. DEFAULT IS 19000101. SINCE LOANS ADJUST MONTHLY, ONLY REPORT THE FIRST ADJUSTMENT DATE FOR LOANS WITH TEASER PERIOD. - ------------------------------------------------------------------------------------------------------------------- Blank 1(x) - ------------------------------------------------------------------------------------------------------------------- Next Interest Payment 19 YYYYMMDD Applies only to payment capped ARM loans and reflects the next Change Date pending payment adjustment date. DEFAULT IS 19000101. - ------------------------------------------------------------------------------------------------------------------- Blank 1(x) - ------------------------------------------------------------------------------------------------------------------- Index Value at Reset 20 6.3 The index rate used in determining the ARM coupon. Date DEFAULT VALUE IS 0 FOR AN ARM LOAN IF THE INDEX IS NOT CHANGING IN THE CURRENT PERIOD. ALSO POPULATE 0 IF THE LOAN IS A FIXED RATE LOAN. - ------------------------------------------------------------------------------------------------------------------- Blank 1(x) - ------------------------------------------------------------------------------------------------------------------- Next Mortgage Rate 21 6.3 Should be populated in advance of the rate adjustment.. DEFAULT VALUE expected at reset date IS 0 FOR AN ARM LOAN IF THE RATE IS NOT CHANGING. DEFAULT VALUE IS 0 IF HE LOAN IS A FIXED RATE LOAN. - ------------------------------------------------------------------------------------------------------------------- Blank 1(x) - ------------------------------------------------------------------------------------------------------------------- Collateral Group No. # 22 2 This is a collateral grouping number for whole loan directed collateral deals. DEFAULT VALUE IS 0. REPORT THE HELOCS AND FIXED RATES SEPARATELY. - ------------------------------------------------------------------------------------------------------------------- Blank 1(x) - ------------------------------------------------------------------------------------------------------------------- Current Arrearage Paid 23 13.2 The current amount of cashflow applied to the arrearage balance. Applies to loans that have been or are currently in default. DEFAULT VALUE IS 0. - ------------------------------------------------------------------------------------------------------------------- Blank 1(x) - ------------------------------------------------------------------------------------------------------------------- Outstanding Arrearage 24 13.2 The total amount of outstanding interest accrued under forbearance Balance period, after current arrearage payment. DEFAULT VALUE IS 0. - ------------------------------------------------------------------------------------------------------------------- Blank 1(x) - ------------------------------------------------------------------------------------------------------------------- Loan Number 25 13(X) Loan number assigned to the mortgage by ___. Used for disclosure. - ------------------------------------------------------------------------------------------------------------------- Blank 1(x) - ------------------------------------------------------------------------------------------------------------------- Prepayment Premium 26 13.2 The borrowers penalty payment for prepaying his mortgage. This Amount amount is allocated in aggregate as a directed collateral amount to a specific bond. DEFAULT VALUE IS 0. - -------------------------------------------------------------------------------------------------------------------
The Bonds: - - File must be a text file (either space or tab delimited). - - Any dates should be in YYYYMMDD format. They should not contain slashes (/) or dashes (-). - - Number fields should NOT include commas. - - Any negative number should be denoted by a "-" in front of the number, do not put the "-" after the number or use parentheses. F-3 EX-5.1 4 f98626exv5w1.txt EXHIBIT 5.1 EXHIBIT 5.1 [TOBIN & TOBIN LETTERHEAD] May 6, 2004 Sequoia Mortgage Funding Corporation One Belvedere Place, Suite 320 Mill Valley, CA 94941 Sequoia Residential Funding, Inc. One Belvedere Place, Suite 330 Mill Valley, CA 94941 Re: Registration Statement on Form S-3 by Co-Registrants Sequoia Mortgage Funding Corporation and Sequoia Residential Funding, Inc. Ladies and Gentlemen: We have acted as special counsel to Sequoia Mortgage Funding Corporation, a Delaware corporation ("Sequoia Mortgage Funding") and Sequoia Residential Funding, Inc., a Delaware corporation ("Sequoia Residential Funding", and together with Sequoia Mortgage Funding, the "Co-Registrant" or "Co-Registrants"), in connection with the preparation of a registration statement on Form S-3 (the "Registration Statement") for the registration with the Securities and Exchange Commission under the Securities Act of 1933, as amended (the "Act"), of asset-backed securities with an aggregate offering price of up to $1,146,300,000. The amount of asset-backed securities eligible to be sold under Co-Registrants' prior registration statement, No. 333-112334, $4,705,994,200, shall be carried forward to this Registration Statement, for a combined offering of asset-backed securities by the Co-Registrants of up to $5,852,294,200 (the "Asset-Backed Securities"). As described in the Registration Statement, the Asset-Backed Securities consist of Asset-Backed Certificates ("Certificates") and Collateralized Mortgage Bonds ("Bonds"). The Certificates may be issued from time to time in series. Each series of Certificates will be issued by a trust (each, a "Trust") formed by either Sequoia Mortgage Funding or Sequoia Residential Funding pursuant to a pooling and servicing agreement (each, a "Pooling and Servicing Agreement") among the respective Co-Registrant, a master servicer (the "Master Servicer"), a seller (the "Seller") and a trustee (the "Trustee"). Each series of Certificates issued by a Trust may include one or more classes of Certificates. The Bonds are issuable in series under separate indentures (each such agreement an "Indenture"), between an issuer and an indenture trustee. [TOBIN & TOBIN LOGO] Sequoia Mortgage Funding Corporation Sequoia Residential Funding, Inc. May 6, 2004 Page 2 We have examined and relied upon copies of the Co-Registrants' Bylaws, the Registration Statement, the form of Pooling and Servicing Agreement and the forms of Certificates included as exhibits thereto, the form of Indenture and the forms of Bonds included as exhibits thereto, and such other records, documents and statutes as we have deemed necessary for purposes of this opinion. In our examination we have assumed the genuineness of all signatures, the authenticity of all documents submitted to us as originals, the conformity to original documents of all documents submitted to us as certified or photostatic copies and the authenticity of the originals of such documents. As to any facts material to the opinions expressed herein that were not independently established or verified, we have relied upon statements and representations of officers and other representatives of the Co-Registrants and others. Based upon the foregoing, we are of the opinion that: 1. When any Pooling and Servicing Agreement relating to a series of Certificates has been duly and validly authorized by all necessary action on the part of either Sequoia Mortgage Funding or Sequoia Residential Funding and has been duly executed and delivered by the respective Co-Registrant, the Master Servicer, the Seller, the Trustee and any other party thereto, such Pooling and Servicing Agreement will constitute a legal, valid and binding agreement of the respective Co-Registrant, enforceable against the respective Co-Registrant in accordance with its terms, except as enforcement thereof may be limited by bankruptcy, insolvency or other laws relating to or affecting creditors' rights generally or by general equity principles. 2. When a series of Certificates has been duly authorized by all necessary action on the part of either Sequoia Mortgage Funding or Sequoia Residential Funding (subject to the terms thereof being otherwise in compliance with applicable law at such time), duly executed and authenticated by the Trustee for such series in accordance with the terms of the related Pooling and Servicing Agreement and issued and delivered against payment therefor as described in the Registration Statement and the Prospectus delivered in connection therewith, such series of Certificates will be legally and validly issued, fully paid and nonassessable, and the holders thereof will be entitled to the benefits of the related Pooling and Servicing Agreement. [TOBIN & TOBIN LOGO] Sequoia Mortgage Funding Corporation Sequoia Residential Funding, Inc. May 6, 2004 Page 3 3. When an Indenture for a series of Bonds has been duly authorized by all necessary action and duly executed and delivered by the parties thereto, such Indenture will be a legal and valid obligation of the applicable issuer. 4. When an Indenture for a series of Bonds has been duly authorized by all necessary action and duly executed and delivered by the parties thereto, and when the Bonds of such series have been duly executed and authenticated in accordance with the provisions of that Indenture, and issued and sold as contemplated in the Registration Statement and the Prospectus delivered in connection therewith, such Bonds will be legally and validly issued and outstanding, fully paid and non-assessable, and will be binding obligations of the applicable issuer, and the holders of such Bonds will be entitled to the benefits of that Indenture. In rendering the foregoing opinions, we express no opinion as to the laws of any jurisdiction other than the laws of the State of New York (excluding choice of law principles therein), the corporation laws of the State of Delaware and the federal laws of the United States of America. We hereby consent to the filing of this letter as an exhibit to the Registration Statement and to the references to this firm under the heading "Legal Matters" in the base prospectus forming a part of the Registration Statement, without admitting that we are "experts" within the meaning of the Act or the Rules and Regulations of the Commission issued thereunder, with respect to any part of the Registration Statement, including this exhibit. Very truly yours, TOBIN & TOBIN /s/ Tobin & Tobin EX-8.1 5 f98626exv8w1.txt EXHIBIT 8.1 EXHIBIT 8.1 [Letterhead of Chapman and Cutler LLP] May 7, 2004 Sequoia Mortgage Funding Corporation One Belvedere Place Suite 320 Mill Valley, CA 94941 Sequoia Residential Funding, Inc. One Belvedere Place Suite 330 Mill Valley, CA 94941 Re: Registration Statement on Form S-3 of Co-Registrants Sequoia Mortgage Funding Corporation and Sequoia Residential Funding, Inc. Ladies and Gentlemen: We have acted as your special tax counsel and have assisted in the preparation of the tax summary for the Registration Statement on Form S-3, dated May 7, 2004 (the "Registration Statement") which has been filed by Sequoia Mortgage Funding Corporation and Sequoia Residential Funding, Inc., as Co-Registrants (together, the "Co-Registrants" and each a "Co-Registrant") with the Securities and Exchange Commission the (the "SEC") in connection with the registration of certain asset-backed securities (issuable in series) (the "Securities"). Each series of Securities will be issued pursuant to a separate indenture, pooling and servicing agreement or trust agreement and the Securities issued thereunder will be substantially in the form of one of the forms filed as an exhibit to the Registration Statement (such indentures, pooling and servicing agreements and trust agreements, the "Form Agreements"). You have requested our opinion regarding certain descriptions of federal income tax consequences contained in the prospectus and the forms of prospectus supplements to be used in connection with offers and sales of the Securities (the "Prospectus" and "Form Prospectus Supplements", respectively). In formulating our opinions, we have reviewed (i) the Registration Statement and the related Prospectus and Form Prospectus Supplements filed with the SEC on the date hereof , (ii) the forms of the Securities, (iii) the Form Agreements and such other transaction documents as we have considered necessary, and (iv) the Restated Certificates of Incorporation and other organizational documents of the Co-Registrants, as amended and supplemented to date, and such resolutions, certificates, records, and other documents provided by the Co-Registrants as we have deemed necessary or appropriate as a basis for the opinions set forth below. In our examination, we have assumed the legal capacity of all natural persons, the genuineness of all signatures, the authenticity of all documents submitted to us as originals, the conformity to original documents of all documents submitted to us as certified, conformed or other copies, and the authenticity of the originals of such copies. In rendering our opinions, we have assumed that the transactions described in or contemplated by the foregoing documents have been or will be consummated in accordance with such operative documents, and that such documents accurately reflect the material facts of such transactions. Our opinion is also based on the Internal Revenue Code of 1986, as amended, administrative rulings, judicial decisions, Treasury regulations and other applicable authorities. The statutory provisions, regulations, and interpretations on which our opinion is based are subject to change, possibly retroactively. In addition, there can be no complete assurance that the Internal Revenue Service will not take positions contrary to those stated in our opinion. Based on the foregoing, we are of the opinion that the statements set forth under the caption "Federal Income Tax Consequences" in the Prospectus and Form Prospectus Supplements, to the extent that they constitute matters of law or legal conclusions regarding Federal income tax law, are correct in all material respects. We note, however, that each Form Prospectus Supplement relates to a proposed type of transaction and that the above referenced description of "Federal Income Tax Consequences" will, in many circumstances, require further modification to address the actual transaction being done. Other than as stated above, we express no opinion on any issue relating to the Company or any series of Securities or under any law other than the federal income tax laws. We are furnishing this opinion to you solely in connection with the filing of the Registration Statement and it is not to be relied upon, used, circulated, quoted or otherwise referred to for any other purpose without our express written permission. We hereby consent to the filing of this letter as Exhibit 8.1 to the Registration Statement and to and to its incorporation by reference as an exhibit to the Registration Statement. In giving our consent, we do not hereby admit that we come within the category of persons whose consent is required under Section 7 of the Act or the rules and regulations promulgated thereunder. Very truly yours, /s/ Chapman and Cutler LLP -----END PRIVACY-ENHANCED MESSAGE-----