-----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, AN0trcKoI4jRtsE/Rut4Cl3sjvYD0YzceyY0ObKyWhkE+H87DlhXbpuE9Z8/dsvS Z05jKvIqpUtrGQap8NIC6Q== 0000950149-97-000868.txt : 19970430 0000950149-97-000868.hdr.sgml : 19970430 ACCESSION NUMBER: 0000950149-97-000868 CONFORMED SUBMISSION TYPE: S-3/A PUBLIC DOCUMENT COUNT: 7 FILED AS OF DATE: 19970428 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: SEQUOIA MORTGAGE FUNDING CORP CENTRAL INDEX KEY: 0001033146 STANDARD INDUSTRIAL CLASSIFICATION: ASSET-BACKED SECURITIES [6189] STATE OF INCORPORATION: MD FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-3/A SEC ACT: 1933 Act SEC FILE NUMBER: 333-22681 FILM NUMBER: 97589052 BUSINESS ADDRESS: STREET 1: 591 REDWOOD HWY STREET 2: STE 3100 CITY: MILL VALLEY STATE: CA ZIP: 94941 BUSINESS PHONE: 4153897373 MAIL ADDRESS: STREET 1: 591 REDWOOD HIGHWAY STREET 2: STE 3100 CITY: MILL VALLEY STATE: CA ZIP: 94941 S-3/A 1 AMENDMENT #1 TO FORM S-3 1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 28, 1997 REGISTRATION NO. 333-22681 ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ AMENDMENT NO. 1 TO FORM S-3 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ------------------------ SEQUOIA MORTGAGE FUNDING CORPORATION (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 91-1771827 (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
------------------------ 591 REDWOOD HIGHWAY MILL VALLEY, CALIFORNIA 94941 (415) 381-1765 (ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES) ------------------------ DOUGLAS B. HANSEN SEQUOIA MORTGAGE FUNDING CORPORATION 591 REDWOOD HIGHWAY MILL VALLEY, CALIFORNIA 94941 (415) 381-1765 (NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE OF AGENT FOR SERVICE) ------------------------ COPIES TO: PHILLIP R. POLLOCK, ESQ. EDWARD J. FINE, ESQ. TOBIN & TOBIN BROWN & WOOD LLP ONE MONTGOMERY STREET, 15TH FLOOR ONE WORLD TRADE CENTER SAN FRANCISCO, CALIFORNIA 94104 NEW YORK, NEW YORK 10048 (415) 433-1400 (212) 839-5300
------------------------ 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 OF TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE AGGREGATE OFFERING REGISTRATION SECURITIES TO BE REGISTERED REGISTERED PER UNIT(1) PRICE(1) FEE(2) - ----------------------------------------------------------------------------------------------------------- Collateralized Mortgage Bonds...... $1,000,000 100% $1,000,000 $303.03 ===========================================================================================================
(1) Estimated for the purpose of calculating the registration fee. (2) Previously paid. 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. ================================================================================ 2 INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE. SUBJECT TO COMPLETION, DATED APRIL 28, 1997 PROSPECTUS SUPPLEMENT (TO PROSPECTUS DATED , 199 ) $ SEQUOIA MORTGAGE TRUST --------------------, COLLATERALIZED MORTGAGE BONDS ------------------------ The Sequoia Mortgage Trust , Collateralized Mortgage Bonds (the "Bonds"), in the aggregate principal amount of $ , consist of Class A-1, Class B-1 and Class B-2 Bonds. The Issuer will also issue an Investor Certificate (the "Investor Certificate") as described herein. Only the Class A-1 and Class B-1 Bonds (collectively, the "Offered Bonds") are offered hereby. Interest on the Bonds will be payable [monthly on the th day of each month], or if such day is not a business day, the next succeeding business day (each, a "Payment Date"), commencing on , 199 . Interest on the Bonds will be payable in an amount equal to the interest accrued during each Interest Accrual Period (as defined herein). Interest accrued on the Bonds during any Interest Accrual Period will be calculated on the basis of the related Class Principal Amount (as defined herein) immediately prior to the related Payment Date. See "DESCRIPTION OF THE BONDS -- Interest" herein. Payments of principal of the Bonds on each Payment Date will be made in the manner described herein under "DESCRIPTION OF THE BONDS -- Principal." The Bonds are redeemable only under the circumstances described herein. See "INDEX OF CERTAIN DEFINITIONS" on page S-42 of this Prospectus Supplement and on page 84 of the Prospectus for the location of the definitions of certain defined terms. The Class A-1 Bonds are referred to herein as the "Senior Bonds" and the Class B-1 and Class B-2 Bonds are referred to herein collectively as the "Subordinated Bonds." The rights of the holders of the Subordinated Bonds to receive payments of principal and interest will be subject to the priorities described herein. See "DESCRIPTION OF THE BONDS -- Priority of Payments and Allocation of Shortfalls" herein. Under certain circumstances, the Issuer may pledge additional Pledged Mortgages ("Additional Mortgage Collateral") to the Bond Trustee and issue additional Bonds ("Additional Bonds"). Any such pledge of Additional Mortgage Collateral and issuance of such Additional Bonds may affect the timing and amount of payments on any outstanding Class of Offered Bonds and an investor's yield on any such outstanding Bonds. See "SECURITY FOR THE BONDS -- Pledge of Additional Mortgage Collateral and Issuance of Additional Bonds" herein. FOR A DISCUSSION OF CERTAIN RISK FACTORS RELATING TO INVESTMENTS IN THE BONDS, SEE "RISK FACTORS" COMMENCING ON PAGE S-10 OF THIS PROSPECTUS SUPPLEMENT AND ON PAGE 19 OF THE PROSPECTUS. (Cover continued on next page) ------------------------ THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
========================================================================================================== ORIGINAL CLASS BOND INTEREST STATED PRINCIPAL AMOUNT RATE MATURITY(1) - ---------------------------------------------------------------------------------------------------------- Class A-1.............................................. $ (2) - ---------------------------------------------------------------------------------------------------------- Class B-1.............................................. $ (3) ==========================================================================================================
(1) Calculated as described herein under "DESCRIPTION OF THE BONDS -- Stated Maturity." (2) The Bond Interest Rate for the Senior Bonds (the "Senior Bond Interest Rate") and any Interest Accrual Period will equal . (3) The Bond Interest Rate for the Class B-1 Bonds (the "Class B-1 Bond Interest Rate") and any Interest Accrual Period will equal . The Offered Bonds will be purchased by (the "Underwriter") from the Issuer and will be offered by the Underwriter from time to time in negotiated transactions or otherwise at varying prices to be determined at the time of sale. Proceeds to the Issuer from the sale of the Offered Bonds are expected to be approximately % of the aggregate principal amount of the Offered Bonds plus accrued interest, before deducting issuance expenses payable by the Issuer. The Offered Bonds are offered by the Underwriter, subject to prior sale, when, as and if delivered to and accepted by the Underwriter and subject to its right to reject orders in whole or in part. It is expected that delivery of the Offered Bonds will be made in book-entry form only through the facilities of The Depository Trust Company on or about , 199 . [UNDERWRITER] , 199 3 (Cover continued from previous page) The Bonds will be issued by Sequoia Mortgage Trust (the "Issuer"), a Delaware business trust established by Sequoia Mortgage Funding Corporation (the "Company"), a wholly owned subsidiary of Redwood Trust, Inc., a Maryland corporation ("Redwood Trust"). Prior to their sale to the Issuer by the Company, the Pledged Mortgages will be held by Redwood Trust. The Bonds represent obligations solely of the Issuer and are not insured or guaranteed by any government agency or instrumentality, the Company, Redwood Trust, or any other person or entity. The Issuer is not expected to have any significant assets other than those pledged as collateral to secure the Bonds. The Bonds will be collateralized by -year conventional mortgage loans secured by first liens on one-to four-family residential properties (the "Pledged Mortgages"). The Pledged Mortgages have been sold to the Company by Redwood Trust. All of the Pledged Mortgages bear interest at [fixed] rates [that adjust [annually] based on changes in the level of the Index (as defined herein)]. The Bonds also will be secured by the Bond Account and the Distribution Account described herein. Scheduled net payments on the Pledged Mortgages will be sufficient, irrespective of the rate of prepayments on the Pledged Mortgages, to make timely payments of interest on the Bonds and to retire each Class of Bonds not later than its Stated Maturity. THE YIELD TO INVESTORS ON EACH CLASS OF OFFERED BONDS WILL BE SENSITIVE IN VARYING DEGREES TO, AMONG OTHER THINGS, THE RATE AND TIMING OF PRINCIPAL PAYMENTS (INCLUDING PREPAYMENTS) OF THE PLEDGED MORTGAGES [AND THE LEVEL OF THE INDEX, EACH OF] WHICH MAY VARY SIGNIFICANTLY OVER TIME. [THE BOND INTEREST RATE FOR A CLASS OF OFFERED BONDS MAY ALSO CHANGE FROM PAYMENT DATE TO PAYMENT DATE BASED ON THE NET MORTGAGE RATES (AS DEFINED HEREIN) AND THE OUTSTANDING PRINCIPAL BALANCES OF THE PLEDGED MORTGAGES]. THE YIELD TO MATURITY OF A CLASS OF OFFERED BONDS PURCHASED AT A DISCOUNT OR PREMIUM WILL BE MORE SENSITIVE TO THE RATE AND TIMING OF PAYMENTS THEREON. HOLDERS OF THE OFFERED BONDS SHOULD CONSIDER, IN THE CASE OF ANY SUCH BONDS PURCHASED AT A DISCOUNT, THE RISK THAT A SLOWER THAN ANTICIPATED RATE OF PRINCIPAL PAYMENTS COULD RESULT IN AN ACTUAL YIELD THAT IS LOWER THAN THE ANTICIPATED YIELD AND, IN THE CASE OF ANY OFFERED BONDS PURCHASED AT A PREMIUM, THE RISK THAT A FASTER THAN ANTICIPATED RATE OF PRINCIPAL PAYMENTS COULD RESULT IN AN ACTUAL YIELD THAT IS LOWER THAN THE ANTICIPATED YIELD. THE YIELD TO INVESTORS IN THE OFFERED BONDS ALSO MAY BE ADVERSELY AFFECTED BY NET INTEREST SHORTFALLS (AS DEFINED HEREIN) AND, PARTICULARLY IN THE CASE OF THE CLASS B-1 BONDS, REALIZED LOSSES (AS DEFINED HEREIN). NO REPRESENTATION IS MADE AS TO THE ANTICIPATED RATE OF PREPAYMENTS ON THE PLEDGED MORTGAGES, THE AMOUNT AND TIMING OF NET INTEREST SHORTFALLS OR REALIZED LOSSES, OR AS TO THE RESULTING YIELD TO MATURITY OF ANY CLASS OF OFFERED BONDS. The Underwriter intends to make a secondary market in the Offered Bonds, but has no obligation to do so. There is currently no secondary market for the Offered Bonds and there can be no assurance that such a market 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. ------------------ This Prospectus Supplement does not contain complete information about the offering of the Offered Bonds. Additional information is contained in the Prospectus of the Company dated , 199 and purchasers are urged to read both this Prospectus Supplement and the Prospectus in full. Sales of the Bonds may not be consummated unless the purchaser has received both this Prospectus Supplement and the Prospectus. The Bond Trustee will provide without charge to each person to whom this Prospectus Supplement is delivered, on the written or oral request of such person, a copy of any or all of the documents referred to in the Prospectus under "INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE" that have been or may be incorporated by reference in the Prospectus (not including exhibits to the information that is incorporated by reference unless such exhibits are specifically incorporated by reference into the information that the Prospectus incorporates). Such requests should be directed to the Bond Trustee at , telephone: , facsimile number: . UNTIL 90 DAYS AFTER THE DATE OF THIS PROSPECTUS SUPPLEMENT, ALL DEALERS EFFECTING TRANSACTIONS IN THE OFFERED BONDS, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS SUPPLEMENT AND PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS SUPPLEMENT AND PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS. S-2 4 SUMMARY The following summary is qualified in its entirety by reference to the detailed information appearing elsewhere in this Prospectus Supplement and in the accompanying Prospectus. Certain capitalized terms used in this Summary are defined elsewhere in this Prospectus Supplement or in the Prospectus. See "INDEX OF CERTAIN DEFINITIONS" on page S-42 of this Prospectus Supplement and page 84 of the Prospectus for the location of the definitions of certain capitalized terms. Offered Bonds.............. Sequoia Mortgage Trust , Collateralized Mortgage Bonds, Class A-1 and Class B-1 Bonds (collectively, the "Offered Bonds"). Only the Offered Bonds are offered hereby. Securities Other than the Offered Bonds........ In addition to the Offered Bonds, the Class B-2 Bonds and the Investor Certificate will be issued in the initial amounts and will bear interest at the interest rates indicated below, but are not offered hereby:
INITIAL INTEREST AMOUNT RATE -------- -------- Class B-2 Bonds(1)........................ $ (2) Investor Certificate(1)................... $ (3)
-------------------------------------------- (1) The Class B-2 Bonds and the Investor Certificate will provide limited credit support for the Offered Bonds as described herein. (2) The interest rate for the Class B-2 Bonds (the "Class B-2 Bond Interest Rate") and any Interest Accrual Period will equal . (3) The interest rate for the Investor Certificate (the "Certificate Interest Rate") and any Interest Accrual Period will equal . Any information contained herein with respect to the Class B-2 Bonds or the Investor Certificate is provided only to permit a better understanding of the Offered Bonds. Designations Senior Bonds............. Class A-1 Bonds. Subordinated Bonds....... Class B-1 and Class B-2 Bonds. Offered Bonds............ The Senior Bonds and the Class B-1 Bonds. Book-Entry Bonds......... All Classes of Offered Bonds. Issuer..................... The 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 herein) for the sole purpose of issuing the Bonds and the Investor Certificate. The settlor and sole beneficiary of the Issuer is Sequoia Mortgage Funding Corporation, a Delaware corporation (the "Company"), and a wholly owned subsidiary of Redwood Trust, Inc., a Maryland corporation ("Redwood Trust"). The Owner Trustee of the Issuer is . Redwood Trust will be the manager of the Issuer pursuant to a management agreement (the "Management Agreement") entered into with the Issuer. None of the Company, Redwood Trust or 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. See "THE ISSUER" herein and in the Prospectus. Bond Trustee............... , a banking corporation organized under the laws of (the "Bond Trustee"). Owner Trustee.............. , a banking corporation organized under the laws of the State of Delaware (the "Owner Trustee"). S-3 5 Master Servicing Agreement.................. The Pledged Mortgages will be serviced pursuant to a master servicing agreement dated as of 1, 199 (the "Master Servicing Agreement") among the Issuer, the Bond Trustee and the Master Servicer. Master Servicer............ will act as Master Servicer for the Pledged Mortgages (the "Master Servicer"). On or prior to the Closing Date, the Master Servicer will enter into mortgage servicing agreements (each, a "Servicing Agreement") with certain servicers (each, a "Servicer") pursuant to which each Servicer will perform certain servicing functions with respect to the Pledged Mortgages. See "SERVICING OF THE PLEDGED MORTGAGES -- The Master Servicer" herein. The Master Servicer will administer and supervise the performance of each Servicer, who may in turn be administering and supervising the performance of one or more subservicers of the Pledged Mortgages. The Master Servicer will receive the Master Servicing Fee, and each Servicer will receive the related Servicing Fee, from interest collected on the Pledged Mortgages. The Master Servicer will be obligated to perform the obligations of a terminated Servicer or appoint a successor Servicer. See "SERVICING OF THE PLEDGED MORTGAGES -- Servicing Compensation and Payment of Expenses" herein. Deposit Trust Agreement.... The Issuer will be established and the Investor Certificate will be issued pursuant to an amended and restated deposit trust agreement dated as of , 199 (the "Deposit Trust Agreement") among the Company and the Owner Trustee. Cut-off Date............... 1, 199 . Closing Date............... On or about , 199 . 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 first business day thereafter, commencing in , 199 (each, a "Payment Date"). 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 Record Date for any Payment Date will be the last business day of the month preceding the month of such Payment Date. Priority of Payments....... 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 Class B-1 Bonds; (iv) to principal of the Class B-1 Bonds; (v) to interest on the Class B-2 Bonds; (vi) to principal of the Class B-2 Bonds; (vii) to interest on the Investor Certificate; (viii) to principal of the Investor Certificate; and (ix) to the holder of the Investor Certificate, all remaining Available Funds. Under certain circumstances described herein, (i) payments from Available Funds for a Payment Date that would otherwise be made on the Subordinated Bonds may be made instead on the Senior Bonds, and (ii) payments from Available Funds for a Payment Date that would otherwise be made on the Class B-2 Bonds may be made instead on the Class B-1 Bonds. In addition, under certain circumstances described herein, payments from Available Funds for a Payment Date that would otherwise be made on the Investor Certificate may be made instead on the Senior Bonds and the Subordinated Bonds. See "DESCRIPTION S-4 6 OF THE BONDS -- Priority of Payments and Allocation of Shortfalls" herein. Payments of Interest....... To the extent funds are available therefor, each Class of Bonds will be entitled to receive interest in the amount of the Interest Payment Amount for such Class. See "DESCRIPTION OF THE BONDS -- Interest" herein and in the Prospectus. A. Interest Payment Amount................... For each Class of Bonds, the amount of interest accrued during the related Interest Accrual Period at the applicable Bond Interest Rate. 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. B. Bond Interest Rate.... The Bond Interest Rate for each Class of Bonds for each Payment Date will be as described herein or on the cover page hereof. Payments of Principal...... On each Payment Date, to the extent funds are available therefor, principal payments in reduction of the Class Principal Amount of each Class of Bonds will be made in the order and subject to the priorities set forth herein under "DESCRIPTION OF THE BONDS -- Principal" in an amount equal to such Class' allocable portion of the Principal Payment Amount. 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 Pledged Mortgage. The Stated Maturity for each Class of Bonds is , 20 . See "DESCRIPTION OF THE BONDS -- Stated Maturity" and "-- Weighted Average Lives of the Offered Bonds" herein. Optional Redemption of Bonds.................... 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 Class B-1 Principal Amount, (iii) the Class B-2 Principal Amount and (iv) the Invested Amount, in each case 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 Pledged Mortgages 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 any Class of Subordinated Bonds, any unpaid Class Principal Carryover Shortfall relating thereto), plus accrued and unpaid interest thereon 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 redemption or call at the option of the Issuer nor are they subject to special redemption. See "DESCRIPTION OF THE BONDS -- Redemption at the Option of the Issuer" herein and in the Prospectus. Credit Enhancement Subordination............ Credit enhancement for the Senior Bonds will be provided by the Subordinated Bonds and by the Investor Certificate. Credit enhancement for the Class B-1 Bonds will be provided by the Class B-2 Bonds and the Investor Certificate. Credit enhancement for the Class B-2 Bonds will be provided by the Investor Certificate. The rights of holders of the Subordinated Bonds and the Investor Certificate to receive payments with respect to the Pledged Mortgages will be subordinated to such rights of the holders of the Senior Bonds, S-5 7 the rights of the holders of the Class B-2 Bonds and the Investor Certificate will be further subordinated to such rights of the holders of the Class B-1 Bonds, and the rights of the holder of the Investor Certificate will be further subordinated to such rights of the holders of the Class B-2 Bonds, in each case to the extent described herein. See "DESCRIPTION OF THE BONDS -- Priority of Payments and Allocation of Shortfalls" and "CREDIT ENHANCEMENT" herein. Advances................... The Master Servicer is obligated to make cash advances ("Advances") with respect to delinquent payments of principal and interest on any Pledged Mortgage to the extent described herein. The Bond Trustee will be obligated to make any such Advance if the Master Servicer fails in its obligation to do so, to the extent provided in the Master Servicing Agreement. See "SERVICING OF THE PLEDGED MORTGAGES" herein. Certain Prepayment and Yield Considerations and Risks; Reinvestment Risk........ The effective yields to the holders of the Offered Bonds will be lower than the yields otherwise produced by the applicable rate at which interest is paid to such holders and the purchase price of such Offered Bonds because [monthly] distributions will not be payable to such holders until the th day (or, if such day is not a business day, the following business day) of the month following the [month] in which interest accrues on the Pledged Mortgages (without any additional payment of interest or earnings thereon in respect of such delay). The rate of principal payments on the Offered Bonds, the aggregate amount of payments on the Offered Bonds and the yields to maturity of the Offered Bonds will be related to the rate and timing of payments of principal on the Pledged Mortgages [and the level of the Index]. Since the rate of payment of principal on the Pledged Mortgages will depend on future events, no assurance can be given as to such rate or the rate of principal prepayments. The extent to which the yield to maturity of a Class of Offered Bonds may vary from the anticipated yield may depend upon the degree to which it is purchased at a discount or premium, and the degree to which the timing of payments thereon is sensitive to prepayments, liquidations and purchases of the Pledged Mortgages. Further, an investor should consider the risk that, in the case of any Offered Bond purchased at a discount, a slower than anticipated rate of principal payments (including prepayments) on the Pledged Mortgages could result in an actual yield to such investor that is lower than the anticipated yield and, in the case of any Offered Bond purchased at a premium, a faster than anticipated rate of principal payments on the Pledged Mortgages could result in an actual yield to such investor that is lower than the anticipated yield. Because the Pledged Mortgages may be prepaid at any time, it is not possible to predict the rate at which payments of principal of the Offered Bonds will be received. Since prevailing interest rates are subject to fluctuation, there can be no assurance that investors in the Offered 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 Offered Bonds. See "RISK FACTORS -- Yield, Prepayment and Maturity Risks" herein and "RISK FACTORS -- Prepayment and Yield Considerations" in the Prospectus. Security for the Bonds..... The Bonds will be secured by collateral consisting of the items set forth below: S-6 8 A. Pledged Mortgages..... The Pledged Mortgages will consist primarily of a pool (the "Pledged Mortgage Pool") of -year conventional mortgage loans secured by first liens on one- to four-family residential properties. Such Pledged Mortgages will bear interest at [fixed] rates [that adjust [annually] based on changes in the level of the Index (as defined herein)]. Payments of principal and interest on the Bonds will be based on payments received on the Pledged Mortgages, as described herein. See "DESCRIPTION OF THE BONDS -- Interest" and "-- Principal" herein and "SECURITY FOR THE BONDS -- The Pledged Mortgages" herein and in the Prospectus. [The Mortgage Rate for each Pledged Mortgage will adjust [annually] based on (the "Index"). See "SECURITY FOR THE BONDS -- The Pledged Mortgages -- General", and "-- The Index" herein.] B. Bond 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 Pledged Mortgages (the "Bond Account"). See "DESCRIPTION OF THE BONDS -- Payments on Pledged Mortgages; Accounts" herein and "SERVICING OF THE PLEDGED MORTGAGES" herein and in the Prospectus. C. Distribution 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 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 Bond Account the Bond Distribution Amount (as defined herein) for such Payment Date, to the extent of Available Funds on deposit therein, and will deposit such amount in the Distribution Account. See "DESCRIPTION OF THE BONDS -- Payments on Pledged Mortgages; Accounts" herein and "SERVICING OF THE PLEDGED MORTGAGES" herein and in the Prospectus. Additional Collateral...... The Issuer may pledge additional Pledged Mortgages ("Additional Mortgage Collateral") to the Bond Trustee and issue Additional Bonds within [one year] following the date of initial issuance of the Bonds upon the satisfaction of certain conditions set forth in the Indenture. Although the pledge of any Additional Mortgage Collateral will not result in any change in any Bond Interest Rate, Stated Maturity or Payment Dates of any Class of Offered Bonds, the pledge of Additional Mortgage Collateral may result in a variance of up to years in the weighted average life of the Offered Bonds at % of the Prepayment Assumption (as defined herein), and the characteristics of the Additional Mortgage Collateral may vary within the parameters described herein. Furthermore, no assurance can be given that the pledge of Additional Mortgage Collateral and issuance of Additional Bonds would not affect the timing or amount of payments received by holders of the Offered Bonds. Provided that the conditions described herein and in the Indenture are satisfied, the pledge of Additional Mortgage Collateral and the issuance of Additional Bonds will not be subject to the prior consent of the Bondholders. See "SECURITY FOR THE BONDS -- Pledge of Additional Mortgage Collateral and Issuance of Additional Bonds" herein and in the Prospectus. 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 non-exempt Bondholders. The prepayment rate used by the Issuer for S-7 9 purposes of determining the amount and rate of accrual of original issue discount on the Offered Bonds assumes that the Pledged Mortgages are prepaid at a rate of % of the Prepayment Assumption. Based upon the assumed prepayment rate and the expected price to the public of each Class of Offered Bonds as of the date hereof (including interest accrued before the Closing Date, if any), the Senior Bonds will not be issued with original issue discount and the Class B-1 Bonds will be treated as issued with original issue discount. [Although it is unclear, 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 such term is defined in the Prospectus under "FEDERAL INCOME TAX CONSEQUENCES").] Notwithstanding the use of the Prepayment Assumption in pricing the Offered Bonds, no representation is made that the Pledged Mortgages will actually prepay at such assumed prepayment rate or at any other rate. The amount of original issue discount, if any, and certain other information with respect to each Offered Bond will be set forth on the face of such Offered Bond as required by applicable regulations. Payments on Offered Bonds held by foreign persons will generally be exempt from United States withholding tax, subject to compliance with applicable certification procedures. Counsel to the Issuer has advised the Issuer that in its opinion the Offered Bonds will be treated as debt for federal income tax purposes. The Issuer will not elect to treat the segregated pool of assets securing the Bonds as a "real estate mortgage investment conduit" for federal income tax purposes. See "FEDERAL INCOME TAX CONSEQUENCES" in the Prospectus. Offered Bonds owned by a real estate investment trust will not be treated as "real estate assets" or "Government securities" and interest on the Offered Bonds will not be considered "interest on obligations secured by mortgages on real property or on interests in real property." Similarly, the Offered Bonds will not constitute "qualifying real property loans" for mutual savings banks or domestic building and loan associations and will not constitute "loans secured by an interest in real property" or "obligations of the United States" for domestic building and loan associations. In addition, Offered Bonds held by a regulated investment company will not constitute "Government securities." See "FEDERAL INCOME TAX CONSEQUENCES" in the Prospectus. ERISA Matters.............. Fiduciaries of employee benefit plans and certain other retirement plans and arrangements 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"), including individual retirement accounts and annuities, Keogh plans and collective investment funds in which such plans, accounts, annuities or arrangements are invested (any of the foregoing a "Plan"), persons acting on behalf of a Plan, or persons using the assets of a Plan ("Plan Investors"), should review carefully with their legal advisors whether the purchase or holding of the Offered Bonds could either give rise to a transaction that is prohibited under ERISA or the Code or cause the Pledged Mortgages securing the Offered 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"). 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 Offered Bonds. See "ERISA MATTERS" herein and in the Prospectus. Although not entirely free from doubt, the Issuer believes that the Offered Bonds will S-8 10 be treated as debt obligations without significant equity features for purposes of the Plan Asset Regulations. Accordingly, a Plan that acquires the Offered Bonds should not be treated as having acquired a direct interest in the assets of the Issuer. See "ERISA MATTERS" herein and in the Prospectus. However, there can be no complete assurance that the Offered Bonds will be treated as debt obligations without significant equity features for purposes of the Plan Asset Regulations. Legal Investment........... The Offered Bonds will constitute "mortgage related securities" for purposes of the Secondary Mortgage Market Enhancement Act of 1984 ("SMMEA") so long as they are rated in one of the two highest rating categories by at least one nationally recognized statistical rating organization and, as such, are legal investments for certain entities to the extent provided for in 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 Bonds complies with applicable guidelines, policy statements or restrictions. See "LEGAL INVESTMENT" in the Prospectus. Ratings.................... It is a condition of the issuance of the Senior Bonds that they be rated [AAA] by (" ") and [AAA] by (" " and, together with , the "Rating Agencies"). It is a condition to the issuance of the Class B-1 Bonds that they be rated [AA] by . The ratings of the Offered Bonds of any Class 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. See "RATINGS" herein. The Issuer has not requested a rating of the Offered 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 Offered 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 Offered Bonds could be lower than the respective ratings assigned by the Rating Agencies. Use of Proceeds............ The Issuer intends to distribute all of the net proceeds of the issuance of the Bonds to the Company which will apply such proceeds to the purchase of the Pledged Mortgages. The Pledged Mortgages were purchased by the Company from [Redwood Trust] and sold to the Issuer by the Company. See "USE OF PROCEEDS" herein and in the Prospectus and "METHOD OF DISTRIBUTION" herein. Risk Factors............... For a discussion of certain risks associated with an investment in the Bonds, see "RISK FACTORS" commencing on page S-10 herein and on page 19 in the Prospectus. S-9 11 RISK FACTORS YIELD, PREPAYMENT AND MATURITY RISKS EFFECT OF DELAYS ON PAYMENT ON THE BONDS. The effective yields to the holders of the Offered Bonds will be lower than the yields otherwise produced by the applicable rate at which interest is paid to such holders and the purchase price of such Offered Bonds because [monthly] payments will not be payable to such holders until the th day (or, if such day is not a business day, the following business day) of the month following the [month] in which interest accrues on the Pledged Mortgages (without any additional payment of interest or earnings thereon in respect of such delay). EFFECT OF DELINQUENCIES ON THE PLEDGED MORTGAGES. Delinquencies on the Pledged Mortgages which are not advanced by or on behalf of the Master Servicer (because amounts, if advanced, would be nonrecoverable), may adversely affect the yield on the Offered Bonds. Because of the priority of distributions, shortfalls resulting from delinquencies not so advanced will be borne first by the Investor Certificate, second by the Class B-2 Bonds, third by the Class B-1 Bonds, and fourth by the Senior Bonds. If, as a result of such shortfalls, the sum of (i) the Senior Class Principal Amount, (ii) the Class B-1 Principal Amount, (iii) the Class B-2 Principal Amount and (iv) the Invested Amount exceeds the Pool Principal Balance, the Invested Amount will be reduced by the amount of such excess until the Invested Amount is reduced to zero, then, the Class B-2 Principal Amount will be reduced by the remaining amount of such excess, if any, until the Class B-2 Principal Amount is reduced to zero, and thereafter, the Class B-1 Principal Amount will be reduced by the remaining amount of such excess, if any. [EFFECT OF PERIODIC RATE CAP AND MINIMUM RATE. The Mortgage Rate of each Pledged Mortgage will be subject to a Periodic Rate Cap and a Maximum Rate. If the Index changes substantially between Adjustment Dates, the adjusted Mortgage Rate on a related Pledged Mortgage may not equal the applicable Index plus the related Margin due to the constraint of such caps. In such event, the related Net Mortgage Rate and consequently, each Bond Interest Rate, will be less than would have been the case in the absence of such caps.] [EFFECT OF DISPROPORTIONATE PREPAYMENTS. The Bond Interest Rate for each Class of Offered Bonds will be based upon the weighted average of the Net Mortgage Rates for the Pledged Mortgages. Any disproportionate prepayment of Pledged Mortgages with higher Net Mortgage Rates may adversely affect the yield on the Offered Bonds. The Bond Interest Rates for each Class of Offered Bonds will vary from Payment Date to Payment Date due to (i) the timing of the Mortgage Rate readjustments of the Pledged Mortgages and (ii) different rates of payment of principal of such Pledged Mortgages bearing different Mortgage Rates.] EFFECT OF NET INTEREST SHORTFALLS AND REALIZED LOSSES. Net Interest Shortfalls allocated to the Offered Bonds, if any, will reduce the amount of interest payable on the Offered Bonds which will adversely affect the yields on the Offered Bonds. In addition, although all losses initially will be borne by the Investor Certificate and then by the Class B-2 Bonds, the yields on the Offered Bonds will depend on the rate and timing of Realized Losses. Realized Losses could occur at a time when the Investor Certificate and the Class B-2 Bonds are no longer outstanding and available to absorb Realized Losses. Realized Losses in excess of the sum of the Invested Amount and the Class B-2 Principal Amount will reduce the funds available to make payments to the holders of the Offered Bonds on the related Payment Date. As a result, holders of the Offered Bonds, and particularly holders of the Class B-1 Bonds, may not receive the full amount of interest and principal on a Payment Date that they would have received in the absence of such Realized Losses. In the event that holders of Offered Bonds do not receive the full amount of accrued interest for any Payment Date, the amount which is not paid will be carried forward and will be payable on future Payment Dates to the extent funds are available therefor. Any amount of interest so carried forward will not (except in the case of the Subordinated Bonds) accrue interest until the Bonds are declared due and payable upon the occurrence of an Event of Default, as described herein under "DESCRIPTION OF THE BONDS -- Priority of Payments and Allocation of Shortfalls." Any shortfall in amounts otherwise payable as principal of the Subordinated Bonds will be paid on future Payment Dates to the extent funds are available therefor. So long as the Senior Bonds S-10 12 are outstanding, any shortfall in amounts available for payments of principal of, or interest on, the Subordinated Bonds will not constitute an Event of Default. Under the Indenture, shortfalls in amounts required to be distributed to Bondholders ("Shortfalls") that affect only the Subordinated Bonds will not constitute an Event of Default 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. As described herein, on any Payment Date on which a Shortfall occurs, payments of accrued interest on the Class B-1 Bonds will be subject to the availability of funds in the Distribution Account after payment of accrued interest on and principal then due on all outstanding Senior Bonds. On any Payment Date on which a Shortfall occurs, payments of principal on the Class B-2 Bonds will be subject to the availability of funds therefor after payment of interest on all outstanding Senior Bonds and Class B-1 Bonds and principal of all outstanding Senior Bonds. Also, upon the occurrence of each Shortfall, the Senior Percentage, the Class B-1 Percentage, the Class B-2 Percentage and the Investor Percentage will shift in the manner described herein under "DESCRIPTION OF THE BONDS -- Priority of Payments and Allocation of Shortfalls." Therefore, following the occurrence of any Shortfall allocable to the Class B-1 Bonds, such Class B-1 Bonds will amortize more slowly than would otherwise have been the case in the absence of such Shortfall. As a result of these factors, the yield on the Class B-1 Bonds will be more sensitive than the yield on the Senior Bonds to the occurrence of Shortfalls. The weighted average life of, and the yield to maturity on, the Class B-1 Bonds will be sensitive to the rate and timing of mortgagor defaults and the severity of ensuing losses on the Pledged Mortgages. If the actual rate and severity of losses on the Pledged Mortgages is higher than those assumed by a holder of a Class B-1 Bond, the actual yield to maturity of such Bond may be lower than the yield expected by such holder based on such assumption. The timing of losses on the Pledged Mortgages will also affect an investor's actual yield to maturity, even if the rate of defaults and severity of losses over the life of the Pledged Mortgage Pool are consistent with an investor's expectations. In general, the earlier a loss occurs, the greater the effect on an investor's yield to maturity. The yield to maturity of the Class B-1 Bonds will also be affected by Net Interest Shortfalls allocated to the Class B-1 Bonds, if any, and other cash shortfalls in Available Funds. See "DESCRIPTION OF THE BONDS -- Priority of Payments and Allocation of Shortfalls" herein. EFFECT OF RATE AND TIMING OF PRINCIPAL PAYMENTS. The rate of principal payments on the Offered Bonds, the aggregate amount of payments on the Offered Bonds and the yields to maturity of the Offered Bonds will be related to the rate and timing of payments of principal on the Pledged Mortgages. The rate of principal payments on the Pledged Mortgages will in turn be affected by the amortization schedules of the Pledged Mortgages and by the rate of principal prepayments (including for this purpose prepayments resulting from refinancing, liquidations of the Pledged Mortgages due to defaults, casualties, condemnations and purchases by Redwood Trust [or any optional purchase by the Master Servicer or the Company of a defaulted Pledged Mortgage]). [The Pledged Mortgages may be prepaid by the Mortgagors at any time without a prepayment penalty.] [The Pledged Mortgages are subject to the "due-on-sale" provisions included therein]. See "SECURITY FOR THE BONDS -- The Pledged Mortgages" herein. Prepayments, liquidations and purchases of the Pledged Mortgages (including [any optional purchase by the Master Servicer or the Company of a defaulted Pledged Mortgage] and any optional repurchase by the Issuer of the remaining Pledged Mortgages in connection with the optional redemption of the Bonds, in each case as described herein) will result in payments on the Offered Bonds of principal amounts which would otherwise be distributed over the remaining terms of the Pledged Mortgages. Since the rate of payment of principal on the Pledged Mortgages will depend on future events, no assurance can be given as to such rate or the rate of principal prepayments. The extent to which the yield to maturity of a Class of Offered Bonds may vary from the anticipated yield will depend upon the degree to which such Bond is purchased at a discount or premium, and the degree to which the timing of payments thereon is sensitive to prepayments, liquidations and purchases of the Pledged Mortgages. Further, an investor should consider the risk that, in the case of any Offered Bond purchased at a discount, a slower than anticipated rate of principal payments (including S-11 13 prepayments) on the Pledged Mortgages could result in an actual yield to such investor that is lower than the anticipated yield and, in the case of any Offered Bond purchased at a premium, a faster than anticipated rate of principal payments on the Pledged Mortgages could result in an actual yield to such investor that is lower than the anticipated yield. The rate of principal payments (including prepayments) on pools of mortgage loans may vary significantly over time and may be influenced by a variety of economic, geographic, social and other factors, including changes in mortgagors' housing needs, job transfers, unemployment, mortgagors' net equity in the mortgaged properties and servicing decisions. In general, if prevailing interest rates were to fall significantly below the Mortgage Rates on the Pledged Mortgages, the Pledged Mortgages could be subject to higher prepayment rates than if prevailing interest rates were to remain at or above the Mortgage Rates on the Pledged Mortgages. Conversely, if prevailing interest rates were to rise significantly, the rate of prepayments on the Pledged Mortgages would generally be expected to decrease. No assurances can be given as to the rate of prepayments on the Pledged Mortgages in stable or changing interest rate environments. The timing of changes in the rate of prepayments on the Pledged Mortgages may significantly affect an investor's actual yield to maturity, even if the average rate of principal payments is consistent with an investor's expectation. In general, the earlier a prepayment of principal on the Pledged Mortgages, the greater the effect on an investor's yield to maturity. The effect on an investor's yield as a result of principal payments occurring at a rate higher (or lower) than the rate anticipated by the investor during the period immediately following the issuance of the Bonds may not be offset by a subsequent like decrease (or increase) in the rate of principal payments. NO REPRESENTATION IS MADE AS TO THE RATE OF PRINCIPAL PAYMENTS ON THE PLEDGED MORTGAGES OR AS TO THE YIELD TO MATURITY OF ANY CLASS OF OFFERED BONDS. INVESTORS ARE URGED TO MAKE AN INVESTMENT DECISION WITH RESPECT TO THE OFFERED BONDS BASED ON THE ANTICIPATED YIELD TO MATURITY OF SUCH BONDS RESULTING FROM THEIR RESPECTIVE PRICES AND EACH INVESTOR'S OWN DETERMINATION AS TO ANTICIPATED PLEDGED MORTGAGE PREPAYMENT RATES. CASH FLOW CONSIDERATIONS AND RISKS Minimum monthly payments on the Pledged Mortgages will at least equal and may exceed accrued interest thereon. Even assuming that the Mortgaged Properties provide adequate security for the Pledged Mortgages, substantial delays could be encountered in connection with the liquidation of Pledged Mortgages that are delinquent and resulting shortfalls in distributions to holders of the Offered Bonds could occur. Further, liquidation expenses (such as legal fees, real estate taxes, and maintenance and preservation expenses) will reduce the security for the related Pledged Mortgages and could thereby reduce the proceeds payable to holders of the Offered Bonds. In the event any of the Mortgaged Properties fail to provide adequate security for the related Pledged Mortgages, holders of the Offered Bonds could experience a loss to the extent that any applicable credit enhancement has been exhausted. LIMITED RECOURSE The Offered Bonds represent obligations solely of the Issuer and are not insured or guaranteed by any governmental agency or instrumentality, the Company, Redwood Trust, the Master Servicer, any Servicer or any other person or entity. ISSUANCE OF ADDITIONAL BONDS MAY ADVERSELY AFFECT INVESTMENT Subject to certain conditions set forth herein, in the Prospectus and in the Indenture, the Issuer may pledge additional mortgage loans ("Additional Mortgage Collateral") to the Bond Trustee and issue Additional Bonds within [one year] following the date of initial issuance of the Bonds. Although the pledge of any Additional Mortgage Collateral will not result in any change in the Bond Interest Rate, Stated Maturity or Payment Dates of the Bonds, the pledge of Additional Mortgage Collateral may result in a variance of up to years in the weighted average life of the Bonds at % of the Prepayment Assumption (as described herein), and the characteristics of the Additional Mortgage Collateral may vary within the parameters S-12 14 described herein. Furthermore, no assurance can be given that any pledge of Additional Mortgage Collateral and issuance of Additional Bonds would not affect the timing or amount of payments received by the holders of the Offered Bonds. Provided that the conditions described herein, and in the Indenture are satisfied, the pledge of Additional Mortgage Collateral and the issuance of Additional Bonds will not be subject to the prior consent of the Bondholders. See "SECURITY FOR THE BONDS -- Pledge of Additional Mortgage Collateral and Issuance of Additional Bonds" herein and in the Prospectus. DELINQUENCIES MAY ADVERSELY AFFECT INVESTMENT As of the Cut-off Date, (i) not more than % of the Pledged Mortgages (by Cut-off Date Stated Principal Balance) were delinquent by one or more Scheduled Payments and (ii) not more than % of the Pledged Mortgages (by Cut-off Date Stated Principal Balance) were delinquent by two or more Scheduled Payments. Investors should consider the risk that the inclusion of such loans in the Pledged Mortgages may effect the rates of defaults and prepayments on such Pledged Mortgages and the yields on the Offered Bonds. See "SECURITY FOR THE BONDS -- The Pledged Mortgages" herein. PLEDGED MORTGAGE CONCENTRATION Approximately % and % of the Pledged Mortgages (by Cut-off Date Stated Principal Balance) are expected to be secured by Mortgaged Properties located in and , respectively. Consequently, losses and prepayments on the Pledged Mortgages 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 also by the occurrence of natural disasters (such as earthquakes, fires and floods) in these areas. LIMITED LIQUIDITY OF INVESTMENTS There can be no assurance that a secondary market will develop for the Offered Bonds, or, if one does develop, that it will provide the holders of the Offered Bonds with liquidity of investment or that it will continue to exist for the term of the Offered Bonds. BANKRUPTCY AND INSOLVENCY RISKS Redwood Trust and the Company will treat the transfer of the Pledged Mortgages by Redwood Trust to the Company as a sale. Nevertheless, in the event of a bankruptcy of Redwood Trust the trustee in bankruptcy could attempt to recharacterize the sale of the Pledged Mortgages as a borrowing secured by a pledge of mortgage loans. The Company and the Issuer will treat the transfer of the Pledged Mortgages by the Company to the Issuer as a sale. Nevertheless, in the event of a bankruptcy of the Company, the trustee in bankruptcy could attempt to recharacterize the sale of the Pledged Mortgages as a borrowing secured by a pledge of mortgage loans. In either case, if such an attempt to recharacterize the transfer of the loans were successful, a trustee in bankruptcy could elect to accelerate payment of the Bonds and liquidate the Pledged Mortgages, with the holders of the Offered Bonds entitled to no more than the then outstanding Class Principal Amount, if any, of such Bonds together with interest at the applicable Bond Interest Rates to the date of payment. In the event of an acceleration of the Bonds, the holders of the Offered Bonds would lose the right to future payments of interest, might suffer reinvestment losses in a lower interest rate environment and may fail to recover their initial investment. BOOK-ENTRY BONDS LIMITED LIQUIDITY. Issuance of the Offered Bonds in book-entry form may reduce the liquidity of such Offered Bonds in the secondary trading market since investors may be unwilling to purchase Offered Bonds for which they cannot obtain physical certificates. See "DESCRIPTION OF THE BONDS -- Book-Entry Bonds" herein and in the Prospectus and "RISK FACTORS -- Book-Entry Registration" in the Prospectus. S-13 15 DIFFICULTY IN PLEDGING. Since transactions in the Offered Bonds can be effected only through DTC, CEDEL, Euroclear, participating organizations, indirect participants and certain banks, the ability of Bond Owners to pledge an Offered Bond to persons or entities that do not participate in the DTC, CEDEL or Euroclear system may be limited due to lack of a physical certificate representing the Offered Bonds. See "DESCRIPTION OF THE BONDS -- Book-Entry Bonds" herein and in the Prospectus and "RISK FACTORS -- Book-Entry Registration" in the Prospectus. POTENTIAL DELAYS IN PAYMENT. Bond Owners may experience some delay in their receipt of payments of interest and principal on the Offered Bonds since such payments will be forwarded by the Bond Trustee to DTC and DTC will credit such payments to the accounts of its Participants (as defined herein) which will thereafter credit them to the accounts of Bond Owners either directly or indirectly through indirect participants. Bond Owners will not be recognized as Bondholders as such term is used in the Indenture, and Bond Owners will be permitted to exercise the rights of Bondholders only indirectly through DTC and its Participants. See "DESCRIPTION OF THE BONDS -- Book-Entry Bonds" herein and in the Prospectus and "RISK FACTORS -- Book-Entry Registration" in the Prospectus. RATINGS The ratings of the Classes of Offered Bonds will depend primarily on an assessment by the Rating Agencies of the Pledged Mortgages. The rating by the Rating Agencies of the Classes of Offered Bonds is not a recommendation to purchase, hold or sell the Offered Bonds, inasmuch as such rating does not comment as to the market price or suitability for a particular investor. There is no assurance that the ratings will remain in place for any given period of time or that the ratings will not be lowered or withdrawn by the Rating Agencies. In general, ratings assess credit risk and do not address likelihood of prepayments. FOR A DISCUSSION OF CERTAIN ADDITIONAL RISK FACTORS RELATING TO INVESTMENTS IN THE BONDS, SEE "RISK FACTORS" IN THE PROSPECTUS. 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 , 199 . The Issuer was formed for the sole purpose of issuing the Bonds and the Investor Certificate. The Company is the settlor and sole beneficiary of the Issuer and is the Owner Trustee of the Issuer. The Company is a limited purpose finance corporation the capital stock of which is wholly owned by Redwood Trust, Inc., a Maryland corporation ("Redwood Trust"). Redwood Trust will be the manager of the Issuer pursuant to a management agreement entered into with the Issuer. None of the Company, 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. The Issuer's assets will consist almost entirely of the Pledged Mortgages which will be pledged to secure the Bonds. If the Pledged Mortgages and other collateral securing the Bonds are insufficient for payment of the Offered Bonds, it is unlikely that significant other assets of the Issuer will be available for payment of the Offered Bonds. The amount of funds available to pay the Offered Bonds may be affected by, among other things, Realized Losses incurred on defaulted Pledged Mortgages. See "RISK FACTORS" herein and in the Prospectus and "THE ISSUER" in the Prospectus. The Indenture prohibits the Issuer from incurring any indebtedness other than the Bonds, or assuming or guaranteeing the indebtedness of any other person. S-14 16 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 and Class B-2 Bonds (collectively, the "Subordinated Bonds"). The Issuer will also issue the Investor Certificate (the "Investor Certificate") as described herein. The Senior Bonds and the Class B-1 Bonds are collectively referred to herein as the "Offered Bonds." Only the Offered Bonds are offered hereby. The Classes of Offered Bonds will have the respective Bond Interest Rates described on the cover hereof. The Class B-2 Bonds and the Investor Certificate will bear interest at the Bond Interest Rate and Certificate Interest Rate, respectively, 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 Class B-1 Bonds (the "Class B-1 Principal Amount") as of any Payment Date is the lesser of (i) the aggregate of the Stated Principal Balances of the Pledged Mortgages, less the Senior Class Principal Amount immediately prior to such date, and (ii) the Original Class B-1 Principal Amount reduced by all amounts previously distributed to holders of the Class B-1 Bonds as payments of principal and (c) the Class B-2 Bonds (the "Class B-2 Principal Amount") as of any Payment Date is the lesser of (i) the aggregate of the Stated Principal Balances of the Pledged Mortgages, less the sum of the Senior Class Principal Amount and the Class B-1 Principal Amount, in each case immediately prior to such date, and (ii) the Original Class B-2 Principal Amount reduced by all amounts previously distributed to holders of the Class B-2 Bonds as payments of principal. The Senior Bonds will have an original Senior Class Principal Amount of $ (the "Original Senior Class Principal Amount"), the Class B-1 Bonds will have an original Class B-1 Principal Amount of $ (the "Original Class B-1 Principal Amount") and the Class B-2 Bonds will have an original Class B-2 Principal Amount of $ (the "Original Class B-2 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 Pledged Mortgages, less the sum of (x) the Senior Class Principal Amount, (y) the Class B-1 Principal Amount and (z) the Class B-2 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"). Under certain circumstances, the Issuer may issue Additional Bonds ranking pari passu with the Offered Bonds without the consent of the Bondholders. See "SECURITY FOR THE BONDS -- Pledge of Additional Mortgage Collateral and Issuance of Additional Bonds" herein. BOOK-ENTRY BONDS The Offered Bonds will be book-entry Bonds (each, a Class of "Book-Entry Bonds"). Persons acquiring beneficial ownership interests in the Offered Bonds ("Bond Owners") may elect to hold their Offered 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 Offered 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. S-15 17 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 certificate representing such Offered Bond (a "Definitive Bond"). Unless and until Definitive Bonds are issued, it is anticipated that the only "Bondholders" of the Offered 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 Offered Bonds from the Bond Trustee through DTC and DTC participants. While the Offered 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 Offered 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 Offered 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 Offered Bonds only through Participants and Indirect Participants by instructing such Participants and Indirect Participants to transfer Offered Bonds, by book-entry transfer, through DTC for the account of the purchasers of such Offered Bonds, which account is maintained with their respective Participants. Under the Rules and in accordance with DTC's normal procedures, transfers of ownership of Offered 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 Offered Bonds, see "FEDERAL INCOME TAX CONSEQUENCES -- 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. S-16 18 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 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 S-17 19 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 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 Offered 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 Offered Bonds in book-entry form may reduce the liquidity of such Offered Bonds in the secondary market since certain potential investors may be unwilling to purchase Offered 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 in respect of the Offered Bonds, 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 Offered Bonds which conflict with actions taken with respect to other Offered 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. S-18 20 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. Although DTC, CEDEL and Euroclear have agreed to the foregoing procedures in order to facilitate transfers of Offered 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. For a description of the procedures generally applicable to the Book-Entry Bonds, see "DESCRIPTION OF THE BONDS -- Book-Entry Bonds" in the Prospectus. PAYMENTS ON PLEDGED MORTGAGES; 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 Pledged Mortgages (the "Bond 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 Bond 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 Class B-1 Interest Payment Amount, (iv) the Class B-1 Principal Payment Amount, (v) the Class B-2 Interest Payment Amount and (vi) the Class B-2 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 199 (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 Class B-1 Bonds; (iv) to principal of the Class B-1 Bonds; (v) to interest on the Class B-2 Bonds; (vi) to principal of the Class B-2 Bonds; (vii) to interest on the Investor Certificate; (viii) to S-19 21 principal of the Investor Certificate; and (ix) 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 Pledged Mortgages, 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 Pledged Mortgages, 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 Pledged Mortgage or a Pledged Mortgage 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. INTEREST The Bond Interest Rate for each Class of Bonds for each Payment Date (each, a "Bond Interest Rate") is described herein or 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 Class B-1 Bonds (the "Class B-1 Interest Payment Amount") will be equal to the sum of (i) interest at the Class B-1 Bond Interest Rate on the Class B-1 Principal Amount, (ii) interest at the Class B-1 Bond Interest Rate on any Class B-1 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 "Class B-1 Interest Carryover Shortfall") and (iv) interest at the Class B-1 Bond Interest Rate on any Class B-1 Interest Carryover Shortfall (to the extent permitted by applicable law). The Interest Payment Amount for the Class B-2 Bonds (the "Class B-2 Interest Payment Amount") will be equal to the sum of (i) interest at the Class B-2 Bond Interest Rate on the Class B-2 Principal Amount, (ii) interest at the Class B-2 Bond Interest Rate on any Class B-2 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 exceed the amount actually distributed as interest on such prior Payment Dates and not subsequently distributed (the "Class B-2 Interest Carryover Shortfall") and (iv) interest at the Class B-2 Bond Interest Rate on any Class B-2 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 S-20 22 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 each Class of 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 Pledged Mortgage 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 "SEVENTH", "EIGHTH" and "NINTH" 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 Pledged Mortgage pursuant to the Soldiers' and Sailors' Civil Relief Act of 1940. See "CERTAIN LEGAL ASPECTS OF PLEDGED MORTGAGES -- Soldiers and Sailors' Civil Relief Act" in the Prospectus. A "Prepayment Interest Shortfall" is the amount by which interest paid by a borrower in connection with a prepayment of principal on a Pledged Mortgage is less than one month's interest at the related Mortgage Rate on the Stated Principal Balance of such Pledged Mortgage. 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 Pledged Mortgages 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 Pledged Mortgage [on the related Due Date], (b) the principal portion of the purchase price of each Pledged Mortgage 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 Pledged Mortgage] as of such Payment Date, (c) the Substitution Adjustment Amount in connection with any Deleted Pledged Mortgage received with respect to such Payment Date, (d) any Insurance Proceeds or Liquidation Proceeds allocable to recoveries of principal of Pledged Mortgages that are not yet Liquidated Pledged Mortgages received during the [calendar month] preceding the month of such Payment Date, (e) with respect to each Pledged Mortgage that became a Liquidated Pledged Mortgage during the [calendar month] preceding the month of such Payment Date, the Stated Principal Balance of such Pledged Mortgage, 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 Pledged Mortgage and Due Date, the unpaid principal balance of such Pledged Mortgage 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 Pledged Mortgages outstanding on the Due Date in the month preceding the month of such Payment Date. S-21 23 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 Class B-1 Principal Amount, (iii) the Class B-2 Principal Amount and (iv) the Invested Amount, in each case immediately prior to such date. The "Class B-1 Percentage" for any Payment Date is the percentage equivalent of a fraction the numerator of which is the Class B-1 Principal Amount immediately prior to such date and the denominator of which is the sum of (i) the Senior Class Principal Amount, (ii) the Class B-1 Principal Amount, (iii) the Class B-2 Principal Amount and (iv) the Invested Amount, in each case immediately prior to such date. The "Class B-2 Percentage" for any Payment Date is the percentage equivalent of a fraction the numerator of which is the Class B-2 Principal Amount immediately prior to such date and the denominator of which is the sum of (i) the Senior Class Principal Amount, (ii) the Class B-1 Principal Amount, (iii) the Class B-2 Principal Amount and (iv) 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, the Class B-1 Percentage and the Class B-2 Percentage for such date. SUBORDINATED PRINCIPAL PAYMENT AMOUNT. On each Payment Date, to the extent of Available Funds therefor, the Class B-1 and Class B-2 Principal Payment Amounts for such Payment Date will be distributed as principal of the Class B-1 and Class B-2 Bonds, respectively. The "Class B-1 Principal Payment Amount" and the "Class B-2 Principal Payment Amount" for any Payment Date will equal the sum of (i) the Class B-1 Percentage or the Class B-2 Percentage, as applicable, of the sum of (a) the principal portion of the Scheduled Payment due on each Pledged Mortgage [on the related Due Date], (b) the principal portion of the purchase price of each Pledged Mortgage that was purchased by Redwood Trust or another person pursuant to the Mortgage Loan Purchase Agreement [or by the Master Servicer in connection with any optional purchase by the Master Servicer or the Company of a defaulted Pledged Mortgage] as of such Payment Date, (c) the Substitution Adjustment Amount in connection with any Deleted Pledged Mortgage received with respect to such Payment Date, (d) any Insurance Proceeds or Liquidation Proceeds allocable to recoveries of principal of Pledged Mortgages that are not yet Liquidated Pledged Mortgages received during the [calendar month] preceding the month of such Payment Date, (e) with respect to each Pledged Mortgage that became a Liquidated Pledged Mortgage during the [calendar month] preceding the month of such Payment Date, the Stated Principal Balance of such Pledged Mortgage 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 Class B-1 Principal Carryover Shortfall or Class B-2 Principal Carryover Shortfall, as the case may be. The "Class B-1 Principal Carryover Shortfall" for any Payment Date will equal the excess of (a) the Original Class B-1 Principal Amount reduced by all amounts previously distributed to holders of the Class B-1 Bonds as payments of principal or Class B-1 Principal Carryover Shortfall, over (b) the Class B-1 Principal Amount immediately prior to such date. The "Class B-2 Principal Carryover Shortfall" for any Payment Date will equal the excess of (a) the Original Class B-2 Principal Amount reduced by all amounts previously distributed to holders of the Class B-2 Bonds as payments of principal or Class B-2 Principal Carryover Shortfall, over (b) the Class B-2 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 Pledged Mortgage [on the related Due Date], (b) the principal portion of the purchase price of each Pledged Mortgage 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 Pledged Mortgage] as of such Payment Date, (c) the Substitution Adjustment Amount in connection with any Deleted Pledged Mortgage received with respect to such Payment Date, (d) any Insurance Proceeds or Liquidation Proceeds allocable to recoveries of principal of Pledged Mortgages that are not yet Liquidated Pledged Mortgages 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 Pledged Mortgage that became a Liquidated Pledged Mortgage during the [calendar month] preceding the month of such Payment S-22 24 Date, the Liquidation Proceeds allocable to principal received with respect to such Pledged Mortgage, after application of such amounts pursuant to clause (e) of the definition of Senior Principal Payment Amount, clause (e) of the definition of Class B-1 Principal Payment Amount and clause (e) of the definition of Class B-2 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 Class B-1 Interest Payment Amount; fourth, to the Class B-1 Principal Payment Amount; fifth, to the Class B-2 Interest Payment Amount; sixth, to the Class B-2 Principal Payment Amount; seventh, to the Certificate Interest Payment Amount; eighth, to the Invested Amount Payment; and ninth, 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 Pledged Mortgages 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 Class B-1 Bonds, (iii) the payments of principal on the Class B-2 Bonds and (iv) the payment in reduction of the Invested Amount, the Senior Percentage, the Class B-1 Percentage, the Class B-2 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 Offered Bonds as a result of such shortfall. This shift of the Senior Percentage, the Class B-1 Percentage, the Class B-2 Percentage and the Investor Percentage may cause the Offered Bonds to amortize more rapidly, and the Class B-2 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 Offered Bond purchased at a discount, a slower than anticipated rate of principal payments on the Pledged Mortgages could result in an actual yield to such investor that is lower than the anticipated yield and, in the case of any Offered Bond purchased at a premium, a faster than anticipated rate of principal payments on the Pledged Mortgages could result in an actual yield to such investor that is lower than the anticipated yield. In addition, an investor in the Offered Bonds should consider the risk that there can be no assurance that investors in the Offered 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 Offered 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 Pledged Mortgage, the amount by which the remaining unpaid principal balance of the related Pledged Mortgage exceeds the amount of Liquidation Proceeds applied to the principal balance of the related Pledged Mortgage. A "Liquidated Pledged Mortgage" is a defaulted Pledged Mortgage 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 S-23 25 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. See "THE INDENTURE" in the Prospectus. 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 Pledged Mortgage. The Stated Maturity of each Class of Bonds is , 20 . See "DESCRIPTION OF THE BONDS -- Weighted Average Life of the Offered Bonds" and "SECURITY FOR THE BONDS" herein and in the Prospectus. 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 Pledged Mortgages and the following additional assumptions (collectively, the "Structuring Assumptions"): (i) the Pledged Mortgage Pool consists of one Pledged Mortgage with the following characteristics:
ORIGINAL REMAINING TERM TERM IN TO NET MATURITY MATURITY PRINCIPAL MORTGAGE MORTGAGE (IN (IN BALANCE RATE RATE MONTHS) MONTHS) ---------- ---------- ---------- ---------- ---------- $ % %
(ii) the Pledged Mortgages prepay at the specified constant Prepayment Assumptions, (iii) no defaults in the payment by Mortgagors of principal of and interest on the Pledged Mortgages are experienced, (iv) scheduled payments on the Pledged Mortgages 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 Pledged Mortgages 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 Pledged Mortgage 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 Offered 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 Offered Bonds is , 199 , (xii) Redwood Trust is not required to purchase or substitute for any Pledged Mortgage and (xiii) [the Master Servicer or the Company does not exercise any option to purchase any Pledged Mortgages 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 Pledged Mortgages prepays at the specified constant Prepayment Assumptions, this is not likely to be the case. S-24 26 Moreover, discrepancies exist between the characteristics of the actual Pledged Mortgages which will be delivered to the Bond Trustee and characteristics of the Pledged Mortgages 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 Pledged Mortgages. 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 Pledged Mortgage 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 Pledged Mortgage 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. WEIGHTED AVERAGE LIVES OF THE OFFERED BONDS The weighted average life of an Offered 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 Pledged Mortgages, 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 Offered Bonds will be shortened if the level of prepayments of principal of the Pledged Mortgages increases. However, the weighted average lives of the Offered 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 Pledge of Additional Collateral and the issuance of Additional Bonds also could have an effect on the weighted average life of the Offered Bonds. See "SECURITY FOR THE BONDS -- Pledge of Additional Collateral and Issuance of Additional Bonds" herein and in the Prospectus. The interaction of the foregoing factors may have different effects on the Senior Bonds and the Class B-1 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 Offered Bonds. Further, to the extent the prices of the Offered 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 Offered Bonds may be affected at various constant Prepayment Assumptions, see the Decrement Tables below. S-25 27 DECREMENT TABLES The following tables indicate the percentages of the initial Class Principal Amounts of the Classes of Offered 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 Pledged Mortgages will have the characteristics assumed, (ii) all of the Pledged Mortgages will prepay at the constant Prepayment Assumptions specified in the tables or at any constant Prepayment Assumption or (iii) all of the Pledged Mortgages will prepay at the same rate. Moreover, the diverse remaining terms to maturity of the Pledged Mortgages 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 Pledged Mortgages is consistent with the remaining terms to maturity of the Pledged Mortgages 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 Class B-1 Principal Amount, (iii) the Class B-2 Principal Amount and (iv) 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 Pledged Mortgages 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 Class B-1 or Class B-2 Bonds, any unpaid Class B-1 or Class B-2 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. See "DESCRIPTION OF THE BONDS -- Redemption at the Option of the Issuer" in the Prospectus. 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 holders of the most senior Class of Subordinated Bonds then outstanding. CREDIT ENHANCEMENT Credit enhancement for the Senior Bonds will be provided by the Subordinated Bonds and by the Investor Certificate. Credit enhancement for the Class B-1 Bonds will be provided by the Class B-2 Bonds and by the Investor Certificate. Credit Enhancement for the Class B-2 Bonds will be provided by the Investor Certificate. The rights of holders of the Subordinated Bonds and the Investor Certificate to receive payments with respect to the Pledged Mortgages will be subordinated to such rights of the holders of the Senior Bonds, the rights of the holders of the Class B-2 Bonds and the Investor Certificate will be subordinated to such rights of the holders of the Class B-1 Bonds, and the rights of the holder of the Investor Certificate will be subordinated to such rights of the holders of the Class B-2 Bonds, in each case only to the extent described herein. S-26 28 The subordination of (i) the Subordinated Bonds and the Investor Certificate to the Senior Bonds, (ii) the Class B-2 Bonds and the Investor Certificate to the Class B-1 Bonds and (iii) the Investor Certificate to the Class B-2 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 Pledged Mortgages to the extent described herein. However, the amount of protection afforded by subordination may be exhausted and Shortfalls in payments on the Offered Bonds could result. Any losses realized on the Pledged Mortgages in excess of the related available subordination amount will result in losses on the Offered Bonds. See "DESCRIPTION OF THE BONDS -- Priority of Payments and Allocation of Shortfalls" herein. S-27 29 SECURITY FOR THE BONDS GENERAL The Bonds will be secured by assignments to the Bond Trustee of collateral consisting of (i) the Pledged Mortgages, (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 PLEDGED MORTGAGES The Bonds will be secured by a pool (the "Pledged Mortgage Pool") of -year conventional mortgage loans secured by first liens on one- to four-family residential properties (each, a "Mortgaged Property"). None of the Pledged Mortgages will be guaranteed by any governmental agency. All of the Pledged Mortgages 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 Pledged Mortgages 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 Pledged Mortgages and, subject to the limitations described below under "-- Assignment of Pledged Mortgages," will be obligated to purchase or substitute a similar mortgage loan for any Pledged Mortgage as to which there exists deficient documentation or an uncured material breach of any such representation, warranty or covenant. See "MORTGAGE LOAN PROGRAM -- Representations by Sellers; Repurchases" in the Prospectus. 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 Pledged Mortgages and will have no obligation to repurchase or substitute Pledged Mortgages 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 Pledged Mortgages with deficient documentation or which are otherwise defective under the Mortgage Loan Purchase Agreement. Certain information with respect to the Pledged Mortgage Pool is set forth below. Prior to the Closing Date, Pledged Mortgages may be removed from the collateral and other Pledged Mortgages may be substituted therefor. The Issuer believes that the information set forth herein with respect to the Pledged Mortgages as presently constituted is representative of the characteristics of the Pledged Mortgages as they will be constituted at the Closing Date, although certain characteristics of the Pledged Mortgages in the Pledged Mortgage 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 Pledged Mortgages as of the Cut-off Date. As of the Cut-off Date, the aggregate of the Stated Principal Balances of the Pledged Mortgages is expected to be approximately $ (the "Cut-off Date Pool Principal Balance"). [The Pledged Mortgages provide for the amortization of the amount financed over a series of substantially equal monthly payments.] All of the Pledged Mortgages provide for payments due on the first day of each month (the "Due Date"). At origination, substantially all of the Pledged Mortgages had stated terms to maturity of years. Scheduled monthly payments made by the Mortgagors on the Pledged Mortgages ("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 Pledged Mortgages at any time without penalty.] S-28 30 Each Pledged Mortgage will bear interest at a [fixed][adjustable] Mortgage Rate. [Each Pledged Mortgage 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 Pledged Mortgages, 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 Pledged Mortgages provide that over the life of the Pledged Mortgage 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 Pledged Mortgages are subject to minimum Mortgage Rates. Effective with the first payment due on a Pledged Mortgage 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 Pledged Mortgage 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 Pledged Mortgage 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 Pledged Mortgage and if the Master Servicer reasonably determines that the security for the Pledged Mortgage would not be impaired by the assumption. See "RISK FACTORS" herein and in the Prospectus. Each Pledged Mortgage was originated on or after , 19 . The latest stated maturity date of any Pledged Mortgage is , 20 . The earliest stated maturity date of any Pledged Mortgage is , 20 . [As of the Cut-off Date, no Pledged Mortgage was delinquent more than days.] [None of the Pledged Mortgages are subject to buydown agreements.] [No Pledged Mortgage provides for deferred interest or negative amortization.] No Pledged Mortgage had a Loan-to-Value Ratio at origination of more than %. [Except for Pledged Mortgages, representing approximately % of the Cut-off Date Pool Principal Balance,] each Pledged Mortgage 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 Pledged Mortgage 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 Pledged Mortgage 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 Pledged Mortgage, plus accrued interest thereon and related foreclosure expenses. No such Primary Mortgage Insurance Policy will be required with respect to any such Pledged Mortgage 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 Pledged Mortgage represents 80% or less of the new appraised value. See "-- Underwriting Standards" herein. The "Loan-to-Value Ratio" of a Pledged Mortgage at any given time is a fraction, expressed as a percentage, the numerator of which is the principal balance of the related Pledged Mortgage at the date of S-29 31 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 Pledged Mortgage, 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 Pledged Mortgages. The following information sets forth in tabular format certain information, as of the Cut-off Date, as to the Pledged Mortgages. Other than with respect to rates of interest, percentages (approximate) are stated by Stated Principal Balance of the Pledged Mortgages as of the Cut-off Date and have been rounded in order to total 100%. ORIGINAL LOAN-TO-VALUE RATIOS(1) - --------------------------------------------------------------------------------
AGGREGATE PERCENT NUMBER OF PRINCIPAL OF ORIGINAL LOAN-TO-VALUE PLEDGED BALANCE MORTGAGE RATIOS(%) MORTGAGES OUTSTANDING POOL - ------------------------------------------------------- --------- ----------- -------- $ % --- --- --- Total............................................. $ % === === ===
- --------------- (1) The weighted average original Loan-to-Value Ratio of the Pledged Mortgages is expected to be approximately %. ORIGINAL TERMS TO MATURITY(1) - --------------------------------------------------------------------------------
AGGREGATE PERCENT NUMBER OF PRINCIPAL OF ORIGINAL TERM TO PLEDGED BALANCE MORTGAGE MATURITY (MONTHS) MORTGAGES OUTSTANDING POOL - ------------------------------------------------------- --------- ----------- -------- $ % --- --- --- Total............................................. $ % === === ===
- --------------- (1) As of the Cut-off Date, the weighted average remaining term to maturity of the Pledged Mortgages is expected to be approximately months. S-30 32 CURRENT PLEDGED MORTGAGE PRINCIPAL BALANCES(1) - --------------------------------------------------------------------------------
AGGREGATE PERCENT RANGE OF CURRENT NUMBER OF PRINCIPAL OF PLEDGED MORTGAGE PLEDGED BALANCE MORTGAGE PRINCIPAL BALANCES MORTGAGES OUTSTANDING POOL - ------------------------------------------------------- --------- ----------- -------- $ % --- --- --- Total............................................. $ % === === ===
- --------------- (1) As of the Cut-off Date, the average current Pledged Mortgages principal balance is expected to be approximately $ . CURRENT MORTGAGE RATES(1) - --------------------------------------------------------------------------------
AGGREGATE PERCENT NUMBER OF PRINCIPAL OF PLEDGED BALANCE MORTGAGE CURRENT MORTGAGE RATES (%) MORTGAGES OUTSTANDING POOL - ------------------------------------------------------- --------- ----------- -------- $ % --- --- --- Total............................................. $ % === === ===
- --------------- (1) As of the Cut-off Date, the weighted average Mortgage Rate of the Pledged Mortgages is expected to be approximately % per annum. S-31 33 PURPOSE OF PLEDGED MORTGAGES - --------------------------------------------------------------------------------
AGGREGATE PERCENT NUMBER OF PRINCIPAL OF PLEDGED BALANCE MORTGAGE LOAN PURPOSE MORTGAGES OUTSTANDING POOL - ------------------------------------------------------- --------- ----------- -------- Purchase............................................... $ % Refinance (Rate or Term)............................... Refinance (Cash-out)................................... --- --- --- Total............................................. $ % === === ===
STATE DISTRIBUTION OF MORTGAGED PROPERTIES(1) - --------------------------------------------------------------------------------
AGGREGATE PERCENT NUMBER OF PRINCIPAL OF PLEDGED BALANCE MORTGAGE STATE MORTGAGES 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 Pledged Mortgages will be secured by Mortgaged Properties located in any one postal zip code area. DOCUMENTATION FOR PLEDGED MORTGAGES - --------------------------------------------------------------------------------
AGGREGATE PERCENT NUMBER OF PRINCIPAL OF PLEDGED BALANCE MORTGAGE TYPE OF PROGRAM MORTGAGES OUTSTANDING POOL - ------------------------------------------------------- --------- ----------- -------- Full................................................... $ % Alternative............................................ Reduced................................................ --- --- --- Total............................................. $ % === === ===
S-32 34 OCCUPANCY TYPES(1) - --------------------------------------------------------------------------------
AGGREGATE PERCENT NUMBER OF PRINCIPAL OF PLEDGED BALANCE MORTGAGE OCCUPANCY TYPE MORTGAGES OUTSTANDING POOL - ------------------------------------------------------- --------- ----------- -------- Primary Home........................................... $ % Investor............................................... Second Home............................................ --- --- --- Total............................................. $ % === === ===
- --------------- (1) Based upon representations of the related Mortgagors at the time of origination. PROPERTY TYPE - --------------------------------------------------------------------------------
AGGREGATE PERCENT NUMBER OF PRINCIPAL OF PLEDGED BALANCE MORTGAGE PROPERTY TYPE MORTGAGES OUTSTANDING POOL - ------------------------------------------------------- --------- ----------- -------- Single Family.......................................... $ % Planned Unit Development Condominium................... 2-4 Units.............................................. --- --- --- Total............................................. $ % === === ===
MAXIMUM MORTGAGE RATES(1) - --------------------------------------------------------------------------------
AGGREGATE PERCENT NUMBER OF PRINCIPAL OF PLEDGED BALANCE MORTGAGE LIFETIME CAPS (%) MORTGAGES OUTSTANDING POOL - ------------------------------------------------------- --------- ----------- -------- $ % --- --- --- Total............................................. $ % === === ===
- --------------- (1) As of the Cut-off Date, the weighted average Lifetime Cap of the Pledged Mortgages is expected to be approximately % per annum. S-33 35 MARGIN(1) - --------------------------------------------------------------------------------
AGGREGATE PERCENT NUMBER OF PRINCIPAL OF PLEDGED BALANCE MORTGAGE MARGIN MORTGAGES OUTSTANDING POOL - ------------------------------------------------------- --------- ----------- -------- $ % --- --- --- Total............................................. $ % === === ===
- --------------- (1) As of the Cut-off Date, the weighted average margin of the Pledged Mortgages is expected to be approximately %. NEXT NOTE RATE ADJUSTMENT DATES(1) - --------------------------------------------------------------------------------
AGGREGATE PERCENT NUMBER OF PRINCIPAL OF PLEDGED BALANCE MORTGAGE MONTHS MORTGAGES OUTSTANDING POOL - ------------------------------------------------------- --------- ----------- -------- $ % --- --- --- Total............................................. $ % === === ===
- --------------- (1) As of the Cut-off Date, the weighted average months to the next Adjustment Date of the Pledged Mortgages was approximately months. THE INDEX [DESCRIPTION OF INDEX] ASSIGNMENT OF THE PLEDGED MORTGAGES 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 Pledged Mortgage 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 Pledged Mortgages, exclusive of principal and interest due on or prior to the Cut-off Date. S-34 36 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 Pledged Mortgages 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 Pledged Mortgages 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 Pledged Mortgage. Rather than purchase the Pledged Mortgage as provided above, Redwood Trust may remove such Pledged Mortgage (a "Deleted Pledged Mortgage") from the Collateral and substitute in its place another mortgage loan (a "Replacement Pledged Mortgage"). Any Replacement Pledged Mortgage 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 Pledged Mortgage (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 Pledged Mortgage, (iii) have a Loan-to-Value Ratio not higher than that of the Deleted Pledged Mortgage, (iv) have a remaining term to maturity not greater than (and not more than less than) that of the Deleted Pledged Mortgage, 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 Pledged Mortgage document. PLEDGE OF ADDITIONAL MORTGAGE COLLATERAL AND ISSUANCE OF ADDITIONAL BONDS Subject to certain conditions set forth herein and in the Indenture, the Issuer may pledge Additional Mortgage Collateral to the Bond Trustee and issue Additional Bonds within [one year] of the initial issuance of the Bonds. Such Additional Bonds may represent additional Bonds of one or more outstanding Classes of Offered Bonds or may represent one or more new Classes of Bonds. Any pledge of Additional Mortgage Collateral and issuance of Additional Bonds will be subject to satisfaction of the following conditions: (a) confirmation by each Rating Agency that the pledge of Additional Mortgage Collateral and the corresponding issuance of Additional Bonds will not result in the downgrading of the credit rating of any outstanding Class of Offered Bonds, (b) the pledge of Additional Mortgage Collateral will effect no change in the Bond Interest Rate, Stated Maturity or Payment Dates of the Bonds without the consent of each Bondholder affected thereby, and (c) the weighted average lives of the Bonds calculated at an assumed prepayment rate of % Prepayment Assumption will not vary by more than years from the weighted average lives disclosed herein. In addition, following the pledge of Additional Mortgage Collateral, the following parameters will be satisfied. S-35 37 [1. The percentage of Pledged Mortgages which are [fixed interest rate] mortgage loans will not exceed %.] [2. The percentage of Pledged Mortgages which are [adjustable rate] mortgage loans will not exceed %.] 3. The percentage of Pledged Mortgages that contain "due-on-sale" clauses will not exceed %. 4. The percentage of Pledged Mortgages secured by investor properties will not exceed %. 5. The weighted average original Loan-to-Value Ratio of the Pledged Mortgages will not exceed %. 6. The percentage of Pledged Mortgages originated pursuant to a "limited documentation" program will not exceed %. 7. The percentage of Pledged Mortgages having an original Loan-to-Value Ratio in excess of 80% that will be covered by a Primary Mortgage Insurance Policy will equal at least %. 8. The percentage of Pledged Mortgages which are cash-out refinance mortgages will not exceed %. 9. The percentage of Pledged Mortgages that are delinquent by one or more scheduled payments will not exceed %. 10. The weighted average maturity of the Pledged Mortgages will not increase or decrease by more than %. If the foregoing conditions are satisfied, the pledge of Additional Mortgage Collateral and the issuance of Additional Bonds will not be subject to the prior consent of the Bondholders; however, there can be no assurance that any pledge of Additional Mortgage Collateral and issuance of Additional Bonds will not affect the timing or amount of payments received by the holders of the Offered Bonds. UNDERWRITING STANDARDS All of the Pledged Mortgages 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 Pledged Mortgages will represent and warrant that all Pledged Mortgages 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. See "MORTGAGE LOAN PROGRAM -- Underwriting Standards" in the Prospectus. S-36 38 SERVICING OF THE PLEDGED MORTGAGES 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 Pledged Mortgages in accordance with the terms set forth in the Master Servicing Agreement. The Master Servicer intends to 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 will enter into or be assigned 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 Pledged Mortgages. The Master Servicer will administer and supervise the performance of each Servicer, who may in turn be administering and supervising the performance of the subservicers of the Pledged Mortgages. 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 On or prior to the Closing Date, the Master Servicer will enter into a separate Servicing Agreement with each Servicer to perform, as independent contractor, servicing functions for the Master Servicer subject to its supervision. Such 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. The Master Servicer may permit Servicers to contract with subservicers to perform some or all of the Servicer's servicing duties, but the Servicers will not thereby be released from their obligations under the Servicing Agreement. The Master Servicer also may enter into subservicing agreements directly with an affiliate of a Servicer or permit a Servicer to transfer its servicing rights and obligations to a third party. In such instances, the affiliate or third party, as the case may be, will perform servicing functions comparable to those normally performed by the Servicer as described above, and the Servicer will not be obligated to perform such servicing functions. When used herein with respect to servicing obligations, the term Servicer includes any such affiliate or third party. The Master Servicer may perform certain supervisory functions with respect to servicing by the Servicer directly or through an agent or independent contractor and the Master Servicer will be responsible for administering and servicing the Pledged Mortgages pursuant to the Master Servicing Agreement. On or before the Closing Date, the Master Servicer will establish one or more accounts (the "Bond Account") into which each Servicer will remit collections on the mortgage loans serviced by it (net of its related servicing compensation). For purposes of the Master Servicing Agreement, , as Master Servicer, will be deemed to have received any amounts with respect to the Pledged Mortgages that are received by a Servicer regardless of whether such amounts are remitted by the Servicer to the Master Servicer. The Master Servicer has reserved the right to remove the Servicer servicing any Pledged Mortgage at any time and will exercise that 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 continue to be responsible for servicing the related Pledged Mortgages. FORECLOSURE, DELINQUENCY AND LOSS EXPERIENCE The following table summarizes the delinquency, foreclosure and loss experience, respectively, as of December 31, 199 , December 31, 199 and December 31, 199 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 S-37 39 Pledged Mortgages, 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 Pledged Mortgages 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).........................................
- --------------- (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.] SERVICING COMPENSATION AND PAYMENT OF EXPENSES The Expense Fees with respect to the Pledged Mortgages are payable out of the interest payments on each Pledged Mortgage. The Expense Fees will vary from Pledged Mortgage to Pledged Mortgage. 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 Pledged Mortgage. 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"), (b) servicing compensation payable to the Servicers in respect of their servicing activities (the "Servicing Fee") and (c) 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 Pledged Mortgage. The Servicing Fee payable to each Servicer will vary from Pledged Mortgage to Pledged Mortgage and will range from % to % per annum, in each case of the Stated Principal Balance of the related Pledged Mortgage serviced by such Servicer. The Master Servicer is obligated to pay certain ongoing expenses associated with the Pledged Mortgages 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 Pledged Mortgages, as described herein under "-- Adjustment to Master Servicing Fee and Invested Amount in Connection with Certain Prepaid Pledged Mortgages." The Master Servicer or the related 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 deposit in the Bond Account and the Distribution Account. The Net Mortgage Rate of a Pledged Mortgage is the Mortgage Rate thereof minus the related Expense Fee Rate. S-38 40 ADJUSTMENT TO MASTER SERVICING FEE AND INVESTED AMOUNT IN CONNECTION WITH CERTAIN PREPAID PLEDGED MORTGAGES When a borrower prepays a Pledged Mortgage 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 Pledged Mortgage sufficient to pay to Bondholders the full amount of interest to which they would be entitled in respect of such Pledged Mortgage 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 "seventh", "eighth" and "ninth" 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 Pledged Mortgages 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 Pledged Mortgages (net of the Master Servicing Fee and the applicable Servicing Fee with respect to the related Pledged Mortgages) 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 Pledged Mortgage 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 Pledged Mortgage 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 Pledged Mortgage. 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 by a Servicer to advance funds as required under the related Servicing Agreement will constitute a default thereunder, in which case the Master Servicer will be obligated to make any such advance in accordance with the terms of the Master Servicing Agreement.] Any failure 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. USE OF PROCEEDS The Issuer intends to distribute all of the net proceeds of the issuance of the Offered Bonds to the Company which will use such proceeds to pay certain indebtedness incurred by Redwood Trust in connection with the acquisition of the Pledged Mortgages. See "USE OF PROCEEDS" in the Prospectus and "UNDERWRITING" herein. FEDERAL INCOME TAX CONSEQUENCES Giancarlo & Gnazzo, A Professional Corporation, has advised the Company 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 Offered Bonds issued with original issue discount, will be taxable to non- S-39 41 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 Pledged Mortgages 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 Offered Bonds as of the date hereof (including interest accrued before the issue date, if any), the Class A-1 Bonds will not be issued with original issue discount and the Class B-1 Bonds will be treated as issued with original issue discount. [Although it is unclear, the Issuer intends to treat the Offered 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 Offered Bonds, no representation is made that the Pledged Mortgages will actually prepay at or at any other rate. The amount of original issue discount and certain other information with respect to each Offered Bond will be set forth on the face of such Bond as required by applicable regulations and as described in the Prospectus. See "DESCRIPTION OF THE BONDS -- Weighted Average Life of the Offered Bonds" herein and "FEDERAL TAX CONSEQUENCES" 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. 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 Offered Bonds could give rise to a transaction that is prohibited under ERISA or the Code or cause the Pledged Mortgages securing the Offered 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 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 Offered Bonds. See "ERISA MATTERS" in the Prospectus. If the Offered Bonds are treated as equity for purposes of ERISA, the purchaser of the Offered Bonds could be treated as having acquired a direct interest in the Pledged Mortgages securing the Offered Bonds. In that event, the purchase, holding, or resale of the Offered Bonds could result in a transaction that is prohibited under ERISA or the Code. Furthermore, regardless of whether the Offered Bonds are treated as equity for purposes of ERISA, the acquisition or holding of the Offered Bonds by or on behalf of a Plan could still be considered to give rise to a prohibited transaction if the Issuer, the Bond 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 Offered Bonds, depending in part upon the type of Plan fiduciary making the decision to acquire the Offered 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 an in-house asset manager. Before purchasing the Offered Bonds, a Plan subject to the fiduciary responsibility provisions of ERISA or described in Section 4975(e)(1) (and not S-40 42 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 Offered 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. See "ERISA MATTERS" in the Prospectus. Although not entirely free from doubt, the Issuer believes that the Offered Bonds will be treated as debt obligations without significant equity features for purposes of the Plan Asset Regulations. Accordingly, a Plan that acquires the Offered 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 Offered 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 Company, Redwood Trust and the Underwriter, the Company has agreed to cause the Issuer to sell to the Underwriter, and the Underwriter has agreed to purchase from the Issuer, the Offered Bonds. Distribution of the Offered 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 Offered 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 Offered Bonds, but has no obligation to do so. There can be no assurance that a secondary market for the Offered 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 Offered Bonds will not be listed on any national securities exchange. The Company 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 Giancarlo and Gnazzo, A Professional Corporation, San Francisco, California. Brown & Wood LLP, New York, New York will act as counsel for the Underwriter. 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 Class B-1 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 S-41 43 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 Offered 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 Offered 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 Offered 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 Offered Bonds could be lower than the respective ratings assigned by the Rating Agencies. S-42 44 INDEX OF CERTAIN DEFINITIONS
PAGE ---- Additional Mortgage Collateral........................................................ S-7 Adjustment Date....................................................................... S-28 Advance............................................................................... S-38 Available Funds....................................................................... S-19 Belgian Cooperative.........................................................S-17, S-19, S-36 Beneficial owner...................................................................... S-15 Bond Account.......................................................................S-7, S-20 Bond Distribution Amount.............................................................. S-19 Bond Interest Rate.................................................................... S-20 Bond Owners........................................................................... S-15 Bond Trustee.......................................................................... S-3 Bonds..............................................................................S-1, S-15 Book-Entry Bonds...................................................................... S-15 CEDEL Participants.................................................................... S-17 Certificate Interest Payment Amount................................................... S-20 Certificate Interest Rate............................................................. S-3 Class B-1 Bond Interest Rate.......................................................... S-1 Class B-1 Interest Carryover Shortfall................................................ S-20 Class B-1 Interest Payment Amount..................................................... S-20 Class B-1 Percentage.................................................................. S-21 Class B-1 Principal Amount............................................................ S-15 Class B-1 Principal Carryover Shortfall............................................... S-22 Class B-1 Principal Payment Amount.................................................... S-22 Class B-2 Interest Carryover Shortfall................................................ S-20 Class B-2 Interest Payment Amount..................................................... S-20 Class B-2 Interest Rate............................................................... S-3 Class B-2 Percentage.................................................................. S-21 Class B-2 Principal Amount............................................................ S-15 Class B-2 Principal Carryover Shortfall............................................... S-22 Class B-2 Principal Payment Amount.................................................... S-22 Class Principal Amount................................................................ S-15 Code...............................................................................S-8, S-39 Company.............................................................................S-2, S-3 Controlling Class..................................................................... S-26 CPR................................................................................... S-25 Cut-off Date Pool Principal Balance................................................... S-27 Definitive Bond....................................................................... S-15 Deleted Pledged Mortgage.............................................................. S-34 Deposit Trust Agreement............................................................... S-4 Distribution Account...............................................................S-7, S-19 DTC................................................................................... S-15 Due Date.............................................................................. S-29 ERISA..............................................................................S-8, S-39 Euroclear Operator.................................................................... S-17 Euroclear Participants................................................................ S-17 European Depositaries................................................................. S-15
S-43 45
PAGE ---- FHLMC................................................................................. S-28 Financial Intermediary................................................................ S-16 FNMA.................................................................................. S-28 Index..............................................................................S-7, S-28 Insurance Proceeds.................................................................... S-19 Interest Accrual Period............................................................... S-5 Interest Payment Amount............................................................... S-20 Invested Amount....................................................................... S-15 Invested Amount Payment............................................................... S-22 Investor Certificate...............................................................S-1, S-15 Investor Percentage................................................................... S-22 Issuer................................................................................ S-2 Liquidation Proceeds.................................................................. S-19 Loan-to-Value Ratio................................................................... S-28 Management Agreement.................................................................. S-3 Margin................................................................................ S-28 Master Servicing Agreement............................................................ S-4 Maximum Rate.......................................................................... S-28 Morgan................................................................................ S-17 Mortgage.............................................................................. S-34 Mortgage File......................................................................... S-34 Mortgage Loan Purchase Agreement...................................................... S-27 Mortgage Note......................................................................... S-34 Mortgaged Property.................................................................... S-27 Net Interest Shortfall................................................................ S-20 Net Interest Shortfalls............................................................... S-20 Offered Bonds.................................................................S-1, S-3, S-15 Original Class B-1 Principal Amount................................................... S-15 Original Class B-2 Principal Amount................................................... S-15 Original Invested Amount.............................................................. S-15 Original Senior Class Principal Amount................................................ S-15 Owner Trustee......................................................................... S-3 Payment Date..................................................................S-1, S-4, S-19 Periodic Rate Cap..................................................................... S-28 Plan...............................................................................S-8, S-39 Plan Asset Regulations.............................................................S-8, S-39 Plan Investors.....................................................................S-8, S-39 Pledged Mortgage Pool..............................................................S-7, S-27 Pledged Mortgages..................................................................... S-2 Pool Principal Balance................................................................ S-21 Prepayment Assumption................................................................. S-25 Prepayment Interest Shortfall......................................................... S-21 Primary Mortgage Insurance Policy..................................................... S-28 PTCE.................................................................................. S-39 Rating Agencies....................................................................S-9, S-40 Record Date........................................................................... S-19 Redwood Trust.................................................................S-2, S-3, S-14 REMIC................................................................................. S-39
S-44 46
PAGE ---- REO Property.......................................................................... S-38 Replacement Pledged Mortgage.......................................................... S-34 Rules................................................................................. S-16 Scheduled Payments.................................................................... S-27 Seller................................................................................ S-36 Senior Bond Interest Rate............................................................. S-1 Senior Bonds.......................................................................S-1, S-15 Senior Class Principal Amount......................................................... S-15 Senior Interest Payment Amount........................................................ S-20 Senior Percentage..................................................................... S-21 Shortfalls............................................................................ S-10 SMMEA................................................................................. S-9 Stated Principal Balance.............................................................. S-21 Structuring Assumptions............................................................... S-24 Subordinated Bonds.................................................................S-1, S-15 Substitution Adjustment Amount........................................................ S-34 Terms and Conditions.................................................................. S-17 Underwriter........................................................................... S-1 Variable Rate Debt Instruments........................................................ S-8
S-45 47 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 S-46 48 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 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. S-47 49 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 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 Global Bond or, in the case of a Form 1001 or a Form 4224 filer, his agent, files by submitting the appropriate form to the person through whom it holds (the 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 S-48 50 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-49 51 INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE. SUBJECT TO COMPLETION, DATED APRIL 28, 1997 PROSPECTUS SUPPLEMENT (TO PROSPECTUS DATED , 199 ) $ SEQUOIA MORTGAGE TRUST --------------------, COLLATERALIZED MORTGAGE BONDS ------------------------ The Sequoia Mortgage Trust , Collateralized Mortgage Bonds, in the aggregate principal amount of $ , consist of Class A-1 and Class B-1 Bonds (the "Bonds"). The Issuer will also issue an Investor Certificate (the "Investor Certificate") as described herein. Only the Bonds are offered hereby. Interest on the Bonds will be payable [monthly on the th day of each month], or if such day is not a business day, the next succeeding business day (each, a "Payment Date"), commencing on , 199 . Interest on the Bonds will be payable in an amount equal to the interest accrued during each Interest Accrual Period (as defined herein). Interest accrued on the Bonds during any Interest Accrual Period will be calculated on the basis of the related Class Principal Amount (as defined herein) immediately prior to the related Payment Date. See "DESCRIPTION OF THE BONDS -- Interest" herein. Payments of principal of the Bonds on each Payment Date will be made in the manner described herein under "DESCRIPTION OF THE BONDS -- Principal." The Bonds are redeemable only under the circumstances described herein. See "INDEX OF CERTAIN DEFINITIONS" on page S-43 of this Prospectus Supplement and on page 84 of the Prospectus for the location of the definitions of certain defined terms. The Class A-1 Bonds are referred to herein as the "Senior Bonds" and the Class B-1 Bonds are referred to herein as the "Subordinated Bonds." The rights of the holders of the Subordinated Bonds to receive payments of principal and interest will be subject to the priorities described herein. See "DESCRIPTION OF THE BONDS -- Priority of Payments and Allocation of Shortfalls" herein. Under certain circumstances, the Issuer may pledge additional Pledged Mortgages ("Additional Mortgage Collateral") to the Bond Trustee and issue additional Bonds ("Additional Bonds"). Any such pledge of Additional Mortgage Collateral and issuance of such Additional Bonds may affect the timing and amount of payments on any outstanding Class of Bonds and an investor's yield on any such outstanding Bonds. See "SECURITY FOR THE BONDS -- Pledge of Additional Mortgage Collateral and Issuance of Additional Bonds" herein. The Senior Bonds will be unconditionally and irrevocably guaranteed as to payment of Insured Payments (as defined herein) pursuant to the terms of the financial guaranty insurance policy (the "Bond Insurance Policy") to be issued by . [Insurer Logo] ------------------------ FOR A DISCUSSION OF CERTAIN RISK FACTORS RELATING TO INVESTMENTS IN THE BONDS, SEE "RISK FACTORS" COMMENCING ON PAGE S-12 OF THIS PROSPECTUS SUPPLEMENT AND ON PAGE 19 OF THE PROSPECTUS. (Cover continued on next page) ------------------------ THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
=========================================================================================================== ORIGINAL CLASS BOND INTEREST PRINCIPAL AMOUNT RATE STATED MATURITY(1) - ----------------------------------------------------------------------------------------------------------- Class A-1............................. $ (2) - ----------------------------------------------------------------------------------------------------------- Class B-1............................. $ (3) ===========================================================================================================
(1) Calculated as described herein under "DESCRIPTION OF THE BONDS -- Stated Maturity." (2) The Bond Interest Rate for the Senior Bonds (the "Senior Bond Interest Rate") and any Interest Accrual Period will equal . (3) The Bond Interest Rate for the Subordinated Bonds (the "Subordinated Bond Interest Rate") and any Interest Accrual Period will equal . The Bonds will be purchased by (the "Underwriter") from the Issuer and will be offered by the Underwriter from time to time in negotiated transactions or otherwise at varying prices to be determined at the time of sale. Proceeds to the Issuer from the sale of the Bonds are expected to be approximately % of the aggregate principal amount of the Bonds plus accrued interest, before deducting issuance expenses payable by the Issuer. The Bonds are offered by the Underwriter, subject to prior sale, when, as and if delivered to and accepted by the Underwriter and subject to its right to reject orders in whole or in part. It is expected that delivery of the Bonds will be made in book-entry form only through the facilities of The Depository Trust Company on or about , 199 . [UNDERWRITER] , 199 52 (Cover continued from previous page) The Bonds will be issued by Sequoia Mortgage Trust (the "Issuer"), a Delaware business trust established by Sequoia Mortgage Funding Corporation (the "Company"), a wholly owned subsidiary of Redwood Trust, Inc., a Maryland corporation ("Redwood Trust"). Prior to their sale to the Issuer by the Company, the Pledged Mortgages will be held by Redwood Trust. The Bonds represent obligations solely of the Issuer and are not insured or guaranteed by any government agency or instrumentality, the Company, Redwood Trust, [Name of Insurer] (except as set forth herein) or any other person or entity. Payments on the Subordinated Bonds will be payable solely from the Collateral pledged to secure the Bonds and the payments on the Senior Bonds will be payable solely from the Collateral pledged to secure the Bonds and the Bond Insurance Policy. None of the Company, Redwood Trust or the Master Servicer 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 herein with regard to the Bond Insurance Policy. The Issuer is not expected to have any significant assets other than those pledged as collateral to secure the Bonds. The Bonds will be collateralized by -year conventional mortgage loans secured by first liens on one- to four-family residential properties (the "Pledged Mortgages"). The Pledged Mortgages have been sold to the Company by Redwood Trust. All of the Pledged Mortgages bear interest at [fixed] rates [that adjust [annually] based on changes in the level of the Index (as defined herein)]. The Bonds also will be secured by the Bond Account and the Distribution Account described herein. Scheduled net payments on the Pledged Mortgages will be sufficient, irrespective of the rate of prepayments on the Pledged Mortgages, to make timely payments of interest on the Bonds and to retire each Class of Bonds not later than its Stated Maturity. THE YIELD TO INVESTORS ON EACH CLASS OF BONDS WILL BE SENSITIVE IN VARYING DEGREES TO, AMONG OTHER THINGS, THE RATE AND TIMING OF PRINCIPAL PAYMENTS (INCLUDING PREPAYMENTS) OF THE PLEDGED MORTGAGES [AND THE LEVEL OF THE INDEX, EACH OF] WHICH MAY VARY SIGNIFICANTLY OVER TIME. [THE BOND INTEREST RATE FOR A CLASS OF BONDS MAY ALSO CHANGE FROM PAYMENT DATE TO PAYMENT DATE BASED ON THE NET MORTGAGE RATES (AS DEFINED HEREIN) AND THE OUTSTANDING PRINCIPAL BALANCES OF THE PLEDGED MORTGAGES]. THE YIELD TO MATURITY OF A CLASS OF BONDS PURCHASED AT A DISCOUNT OR PREMIUM WILL BE MORE SENSITIVE TO THE RATE AND TIMING OF PAYMENTS THEREON. HOLDERS OF THE BONDS SHOULD CONSIDER, IN THE CASE OF ANY SUCH BONDS PURCHASED AT A DISCOUNT, THE RISK THAT A SLOWER THAN ANTICIPATED RATE OF PRINCIPAL PAYMENTS COULD RESULT IN AN ACTUAL YIELD THAT IS LOWER THAN THE ANTICIPATED YIELD AND, IN THE CASE OF ANY BONDS PURCHASED AT A PREMIUM, THE RISK THAT A FASTER THAN ANTICIPATED RATE OF PRINCIPAL PAYMENTS COULD RESULT IN AN ACTUAL YIELD THAT IS LOWER THAN THE ANTICIPATED YIELD. THE YIELD TO INVESTORS IN THE BONDS ALSO MAY BE ADVERSELY AFFECTED BY NET INTEREST SHORTFALLS (AS DEFINED HEREIN) AND, PARTICULARLY IN THE CASE OF THE SUBORDINATED BONDS, REALIZED LOSSES (AS DEFINED HEREIN). NO REPRESENTATION IS MADE AS TO THE ANTICIPATED RATE OF PREPAYMENTS ON THE PLEDGED MORTGAGES, THE AMOUNT AND TIMING OF NET INTEREST SHORTFALLS OR REALIZED LOSSES, OR AS TO THE RESULTING YIELD TO MATURITY OF ANY CLASS OF BONDS. The Underwriter intends to make a secondary market in the Bonds, but has no obligation to do so. There is currently no secondary market for the Bonds and there can be no assurance that such a market 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. ------------------------ This Prospectus Supplement does not contain complete information about the offering of the Bonds. Additional information is contained in the Prospectus of the Company dated , 199 and purchasers are urged to read both this Prospectus Supplement and the Prospectus in full. Sales of the Bonds may not be consummated unless the purchaser has received both this Prospectus Supplement and the Prospectus. UNTIL 90 DAYS AFTER THE DATE OF THIS PROSPECTUS SUPPLEMENT, ALL DEALERS EFFECTING TRANSACTIONS IN THE BONDS, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS SUPPLEMENT AND PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS SUPPLEMENT AND PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS. S-2 53 INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE In addition to the documents described under "INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE" in the Prospectus, the financial statements included in, or as exhibits to the following documents which have been filed with the Securities and Exchange Commission by the Insurer, are hereby incorporated by reference in this Prospectus Supplement: (a) The Annual Report on Form 10-K for the year ended , 19 ; and (b) The Quarterly Report on Form 10-Q for the period ended , 19 . All financial statements included in documents filed by the Insurer pursuant to Section 13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), subsequent to the date of this Prospectus Supplement and prior to the termination of the offering of the Bonds shall be deemed to be incorporated by reference into this Prospectus Supplement and to be a part hereof from the respective dates of filing such documents. The Company hereby undertakes that, for purposes of determining any liability under the Securities Act of 1933, as amended, each filing of the financial statements included in or as an exhibit to the documents of the Insurer referred to above and filed pursuant to Section 13(a) or Section 15(d) of the 1934 Act that is incorporated by reference in the Registration Statement of which this Prospectus Supplement and the accompanying Prospectus is a part shall be deemed to be a new registration statement relating to the Bonds offered hereby, and the offering of such Bonds at that time shall be deemed to be the initial bona fide offering thereof. The Bond Trustee will provide without charge to each person to whom this Prospectus Supplement is delivered, on the written or oral request of such person, a copy of any or all of the documents referred to above and in the Prospectus under "INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE" that have been or may be incorporated by reference in the Prospectus (not including exhibits to the information that is incorporated by reference unless such exhibits are specifically incorporated by reference into the information that the Prospectus incorporates). Such requests should be directed to the Bond Trustee at , telephone: , facsimile number: . S-3 54 SUMMARY The following summary is qualified in its entirety by reference to the detailed information appearing elsewhere in this Prospectus Supplement and in the accompanying Prospectus. Certain capitalized terms used in this Summary are defined elsewhere in this Prospectus Supplement or in the Prospectus. See "INDEX OF CERTAIN DEFINITIONS" on page S-43 of this Prospectus Supplement and page 84 of the Prospectus for the location of the definitions of certain capitalized terms. Bonds...................... Sequoia Mortgage Trust , Collateralized Mortgage Bonds, Class A-1 and Class B-1 Bonds (collectively, the "Bonds"). Only the Bonds are offered hereby. Securities Other than the Bonds...................... In addition to the Bonds, the Investor Certificate will be issued in the initial amount and will bear interest at the interest rate indicated below, but is not offered hereby:
INITIAL CERTIFICATE INVESTED INTEREST AMOUNT RATE ---------- ----------- Investor Certificate(1)................ $ (2)
-------------------------------------------- (1) The Investor Certificate will provide limited credit support for the Bonds as described herein. (2) The interest rate for the Investor Certificate (the "Certificate Interest Rate") and any Interest Accrual Period will equal. Any information contained herein with respect to the Investor Certificate is provided only to permit a better understanding of the Bonds. Designations Senior Bonds............. Class A-1 Bonds. Subordinated Bonds....... Class B-1 Bonds. Bonds.................... The Senior Bonds and the Subordinated Bonds. Book-Entry Bonds......... All Classes of Bonds. Issuer..................... The 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 herein) for the sole purpose of issuing the Bonds and the Investor Certificate. The settlor and sole beneficiary of the Issuer is Sequoia Mortgage Funding Corporation, a Delaware corporation (the "Company"), and a wholly owned subsidiary of Redwood Trust, Inc., a Maryland corporation ("Redwood Trust"). The Owner Trustee of the Issuer is . Redwood Trust will be the manager of the Issuer pursuant to a management agreement (the "Management Agreement") entered into with the Issuer. None of the Company, Redwood Trust or the Master Servicer (as defined herein) 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 herein with regard to the Bond Insurance Policy. See "THE ISSUER" herein and in the Prospectus. Bond Trustee............... , a banking corporation organized under the laws of (the "Bond Trustee"). Owner Trustee.............. , a banking corporation organized under the laws of the State of Delaware (the "Owner Trustee"). S-4 55 Master Servicing Agreement.................. The Pledged Mortgages will be serviced pursuant to a master servicing agreement dated as of 1, 199 (the "Master Servicing Agreement") among the Issuer, the Bond Trustee and the Master Servicer. Master Servicer............ will act as Master Servicer for the Pledged Mortgages (the "Master Servicer"). On or prior to the Closing Date, the Master Servicer will enter into mortgage servicing agreements (each, a "Servicing Agreement") with certain servicers (each, a "Servicer") pursuant to which each Servicer will perform certain servicing functions with respect to the Pledged Mortgages. See "SERVICING OF THE PLEDGED MORTGAGES -- The Master Servicer" herein. The Master Servicer will administer and supervise the performance of each Servicer, who may in turn be administering and supervising the performance of one or more subservicers of the Pledged Mortgages. The Master Servicer will receive the Master Servicing Fee, and each Servicer will receive the related Servicing Fee, from interest collected on the Pledged Mortgages. The Master Servicer will be obligated to perform the obligations of a terminated Servicer or appoint a successor Servicer. See "SERVICING OF THE PLEDGED MORTGAGES -- Servicing Compensation and Payment of Expenses" herein. Deposit Trust Agreement.... The Issuer will be established and the Investor Certificate will be issued pursuant to an amended and restated deposit trust agreement dated as of , 199 (the "Deposit Trust Agreement") among the Company and the Owner Trustee. Cut-off Date............... 1, 199 . Closing Date............... On or about , 199 . 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 first business day thereafter, commencing in 199 (each, a "Payment Date"). 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 Record Date for any Payment Date will be the last business day of the month preceding the month of such Payment Date. Priority of Payments....... 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. Under certain circumstances described herein, payments from Available Funds for a Payment Date that would otherwise be made on the Subordinated Bonds may be made instead on the Senior Bonds. In addition, under certain circumstances described herein, payments from Available Funds for a Payment Date that would otherwise be made on the Investor Certificate may be made instead on the Senior Bonds and S-5 56 the Subordinated Bonds. See "DESCRIPTION OF THE BONDS -- Priority of Payments and Allocation of Shortfalls" herein. Payments of Interest....... To the extent funds are available therefor, each Class of Bonds will be entitled to receive interest in the amount of the Interest Payment Amount for such Class. See "DESCRIPTION OF THE BONDS -- Interest" herein and in the Prospectus. A. Interest Payment Amount................ For each Class of Bonds, the amount of interest accrued during the related Interest Accrual Period at the applicable Bond Interest Rate. 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. B. Bond Interest Rate.... The Bond Interest Rate for each Class of Bonds for each Payment Date will be as described on the cover page hereof. Payments of Principal...... On each Payment Date, to the extent funds are available therefor, principal payments in reduction of the Senior Class Principal Amount and the Subordinated Class Principal Amount will be made in the order and subject to the priorities set forth herein under "DESCRIPTION OF THE BONDS -- Principal" in an amount equal to the Senior Principal Payment Amount and the Subordinated Principal Payment Amount, respectively. 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 Pledged Mortgage. The Stated Maturity for each Class of Bonds is , 20 . See "DESCRIPTION OF THE BONDS -- Stated Maturity" and " -- Weighted Average Lives of the Bonds" herein. Optional Redemption of Bonds...................... 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, in each case 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 Pledged Mortgages 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 relating thereto), plus accrued and unpaid interest thereon 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 redemption or call at the option of the Issuer nor are they subject to special redemption. See "DESCRIPTION OF THE BONDS -- Redemption at the Option of the Issuer" herein and in the Prospectus. Credit Enhancement A. Subordination......... Credit enhancement for the Senior Bonds will be provided by the Subordinated Bonds and by the Investor Certificate. Credit enhancement for the Subordinated Bonds will be provided by the Investor Certificate. S-6 57 The rights of holders of the Subordinated Bonds and the Investor Certificate to receive payments with respect to the Pledged Mortgages 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 of the holders of the Subordinated Bonds, in each case to the extent described herein. See "DESCRIPTION OF THE BONDS -- Priority of Payments and Allocation of Shortfalls" and "CREDIT ENHANCEMENT" herein. B. Bond Insurance Policy..................... In addition to the other credit support described herein, (the "Insurer") will issue a financial guaranty insurance policy (the "Bond Insurance Policy") pursuant to which it will irrevocably and unconditionally guarantee payment of the Insured Payments, as described herein. If prior to a Payment Date the Bond Trustee determines that the Available Funds (as defined herein) for a Payment Date are less than the Senior Interest Payment Amount and Senior Principal Payment Amount (as each such term is defined herein) due on such Payment Date, the Bond Trustee will, subject to the terms of the Bond Insurance Policy, draw an amount under the Bond Insurance Policy equal to such shortfall and deposit such amount (the "Insured Payment") into the Distribution Account for payment to the Senior Bondholders. Pursuant to the Indenture, the Insurer will be subrogated to the rights of the Senior Bondholders to receive any payments on such Senior Bonds to the extent of payments under the Bond Insurance Policy that remain unreimbursed. In addition, under the Indenture, absent the existence of a default by the Insurer under the Bond Insurance Policy, the Insurer will be entitled to exercise certain voting rights of the Bondholders without the consent of such Bondholders, and the Bondholders may exercise such rights only with the prior written consent of the Insurer. In addition, unless the Insurer defaults on its payment obligations under the Bond Insurance Policy, the Insurer, rather than the Bond Trustee or the Bondholders, will have the right to direct all matters relating to the Bonds in any proceeding in a bankruptcy of the Issuer. See "CREDIT ENHANCEMENT -- The Bond Insurance Policy" herein. [Description of the Insurer.] The Insurer's claims-paying ability is rated by . See "CREDIT ENHANCEMENT -- The Insurer" herein. Advances................... The Master Servicer is obligated to make cash advances ("Advances") with respect to delinquent payments of principal and interest on any Pledged Mortgage to the extent described herein. The Bond Trustee will be obligated to make any such Advance if the Master Servicer fails in its obligation to do so, to the extent provided in the Master Servicing Agreement. See "SERVICING OF THE PLEDGED MORTGAGES" herein. Certain Prepayment and Yield Considerations and Risks; Reinvestment Risk........ The effective yields to the holders of the Bonds will be lower than the yields otherwise produced by the applicable rate at which interest is paid to such holders and the purchase price of such Bonds because [monthly] S-7 58 distributions will not be payable to such holders until the th day (or, if such day is not a business day, the following business day) of the month following the [ month] in which interest accrues on the Pledged Mortgages (without any additional payment of interest or earnings thereon in respect of such delay). The rate of principal payments on the Bonds, the aggregate amount of payments on the Bonds and the yields to maturity of the Bonds will be related to the rate and timing of payments of principal on the Pledged Mortgages [and the level of the Index]. Since the rate of payment of principal on the Pledged Mortgages will depend on future events, no assurance can be given as to such rate or the rate of principal prepayments. The extent to which the yield to maturity of a Class of Bonds may vary from the anticipated yield may depend upon the degree to which it is purchased at a discount or premium, and the degree to which the timing of payments thereon is sensitive to prepayments, liquidations and purchases of the Pledged Mortgages. Further, an investor should consider the risk that, in the case of any Bond purchased at a discount, a slower than anticipated rate of principal payments (including prepayments) on the Pledged Mortgages 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 Pledged Mortgages could result in an actual yield to such investor that is lower than the anticipated yield. Because the Pledged Mortgages may be prepaid at any time, it is not possible to predict the rate at which payments of principal of the Bonds will be received. Since prevailing interest rates are subject to fluctuation, 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. Security for the Bonds..... The Bonds will be secured by collateral consisting of the items set forth below: A. Pledged Mortgages..... The Pledged Mortgages will consist primarily of a pool (the "Pledged Mortgage Pool") of -year conventional mortgage loans secured by first liens on one-to four-family residential properties. Such Pledged Mortgages will bear interest at [fixed] rates [that adjust [annually] based on changes in the level of the Index (as defined herein)]. Payments of principal and interest on the Bonds will be based on payments received on the Pledged Mortgages, as described herein. See "SECURITY FOR THE BONDS -- The Pledged Mortgages" and "DESCRIPTION OF THE BONDS -- Interest" and " -- Principal" herein and in the Prospectus. [The Mortgage Rate for each Pledged Mortgage will adjust [annually] based on (the "Index"). See "SECURITY FOR THE BONDS -- The Pledged Mortgages -- General", and "-- The Index" herein.] S-8 59 B. Bond 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 Pledged Mortgages (the "Bond Account"). See "DESCRIPTION OF THE BONDS -- Payments on Pledged Mortgages; Accounts" herein and "SERVICING OF THE PLEDGED MORTGAGES" herein and in the Prospectus. C. Distribution 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 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 Bond Account the Bond Distribution Amount (as defined herein) for such Payment Date, to the extent of Available Funds on deposit therein, and will deposit such amount in the Distribution Account. See "DESCRIPTION OF THE BONDS -- Payments on Pledged Mortgages; Accounts" herein and "SERVICING OF THE PLEDGED MORTGAGES" herein and in the Prospectus. Additional Collateral...... The Issuer may pledge additional Pledged Mortgages ("Additional Mortgage Collateral") to the Bond Trustee and issue Additional Bonds within [one year] following the date of initial issuance of the Bonds upon the satisfaction of certain conditions set forth in the Indenture. Although the pledge of any Additional Mortgage Collateral will not result in any change in any Bond Interest Rate, Stated Maturity or Payment Dates of any Class of Bonds, the pledge of Additional Mortgage Collateral may result in a variance of up to years in the weighted average life of the Bonds at % of the Prepayment Assumption (as defined herein), and the characteristics of the Additional Mortgage Collateral may vary within the parameters described herein. Furthermore, no assurance can be given that the pledge of Additional Mortgage Collateral and issuance of Additional Bonds would not affect the timing or amount of payments received by holders of the Bonds. Provided that the conditions described herein and in the Indenture are satisfied, the pledge of Additional Mortgage Collateral and the issuance of Additional Bonds will not be subject to the prior consent of the Bondholders. See "SECURITY FOR THE BONDS -- Pledge of Additional Mortgage Collateral and Issuance of Additional Bonds" herein and in the Prospectus. 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 Bonds issued with original issue discount, will be taxable to non-exempt Bondholders. The prepayment rate used by the Issuer for purposes of determining the amount and rate of accrual of original issue discount on the Bonds assumes that the Pledged Mortgages are prepaid at a rate of % of the Prepayment Assumption. Based upon the assumed prepayment rate and the expected price to the public of each Class of Bonds as of the date hereof (including interest accrued before the Closing 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 it is unclear, 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 such term is defined in S-9 60 the Prospectus under "FEDERAL INCOME TAX CONSEQUENCES").] Notwithstanding the use of the Prepayment Assumption in pricing the Bonds, no representation is made that the Pledged Mortgages will actually prepay at such assumed prepayment rate or at any other rate. The amount of original issue discount, if any, and certain other information with respect to each Bond will be set forth on the face of such Bond as required by applicable regulations. Payments on Bonds held by foreign persons will generally be exempt from United States withholding tax, subject to compliance with applicable certification procedures. Counsel to the Issuer has advised the Issuer that in its opinion the Bonds will be treated as debt for federal income tax purposes. The Issuer will not elect to treat the segregated pool of assets securing the Bonds as a "real estate mortgage investment conduit" for federal income tax purposes. See "FEDERAL INCOME TAX CONSEQUENCES" in the Prospectus. Bonds owned by a real estate investment trust will not be treated as "real estate assets" or "Government securities" and interest on the Bonds will not be considered "interest on obligations secured by mortgages on real property or on interests in real property." Similarly, the Bonds will not constitute "qualifying real property loans" for mutual savings banks or domestic building and loan associations and will not constitute "loans secured by an interest in real property" or "obligations of the United States" for domestic building and loan associations. In addition, Bonds held by a regulated investment company will not constitute "Government securities." See "FEDERAL INCOME TAX CONSEQUENCES" in the Prospectus. ERISA Matters.............. Fiduciaries of employee benefit plans and certain other retirement plans and arrangements 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"), including individual retirement accounts and annuities, Keogh plans and collective investment funds in which such plans, accounts, annuities or arrangements are invested (any of the foregoing a "Plan"), persons acting on behalf of a Plan, or persons using the assets of a Plan ("Plan Investors"), should review carefully with their legal advisors whether the purchase or holding of the Bonds could either give rise to a transaction that is prohibited under ERISA or the Code or cause the Pledged Mortgages 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"). 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. See "ERISA MATTERS" herein and in the Prospectus. 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. See "ERISA MATTERS" herein and in the Prospectus. However, there can be no complete assurance that the Bonds will be treated S-10 61 as debt obligations without significant equity features for purposes of the Plan Asset Regulations. Legal Investment........... The Bonds will constitute "mortgage related securities" for purposes of the Secondary Mortgage Market Enhancement Act of 1984 ("SMMEA") so long as they are rated in one of the two highest rating categories by at least one nationally recognized statistical rating organization and, as such, are legal investments for certain entities to the extent provided for in 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 Bonds complies with applicable guidelines, policy statements or restrictions. See "LEGAL INVESTMENT" in the Prospectus. Ratings.................... It is a condition of the issuance of the Senior Bonds that they be rated AAA by (" ") and AAA by (" " and, together with , the "Rating Agencies"). It is a condition to the issuance of the Subordinated Bonds that they be rated [AA] by . The ratings of the Bonds of any Class 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. See "RATINGS" herein. 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. Use of Proceeds............ The Issuer intends to distribute all of the net proceeds of the issuance of the Bonds to the Company which will apply such proceeds to the purchase of the Pledged Mortgages. The Pledged Mortgages were purchased by the Company from [Redwood Trust] and sold to the Issuer by the Company. See "USE OF PROCEEDS" herein and in the Prospectus and "METHOD OF DISTRIBUTION" herein. Risk Factors............... For a discussion of certain risks associated with an investment in the Bonds, see "RISK FACTORS" commencing on page S-12 herein and on page 19 in the Prospectus. S-11 62 RISK FACTORS YIELD, PREPAYMENT AND MATURITY RISKS EFFECT OF DELAYS IN PAYMENT ON THE BONDS. The effective yields to the holders of the Bonds will be lower than the yields otherwise produced by the applicable rate at which interest is paid to such holders and the purchase price of such Bonds because [monthly] payments will not be payable to such holders until the th day (or, if such day is not a business day, the following business day) of the month following the [month] in which interest accrues on the Pledged Mortgages (without any additional payment of interest or earnings thereon in respect of such delay). EFFECT OF DELINQUENCIES ON THE PLEDGED MORTGAGES. Delinquencies on the Pledged Mortgages which are not advanced by or on behalf of the Master Servicer (because amounts, if advanced, would be nonrecoverable), may adversely affect the yield on the Bonds. Because of the priority of distributions, shortfalls resulting from delinquencies not so advanced will be borne first by the Investor Certificate and then by the Subordinated Bonds. If, as a result of such shortfalls, the sum of (i) the Senior Class Principal Amount, (ii) the Subordinated Principal Amount and (iii) the Invested Amount exceeds the Pool Principal Balance, the Invested Amount will be reduced by the amount of such excess until the Invested Amount is reduced to zero, and thereafter, the Subordinated Class Principal Amount will be reduced by the remaining amount of such excess, if any. [EFFECT OF PERIODIC RATE CAP AND MINIMUM RATE. The Mortgage Rate of each Pledged Mortgage will be subject to a Periodic Rate Cap and a Maximum Rate. If the Index changes substantially between Adjustment Dates, the adjusted Mortgage Rate on a related Pledged Mortgage may not equal the applicable Index plus the related Margin due to the constraint of such caps. In such event, the related Net Mortgage Rate and consequently, each Bond Interest Rate, will be less than would have been the case in the absence of such caps.] [EFFECT OF DISPROPORTIONATE PREPAYMENTS. The Bond Interest Rate for each Class of Bonds will be based upon the weighted average of the Net Mortgage Rates for the Pledged Mortgages. Any disproportionate prepayment of Pledged Mortgages with higher Net Mortgage Rates may adversely affect the yield on the Bonds. The Bond Interest Rates for each Class of Bonds will vary from Payment Date to Payment Date due to (i) the timing of the Mortgage Rate readjustments of the Pledged Mortgages and (ii) different rates of payment of principal of such Pledged Mortgages bearing different Mortgage Rates.] EFFECT OF NET INTEREST SHORTFALLS AND REALIZED LOSSES. Net Interest Shortfalls allocated to the Subordinated Bonds, if any, will reduce the amount of interest payable on the Subordinated Bonds which will adversely affect the yields on the Subordinated Bonds. In addition, although all losses initially will be borne by the Investor Certificate, the yields on the Subordinated Bonds will depend on the rate and timing of Realized Losses. Realized Losses could occur at a time when the Investor Certificate no longer outstanding and available to absorb Realized Losses. Realized Losses in excess of the Invested Amount will reduce the funds available to make payments to the holders of the Subordinated Bonds on the related Payment Date. As a result, holders of the Subordinated Bonds may not receive the full amount of interest and principal on a Payment Date that they would have received in the absence of such Realized Losses. In the event that holders of Subordinated Bonds do not receive the full amount of accrued interest for any Payment Date, the amount which is not paid will be carried forward and will be payable on future Payment Dates to the extent funds are available therefor. Any amount of interest so carried forward will not (except in the case of the Subordinated Bonds) accrue interest until the Bonds are declared due and payable upon the occurrence of an Event of Default, as described herein under "DESCRIPTION OF THE BONDS -- Priority of Payments and Allocation of Shortfalls." Any shortfall in amounts otherwise payable as principal of the Subordinated Bonds will be paid on future Payment Dates to the extent funds are available therefor. So long as the Senior Bonds are outstanding, any shortfall in amounts available for payments of principal of, or interest on, the Subordinated Bonds will not constitute an Event of Default. Under the Indenture, shortfalls in amounts required to be distributed to Bondholders ("Shortfalls") that affect only the Subordinated Bonds will not constitute an Event of Default until all the Senior Bonds have S-12 63 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. As described herein, on any Payment Date on which a Shortfall occurs, payments of accrued interest on the Subordinated Bonds will be subject to the availability of funds in the Distribution Account after payment of accrued interest on and principal then due on all outstanding Senior Bonds. Also, upon the occurrence of each Shortfall, the Senior Percentage, the Subordinated Percentage and the Investor Percentage will shift in the manner described herein under "DESCRIPTION OF THE BONDS -- Priority of Payments and Allocation of Shortfalls." Therefore, following the occurrence of any Shortfall allocable to the Subordinated Bonds, such Subordinated Bonds will amortize more slowly than would otherwise have been the case in the absence of such Shortfall. As a result of these factors, the yield on the Subordinated Bonds will be more sensitive than the yield on the Senior Bonds to the occurrence of Shortfalls. The weighted average life of, and the yield to maturity on, the Subordinated Bonds will be sensitive to the rate and timing of mortgagor defaults and the severity of ensuing losses on the Pledged Mortgages. If the actual rate and severity of losses on the Pledged Mortgages is higher than those assumed by a holder of a Subordinated Bond, the actual yield to maturity of such Bond may be lower than the yield expected by such holder based on such assumption. The timing of losses on the Pledged Mortgages will also affect an investor's actual yield to maturity, even if the rate of defaults and severity of losses over the life of the Pledged Mortgage Pool are consistent with an investor's expectations. In general, the earlier a loss occurs, the greater the effect on an investor's yield to maturity. The yield to maturity of the Subordinated Bonds will also be affected by Net Interest Shortfalls allocated to the Subordinated Bonds, if any, and other cash shortfalls in Available Funds. See "DESCRIPTION OF THE BONDS -- Priority of Payments and Allocation of Shortfalls" herein. EFFECT OF RATE AND TIMING OF PRINCIPAL PAYMENTS. The rate of principal payments on the Bonds, the aggregate amount of payments on the Bonds and the yields to maturity of the Bonds will be related to the rate and timing of payments of principal on the Pledged Mortgages. The rate of principal payments on the Pledged Mortgages will in turn be affected by the amortization schedules of the Pledged Mortgages and by the rate of principal prepayments (including for this purpose prepayments resulting from refinancing, liquidations of the Pledged Mortgages due to defaults, casualties, condemnations and purchases by Redwood Trust [or any optional purchase by the Master Servicer or the Company of a defaulted Pledged Mortgage]). [The Pledged Mortgages may be prepaid by the Mortgagors at any time without a prepayment penalty.] [The Pledged Mortgages are subject to the "due-on-sale" provisions included therein.] See "SECURITY FOR THE BONDS -- The Pledged Mortgages" herein. Prepayments, liquidations and purchases of the Pledged Mortgages (including [any optional purchase by the Master Servicer or the Company of a defaulted Pledged Mortgage] and any optional repurchase by the Issuer of the remaining Pledged Mortgages in connection with the optional redemption of the Bonds, in each case as described herein) will result in payments on the Bonds of principal amounts which would otherwise be distributed over the remaining terms of the Pledged Mortgages. Since the rate of payment of principal on the Pledged Mortgages will depend on future events, no assurance can be given as to such rate or the rate of principal prepayments. The extent to which the yield to maturity of a Class of Bonds may vary from the anticipated yield will depend upon the degree to which such Bond is purchased at a discount or premium, and the degree to which the timing of payments thereon is sensitive to prepayments, liquidations and purchases of the Pledged Mortgages. Further, an investor should consider the risk that, in the case of any Bond purchased at a discount, a slower than anticipated rate of principal payments (including prepayments) on the Pledged Mortgages 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 Pledged Mortgages could result in an actual yield to such investor that is lower than the anticipated yield. The rate of principal payments (including prepayments) on pools of mortgage loans may vary significantly over time and may be influenced by a variety of economic, geographic, social and other factors, including changes in mortgagors' housing needs, job transfers, unemployment, mortgagors' net equity in the mortgaged properties and servicing decisions. In general, if prevailing interest rates were to fall significantly S-13 64 below the Mortgage Rates on the Pledged Mortgages, the Pledged Mortgages could be subject to higher prepayment rates than if prevailing interest rates were to remain at or above the Mortgage Rates on the Pledged Mortgages. Conversely, if prevailing interest rates were to rise significantly, the rate of prepayments on the Pledged Mortgages would generally be expected to decrease. No assurances can be given as to the rate of prepayments on the Pledged Mortgages in stable or changing interest rate environments. The timing of changes in the rate of prepayments on the Pledged Mortgages may significantly affect an investor's actual yield to maturity, even if the average rate of principal payments is consistent with an investor's expectation. In general, the earlier a prepayment of principal on the Pledged Mortgages, the greater the effect on an investor's yield to maturity. The effect on an investor's yield as a result of principal payments occurring at a rate higher (or lower) than the rate anticipated by the investor during the period immediately following the issuance of the Bonds may not be offset by a subsequent like decrease (or increase) in the rate of principal payments. NO REPRESENTATION IS MADE AS TO THE RATE OF PRINCIPAL PAYMENTS ON THE PLEDGED MORTGAGES OR AS TO THE YIELD TO MATURITY OF ANY CLASS OF BONDS. INVESTORS ARE URGED TO MAKE AN INVESTMENT DECISION WITH RESPECT TO THE BONDS BASED ON THE ANTICIPATED YIELD TO MATURITY OF SUCH BONDS RESULTING FROM THEIR RESPECTIVE PRICES AND EACH INVESTOR'S OWN DETERMINATION AS TO ANTICIPATED PLEDGED MORTGAGE PREPAYMENT RATES. CASH FLOW CONSIDERATIONS AND RISKS Minimum monthly payments on the Pledged Mortgages will at least equal and may exceed accrued interest thereon. Even assuming that the Mortgaged Properties provide adequate security for the Pledged Mortgages, substantial delays could be encountered in connection with the liquidation of Pledged Mortgages that are delinquent, which could result in shortfalls in payments on Subordinated Bonds and if the Insurer were unable to perform its obligations under the Bond Insurance Policy, on the Senior Bonds. Further, liquidation expenses (such as legal fees, real estate taxes, and maintenance and preservation expenses) will reduce the security for the related Pledged Mortgages and could thereby reduce the proceeds payable to holders of the Bonds. In the event any of the Mortgaged Properties fail to provide adequate security for the related Pledged Mortgages, holders of the Subordinated Bonds could experience a loss to the extent that any applicable credit enhancement has been exhausted and, in the case of the Senior Bonds, if the Insurer was unable to perform its obligations under the Bond Insurance Policy. LIMITED RECOURSE The Bonds represent obligations solely of the Issuer and are not insured by any governmental agency or instrumentality, the Company, Redwood Trust, the Master Servicer, any Servicer, or, except as set forth herein, the Insurer or any other person or entity. ISSUANCE OF ADDITIONAL BONDS MAY ADVERSELY AFFECT INVESTMENT Subject to certain conditions set forth herein, in the Prospectus and in the Indenture, the Issuer may pledge additional mortgage loans ("Additional Mortgage Collateral") to the Bond Trustee and issue Additional Bonds within [one year] following the date of initial issuance of the Bonds. Although the pledge of any Additional Mortgage Collateral will not result in any change in the Bond Interest Rate, Stated Maturity or Payment Dates of the Bonds, the pledge of Additional Mortgage Collateral may result in a variance of up to years in the weighted average life of the Bonds at % of the Prepayment Assumption (as described herein), and the characteristics of the Additional Mortgage Collateral may vary within the parameters described herein. Furthermore, no assurance can be given that any pledge of Additional Mortgage Collateral and issuance of Additional Bonds would not affect the timing or amount of payments received by the holders of the Bonds. Provided that the conditions described herein, and in the Indenture are satisfied, the pledge of Additional Mortgage Collateral and the issuance of Additional Bonds will not be subject to the prior consent of the Bondholders. See "SECURITY FOR THE BONDS -- Pledge of Additional Mortgage Collateral and Issuance of Additional Bonds" herein and in the Prospectus. S-14 65 DELINQUENCIES MAY ADVERSELY AFFECT INVESTMENT As of the Cut-off Date, (i) not more than % of the Pledged Mortgages (by Cut-off Date Stated Principal Balance) were delinquent by one or more Scheduled Payments and (ii) not more than % of the Pledged Mortgages (by Cut-off Date Stated Principal Balance) were delinquent by two or more Scheduled Payments. Investors should consider the risk that the inclusion of such loans in the Pledged Mortgages may effect the rates of defaults and prepayments on such Pledged Mortgages and the yields on the Bonds. See "SECURITY FOR THE BONDS -- The Pledged Mortgages" herein. PLEDGED MORTGAGE CONCENTRATION Approximately % and % of the Pledged Mortgages (by Cut-off Date Stated Principal Balance) are expected to be secured by Mortgaged Properties located in and , respectively. Consequently, losses and prepayments on the Pledged Mortgages 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 also by the occurrence of natural disasters (such as earthquakes, fires and floods) in these areas. LIMITED LIQUIDITY OF INVESTMENT There can be no assurance that a secondary market will develop for the Bonds, or, if one does develop, that it will provide the holders of the Bonds with liquidity of investment or that it will continue to exist for the term of the Bonds. BANKRUPTCY AND INSOLVENCY RISKS Redwood Trust and the Company will treat the transfer of the Pledged Mortgages by Redwood Trust to the Company as a sale. Nevertheless, in the event of a bankruptcy of Redwood Trust the trustee in bankruptcy could attempt to recharacterize the sale of the Pledged Mortgages as a borrowing secured by a pledge of mortgage loans. The Company and the Issuer will treat the transfer of the Pledged Mortgages by the Company to the Issuer as a sale. Nevertheless, in the event of a bankruptcy of the Company, the trustee in bankruptcy could attempt to recharacterize the sale of the Pledged Mortgages as a borrowing secured by a pledge of mortgage loans. In either case, if such an attempt to recharacterize the transfer of the loans were successful, a trustee in bankruptcy could elect to accelerate payment of the Bonds and liquidate the Pledged Mortgages, with the holders of the Bonds entitled to no more than the then outstanding Class Principal Amount, if any, of such Bonds together with interest at the applicable Bond Interest Rates to the date of payment. In the event of an acceleration of the Bonds, the holders of the Bonds would lose the right to future payments of interest, might suffer reinvestment losses in a lower interest rate environment and may fail to recover their initial investment. BOOK-ENTRY BONDS LIMITED LIQUIDITY. Issuance of the Bonds in book-entry form may reduce the liquidity of such Bonds in the secondary trading market since investors may be unwilling to purchase Bonds for which they cannot obtain physical certificates. See "DESCRIPTION OF THE BONDS -- Book-Entry Bonds" herein and in the Prospectus and "RISK FACTORS -- Book-Entry Registration" in the Prospectus. DIFFICULTY IN PLEDGING. Since transactions in the Bonds can be effected only through DTC, CEDEL, Euroclear, participating organizations, indirect participants and certain banks, the ability of a Bond Owner to pledge a Bond to persons or entities that do not participate in the DTC, CEDEL or Euroclear system may be limited due to lack of a physical certificate representing the Bonds. See "DESCRIPTION OF THE BONDS -- Book-Entry Bonds" herein and in the Prospectus and "RISK FACTORS -- Book-Entry Registration" in the Prospectus. POTENTIAL DELAYS IN PAYMENT. Bond Owners may experience some delay in their receipt of payments of interest and principal on the Bonds since such payments will be forwarded by the Bond Trustee to DTC and DTC will credit such payments to the accounts of its Participants (as defined herein) which will thereafter S-15 66 credit them to the accounts of Bond Owners either directly or indirectly through indirect participants. Bond Owners will not be recognized as Bondholders as such term is used in the Indenture, and Bond Owners will be permitted to exercise the rights of Bondholders only indirectly through DTC and its Participants. See "DESCRIPTION OF THE BONDS -- Book-Entry Bonds" herein and in the Prospectus and "RISK FACTORS -- Book-Entry Registration" in the Prospectus. RATINGS The ratings of the Classes of Bonds will depend primarily on an assessment by the Rating Agencies of the Pledged Mortgages and, in the case of the Senior Bonds, upon the claims-paying ability of the Insurer. Any reduction in the rating assigned to the claims-paying ability of the Insurer below the rating initially given to the Senior Bonds may result in a reduction in the rating of the Senior Bonds. The rating by the Rating Agencies of the Classes of Bonds is not a recommendation to purchase, hold or sell the Bonds, inasmuch as such rating does not comment as to the market price or suitability for a particular investor. There is no assurance that the ratings will remain in place for any given period of time or that the ratings will not be lowered or withdrawn by the Rating Agencies. In general, ratings assess credit risk and do not address likelihood of prepayments. FOR A DISCUSSION OF CERTAIN ADDITIONAL RISK FACTORS RELATING TO INVESTMENTS IN THE BONDS, SEE "RISK FACTORS" IN THE PROSPECTUS. 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 , 199 . The Issuer was formed for the sole purpose of issuing the Bonds and the Investor Certificate. The Company is the settlor and sole beneficiary of the Issuer and is the Owner Trustee of the Issuer. The Company is a limited purpose finance corporation the capital stock of which is wholly owned by Redwood Trust, Inc., a Maryland corporation ("Redwood Trust"). Redwood Trust will be the manager of the Issuer pursuant to a management agreement entered into with the Issuer. None of the Company, 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 herein with regard to the Bond Insurance Policy. See "CREDIT ENHANCEMENT -- The Bond Insurance Policy" herein. The Issuer's assets will consist almost entirely of the Pledged Mortgages which will be pledged to secure the Bonds. If the Pledged Mortgages 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 of funds available to pay the Bonds may be affected by, among other things, Realized Losses incurred on defaulted Pledged Mortgages. See "RISK FACTORS" herein and in the Prospectus and "THE ISSUER" in the Prospectus. 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. S-16 67 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 Pledged Mortgages, 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 Pledged Mortgages, 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"). Under certain circumstances, the Issuer may issue Additional Bonds ranking pari passu with the Bonds without the consent of the Bondholders. See "SECURITY FOR THE BONDS -- Pledge of Additional Mortgage Collateral and Issuance of Additional Bonds" herein. 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 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 S-17 68 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 -- 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 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 S-18 69 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 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. S-19 70 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. 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. For a description of the procedures generally applicable to the Book-Entry Bonds, see "DESCRIPTION OF THE BONDS -- Book-Entry Bonds" in the Prospectus. S-20 71 PAYMENTS ON PLEDGED MORTGAGES; 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 Pledged Mortgages (the "Bond 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 Bond 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 199 (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 Pledged Mortgages, 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 Pledged Mortgages, 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 Pledged Mortgage or a Pledged Mortgage 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. S-21 72 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. See "CREDIT ENHANCEMENT -- The Insurer" and "-- The Bond Insurance Policy" herein. 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 Pledged Mortgage 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 Pledged Mortgage pursuant to the Soldiers' and Sailors' Civil Relief Act of 1940. See "CERTAIN LEGAL ASPECTS OF PLEDGED MORTGAGES -- Soldiers and Sailors' Civil Relief Act" in the Prospectus. A "Prepayment Interest Shortfall" is the amount by which interest paid by a borrower in connection with a prepayment of principal on a Pledged Mortgage is less than one month's interest at the related Mortgage Rate on the Stated Principal Balance of such Pledged Mortgage. S-22 73 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 Pledged Mortgages 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 Pledged Mortgage [on the related Due Date], (b) the principal portion of the purchase price of each Pledged Mortgage 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 Pledged Mortgage] as of such Payment Date, (c) the Substitution Adjustment Amount in connection with any Deleted Pledged Mortgage received with respect to such Payment Date, (d) any Insurance Proceeds or Liquidation Proceeds allocable to recoveries of principal of Pledged Mortgages that are not yet Liquidated Pledged Mortgages received during the [calendar month] preceding the month of such Payment Date, (e) with respect to each Pledged Mortgage that became a Liquidated Pledged Mortgage during the [calendar month] preceding the month of such Payment Date, the Stated Principal Balance of such Pledged Mortgage, 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 Pledged Mortgage and Due Date, the unpaid principal balance of such Pledged Mortgage 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 Pledged Mortgages 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 Pledged Mortgage [on the related Due Date], (b) the principal portion of the purchase price of each Pledged Mortgage 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 Pledged Mortgage] as of such Payment Date, (c) the Substitution Adjustment Amount in connection with any Deleted Pledged Mortgage received with respect to S-23 74 such Payment Date, (d) any Insurance Proceeds or Liquidation Proceeds allocable to recoveries of principal of Pledged Mortgages that are not yet Liquidated Pledged Mortgages received during the [calendar month] preceding the month of such Payment Date, (e) with respect to each Pledged Mortgage that became a Liquidated Pledged Mortgage during the [calendar month] preceding the month of such Payment Date, the Stated Principal Balance of such Pledged Mortgage 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 Pledged Mortgage [on the related Due Date], (b) the principal portion of the purchase price of each Pledged Mortgage 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 Pledged Mortgage] as of such Payment Date, (c) the Substitution Adjustment Amount in connection with any Deleted Pledged Mortgage received with respect to such Payment Date, (d) any Insurance Proceeds or Liquidation Proceeds allocable to recoveries of principal of Pledged Mortgages that are not yet Liquidated Pledged Mortgages 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 Pledged Mortgage that became a Liquidated Pledged Mortgage during the [calendar month] preceding the month of such Payment Date, the Liquidation Proceeds allocable to principal received with respect to such Pledged Mortgage, 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 Pledged Mortgages 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 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 S-24 75 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 Pledged Mortgages 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 Pledged Mortgages 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 Pledged Mortgage, the amount by which the remaining unpaid principal balance of the related Pledged Mortgage exceeds the amount of Liquidation Proceeds applied to the principal balance of the related Pledged Mortgage. A "Liquidated Pledged Mortgage" is a defaulted Pledged Mortgage 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. See "THE INDENTURE" in the Prospectus. 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 Pledged Mortgages during the most recent Prepayment Period. Realized Losses on the Pledged Mortgages 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 Pledged Mortgage. The Stated Maturity of each Class of Bonds is , 20 . See "DESCRIPTION OF THE BONDS -- Weighted Average Life of the Bonds" and "SECURITY FOR THE BONDS" herein and in the Prospectus. 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 Pledged Mortgages and the following additional S-25 76 assumptions (collectively, the "Structuring Assumptions"): (i) the Pledged Mortgage Pool consists of one Pledged Mortgage 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 Pledged Mortgages prepay at the specified constant Prepayment Assumptions, (iii) no defaults in the payment by Mortgagors of principal of and interest on the Pledged Mortgages are experienced, (iv) scheduled payments on the Pledged Mortgages 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 Pledged Mortgages 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 Pledged Mortgage 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 , 199 , (xii) Redwood Trust is not required to purchase or substitute for any Pledged Mortgage and (xiii) [the Master Servicer or the Company does not exercise any option to purchase any Pledged Mortgages 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 Pledged Mortgages prepays at the specified constant Prepayment Assumptions, this is not likely to be the case. Moreover, discrepancies exist between the characteristics of the actual Pledged Mortgages which will be delivered to the Bond Trustee and characteristics of the Pledged Mortgages 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 Pledged Mortgages. 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 Pledged Mortgage 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 Pledged Mortgage 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-26 77 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 Pledged Mortgages, 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 Pledged Mortgages 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 Pledge of Additional Collateral and the issuance of Additional Bonds also could have an effect on the weighted average life of the Bonds. See "SECURITY FOR THE BONDS -- Pledge of Additional Mortgage Collateral and Issuance of Additional Bonds" herein and in the Prospectus. 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 Pledged Mortgages will have the characteristics assumed, (ii) all of the Pledged Mortgages will prepay at the constant Prepayment Assumptions specified in the tables or at any constant Prepayment Assumption or (iii) all of the Pledged Mortgages will prepay at the same rate. Moreover, the diverse remaining terms to maturity of the Pledged Mortgages 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 Pledged Mortgages is consistent with the remaining terms to maturity of the Pledged Mortgages 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 Pledged Mortgages 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 S-27 78 subject to special redemption. See "DESCRIPTION OF THE BONDS -- Redemption at the Option of the Issuer" in the Prospectus. 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 Pledged Mortgages 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 Pledged Mortgages 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 Pledged Mortgages in excess of the protection afforded by the Investor Certificate will result in losses on the Subordinated Bonds. See "DESCRIPTION OF THE BONDS -- Priority of Payments and Allocation of Shortfalls" herein. 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 Pledged Mortgages, (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. S-28 79 THE PLEDGED MORTGAGES The Bonds will be secured by a pool (the "Pledged Mortgage Pool") of -year conventional mortgage loans secured by first liens on one- to four-family residential properties (each, a "Mortgaged Property"). None of the Pledged Mortgages will be guaranteed by any governmental agency. All of the Pledged Mortgages 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 Pledged Mortgages 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 Pledged Mortgages and, subject to the limitations described below under " -- Assignment of Pledged Mortgages," will be obligated to purchase or substitute a similar mortgage loan for any Pledged Mortgage as to which there exists deficient documentation or an uncured material breach of any such representation, warranty or covenant. See "MORTGAGE LOAN PROGRAM -- Representations by Sellers; Repurchases" in the Prospectus. 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 Pledged Mortgages and will have no obligation to repurchase or substitute Pledged Mortgages 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 Pledged Mortgages with deficient documentation or which are otherwise defective under the Mortgage Loan Purchase Agreement. Certain information with respect to the Pledged Mortgage Pool is set forth below. Prior to the Closing Date, Pledged Mortgages may be removed from the collateral and other Pledged Mortgages may be substituted therefor. The Issuer believes that the information set forth herein with respect to the Pledged Mortgages as presently constituted is representative of the characteristics of the Pledged Mortgages as they will be constituted at the Closing Date, although certain characteristics of the Pledged Mortgages in the Pledged Mortgage 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 Pledged Mortgages as of the Cut-off Date. As of the Cut-off Date, the aggregate of the Stated Principal Balances of the Pledged Mortgages is expected to be approximately $ (the "Cut-off Date Pool Principal Balance"). [The Pledged Mortgages provide for the amortization of the amount financed over a series of substantially equal monthly payments.] All of the Pledged Mortgages provide for payments due on the first day of each month (the "Due Date"). At origination, substantially all of the Pledged Mortgages had stated terms to maturity of years. Scheduled monthly payments made by the Mortgagors on the Pledged Mortgages ("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 Pledged Mortgages at any time without penalty.] Each Pledged Mortgage will bear interest at a [fixed][adjustable] Mortgage Rate. [Each Pledged Mortgage 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 Pledged Mortgages, 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 S-29 80 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 Pledged Mortgages provide that over the life of the Pledged Mortgage 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 Pledged Mortgages are subject to minimum Mortgage Rates. Effective with the first payment due on a Pledged Mortgage 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 Pledged Mortgage 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 Pledged Mortgage 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 Pledged Mortgage and if the Master Servicer reasonably determines that the security for the Pledged Mortgage would not be impaired by the assumption. See "RISK FACTORS" herein and in the Prospectus. Each Pledged Mortgage was originated on or after , 19 . The latest stated maturity date of any Pledged Mortgage is , 20 . The earliest stated maturity date of any Pledged Mortgage is , 20 . [As of the Cut-off Date, no Pledged Mortgage was delinquent more than days.] [None of the Pledged Mortgages are subject to buydown agreements.] [No Pledged Mortgage provides for deferred interest or negative amortization.] No Pledged Mortgage had a Loan-to-Value Ratio at origination of more than %. [Except for Pledged Mortgages, representing approximately % of the Cut-off Date Pool Principal Balance,] each Pledged Mortgage 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 Pledged Mortgage 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 Pledged Mortgage 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 Pledged Mortgage, plus accrued interest thereon and related foreclosure expenses. No such Primary Mortgage Insurance Policy will be required with respect to any such Pledged Mortgage 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 Pledged Mortgage represents 80% or less of the new appraised value. See " -- Underwriting Standards" herein. The "Loan-to-Value Ratio" of a Pledged Mortgage at any given time is a fraction, expressed as a percentage, the numerator of which is the principal balance of the related Pledged Mortgage 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 Pledged Mortgage, 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 Pledged Mortgages. S-30 81 The following information sets forth in tabular format certain information, as of the Cut-off Date, as to the Pledged Mortgages. Other than with respect to rates of interest, percentages (approximate) are stated by Stated Principal Balance of the Pledged Mortgages as of the Cut-off Date and have been rounded in order to total 100%.
ORIGINAL LOAN-TO-VALUE RATIOS(1) - ----------------------------------------------------------------------------------------------- AGGREGATE PERCENT NUMBER OF PRINCIPAL OF PLEDGED BALANCE MORTGAGE ORIGINAL LOAN-TO-VALUE RATIOS(%) MORTGAGES OUTSTANDING POOL - ------------------------------------------------------- --------- ----------- -------- $ % --- --- --- Total............................................. $ % === === ===
- --------------- (1) The weighted average original Loan-to-Value Ratio of the Pledged Mortgages is expected to be approximately %.
ORIGINAL TERMS TO MATURITY(1) - ----------------------------------------------------------------------------------------------- AGGREGATE PERCENT NUMBER OF PRINCIPAL OF PLEDGED BALANCE MORTGAGE ORIGINAL TERM TO MATURITY (MONTHS) MORTGAGES OUTSTANDING POOL - ------------------------------------------------------- --------- ----------- -------- $ % --- --- --- Total............................................. $ % === === ===
- --------------- (1) As of the Cut-off Date, the weighted average remaining term to maturity of the Pledged Mortgages is expected to be approximately months. S-31 82
CURRENT PLEDGED MORTGAGE PRINCIPAL BALANCE(1) - ----------------------------------------------------------------------------------------------- AGGREGATE PERCENT NUMBER OF PRINCIPAL OF PLEDGED BALANCE MORTGAGE RANGE OF CURRENT PLEDGED MORTGAGE PRINCIPAL BALANCES MORTGAGES OUTSTANDING POOL - ------------------------------------------------------- --------- ----------- -------- $ % --- --- --- Total............................................. $ % === === ===
- --------------- (1) As of the Cut-off Date, the average current Pledged Mortgages principal balance is expected to be approximately $ .
CURRENT MORTGAGE RATES(1) - ----------------------------------------------------------------------------------------------- AGGREGATE PERCENT NUMBER OF PRINCIPAL OF PLEDGED BALANCE MORTGAGE CURRENT MORTGAGE RATES(%) MORTGAGES OUTSTANDING POOL - ------------------------------------------------------- --------- ----------- -------- $ % --- --- --- Total............................................. $ % === === ===
- --------------- (1) As of the Cut-off Date, the weighted average Mortgage Rate of the Pledged Mortgages is expected to be approximately % per annum. S-32 83
PURPOSE OF PLEDGED MORTGAGES - ----------------------------------------------------------------------------------------------- AGGREGATE PERCENT NUMBER OF PRINCIPAL OF PLEDGED BALANCE MORTGAGE LOAN PURPOSE MORTGAGES OUTSTANDING POOL - ------------------------------------------------------- --------- ----------- -------- Purpose................................................ $ % Refinance (Rate or Term)............................... Refinance (Cash-out)................................... --- --- --- Total............................................. $ % === === ===
STATE DISTRIBUTION OF MORTGAGED PROPERTIES(1) - ----------------------------------------------------------------------------------------------- AGGREGATE PERCENT NUMBER OF PRINCIPAL OF PLEDGED BALANCE MORTGAGE STATE MORTGAGES 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 Pledged Mortgages will be secured by Mortgaged Properties located in any one postal zip code area.
DOCUMENTATION FOR PLEDGED MORTGAGES - ----------------------------------------------------------------------------------------------- AGGREGATE PERCENT NUMBER OF PRINCIPAL OF PLEDGED BALANCE MORTGAGE TYPE OF PROGRAM MORTGAGES OUTSTANDING POOL - ------------------------------------------------------- --------- ----------- -------- Full................................................... $ % Alternative............................................ Reduced................................................ --- --- --- Total............................................. $ % === === ===
OCCUPANCY TYPES(1) - ----------------------------------------------------------------------------------------------- AGGREGATE PERCENT NUMBER OF PRINCIPAL OF PLEDGED BALANCE MORTGAGE OCCUPANCY TYPE MORTGAGES OUTSTANDING POOL - ------------------------------------------------------- --------- ----------- -------- Primary Home........................................... $ % Investor............................................... Second Home............................................ --- --- --- Total............................................. $ % === === ===
- --------------- (1) Based upon representations of the related Mortgagors at the time of origination. S-33 84
PROPERTY TYPE - ----------------------------------------------------------------------------------------------- AGGREGATE PERCENT NUMBER OF PRINCIPAL OF PLEDGED BALANCE MORTGAGE PROPERTY TYPE MORTGAGES OUTSTANDING POOL - ------------------------------------------------------- --------- ----------- -------- Single Family.......................................... $ % Planned Unit Development Condominium............................................ 2-4 Units.............................................. --- --- --- Total............................................. $ % === === ===
MAXIMUM MORTGAGE RATES(1) - ----------------------------------------------------------------------------------------------- AGGREGATE PERCENT NUMBER OF PRINCIPAL OF PLEDGED BALANCE MORTGAGE LIFETIME CAPS(%) MORTGAGES OUTSTANDING POOL - ------------------------------------------------------- --------- ----------- -------- $ % --- --- --- Total............................................. $ % === === ===
- --------------- (1) As of the Cut-off Date, the weighted average Lifetime Cap of the Pledged Mortgages is expected to be approximately % per annum.
MARGIN(1) - ----------------------------------------------------------------------------------------------- AGGREGATE PERCENT NUMBER OF PRINCIPAL OF PLEDGED BALANCE MORTGAGE MARGIN MORTGAGES OUTSTANDING POOL - ------------------------------------------------------- --------- ----------- -------- $ % --- --- --- Total............................................. $ % === === ===
- --------------- (1) As of the Cut-off Date, the weighted average margin of the Pledged Mortgages is expected to be approximately %. S-34 85
NEXT NOTE RATE ADJUSTMENT DATES(1) - ----------------------------------------------------------------------------------------------- AGGREGATE PERCENT NUMBER OF PRINCIPAL OF PLEDGED BALANCE MORTGAGE MONTHS MORTGAGES OUTSTANDING POOL - ------------------------------------------------------- --------- ----------- -------- $ % --- --- --- Total............................................. $ % === === ===
- --------------- (1) As of the Cut-off Date, the weighted average months to the next Adjustment Date of the Pledged Mortgages was approximately months. THE INDEX [DESCRIPTION OF INDEX] ASSIGNMENT OF THE PLEDGED MORTGAGES 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 Pledged Mortgage 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 Pledged Mortgages, 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 Pledged Mortgages 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 Pledged Mortgages 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 Pledged Mortgage. Rather than purchase the Pledged Mortgage as provided above, S-35 86 Redwood Trust may remove such Pledged Mortgage (a "Deleted Pledged Mortgage") from the Collateral and substitute in its place another mortgage loan (a "Replacement Pledged Mortgage"). Any Replacement Pledged Mortgage 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 Pledged Mortgage (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 Pledged Mortgage, (iii) have a Loan-to-Value Ratio not higher than that of the Deleted Pledged Mortgage, (iv) have a remaining term to maturity not greater than (and not more than less than) that of the Deleted Pledged Mortgage, 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 Pledged Mortgage document. PLEDGE OF ADDITIONAL COLLATERAL AND ISSUANCE OF ADDITIONAL BONDS Subject to certain conditions set forth herein and in the Indenture, the Issuer may pledge Additional Mortgage Collateral to the Bond Trustee and issue Additional Bonds within [one year] of the initial issuance of the Bonds. Such Additional Bonds may represent additional Bonds of one or more outstanding Classes of Bonds or may represent one or more new Classes of Bonds. Any pledge of Additional Mortgage Collateral and issuance of Additional Bonds will be subject to satisfaction of the following conditions: (a) confirmation by each Rating Agency that the pledge of Additional Mortgage Collateral and the corresponding issuance of Additional Bonds will not result in the downgrading of the credit rating of any outstanding Class of Bonds (without regard to the Bond Insurance Policy), (b) the prior written approval of the Insurer and the guaranty of amounts due with respect to such Additional Bonds pursuant to the terms of a policy issued by the Insurer, (c) the pledge of Additional Mortgage Collateral will effect no change in the Bond Interest Rate, Stated Maturity or Payment Dates of the Bonds without the consent of each Bondholder affected thereby, and (d) the weighted average lives of the Bonds calculated at an assumed prepayment rate of % Prepayment Assumption will not vary by more than years from the weighted average lives disclosed herein. In addition, following the pledge of Additional Mortgage Collateral, the following parameters will be satisfied. [1. The percentage of Pledged Mortgages which are [fixed interest rate] mortgage loans will not exceed %.] [2. The percentage of Pledged Mortgages which are [adjustable rate] mortgage loans will not exceed %.] 3. The percentage of Pledged Mortgages that contain "due-on-sale" clauses will not exceed %. 4. The percentage of Pledged Mortgages secured by investor properties will not exceed %. 5. The weighted average original Loan-to-Value Ratio of the Pledged Mortgages will not exceed %. 6. The percentage of Pledged Mortgages originated pursuant to a "limited documentation" program will not exceed %. 7. The percentage of Pledged Mortgages having an original Loan-to-Value Ratio in excess of 80% that will be covered by a Primary Mortgage Insurance Policy will equal at least %. 8. The percentage of Pledged Mortgages which are cash-out refinance mortgages will not exceed %. 9. The percentage of Pledged Mortgages that are delinquent by one or more scheduled payments will not exceed %. S-36 87 10. The weighted average maturity of the Pledged Mortgages will not increase or decrease by more than %. If the foregoing conditions are satisfied, the pledge of Additional Mortgage Collateral and the issuance of Additional Bonds will not be subject to the prior consent of the Bondholders; however, there can be no assurance that any pledge of Additional Mortgage Collateral and issuance of Additional Bonds will not affect the timing or amount of payments received by the holders of the Bonds. UNDERWRITING STANDARDS All of the Pledged Mortgages 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 Pledged Mortgages will represent and warrant that all Pledged Mortgages 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. See "MORTGAGE LOAN PROGRAM -- Underwriting Standards" in the Prospectus. SERVICING OF THE PLEDGED MORTGAGES 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 Pledged Mortgages in accordance with the terms set forth in the Master Servicing Agreement. The Master Servicer intends to 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 will enter into or be assigned 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 Pledged Mortgages. The Master Servicer will administer and supervise the performance of each Servicer, who may in turn be administering and supervising the performance of the subservicers of the Pledged Mortgages. 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 On or prior to the Closing Date, the Master Servicer will enter into a separate Servicing Agreement with each Servicer to perform, as independent contractor, servicing functions for the Master Servicer subject to its supervision. Such servicing functions include collection and remittance of principal and interest payments, S-37 88 administration of mortgage escrow accounts, collection of certain insurance claims and, if necessary, foreclosure. The Master Servicer may permit Servicers to contract with subservicers to perform some or all of the Servicer's servicing duties, but the Servicers will not thereby be released from their obligations under the Servicing Agreement. The Master Servicer also may enter into sub-servicing agreements directly with an affiliate of a Servicer or permit a Servicer to transfer its servicing rights and obligations to a third party. In such instances, the affiliate or third party, as the case may be, will perform servicing functions comparable to those normally performed by the Servicer as described above, and the Servicer will not be obligated to perform such servicing functions. When used herein with respect to servicing obligations, the term Servicer includes any such affiliate or third party. The Master Servicer may perform certain supervisory functions with respect to servicing by the Servicer directly or through an agent or independent contractor and the Master Servicer will be responsible for administering and servicing the Pledged Mortgages pursuant to the Master Servicing Agreement. On or before the Closing Date, the Master Servicer will establish one or more accounts (the "Bond Account") into which each Servicer will remit collections on the mortgage loans serviced by it (net of its related servicing compensation). For purposes of the Master Servicing Agreement, , as Master Servicer, will be deemed to have received any amounts with respect to the Pledged Mortgages that are received by a Servicer regardless of whether such amounts are remitted by the Servicer to the Master Servicer. The Master Servicer has reserved the right to remove the Servicer servicing any Pledged Mortgage at any time and will exercise that 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 continue to be responsible for servicing the related Pledged Mortgages. FORECLOSURE, DELINQUENCY AND LOSS EXPERIENCE The following table summarizes the delinquency, foreclosure and loss experience, respectively, as of December 31, 199 , December 31, 199 and December 31, 199 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 Pledged Mortgages, 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 Pledged Mortgages 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. S-38 89 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 COMPENSATION AND PAYMENT OF EXPENSES The Expense Fees with respect to the Pledged Mortgages are payable out of the interest payments on each Pledged Mortgage. The Expenses Fees will vary from Pledged Mortgage to Pledged Mortgage. 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 Pledged Mortgage. 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"), (b) servicing compensation payable to the Servicers in respect of their servicing activities (the "Servicing Fee") and (c) 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 Pledged Mortgage. The Servicing Fee payable to each Servicer will vary from Pledged Mortgage to Pledged Mortgage and will range from % to % per annum, in each case of the Stated Principal Balance of the related Pledged Mortgage serviced by such Servicer. The Master Servicer is obligated to pay certain ongoing expenses associated with the Pledged Mortgages 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 Pledged Mortgages, as described herein under "-- Adjustment to Master Servicing Fee and Invested Amount in Connection with Certain Prepaid Pledged Mortgages." The Master Servicer or the related 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 Bond Account and the Distribution Account. The Net Mortgage Rate of a Pledged Mortgage is the Mortgage Rate thereof minus the related Expense Fee Rate. ADJUSTMENT TO MASTER SERVICING FEE AND INVESTED AMOUNT IN CONNECTION WITH CERTAIN PREPAID PLEDGED MORTGAGES When a borrower prepays a Pledged Mortgage 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 Pledged Mortgage sufficient to pay to Bondholders the full amount of interest to which they would be entitled in respect of such Pledged Mortgage 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. S-39 90 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 Pledged Mortgages 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 Pledged Mortgages (net of the Master Servicing Fee and the applicable Servicing Fee with respect to the related Pledged Mortgages) 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 Pledged Mortgage 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 Pledged Mortgage 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 Pledged Mortgage. 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 by a Servicer to advance funds as required under the related Servicing Agreement will constitute a default thereunder, in which case the Master Servicer will be obligated to make any such advance in accordance with the terms of the Master Servicing Agreement.] Any failure 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 Pledged Mortgages. See "USE OF PROCEEDS" in the Prospectus and "METHOD OF DISTRIBUTION" herein. FEDERAL INCOME TAX CONSEQUENCES Giancarlo and Gnazzo, A Professional Corporation, has advised the Company 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 Pledged Mortgages 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 it is unclear, 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")]. S-40 91 Notwithstanding the use of in pricing the Bonds, no representation is made that the Pledged Mortgages 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. See "DESCRIPTION OF THE BONDS -- Weighted Average Life of the Bonds" herein and "FEDERAL TAX CONSEQUENCES" 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. 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 Pledged Mortgages 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 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. See "ERISA MATTERS" in the Prospectus. 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 Pledged Mortgages 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. See "ERISA MATTERS" in the Prospectus. 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. S-41 92 METHOD OF DISTRIBUTION Subject to the terms and conditions set forth in the Underwriting Agreement between the Company, Redwood Trust and the Underwriter, the Company 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 Company 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 Giancarlo and Gnazzo, A Professional Corporation, San Francisco, California. Brown & Wood LLP, New York, New York will act as counsel for the Underwriter. 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-42 93 INDEX OF DEFINED TERMS
PAGE ------ Additional Mortgage Collateral....................................................... S-9 Adjustment Date...................................................................... S-29 Advance.............................................................................. S-40 Available Funds...................................................................... S-21 Belgian Cooperative.................................................................. S-19 Beneficial owner..................................................................... S-17 Bond Account..................................................................S-9, S-21, S-39 Bond Distribution Amount............................................................. S-21 Bond Interest Rate................................................................... S-22 Bond Owners.......................................................................... S-17 Bond Trustee......................................................................... S-4 Bonds..........................................................................S-1, S-4, S-17 Book-Entry Bonds..................................................................... S-17 CEDEL Participants................................................................... S-19 Certificate Interest Payment Amount.................................................. S-22 Certificate Interest Rate............................................................ S-5 Class Principal Amount............................................................... S-17 Code...............................................................................S-10, S-41 Company..............................................................................S-2, S-4 Controlling Class.................................................................... S-28 CPR.................................................................................. S-26 Cut-off Date Pool Principal Balance.................................................. S-29 Definitive Bond...................................................................... S-17 Deleted Pledged Mortgage............................................................. S-36 Deposit Trust Agreement.............................................................. S-5 Distribution Account................................................................S-9, S-21 DTC.................................................................................. S-17 Due Date............................................................................. S-29 ERISA..............................................................................S-10, S-40 Euroclear Operator................................................................... S-19 Euroclear Participants............................................................... S-19 European Depositaries................................................................ S-17 Expense Fee Rate..................................................................... S-39 FHLMC................................................................................ S-30 Financial Intermediary............................................................... S-17 FNMA................................................................................. S-30 Index...............................................................................S-8, S-29 Indirect Participants................................................................ S-18 Insurance Proceeds................................................................... S-21 Interest Accrual Period.............................................................S-6, S-22 Interest Payment Amount.............................................................. S-22 Invested Amount...................................................................... S-17 Invested Amount Payment.............................................................. S-24 Investor Certificate................................................................S-1, S-16 Investor Percentage.................................................................. S-23 Issuer............................................................................... S-2
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PAGE ------ Liquidated Pledged Mortgage.......................................................... S-25 Liquidation Proceeds................................................................. S-21 Loan-to-Value Ratio.................................................................. S-30 Management Agreement................................................................. S-4 Margin............................................................................... S-29 Master Servicing Fee................................................................. S-39 Maximum Rate......................................................................... S-29 Morgan............................................................................... S-19 Mortgage............................................................................. S-35 Mortgage File........................................................................ S-35 Mortgage Loan Purchase Agreement..................................................... S-28 Mortgage Note........................................................................ S-35 Mortgaged Property................................................................... S-28 Net Interest Shortfall............................................................... S-22 Net Interest Shortfalls.............................................................. S-22 Offered Bonds..................................................................S-1, S-4, S-17 Original Class B-1 Principal Amount.................................................. S-17 Original Invested Amount............................................................. S-17 Original Senior Class Principal Amount............................................... S-17 Owner Trustee........................................................................ S-4 Participants......................................................................... S-17 Payment Date...................................................................S-1, S-5, S-21 Periodic Rate Cap.................................................................... S-29 Plan...............................................................................S-10, S-41 Plan Asset Regulations.............................................................S-10, S-41 Plan Investors.....................................................................S-10, S-41 Pledged Mortgage Pool...............................................................S-7, S-29 Pledged Mortgages.................................................................... S-2 Pool Principal Balance............................................................... S-23 Prepayment Assumption................................................................ S-26 Prepayment Interest Shortfall........................................................ S-22 Primary Mortgage Insurance Policy.................................................... S-38 PTCE................................................................................. S-41 Rating Agencies....................................................................S-11, S-42 Realized Loss........................................................................ S-25 Record Date.......................................................................... S-21 Redwood Trust..................................................................S-2, S-4, S-16 Relevant Depositary.................................................................. S-17 REMIC................................................................................ S-41 REO Property......................................................................... S-40 Replacement Pledged Mortgage......................................................... S-36 Rules................................................................................ S-18 Scheduled Payments................................................................... S-29 Seller............................................................................... S-37 Senior Bond Interest Rate............................................................ S-1 Senior Bonds........................................................................S-1, S-16 Senior Class Principal Amount........................................................ S-17 Senior Interest Payment Amount....................................................... S-22
S-44 95
PAGE ------ Senior Percentage.................................................................... S-23 Senior Principal Payment Amount...................................................... S-23 Servicing Fee........................................................................ S-39 Shortfalls........................................................................... S-12 SMMEA................................................................................ S-11 Stated Principal Balance............................................................. S-23 Structuring Assumptions.............................................................. S-25 Subordinated Bond Interest Rate...................................................... S-1 Subordinated Bonds..................................................................S-1, S-16 Subordinated Class Principal Amount.................................................. S-17 Subordinated Interest Carryover Shortfall............................................ S-22 Subordinated Interest Payment Amount................................................. S-22 Subordinated Percentage.............................................................. S-23 Subordinated Principal Carryover Shortfall........................................... S-24 Subordinated Principal Payment Amount................................................ S-23 Substitution Adjustment Amount....................................................... S-36 Terms and Conditions................................................................. S-19 Underwriter.......................................................................... S-1 Variable Rate Debt Instruments....................................................... S-19 "Investor............................................................................ S-1
S-45 96 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 S-46 97 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 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. S-47 98 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 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 S-48 99 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-49 100 INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE. SUBJECT TO COMPLETION, DATED APRIL 28, 1997 PROSPECTUS SEQUOIA MORTGAGE FUNDING CORPORATION DEPOSITOR $ (AGGREGATE AMOUNT) COLLATERALIZED MORTGAGE BONDS (ISSUABLE IN SERIES) ------------------------ Sequoia Mortgage Funding Corporation, a Delaware corporation (the "Company"), proposes to establish one or more trusts to issue and sell from time to time under this Prospectus and related Prospectus Supplements one or more Series of Collateralized Mortgage Bonds (the "Bonds"). The Bonds of each Series will be collateralized primarily by mortgage collateral (the "Mortgage Collateral") consisting of one or more of the following: (i) fixed-rate, first or junior lien mortgage loans secured by one- to four-family residential properties (the "Fixed Rate Pledged Mortgages"), (ii) floating-rate, first or junior lien mortgage loans secured by one- to four-family residential properties (the "Floating Rate Pledged Mortgages" and, together with the Fixed Rate Pledged Mortgages, the "Pledged Mortgages"), (iii) mortgage pass-through securities (the "Agency Securities") issued or guaranteed by the Government National Mortgage Association ("GNMA"), the Federal National Mortgage Association ("FNMA") or the Federal Home Loan Mortgage Corporation ("FHLMC"), (iv) Private Mortgage-Backed Securities (as defined herein), (v) a combination of such Agency Securities and/or Private Mortgage-Backed Securities (collectively, the "Certificates") or (vi) a combination of Certificates and Pledged Mortgages. A Series of Bonds also may be secured by certain cash accounts, insurance policies, surety bonds, reinvestment income, guaranties, letters of credit or other assets to the extent described herein and in the related Prospectus Supplement. Certain capitalized terms used and not otherwise defined herein shall have the meanings ascribed thereto elsewhere in this Prospectus. See "INDEX OF CERTAIN DEFINITIONS" on page 84 of this Prospectus for the location of the definitions of certain capitalized terms. Each Series of Bonds will consist of one or more Classes of Bonds. Interest on the Bonds will accrue at a fixed rate, a variable rate or a combination thereof, as determined in the manner specified in the related Prospectus Supplement. Principal payments on each Class of Bonds of a Series will be made in the manner specified in the related Prospectus Supplement. If so specified in the related Prospectus Supplement, one or more Classes of Bonds of a Series may be entitled to receive payments of principal, interest or any combination thereof prior to one or more other Classes of Bonds of such Series either for the life of such Bonds or during certain periods. A Series of Bonds may include one or more Classes of Bonds entitled to (i) principal distributions, with disproportionate, nominal or no interest distributions or (ii) interest distributions, with disproportionate, nominal or no principal distributions. In addition, a Series of Bonds may include one or more Classes of Bonds that are senior in right of payment to one or more other Classes of Bonds of such Series. Credit enhancement for the Bonds of a Series will be as specified in the related Prospectus Supplement. The rate of payment of the principal of each Class of Bonds will generally depend, among other things, on the rate of payment (including prepayments) of the Mortgage Collateral pledged as security therefor. Consequently, the actual maturity of any Class of Bonds could occur substantially sooner than its Stated Maturity. Each Series of Bonds may be redeemed under the circumstances described herein and in the related Prospectus Supplement. UNDER CERTAIN CIRCUMSTANCES, A TRUST MAY PLEDGE ADDITIONAL MORTGAGE COLLATERAL ("ADDITIONAL MORTGAGE COLLATERAL") TO THE RELATED BOND TRUSTEE AND ISSUE ADDITIONAL BONDS ("ADDITIONAL BONDS") OF A SERIES. ANY SUCH PLEDGE OF ADDITIONAL MORTGAGE COLLATERAL AND ISSUANCE OF ADDITIONAL BONDS MAY AFFECT THE TIMING AND AMOUNT OF PAYMENTS ON ANY OUTSTANDING BONDS OF THAT SERIES AND AN INVESTOR'S YIELD ON ANY SUCH OUTSTANDING BONDS. SEE "SECURITY FOR THE BONDS -- PLEDGE OF ADDITIONAL MORTGAGE COLLATERAL AND ISSUANCE OF ADDITIONAL BONDS" HEREIN. FOR A DISCUSSION OF CERTAIN RISK FACTORS RELATING TO INVESTMENTS IN THE BONDS, SEE "RISK FACTORS" COMMENCING ON PAGE 19 OF THIS PROSPECTUS. THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. Each Series of Bonds will be issued by a separate trust (each, an "Issuer") established by the Company, will represent obligations solely of such Issuer and will not be insured or guaranteed by GNMA, FNMA or FHLMC or any other governmental agency or instrumentality or by the Company, any affiliate of the Company, or, unless otherwise specified in the related Prospectus Supplement, any other person or entity. No Issuer of any Series of Bonds is expected to have significant assets other than those pledged as collateral for such Series of Bonds. Prior to issuance, there will have been no market for the Bonds of any Series, and there can be no assurance that a secondary market for any Bonds will develop or, if it does develop that it will continue or provide Bondholders with a sufficient level of liquidity of investment. This Prospectus may not be used to consummate sales of a Series of Bonds unless accompanied by a Prospectus Supplement. Bonds of each Series will be characterized for federal income tax purposes as debt instruments. See "FEDERAL INCOME TAX CONSEQUENCES" herein. Offers of the Bonds of any Series may be made through one or more different methods, including offerings through underwriters, as more fully described under "PLAN OF DISTRIBUTION" herein and in the related Prospectus Supplement. , 1997. 101 UNTIL 90 DAYS AFTER THE DATE OF EACH PROSPECTUS SUPPLEMENT, ALL DEALERS EFFECTING TRANSACTIONS IN THE SECURITIES COVERED BY SUCH PROSPECTUS SUPPLEMENT, WHETHER OR NOT PARTICIPATING IN THE DISTRIBUTION THEREOF, MAY BE REQUIRED TO DELIVER SUCH PROSPECTUS SUPPLEMENT AND THIS PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS AND PROSPECTUS SUPPLEMENT WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS. PROSPECTUS SUPPLEMENT The Prospectus Supplement relating to a Series of Bonds to be offered hereunder will, among other things, set forth with respect to such Series of Bonds, if applicable: (i) information concerning the Issuer of such Series of Bonds; (ii) the principal amount and the interest rate, or the method to be used to determine the interest rate, of each Class of such Series of Bonds; (iii) certain characteristics of the Mortgage Collateral securing such Series of Bonds and, if applicable, information as to any insurance policies, surety bonds, guaranties, letters of credit or other instruments or agreements, and the amount and source of any Reserve Fund or other cash account for the Bonds of such Series; (iv) the circumstances, if any, under which the Bonds of such Series are subject to special redemption or optional redemption; (v) the Stated Maturity of each Class of Bonds of such Series; (vi) the method used to calculate the aggregate amount of principal required to be applied to the Bonds of such Series on each Payment Date and the priority in which such payments will be applied among the Classes of Bonds of such Series; (vii) the principal amount of each Class of Bonds of such Series that would be outstanding on specified Payment Dates if the Pledged Mortgages or the mortgage loans underlying the Certificates, as the case may be, pledged as security for such Bonds, were prepaid at various assumed rates; (viii) the Payment Dates and the Assumed Reinvestment Rate for such Series of Bonds; (ix) information as to the nature and extent of subordination with respect to any Class of Bonds of such Series that is subordinate in right of payment to any other Class; (x) any minimum principal payment requirements and the terms of any related minimum principal payment agreement with respect to such Series of Bonds; (xi) additional information with respect to the plan of distribution of the Bonds of such Series; and (xii) information as to the Master Servicer and the Bond Trustee for such Series. AVAILABLE INFORMATION The Depositor has filed with the Securities and Exchange Commission (the "Commission") a Registration Statement under the Securities Act of 1933, as amended (the "Securities Act"), with respect to the Bonds. This Prospectus, which forms a part of the Registration Statement, and the Prospectus Supplement relating to each Series of Bonds contain summaries of the material terms of the documents referred to herein and therein, but do not contain all of the information set forth in the Registration Statement pursuant to the Rules and Regulations of the Commission. For further information, reference is made to such Registration Statement and the exhibits thereto. Such Registration Statement and exhibits can be inspected and copied at prescribed rates at the public reference facilities maintained by the Commission at its Public Reference Section, 450 Fifth Street, N.W., Washington, D.C. 20549, and at its Regional Offices located as follows: Midwest Regional Office, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661; and Northeast Regional Office, Seven World Trade Center, New York, New York 10048. The Commission also maintains a Web site at http://www.sec.gov from which such Registration Statement and exhibits may be obtained. No person has been authorized to give any information or to make any representation other than those contained in this Prospectus and any Prospectus Supplement with respect hereto and, if given or made, such information or representations must not be relied upon. This Prospectus and any Prospectus Supplement with respect hereto do not constitute an offer to sell or a solicitation of an offer to buy any securities other than the Bonds offered hereby and thereby nor an offer of the Bonds to any person in any state or other jurisdiction in which such offer would be unlawful. The delivery of this Prospectus at any time does not imply that information herein is correct as of any time subsequent to its date. 2 102 INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE All documents subsequently filed by or on behalf of the Issuer referred to in the accompanying Prospectus Supplement with the Commission pursuant to Section 13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), after the date of this Prospectus and prior to the termination of any offering of the Bonds issued by such Issuer 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 such documents. Any statement contained in a document incorporated or deemed to be incorporated by reference herein shall be deemed to be modified or superseded for all purposes of this Prospectus to the extent that a statement contained herein (or in the accompanying Prospectus 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 so modified or superseded, to constitute a part of this Prospectus. None of the Company, the Master Servicer or the Bond Trustee for any Series intends to file with the Commission periodic reports with respect to the related Issuer following completion of the reporting period required by Rule 15d-1 or Regulation 15D under the Exchange Act. The Bond Trustee or such other entity specified in the related Prospectus Supplement on behalf of any Issuer 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). Such requests should be directed to the Corporate Trust Office of the Bond Trustee or the address of such other entity specified in the accompanying Prospectus Supplement. Included in the accompanying Prospectus Supplement is the name, address, telephone number and, if available, facsimile number of the office or contact person at the Corporate Trust Office of the Bond Trustee or such other entity. 3 103 SUMMARY The following summary is qualified in its entirety by reference to the detailed information appearing elsewhere in this Prospectus and in the related Prospectus Supplement with respect to the Series of Bonds offered thereby and to the related Indenture (as defined herein). Certain capitalized terms used and not otherwise defined herein shall have the meanings ascribed thereto elsewhere in this Prospectus. See "INDEX OF CERTAIN DEFINITIONS" on page 84 of this Prospectus for the location of the definitions of certain capitalized terms. Securities Offered......... The Collateralized Mortgage Bonds (the "Bonds") offered hereby will be secured primarily by mortgage collateral (the "Mortgage Collateral") consisting of one or more of the following: (i) fixed-rate, first or junior lien mortgage loans secured by one- to four-family residential properties (the "Fixed Rate Pledged Mortgages"), (ii) floating-rate, first or junior lien mortgage loans secured by one-to four-family residential properties (the "Floating Rate Pledged Mortgages" and, together with the Fixed Rate Pledged Mortgages, the "Pledged Mortgages"), (iii) mortgage pass-through securities (the "Agency Securities") issued or guaranteed by the Government National Mortgage Corporation ("GNMA"), the Federal National Mortgage Corporation ("FNMA") or the Federal Home Loan Mortgage Corporation ("FHLMC"), (iv) other mortgage pass-through certificates or collateralized mortgage obligations (the "Private Mortgage-Backed Securities"), (v) a combination of such Agency Securities and/or Private Mortgage-Backed Securities (collectively, the "Certificates") or (vi) a combination of Certificates and Pledged Mortgages. A Series of Bonds also may be secured by certain cash accounts, insurance policies, surety bonds, reinvestment income, guaranties or letters of credit to the extent described herein and in the related Prospectus Supplement. See "SECURITY FOR THE BONDS" herein. The Bonds will be issued from time to time in one or more Series pursuant to Indentures (as defined herein) between each Issuer and a bank or trust company acting as trustee (the "Bond Trustee") for the holders of the Bonds of each Series (the "Bondholders") under the relevant Indenture. Each Series of Bonds will consist of one or more Classes of Bonds which may include one or more Classes of Deferred Interest Bonds (as defined herein). A Series of Bonds may include one or more Classes of Senior Bonds (collectively, the "Senior Bonds") and one or more Classes of Subordinated Bonds (collectively, the "Subordinated Bonds"). Unless otherwise specified in the related Prospectus Supplement, the Bonds represent obligations solely of the Issuer and are not insured or guaranteed by any other person or entity. See "DESCRIPTION OF THE BONDS" herein. Bonds of a Class may differ from Bonds of other Classes of the same Series in the amounts allocated to and the priority of principal payments and interest rate or in such other manner as specified in the related Prospectus Supplement. A Series of Bonds may include one or more Classes of Bonds entitled to (i) principal distributions, with disproportionate, nominal or no interest distributions or (ii) interest distributions, with disproportionate, nominal or no principal distributions. A Series of Bonds may be insured or guaranteed as to payment of principal and interest by a third-party insurer or guarantor, or secured by certain cash accounts, insurance policies, surety bonds, reinvestment income, guaranties, letters of credit 4 104 or other assets, in each case to the extent provided herein and in the related Prospectus Supplement. Issuer..................... The Issuer with respect to each Series of Bonds will be a trust established by Sequoia Mortgage Funding Corporation, a Delaware corporation (the "Company"), for the sole purpose of issuing such Series of Bonds and engaging in transactions relating thereto. The Company is a wholly owned limited purpose finance subsidiary of Redwood Trust, Inc. ("Redwood Trust"). Redwood Trust, a Maryland corporation, has elected to be taxed as a real estate investment trust under the Internal Revenue Code of 1986, as amended (the "Code"). Each trust that is formed to act as an Issuer will be created pursuant to a deposit trust agreement between the Company, acting as depositor (in such capacity, the "Depositor"), and a bank, trust company, or other fiduciary acting as owner trustee (the "Owner Trustee"). Each trust will be established by the Company solely for the purpose of issuing one Series of Bonds and engaging in transactions relating thereto. Neither Redwood Trust, the Company nor any of their respective affiliates will guarantee or otherwise be obligated to make payments on the Bonds. The Bonds will be obligations solely of their respective Issuers. The assets of each such Issuer, other than those pledged as collateral for the Bonds it issues, are not expected to be significant. See "THE ISSUER" herein. Master Servicer............ The entity or entities named as Master Servicer (each, a "Master Servicer") in the related Prospectus Supplement will act as master servicer with respect to all of the Pledged Mortgages securing a Series of Bonds pursuant to an agreement (each, a "Master Servicing Agreement") among the Master Servicer, the related Issuer and the related Bond Trustee. The Master Servicer will administer and supervise the performance of the entities primarily responsible for servicing the Pledged Mortgages (each, a "Servicer"), who may in turn be administering and supervising the performance of one or more subservicers of such Pledged Mortgages, and will be obligated to perform the obligations of a terminated Servicer or appoint a successor Servicer. See "SERVICING OF THE PLEDGED MORTGAGES" herein. Special Servicer........... If specified in the related Prospectus Supplement, the Company may appoint a special servicer (each, a "Special Servicer") to service, make certain decisions and take various actions with respect to delinquent or defaulted Pledged Mortgages pledged as security for the related Series of Bonds. See "SERVICING OF THE PLEDGED MORTGAGES -- Special Servicing Agreement" herein. Interest Payments.......... Each Class of Bonds of a Series will bear interest at the rate, or determined in the manner, set forth for such Class in the related Prospectus Supplement. Interest on a Series of Bonds or on a Class of Bonds within a Series may accrue at a fixed rate, a variable rate or a combination thereof, as determined in the manner specified in the related Prospectus Supplement. One or more Classes of Bonds within a Series may be zero coupon bonds. Interest on each Class of Bonds of a Series other than a Class of Deferred Interest Bonds will be paid on the dates specified in the related Prospectus Supplement (each, a "Payment Date"), to holders of record at the close of business on each of the dates specified in such Prospectus Supplement (each, a "Record Date"). Interest on each Class of Deferred Interest Bonds of a Series will accrue 5 105 but will not be paid (except in certain circumstances involving an optional redemption of the Deferred Interest Bonds or as otherwise specified in the related Prospectus Supplement) until the Classes of Bonds specified in the related Prospectus Supplement have been paid in full. Interest accrued but not paid on a Class of Deferred Interest Bonds will be added to the principal thereof on each Payment Date. Each such payment or accrual of interest will include all interest accrued either to, but not including, the related Payment Date or, if so indicated in the related Prospectus Supplement, through a date prior to such Payment Date, as specified in the related Prospectus Supplement. In the latter case, the effective yield to the holders of the Bonds will be reduced to a level below the yield which would apply if interest were paid or accrued to the respective Payment Date. One or more Classes of Bonds of a Series may be subordinated in the right to receive payments of interest (and/or principal or any combination thereof) to one or more other Classes of Bonds of such Series, either throughout the lives of the Bonds of such Class or during specified periods, and, in addition, may be entitled to receive such payments only after the occurrence of certain events specified in the related Prospectus Supplement. See "DESCRIPTION OF THE BONDS -- Payments of Interest" herein. Principal Payments......... Principal payments on each Series of Bonds will be made on each Payment Date in an aggregate amount equal to the sum of (a) if specified in the related Prospectus Supplement, the amount of interest accrued but not then payable on the Deferred Interest Bonds of the Series, if any, from the prior Payment Date or, if specified in the related Prospectus Supplement, from a date prior to such prior Payment Date, and (b) either (i) the percentage or percentages specified in the related Prospectus Supplement of the funds available for such purpose ("Available Funds") for such Payment Date or (ii) the sum of (x) an amount determined by reference to the aggregate decline in the bond values (the "Bond Values") of the Mortgage Collateral securing the Bonds of such Series in the period (each, a "Due Period") ending prior to such Payment Date (collectively, the "Basic Principal Payment") and (y) the amount, if any, of the spread (the "Spread") specified in the related Prospectus Supplement. The Prospectus Supplement for a Series of Bonds will specify the method or methods used to determine Available Funds for each related Payment Date. Payments of principal of the Bonds of a Series will be allocated among the Classes of Bonds of such Series in the manner specified in the related Prospectus Supplement. One or more Classes of Bonds of a Series may be subordinated in the right to receive payments of principal (and/or interest or any combination thereof) to one or more other Classes of Bonds of such Series, either throughout the lives of the Bonds of such Class or during specified periods, and, in addition, may be entitled to receive such payments only after the occurrence of certain events specified in the related Prospectus Supplement. All payments of principal of Bonds of a particular Class will be applied on a pro rata basis among all Bonds of such Class, unless otherwise specified in the related Prospectus Supplement. See "DESCRIPTION OF THE BONDS -- Payments of Principal" herein. 6 106 The "Bond Value" of an item of Mortgage Collateral represents the principal amount of the Bonds of a Series that, based on certain assumptions and irrespective of prepayments on the Mortgage Collateral, can be supported by scheduled distributions on the Mortgage Collateral, together with (depending on the method used to determine the Bond Value of the Mortgage Collateral) (i) reinvestment earnings thereon at the Assumed Reinvestment Rate (as defined herein) specified in the related Prospectus Supplement and (ii) if applicable, the cash available to be withdrawn from any Reserve Fund (as defined herein) established for such purpose for such Series. The Prospectus Supplement for a Series of Bonds will specify the method or methods and related assumptions used to determine the Bond Values of the Mortgage Collateral securing the Series. Unless otherwise provided in the related Prospectus Supplement, the Spread for a Series of Bonds, if applicable, will represent the excess, if any, of the sum of (i) all payments on the related Mortgage Collateral deposited in the related Bond Account (as defined herein) in the Due Period preceding a Payment Date for the Series, (ii) the reinvestment income thereon and (iii) amounts which are required or are permitted to be withdrawn from any Reserve Fund less the sum of (i) all interest payable on the Bonds of such Series on such Payment Date, (ii) the Basic Principal Payment required to be made on the Bonds of such Series on such Payment Date, (iii) an amount reflecting the redemption price of certain Bonds of such Series redeemed, and (iv) certain expenses accrued by the Issuer, during the preceding Due Period. The Stated Maturities for the Classes of Bonds comprising a Series are the dates determined by the Company to fall a specified period after the dates on which the Bonds of each such Class will be fully paid assuming (i) timely receipt of scheduled payments (with no prepayments) on the Mortgage Collateral securing such Bonds, (ii) if applicable, such scheduled payments are, upon deposit in the Bond Account, reinvested at the Assumed Reinvestment Rate specified in the related Prospectus Supplement, (iii) no Mortgage Collateral is substituted by the Issuer or the Seller for any of the Mortgage Collateral initially pledged to secure the Bonds of the Series and (iv) if applicable, no portion of the Spread is applied to the payment of the Bonds, unless the related Prospectus Supplement provides otherwise, in which event such Stated Maturities will be based on the assumptions specified in such Prospectus Supplement. If so provided in the related Prospectus Supplement, holders of one or more Classes of Bonds of a Series may have the right, at their option, to receive full payment in respect of such Bonds prior to Stated Maturity, in each case to the extent and subject to the conditions specified in such Prospectus Supplement. The Assumed Reinvestment Rate, if applicable, for a Series of Bonds will be set forth in the related Prospectus Supplement and may be any rate permitted by the nationally recognized statistical rating agency or agencies rating such Series of Bonds (each, a "Rating Agency") or a rate provided under a guaranteed investment contract, surety bond or similar arrangement satisfactory to each Rating Agency. If the Assumed Reinvestment Rate is so provided, the related Prospectus Supplement will describe the terms of such arrangement. The rate of prepayments 7 107 (including for this purpose prepayments resulting from refinancing or liquidations of the Pledged Mortgages or the mortgage loans underlying the Certificates, as the case may be, due to defaults, casualties, condemnations and repurchases by the Seller (as defined herein), the Issuer or Redwood Trust or purchases by the Master Servicer or the Company) on The Mortgage Collateral securing any Series of Bonds will depend on the characteristics of the Pledged Mortgages or the mortgage loans underlying the Certificates, as the case may be, as well as on other factors including, without limitation, homeowner mobility, economic conditions, the presence and enforceability of "due-on-sale" clauses, mortgage market interest rates and the availability of mortgage funds, and no assurance can be given as to the actual prepayment experience of the Mortgage Collateral. The weighted average life of the Bonds of a Series may also be affected by the exercise by the Issuer of its right to pledge Additional Mortgage Collateral (as defined herein) to the Bond Trustee or to substitute other Mortgage Collateral for the Mortgage Collateral originally pledged as security for such Bonds. See "DESCRIPTION OF THE BONDS and -- Weighted Average Life of the Bonds", "SECURITY FOR THE BONDS -- Substitution of Mortgage Collateral" and "Pledge of Additional Mortgage Collateral and Issuance of Additional Bonds" herein. Redemption of Bonds........ The Bonds of each Series will be redeemable under the following circumstances: A. Special Redemption...... The Bonds of a Series or a Class may be subject to special redemption, in whole or in part, as specified in the related Prospectus Supplement. Pursuant to a special redemption, the Issuer will be required to redeem, on the dates specified in such Prospectus Supplement, at 100% of their unpaid principal amount, plus accrued interest, outstanding Bonds of a Series or Class if, as a result of substantial payments of principal on the Pledged Mortgages or on the mortgage loans underlying the Certificates pledged as security for such Series or Class of Bonds or low reinvestment yields, or both, the Bond Trustee determines, based on the assumptions specified in the Indenture, that in the absence of such special redemption the amount of cash expected to be on deposit in the Bond Account on the next Payment Date for such Series of Bonds would be insufficient to make required payments on the Bonds of such Series on such Payment Date. Any such redemption will not exceed the principal amount of Bonds that would otherwise be required to be paid on the next Payment Date out of the principal payments and prepayments so received. See "DESCRIPTION OF THE BONDS -- Special Redemption" herein. Principal payments on a special redemption will be applied to Bonds of a Series in accordance with the priorities specified in the related Prospectus Supplement. B. Optional Redemption..... If so provided in the related Prospectus Supplement, the Bonds of each Series may be subject to redemption at the option of the Issuer or another entity or entities. The Prospectus Supplement for each Series will specify the circumstances, if any, under which the Bonds of such Series may be so redeemed, the manner of effecting such redemption, the conditions to which such redemption are subject and the redemption prices for each Class of Bonds to be redeemed. See "DESCRIPTION OF THE BONDS -- Optional Redemption" herein. 8 108 Security for the Bonds..... Each Series of Bonds will be separately secured by collateral consisting of the items set forth below. Unless otherwise provided in the related Prospectus Supplement, the Issuer may substitute other Mortgage Collateral for the Mortgage Collateral originally pledged as security for the Bonds of a Series so long as the substitute Mortgage Collateral meets certain criteria. See "SECURITY FOR THE BONDS -- Substitution of Mortgage Collateral" herein. A. Pledged Mortgages....... In connection with the issuance of a Series of Bonds secured in whole or in part by Pledged Mortgages, the Issuer will pledge and assign to the Bond Trustee a pool of conventional (i.e., not insured or guaranteed by any governmental agency) loans secured by first or junior mortgages or deeds of trust on one- to four-family residential properties. If so specified in the related Prospectus Supplement, the Pledged Mortgages may include cooperative apartment loans ("Cooperative Loans") secured by security interests in shares issued by private, nonprofit, cooperative housing corporations ("Cooperatives") and in the related proprietary leases or occupancy agreements granting exclusive rights to occupy specific dwelling units in such Cooperatives' buildings. See "SECURITY FOR THE BONDS -- The Pledged Mortgages" herein. B. General Attributes of Pledged Mortgages........ The payment terms of the Pledged Mortgages securing a Series of Bonds, if any, will be described in the related Prospectus Supplement and may include any of the following features or combinations thereof or other features described in the related Prospectus Supplement: (a) Interest may be payable at a fixed rate, a rate adjustable from time to time in relation to an index (which will be specified in the related Prospectus Supplement), 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, or a rate that is convertible from an adjustable rate to a fixed rate. 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 related Prospectus Supplement. The loan agreement or promissory note (the "Mortgage Note") in respect of a Pledged Mortgage may provide for the payment of interest at a rate lower than the interest rate (the "Mortgage Rate") specified in such Mortgage Note for a period of time or for the life of the loan, and the amount of any difference may be contributed from funds supplied by a third party. (b) 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 interest rate on the Pledged Mortgage or may not be amortized during all or a portion of the original term. Payment of all or a substantial portion of the principal may be due on maturity ("balloon payments"). Principal may include interest that has been deferred and added to the principal balance of the Pledged Mortgage. 9 109 (c) 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. Pledged Mortgages may include limits on periodic increases or decreases in the amount of monthly payments and may include maximum or minimum amounts of monthly payments. (d) The Pledged Mortgages generally may be prepaid at any time without payment of any prepayment fee, unless otherwise specified in the related Prospectus Supplement. If so specified in the related Prospectus Supplement, prepayments of principal may be subject to a prepayment fee, which may be fixed for the life of any such Pledged Mortgage or may decline over time, and may be prohibited for the life of any such Pledged Mortgage or for certain periods ("lockout periods"). Certain Pledged Mortgages may permit prepayments after expiration of the applicable lockout period and may require the payment of a prepayment fee in connection with any such subsequent prepayment. All or a portion of any prepayment fee may be payable as additional interest on the Bonds, if so specified in the related Prospectus Supplement. Other Pledged Mortgages may permit prepayments without payment of a fee unless the prepayment occurs during specified time periods. The Pledged Mortgages may include "due-on-sale" clauses which permit the mortgagee to demand payment of the entire Pledged Mortgage in connection with the sale or certain transfers of the related Mortgaged Property (as defined below). Other Pledged Mortgages may be assumable by persons meeting then applicable underwriting standards. See "MORTGAGE LOAN PROGRAM -- Underwriting Standards" herein. (e) The real property constituting security for repayment of a Pledged Mortgage (each, a "Mortgaged Property") may be located in any one of the fifty states, the District of Columbia, Guam, Puerto Rico, any other territory of the United States or such other location as may be specified in the related Prospectus Supplement. Unless otherwise specified in the related Prospectus Supplement, all of the Pledged Mortgages will be covered by standard hazard insurance policies insuring against losses due to fire and various other causes. The Pledged Mortgages will be covered by Primary Mortgage Insurance Policies (as defined herein) to the extent provided in the related Prospectus Supplement. See "SECURITY FOR THE BONDS -- The Pledged Mortgages" herein. C. Agency Securities....... The Agency Securities securing a Series of Bonds will consist of (i) fully modified pass-through mortgage-backed certificates guaranteed as to timely payment of principal and interest by the Government National Mortgage Association ("GNMA Certificates"), (ii) certificates ("Guaranteed Mortgage Pass-Through Certificates") issued and guaranteed as to timely payment of principal and interest by the Federal National Mortgage Association ("FNMA Certificates"), (iii) mortgage participation certificates issued and guaranteed as to timely payment of interest and, unless otherwise specified in the related Prospectus Supplement, ultimate payment of principal by the Federal Home Loan Mortgage Corporation ("FHLMC Certificates"), (iv) stripped mortgage- 10 110 backed securities representing an undivided interest in all or a part of either the principal distributions (but not the interest distributions) or the interest distributions (but not the principal distributions) or in some specified portion of the principal and interest distributions (but not all of such distributions) on certain GNMA, FNMA or FHLMC Certificates and, unless otherwise specified in the related Prospectus Supplement, guaranteed to the same extent as the underlying securities, (v) another type of pass-through certificate issued or guaranteed by GNMA, FNMA or FHLMC and described in the related Prospectus Supplement or (vi) a combination of such Agency Securities. All GNMA Certificates will be backed by the full faith and credit of the United States. No FHLMC or FNMA Certificates will be backed, directly or indirectly, by the full faith and credit of the United States. The Agency Securities may consist of pass-through securities issued under FHLMC's Cash or Guarantor Program, the GNMA I Program, the GNMA II Program or another program specified in the related Prospectus Supplement. The payment characteristics of the mortgage loans underlying the Agency Securities will be described in the related Prospectus Supplement. See "SECURITY FOR THE BONDS -- Agency Securities" herein. D. Private Mortgage-Backed Securities............... Private Mortgage-Backed Securities may include (a) mortgage pass-through certificates representing beneficial interests in certain mortgage loans or (b) collateralized mortgage obligations secured by such mortgage loans. Private Mortgage-Backed Securities may include stripped mortgage-backed securities representing an undivided interest in all or a part of any 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 (but not all of such distributions) on certain mortgage loans. Although individual mortgage loans underlying a Private Mortgage-Backed Security may be insured or guaranteed by the United States or an agency or instrumentality thereof, they need not be, and the Private Mortgage-Backed Securities themselves will not be so insured or guaranteed. Unless otherwise specified in the Prospectus Supplement relating to a Series of Bonds, payments on the Private Mortgage-Backed Securities will be distributed directly to the Bond Trustee as registered owner of such Private Mortgage-Backed Securities. See "SECURITY FOR THE BONDS -- Private Mortgage-Backed Securities" herein. The related Prospectus Supplement for a Series of Bonds will specify, among other things, the approximate aggregate principal amount and type of any Private Mortgage-Backed Securities to be included in the Mortgage Collateral for such Series and, as to any such Private Mortgage-Backed Securities comprising a significant portion of the Mortgage Collateral, to the extent such information is known to the Issuer, will in general include the following: (i) certain characteristics of the mortgage loans that comprise the underlying assets for the Private Mortgage-Backed Securities including (A) the payment features of such mortgage loans (B) the approximate aggregate principal amount of the underlying mortgage loans that are insured or guaranteed by a governmental entity, (C) the servicing fee or range of servicing fees with respect to the 11 111 mortgage loans and (D) the minimum and maximum stated maturities of the mortgage loans at origination; (ii) the maximum original term to stated maturity of the Private Mortgage-Backed Securities; (iii) the weighted average term to stated maturity of the Private Mortgage-Backed Securities; (iv) the pass-through or certificate rate or ranges thereof for the Private Mortgage-Backed Securities; (v) the weighted average pass-through or certificate rate of the Private Mortgage-Backed Securities; (vi) the issuer of the Private Mortgage-Backed Securities (the "PMBS Issuer"), the servicer of the Private Mortgage-Backed Securities (the "PMBS Servicer") and the trustee of the Private Mortgage-Backed Securities (the "PMBS Trustee"); (vii) certain characteristics of credit support, if any, such as reserve funds, insurance policies, surety bonds, letters of credit or guaranties relating to the mortgage loans underlying the Private Mortgage-Backed Securities or to such Private Mortgage-Backed Securities themselves; (viii) the terms on which underlying mortgage loans for such Private Mortgage-Backed Securities may, or are required to, be repurchased prior to stated maturity and the terms of any redemption or other call feature; and (ix) the terms on which substitute mortgage loans may be delivered to replace those initially deposited with the PMBS Trustee. See "SECURITY FOR THE BONDS -- Private Mortgage-Backed Securities" herein. E. Bond and Distribution Accounts................. All scheduled monthly principal and interest payments and all prepayments received with respect to the Mortgage Collateral for a Series of Bonds, other than amounts not required to be remitted to the Bond Trustee, such as amounts retained by the Master Servicer, any Servicer or any subservicer of Pledged Mortgages as servicing compensation, to pay certain insurance premiums or to reimburse the Master Servicer or any Servicer for certain advances it has made, will be remitted to an account (the "Bond Account") to be established as an Eligible Account (as defined herein) on the closing date for the sale of such Series of Bonds (the "Closing Date"). All principal and interest distributions received from the Mortgage Collateral and remitted to the Bond Account, other than amounts, if any, subsequently withdrawn to reimburse the Master Servicer or any Servicer for certain non-recoverable advances it has made, together with (i) the amount of cash, if any, initially deposited in the Bond Account by the Issuer, (ii) if applicable, all amounts withdrawn from any related Reserve Funds, (iii) any Insurance Proceeds and Liquidation Proceeds (as such terms are defined herein) and (iv) if so specified in the related Prospectus Supplement, all reinvestment income earned thereon, will be available transfer to the Distribution Account (as defined herein) for application to the payment of the principal of, and interest on, such Series of Bonds as described in the related Prospectus Supplement. On or prior to the Closing Date, the Bond Trustee will establish an account (the "Distribution Account") which shall be an Eligible Account (as defined herein) maintained with the Bond Trustee for the benefit of the Bondholders of the related Series. On or prior to a date specified in the related Prospectus Supplement and preceding each related Payment Date (each, a "Distribution Account Deposit Date"), the Master Servicer shall withdraw from the Bond Account the amount 12 112 required to be distributed to Bondholders on such Payment Date (the "Bond Distribution Amount"), to the extent of funds available for such purpose on deposit therein, and will deposit such amount in the Distribution Account. Any funds remaining in the Bond Account on a Payment Date, other than amounts not constituting Available Funds, if so specified in the related Prospectus Supplement, after (i) the reimbursement of the Master Servicer or any Servicer for non-recoverable advances made by it, (ii) each required payment of interest and principal to Bondholders of the related Series has been paid in full, (iii) if applicable, any Reserve Fund has been funded in the manner described in the related Prospectus Supplement and (iv) the payment of certain expenses relating to such Series of Bonds, will be subject to withdrawal upon the order of the Issuer. See "SECURITY FOR THE BONDS -- Bond and Distribution Accounts" and "SERVICING OF THE PLEDGED MORTGAGES" herein. Additional Collateral...... If so specified in the related Prospectus Supplement, subject to certain conditions set forth herein and in such Prospectus Supplement, the Issuer may pledge additional Pledged Mortgages or Certificates ("Additional Mortgage Collateral") to the Bond Trustee and issue Additional Bonds of the related Series within five years of the date of initial issuance of the Bonds of such Series. Although the pledge of any Additional Mortgage Collateral generally will not result in any change in the interest rate, Stated Maturity or Payment Dates of any outstanding Bonds of such Series, the pledge of Additional Mortgage Collateral may result in a variance in the weighted average life of any outstanding Class of Bonds of such Series at the prepayment rate assumed for the pricing of the initial issuance of such Class, and the characteristics of the Additional Mortgage Collateral may vary within the parameters specified in the related Prospectus Supplement. Furthermore, no assurance can be given that any pledge of Additional Mortgage Collateral and issuance of Additional Bonds would not affect the timing or amount of payments received by Holders of the outstanding Bonds of that Series. See "SECURITY FOR THE BONDS -- Additional Mortgage Collateral and Issuance of Additional Bonds" herein. Pre-Funding Accounts....... If so specified in the related Prospectus Supplement, the assets of the Issuer will include the funds on deposit in an account (a "Pre-Funding Account") which will be used to purchase additional Mortgage Collateral during a period specified in such Prospectus Supplement (such period, the "Funding Period"). See "SECURITY FOR THE BONDS -- Pre-Funding Accounts" herein. Credit Enhancement......... The Mortgage Collateral securing a Series of Bonds or the Bonds of one or more Classes in the related Series may have the benefit of one or more types of credit enhancement as described in the related Prospectus Supplement. The protection against losses afforded by any such credit enhancement may be limited. The type, characteristics and amount of credit enhancement will be determined based on the characteristics of the Pledged Mortgages underlying or comprising the Mortgage Collateral and will be established on the basis of requirements of each Rating Agency. In addition, one or more Classes of Bonds of a Series may be guaranteed as to payment of principal and interest by a third party 13 113 insurer or guarantor, to the extent provided in the related Prospectus Supplement. See "CREDIT ENHANCEMENT" herein. A. Subordination........... A Series of Bonds may consist of one or more Classes of Senior Bonds and one or more Classes of Subordinated Bonds. The rights of the holders of the Subordinated Bonds of a Series (the "Subordinated Bondholders") to receive payments of principal and/or interest (or any combination thereof) will be subordinated to such rights of the holders of the Senior Bonds of the same Series (the "Senior Bondholders") to the extent described in the related Prospectus Supplement. This subordination is intended to enhance the likelihood of regular receipt by the Senior Bondholders of the full amount of their scheduled payments of principal and/or interest. The protection afforded to the Senior Bondholders of a Series by means of the subordination feature will be accomplished by (i) the preferential right of such holders to receive, prior to any payment being made on the related Subordinated Bonds, the amounts of principal and/or interest due them on each Payment Date out of the funds available for payment on such date in the related Distribution Account and, to the extent described in the related Prospectus Supplement, by the right of such holders to receive future payments that would otherwise have been payable to the Subordinated Bondholders; or (ii) as otherwise described in the related Prospectus Supplement. If so specified in the related Prospectus Supplement, subordination may apply only in the event of certain types of losses not covered by other forms of credit support, such as hazard losses not covered by standard hazard insurance policies or losses due to the bankruptcy or fraud of the borrower. The related Prospectus Supplement will set forth information concerning, among other things, the amount of subordination of a Class or Classes of Subordinated Bonds in a Series, the circumstances in which such subordination will be applicable and the manner, if any, in which the amount of subordination will decrease over time. See "CREDIT ENHANCEMENT -- Subordination" herein. B. Reserve Funds........... If so specified in the related Prospectus Supplement, the Issuer will deposit in one or more Reserve Funds to be established with the Bond Trustee, cash, certificates of deposit, letters of credit, surety bonds, guaranteed investment contracts or any combination thereof, which may be used by the Bond Trustee to make payments on such Series of Bonds to the extent funds are not otherwise available. The related Prospectus Supplement will specify the manner of funding the related Reserve Fund and the conditions under which the amounts in any such Reserve Fund will be used to make payments to holders of Bonds of a particular Class or released from the lien of the related Indenture. See "CREDIT ENHANCEMENT -- Reserve Funds" herein. C. Mortgage Pool Insurance Policy................... If so specified in the related Prospectus Supplement, a mortgage pool insurance policy or policies (the "Mortgage Pool Insurance Policy") may be obtained and maintained for a Series of Bonds secured by Pledged Mortgages, which shall be limited in scope, covering defaults on such Pledged Mortgages in an initial amount equal to a specified percentage of the aggregate principal balance of all Pledged Mortgages included in the related mortgage pool as of the first day of the month of issuance of the related Series of Bonds or such other date as is specified 14 114 in the related Prospectus Supplement (the "Cut-off Date"). See "CREDIT ENHANCEMENT -- Mortgage Pool Insurance Policies" herein. D. Special Hazard Insurance Policy................... If so specified in the related Prospectus Supplement, a special hazard insurance policy or policies (the "Special Hazard Insurance Policy") may be obtained and maintained for a Series of Bonds secured by Pledged Mortgages, covering certain physical risks that are not otherwise insured against by standard hazard insurance policies. Each Special Hazard Insurance Policy will be limited in scope and will cover losses pursuant to the provisions of each such Special Hazard Insurance Policy as described in the related Prospectus Supplement. See "CREDIT ENHANCEMENT -- Special Hazard Insurance Policies" herein. E. Bankruptcy Bond......... If so specified in the related Prospectus Supplement, a bankruptcy bond or bonds (the "Bankruptcy Bond") may be obtained for a Series of Bonds secured by Pledged Mortgages to cover certain losses resulting from action that may be taken by a bankruptcy court in connection with a Pledged Mortgage. The level of coverage and the limitations in scope of each Bankruptcy Bond will be specified in the related Prospectus Supplement. See "CREDIT ENHANCEMENT -- Bankruptcy Bonds" herein. F. Bond Insurance Policies, Surety Bonds and Guarantees............... If so specified in the related Prospectus Supplement, credit enhancement for one or more Classes of Bonds of a Series may be provided by insurance policies or surety bonds (each, a "Bond Insurance Policy") issued by one or more insurance companies or sureties. Such bond guarantee insurance or surety bond will guarantee timely payments of interest and/or full payment of principal on the basis of a schedule of principal payments set forth in or determined in the manner specified in the related Prospectus Supplement. If specified in the related Prospectus Supplement, one or more bankruptcy bonds or other insurance or third-party guarantees may be used to provide coverage for the risks of default or types of loses set forth in such Prospectus Supplement. See "CREDIT ENHANCEMENT -- Bond Insurance Policies, Surety Bonds and Guarantees" herein. G. Letter of Credit........ If so specified in the related Prospectus Supplement, credit enhancement may be provided for a Series of Bonds secured by Pledged Mortgages by one or more letters of credit. A letter of credit may provide limited protection against certain losses in addition to or in lieu of other credit enhancement, such as losses resulting from delinquent payments on the Pledged Mortgages securing the related Series of Bonds, losses from risks not covered by standard hazard insurance policies, losses due to bankruptcy of a borrower and application of certain provisions of the federal Bankruptcy Code, and losses due to denial of insurance coverage due to misrepresentations made in connection with the origination or sale of a Pledged Mortgage. The issuer of the letter of credit (the "L/C Bank") will be obligated to honor demands with respect to such letter or credit, to the extent of the amount available thereunder to provide funds under the circumstances and subject to such conditions as are specified in the related Prospectus Supplement. The liability of the L/C Bank 15 115 under its letter of credit will be reduced by the amount of unreimbursed payments thereunder. The maximum liability of a L/C Bank under its letter of credit will be an amount equal to a percentage specified in the related Prospectus Supplement of the initial aggregate outstanding principal balance of the Pledged Mortgages securing the related Series of Bonds or one or more Classes of Bonds of such Series (the "L/C Percentage"). The maximum amount available at any time to be paid under a letter of credit will be determined in the manner specified therein and in the related Prospectus Supplement. See "CREDIT ENHANCEMENT -- Letter of Credit" herein. H. Over-Collateralization... If so specified in the related Prospectus Supplement, credit enhancement may consist of over-collateralization whereby the aggregate principal balance of the related Mortgage Collateral exceeds the aggregate principal balance of the Bonds of the related Series. Such over-collateralization may exist on the related Closing Date or develop thereafter as a result of the application of a portion of the interest payment on each Pledged Mortgage or Certificate, as the case may be, as an additional payment in respect of principal to reduce the principal balance of a certain Class or Classes of Bonds of such Series and, thus, accelerate the rate of payment of principal on such Class or Classes of Bonds. See "CREDIT ENHANCEMENT -- Over-Collateralization" herein. I. Cross-Collateralization...If so specified in the related Prospectus Supplement, separate Classes of such Series may be secured by separate groups of Mortgage Collateral. In such case, credit support may be provided by a cross-collateralization feature which requires that payments be made with respect to Bonds secured by one or more groups of Mortgage Collateral prior to payments to Subordinated Bonds secured by other groups of Mortgage Collateral within the same Series. See "CREDIT ENHANCEMENT -- Cross- Collateralization" herein. If so specified in the related 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 Series of Bonds. If applicable, the related Prospectus Supplement will identify the Series of Bonds to which such credit enhancement relates and the manner of determining the amount of coverage provided to such Series of Bonds thereby and of the application of such coverage to the identified Series of Bonds. See "CREDIT ENHANCEMENT -- Cross-Collateralization" herein. J. Minimum Principal Payment Agreement........ If so specified in the related Prospectus Supplement, an Issuer may enter into an agreement with an institution pursuant to which such institution will provide such funds as may be necessary to enable such Issuer to make principal payments on the Bonds of the related Series at a minimum rate set forth in such Prospectus Supplement. See "CREDIT ENHANCEMENT -- Minimum Principal Payment Agreement" herein. K. Other Arrangements...... If so specified and to the extent described in the related Prospectus Supplement, one or more insurance policies, guaranties, surety bonds, letters of credit, cash accounts, guaranteed investment contracts, cross 16 116 support or reinvestment income may be used to provide coverage for certain risks of default or various types of losses. Other arrangements may also include derivative arrangements. A derivative arrangement is a contract or agreement, the price of which is directly dependent upon (i.e., "derived from") the value of one or more underlying assets. Derivatives involve rights or obligations based on the underlying asset, but do not necessarily result in a transfer of the underlying asset. Examples of derivative arrangements include swap agreements, interest rate swaps, interest rate caps, interest rate floors, interest rate collars and currency swap agreements. See "CREDIT ENHANCEMENT -- Other Arrangements" herein. Advances................... The Master Servicer and each Servicer may be obligated to advance amounts (each, an "Advance") corresponding to delinquent interest and/or principal payments on the Pledged Mortgages securing a Series of Bonds (including, in the case of Cooperative Loans, unpaid maintenance fees or other charges under the related proprietary lease) until the date, as specified in the related Prospectus Supplement, following the date on which the related Mortgaged Property is sold at a foreclosure sale or the related Pledged Mortgages are otherwise liquidated. Any obligation to make Advances may be subject to limitations as specified in the related Prospectus Supplement. If so specified in the related Prospectus Supplement, Advances may be drawn from a cash account available for such purpose as described in such Prospectus Supplement. Advances will be reimbursable to the extent described under "SERVICING OF THE PLEDGED MORTGAGES -- Advances and Other Amounts Payable by Master Servicer" herein and " -- Advances" in the related Prospectus Supplement. In the event the Master Servicer or Servicer fails to make a required Advance, the Bond Trustee may be obligated to advance such amounts otherwise required to be advanced by the Master Servicer or Servicer. See "SERVICING OF PLEDGED MORTGAGES -- Advances and Other Amounts Payable by Master Servicer" herein. Tax Status of the Bonds.... The Bonds, when beneficially owned by someone other than Redwood Trust or one of its qualified real estate investment trust ("REIT") subsidiaries (as defined in section 856(i) of the Code), will constitute indebtedness for federal income tax purposes and not an ownership interest in the Issuer or the Collateral. See "FEDERAL INCOME TAX CONSEQUENCES" herein and in the related Prospectus Supplement for information concerning the material federal tax consequences of an investment in the Bonds. See "FEDERAL INCOME TAX CONSEQUENCES" herein. Use of Proceeds............ The net proceeds to be received from the sale of the Bonds of each Series will be applied by the Company to the purchase or acquisition of the related Mortgage Collateral or will be used by the Company for general corporate purposes. The Mortgage Collateral pledged to secure a Series of Bonds will either be contributed to the Company's capital by Redwood Trust (or an affiliate) or acquired by the Company from Redwood Trust (or an affiliate) and deposited with the Issuer of such Series by the Company. See "USE OF PROCEEDS" herein. 17 117 Ratings.................... It is a condition to the issuance of each Series of Bonds that the Bonds of such Series to be offered hereunder be rated in one of the four highest rating categories by at least one nationally recognized statistical rating organization. A rating is not a recommendation to purchase, hold or sell Bonds inasmuch as such rating does not comment as to market price or suitability for a particular investor. Ratings of Bonds will address the likelihood of the payment of principal and interest thereon pursuant to their terms. There can be no assurance that a rating will remain for a given period of time or that a rating will not be lowered or withdrawn entirely by a rating agency if in its judgment circumstances in the future so warrant. See "RATINGS" herein. For more detailed information regarding the ratings assigned to any Class of a particular Series of Bonds, see "SUMMARY OF TERMS -- Ratings" and "RATINGS" in the related Prospectus Supplement. Legal Investment........... The Prospectus Supplement for each Series of Bonds will specify which, if any, of the Classes of Bonds offered thereby will constitute "mortgage related securities" for purposes of the Secondary Mortgage Market Enhancement Act of 1984 ("SMMEA"). Classes of Bonds that qualify as "mortgage-related securities" will be legal investments for certain types of institutional investors to the extent provided in SMMEA, subject, in any case, to any other regulations that may govern investments by such institutional investors. Institutions whose investment activities are subject to review by federal or state authorities should consult with their counsel or the applicable authorities to determine whether an investment in a particular Class of Bonds of a Series (whether or not such Class constitutes a "mortgage-related security") complies with applicable guidelines, policy statements or restrictions. See "LEGAL INVESTMENT" herein. ERISA Matters.............. Generally, plans that are subject to the requirements of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), and the Internal Revenue Code of 1986, as amended (the "Code"), are permitted to purchase instruments, like the Bonds, that are debt under applicable state law and have no "substantial equity features". If the Bonds are deemed to be equity interests and no statutory, regulatory or administrative exemption applies, the Issuer will hold plan assets by reason of a Plan's investment in the Bonds. Accordingly, any Plan fiduciary considering whether to purchase the Bonds on behalf of a Plan should consult with its counsel regarding the applicability of the provisions of ERISA and the Code and the availability of any exemptions. See "ERISA MATTERS" herein. Risk Factors............... For a discussion of certain risks associated with an investment in the Bonds, see "RISK FACTORS" commencing on page 19 herein and in the related Prospectus Supplement. 18 118 RISK FACTORS Investors should consider, among other things, the following factors in connection with an investment in the Bonds. RISKS ASSOCIATED WITH NATURE OF PLEDGED MORTGAGES FACTORS WHICH MAY ADVERSELY AFFECT PROPERTY VALUES. There are several factors that could adversely affect the value of Mortgaged Properties such that the outstanding balance of the related Pledged Mortgages would equal or exceed the value of the Mortgaged Properties. Among the factors that could adversely affect the value of the Mortgaged Properties are an overall decline in the residential real estate market in the areas in which the Mortgaged Properties are located or a decline in the general condition of the Mortgaged Properties as a result of failure of borrowers to maintain adequately the Mortgaged Properties or of natural disasters that are not necessarily covered by insurance, such as earthquakes and floods. If such a decline occurs, the actual rates of delinquencies, foreclosures and losses on the Pledged Mortgages could be higher than those currently experienced in the mortgage lending industry in general. Losses on such Pledged Mortgages that are not otherwise covered by the credit enhancement described in the applicable Prospectus Supplement will be borne by the holder of one or more classes of Bonds of the related Series. DELAYS DUE TO LIQUIDATION. Even assuming that the Mortgaged Properties provide adequate security for the Pledged Mortgages, substantial delays could be encountered in connection with the liquidation of defaulted Pledged Mortgages and corresponding delays in the receipt of related proceeds by Bondholders could occur. An action to foreclose on a Mortgaged Property securing a Pledged Mortgage 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 Mortgaged Property. In the event of a default by a borrower, these restrictions, among other things, may impede the ability of the Master Servicer to foreclose on or sell the Mortgaged Property or to obtain liquidation proceeds sufficient to repay all amounts due on the related Pledged Mortgage. In addition, the Master Servicer will be entitled to deduct from related liquidation proceeds all expenses reasonably incurred in attempting to recover amounts due on defaulted Pledged Mortgages and not yet repaid, including legal fees and costs of legal action, real estate taxes and maintenance and preservation expenses. DISPROPORTIONATE EFFECT OF LIQUIDATION EXPENSES. Liquidation expenses with respect to defaulted loans do not vary directly with the outstanding principal balance of the loan at the time of default. Therefore, assuming that a servicer took the same steps in realizing upon a defaulted loan having a small remaining principal balance as it would in the case of a defaulted loan having a large remaining principal balance, the amount realized after expenses of liquidation would be smaller as a percentage of the outstanding principal balance of the small loan than would be the case with the defaulted loan having a large remaining principal balance. NATURE OF SECURITY PROVIDED BY JUNIOR LIENS. Certain Pledged Mortgages may be secured by second liens on the related Mortgaged Properties. As to Pledged Mortgages secured by second mortgages, the proceeds from any liquidation, insurance or condemnation proceedings will be available to satisfy the outstanding balance of such Pledged Mortgages only to the extent that the claims of such senior mortgages have been satisfied in full, including any related foreclosure costs. In addition, the holder of a Pledged Mortgage secured by a junior mortgage may not foreclose on the Mortgaged Property unless it forecloses subject to the senior mortgages, in which case it must either pay the entire amount due on the senior mortgages to the senior mortgagees at or prior to the foreclosure sale or undertake the obligation to make payments on the senior mortgages in the event the mortgagor is in default thereunder. The Issuer will not have any source of funds to satisfy the senior mortgages or make payments due to the senior mortgagees, although the Master Servicer or Servicer may, at its option, advance such amounts to the extent deemed recoverable and prudent. In the event that such proceeds from a foreclosure or similar sale of the related Mortgaged Property are insufficient to satisfy all senior liens and the Pledged Mortgage in the aggregate, the Issuer, as the holder of the junior lien, and, accordingly, Holders of one or more Classes of the Bonds, to the extent not 19 119 covered by credit enhancement, are likely to (i) incur losses in jurisdictions in which a deficiency judgment against the borrower is not available, and (ii) incur losses if any deficiency judgment obtained is not realized upon. In addition, the rate of default of second mortgage loans may be greater than that of mortgage loans secured by first liens on comparable properties. PREPAYMENT AND YIELD CONSIDERATIONS The rate of payments of principal, including prepayments (including for this purpose prepayments resulting from refinancing or liquidations of the Pledged Mortgages or the mortgage loans underlying the Certificates, as the case may be, due to defaults, casualties, condemnations and repurchases by the Seller, the Issuer or Redwood Trust or purchases by the Master Servicer or the Company), on the Mortgage Collateral securing a Series of Bonds will directly affect the weighted average life of such Series of Bonds. The "weighted average life" of a security refers to the average length of time, weighted by principal, that will elapse from the date of issuance to the date each dollar of principal is repaid to the investor. The yields to maturity and weighted average lives of the Bonds will be affected primarily by the amount and timing of principal payments received on or in respect of the Mortgage Collateral securing the related Series of Bonds. The "yield to maturity" of a security refers to the investment rate of return on such security if held to maturity. [This definition should be reviewed by an investment banker or a financial officer of Redwood Trust.] A Series of Bonds may include one or more Classes of Deferred Interest Bonds with respect to which certain accrued interest will not be paid but rather will be added to the principal balance thereof and, as a result, yields on such Bonds will be sensitive to (a) the provisions of such Deferred Interest Bonds relating to the timing of payments of interest thereon and (b) if such Deferred Interest Bonds accrue interest at a variable or adjustable rate, changes in such rate. The rate of prepayments with respect to conventional mortgage loans has fluctuated significantly in recent years. The rate of payment of principal, including prepayments, on the Pledged Mortgages or the mortgage loans underlying the Certificates, as the case may be, may be influenced by a variety of economic, geographic, social, tax, legal and other factors. In general, if prevailing interest rates fall significantly below the Mortgage Rates borne by the mortgage loans underlying the Certificates or the Pledged Mortgages, such mortgage loans or Pledged Mortgages are likely to be subject to higher prepayment rates than if prevailing interest rates remain at or above such Mortgage Rates. Conversely, if prevailing interest rates rise appreciably above the Mortgage Rates borne by the mortgage loans underlying the Certificates or the Pledged Mortgages, such mortgage loans or the Pledged Mortgages are likely to experience a lower prepayment rate than if prevailing interest rates remain at or below such Mortgage Rates. However, there can be no assurance that such will be the case. In addition, the yields to maturity and weighted average lives of the Bonds of a Series will be affected by the distribution of amounts remaining in any Pre-Funding Account following the end of the related Funding Period. In each case, Bondholders may be unable to reinvest such payments in securities of comparable quality having interest rates similar to those borne by such Bonds. It is possible that yields on any such reinvestments will be lower, and may be significantly lower, than the yields on such Bonds. The extent to which the yields to maturity of the Bonds of a Series may vary from the anticipated yields will depend upon the degree to which such Bonds are purchased at a discount or premium, and the degree to which the timing of payments thereon is sensitive to the rate of payments of principal, including prepayments, on the related Mortgage Collateral. The timing of changes in the rate of prepayments on such Mortgage Collateral may significantly affect an investor's actual yield to maturity, even if the average rate of principal payments is consistent with an investor's expectation. The Prospectus Supplement relating to a Series of Bonds 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 such Bonds. ENVIRONMENTAL RISKS Real property pledged as security to a lender may be subject to certain environmental risks. Under the laws of certain states, contamination of a property may give rise to a lien on the property to assure the costs of cleanup. In several states, such a lien has priority over the lien of an existing mortgage against such property. In addition, under the laws of some states and under the federal Comprehensive Environmental Response 20 120 Compensation and Liability Act of 1980 ("CERCLA"), a lender may be liable, as an "owner" or "operator", for costs of addressing releases or threatened releases of hazardous substances that require remedy at a property, if agents or employees of the lender have become sufficiently involved in the operations of the borrower, regardless of whether the environmental damage or threat was caused by a prior owner. Such costs could result in a loss to the holders of one or more Classes of a Series of Bonds. A lender also risks such liability on foreclosure of the related property. See "CERTAIN LEGAL ASPECTS OF PLEDGED MORTGAGES -- Environmental Risks" herein. LIMITED LIQUIDITY OF INVESTMENT Prior to issuance, there will have been no market for the Bonds of any Series, and there can be no assurance that a secondary market for any Bonds will develop or, if it does develop, that it will provide Bondholders with a sufficient level of liquidity of investment or will continue while Bonds of such Series remain outstanding. In addition, the market value of Bonds of any Series may fluctuate with changes in prevailing rates of interest and prepayments, spreads and other factors. Consequently, the sale of Bonds by a Bondholder in any secondary market that may develop may be at a discount from their purchase price. Issuance of the Bonds of a Series in book-entry form may also reduce the liquidity of such Bonds since investors may be unwilling to purchase Bonds for which they cannot obtain physical certificates. See "-- Book-Entry Registration" herein. No Issuer is expected to apply to have the Bonds issued by it listed on any exchange. BANKRUPTCY AND INSOLVENCY RISKS EFFECTS OF BANKRUPTCY OF REDWOOD TRUST OR DEPOSITOR. Redwood Trust and the Depositor will treat the transfer of the Mortgage Collateral by Redwood Trust to the Depositor as a sale for accounting purposes. The Depositor and each Issuer will treat the transfer of Mortgage Collateral from the Depositor to such Issuer as a sale for accounting purposes. As a sale of the Mortgage Collateral by Redwood Trust to the Depositor, the Mortgage Collateral would not be part of Redwood Trust's bankruptcy estate and would not be available to Redwood Trust's creditors. However, in the event of the insolvency of Redwood Trust, it is possible that the bankruptcy trustee or a creditor of Redwood Trust may attempt to recharacterize the sale of the Mortgage Collateral as a borrowing by Redwood Trust, secured by a pledge of the Mortgage Collateral. Similarly, as a sale of the Mortgage Collateral by the Depositor to an Issuer, the Mortgage Collateral would not be part of the Depositor's bankruptcy estate and would not be available to the Depositor's creditors. However, in the event of the insolvency of the Depositor, it is possible that the bankruptcy trustee or a creditor of the Depositor may attempt to recharacterize the sale of the Mortgage Collateral as a borrowing by the Depositor, secured by a pledge of the Mortgage Collateral. In either case, in the event the transfer is recharacterized as a pledge, unless otherwise provided in the related Prospectus Supplement, the Depositor or the Issuer, as the case may be, will have a perfected security interest in the related Mortgage Collateral. Nonetheless, a court could prevent timely payments of amounts due on the Bonds and result in a reduction of payments due on the Bonds. EFFECTS OF BANKRUPTCY OF THE MASTER SERVICER. In the event of a bankruptcy or insolvency of the Master Servicer, the bankruptcy trustee or receiver may have the power to prevent the Bond Trustee or the Bondholders from appointing a successor Master Servicer. The time period during which cash collections may be commingled with the Master Servicer's own funds prior to each Distribution Date will be specified in the related Prospectus Supplement. In the event of the insolvency of the Master Servicer and if such cash collections are commingled with the Master Servicer's own funds for at least ten days, the Bond Trustee will likely not have a perfected interest in such collections since such collections would not have been deposited in a segregated account within ten days after the collection thereof, and the inclusion thereof in the bankruptcy estate of the Master Servicer may result in delays in payment and failure to pay amounts due on the Bonds of the related Series. EFFECTS OF BANKRUPTCY OF OBLIGORS ON THE MORTGAGE COLLATERAL. 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 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 21 121 permission of the bankruptcy court. The rehabilitation plan proposed by the debtor may reduce 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 such proceedings under the federal Bankruptcy Code, including but not limited to any automatic stay, could result in delays in receiving payments on the Mortgage Collateral securing a Series of Bonds and possible reductions in the aggregate amount of such payments. EFFECTS OF BOOK-ENTRY REGISTRATION LIMITED LIQUIDITY. If the Bonds of a Series are issued in book-entry form, such registration may reduce the liquidity of such Bonds in the secondary trading market since investors may be unwilling to purchase Bonds for which they cannot obtain physical certificates. Since transactions in book-entry Bonds can be effected only through the Depository Trust Company ("DTC") in the United States, CEDEL or Euroclear in Europe, participating organizations and Financial Intermediaries (as defined herein), the ability of a Bondholder to pledge a book-entry Bond to persons or entities that do not participate in the DTC, CEDEL or Euroclear systems may be limited due to lack of a physical certificate representing such Bonds. Bond Owners will not be recognized as Bondholders as such term is used in the related Indenture, and Bond Owners will be permitted to exercise the rights of Bondholders only indirectly through DTC and its Participants. POTENTIAL DELAYS IN PAYMENTS. In addition, Bondholders may experience some delay in their receipt of distributions of interest and principal on book-entry Bonds since distributions are required to be forwarded by the Bond Trustee to DTC and DTC will then be required to credit such distributions to the accounts of depository participants which thereafter will be required to credit them to the account of Bondholders either directly or indirectly through Financial Intermediaries. See "DESCRIPTION OF THE BONDS -- Book-Entry Bonds" herein. RATINGS OF THE BONDS RATINGS NOT A RECOMMENDATION. It will be a condition to the issuance of a Class of Bonds offered hereby that they be rated in one of the four highest rating categories by each Rating Agency identified as rating such Class in the related Prospectus Supplement. Any such rating would be based on, among other things, the adequacy of the value of the related Mortgage Collateral and any credit enhancement with respect to such Class and will represent such Rating Agency's assessment solely of the likelihood that holders of such Class of Bonds will receive payments to which such Bondholders are entitled under the Indenture. Such rating will not constitute an assessment of the likelihood that principal prepayments on mortgages underlying the related Mortgage Collateral will be made, the degree to which the rate of such prepayments might differ from that originally anticipated or the likelihood of early optional termination of the Series of Bonds. Such rating shall not be deemed a recommendation to purchase, hold or sell Bonds, inasmuch as it does not address market price or suitability for a particular investor. Such rating will not address the possibility that prepayment at higher or lower rates than anticipated by an investor may cause such investor to experience a lower than anticipated yield or that an investor purchasing a Bond at a significant premium might fail to recoup its initial investment under certain prepayment scenarios. RATINGS MAY BE LOWERED OR WITHDRAWN. There is also no assurance that any such rating will remain in effect for any given period of time or may not be lowered or withdrawn entirely by the applicable Rating Agency in the future if in its judgment circumstances so warrant. In addition to being lowered or withdrawn due to any erosion in the adequacy of the value of the assets of the Issuer or any credit enhancement with respect to a Series of Bonds, such rating might also be lowered or withdrawn because of, among other reasons, an adverse change in the financial or other condition of a credit enhancement provider or a change in the rating of such credit enhancement provider's long term debt. LIMITATIONS OF ANALYSIS PERFORMED BY RATING AGENCIES. The amount, type and nature of credit enhancement, if any, established with respect to a Class of Bonds of a Series will be determined on the basis of criteria established by each Rating Agency. Such criteria are sometimes based upon an actuarial analysis of 22 122 the behavior of similar loans in a larger group. Such analysis is often the basis upon which each Rating Agency determines the amount of credit enhancement required with respect to each such Class. There can be no assurance that the historical data supporting any such actuarial analysis will accurately reflect future experience nor any assurance that the data derived from a large pool of similar loans accurately predicts the delinquency, foreclosure or loss experience of any particular pool of mortgages underlying the Mortgage Collateral. No assurance can be given that the values of any Mortgaged Properties have remained or will remain at their levels on the respective dates of origination of the related mortgages. If the residential real estate markets should experience an overall decline in values such that the outstanding principal balances of the mortgages underlying the Mortgage Collateral securing a particular Series of Bonds and any secondary financing on the related Mortgaged Properties become equal to or greater than the value of the Mortgaged Properties, the rates of delinquencies, foreclosures and losses could be higher than those now generally experienced in the mortgage lending industry. In addition, adverse economic conditions (which may or may not affect real property values) may affect the timely payment by mortgagors of scheduled payments of principal and interest on the Mortgage Collateral and, accordingly, the rates of delinquencies, foreclosures and losses with respect to any Mortgage Collateral securing a Series of Bonds. To the extent that such losses are not covered by credit enhancement, such losses will be borne, at least in part by the holders of one or more Classes of Bonds of the related Series. CREDIT CONSIDERATIONS AND RISKS LIMITED SOURCE OF PAYMENTS. The Company does not have, nor is it expected to have, any significant assets. Although the Bonds will be obligations of their respective Issuers, no Issuer is expected to have significant assets other than those pledged to secure separately the Series of Bonds issued by it. Unless otherwise provided in the related Prospectus Supplement, the Bonds of a Series will be payable solely from the assets pledged to secure such Series and will not have any claim against or security interest in the assets pledged to secure any other Series. There will be no recourse to the Company or Redwood Trust, or any other person for any failure to make payments on the Bonds. In addition, at the times set forth in the related Prospectus Supplement, certain Mortgage Collateral and/or any balance remaining in the Bond Account for a Series of Bonds immediately after making all payments due on such Bonds, after making any other payments specified in the related Prospectus Supplement, may be promptly released or remitted to the Company, Redwood Trust, any credit enhancement provider or any other person entitled thereto and will no longer be available for making payments on such Bonds. Consequently, investors in the Bonds of a Series must rely solely upon payments of principal and interest on the Mortgage Collateral pledged to secure such Series, the security therefor and the sources of credit enhancement identified in the related Prospectus Supplement to provide for payments on such Bonds. NO RECOURSE TO COMPANY OR REDWOOD TRUST. The Bonds will not represent an interest in or obligation of the Company or Redwood Trust or any affiliate thereof. The only obligations, if any, of the Company with respect to the Mortgage Collateral or the Bonds of any Series will be pursuant to certain representations and warranties. The Company does not have, and is not expected in the future to have, any significant assets with which to meet any obligation to repurchase Mortgage Collateral with respect to which there has been a breach of any representation or warranty. If, for example, the Company were required to repurchase a Pledged Mortgage, its only sources of funds to make such repurchase would be from funds obtained (i) from the enforcement of a corresponding obligation, if any, on the part of Redwood Trust or other Seller, or (ii) to the extent provided in the related Prospectus Supplement, from a Reserve Fund or similar credit enhancement established to provide funds for such repurchases. The only obligations of Redwood Trust or other Seller with respect to the Mortgage Collateral or the Bonds of any Series will be pursuant to certain representations and warranties. Redwood Trust or such other Seller may be required to repurchase or substitute for any Pledged Mortgage with respect to which such representations and warranties are breached. There is no assurance, however, that Redwood Trust or such other Seller will have the financial ability to effect any such repurchase or substitution. LIMITATIONS OF DIRECT OR INDIRECT BACKING FOR BONDS. Only Agency Certificates are guaranteed by any agency or instrumentality of the United States and only the guarantee by GNMA of GNMA Certificates is 23 123 entitled to the full faith and credit of the United States. The guarantees by FNMA and FHLMC of FNMA Certificates and FHLMC Certificates, respectively, are backed only by the credit of FNMA, a federally chartered, privately owned corporation or by the credit of FHLMC, a federally chartered corporation controlled by the Federal Home Loan Banks. Neither the United States nor any agency thereof will be obligated to finance the operations of FNMA or FHLMC or to assist either FNMA or FHLMC in any other way. See "SECURITY FOR THE BOND -- Agency Securities" herein. Although payment of principal of, and interest on, any Agency Certificate securing all or part of a Series of Bonds will be guaranteed by either GNMA, FNMA or FHLMC, such guarantee will run only to such Agency Certificate and will not guarantee the payment of principal or interest on the Bonds of such Series. The Prospectus Supplement for a Series of Bonds which is secured in whole or in part by Mortgage Collateral other than Agency Certificates may describe certain arrangements through which such Bonds, such Private Mortgage-Backed Certificates and/or the mortgage loans underlying such Private Mortgage-Backed Certificates are insured, guaranteed or otherwise backed. Any such backing may be subject to contingencies described in the applicable Prospectus Supplement and will be limited to the credit and assets of the particular specified insurer or guarantor and will not be entitled to the full faith and credit of the United States or to any agency or instrumentality thereof. DEFICIENCY ON SALE OF MORTGAGE COLLATERAL. In the event of an acceleration of the payment of the Bonds of a Series, upon an Event of Default (as defined herein) under the Indenture with respect to such Series, there is no assurance that the proceeds from any sale of the Mortgage Collateral would be sufficient to pay in full the outstanding principal amount of such Series of Bonds together with interest accrued thereon. The market value of such Mortgage Collateral generally will fluctuate with changes in prevailing rates of interest. Consequently, such Mortgage Collateral may be liquidated at a discount, in which case the proceeds of liquidation might be less than the aggregate outstanding principal amount and interest payable on the Bonds of such Series. Although the Bonds will be obligations of their respective Issuers, no Issuer is expected to have significant assets other than those pledged to secure separately the Series of Bonds issued by it. It is therefore unlikely that the Issuer will have sufficient other assets available for payment of any such deficiency. If, following an Event of Default, a Series of Bonds has been declared to be due and payable, the Bond Trustee may, in its discretion, but subject to the direction of the Bondholders, refrain from selling the collateral for such Series of Bonds and continue to apply amounts received on the collateral to payments due on the Bonds of such Series in accordance with their terms, notwithstanding the acceleration of the maturity of such Bonds. See "THE INDENTURE -- Rights Upon Events of Default" herein. EFFECT OF SUBORDINATION. If so specified in the related Prospectus Supplement, the rights of the holders of one or more Classes of Subordinated Bonds will be subordinate to the rights of one or more Classes of Senior Bonds of such Series to payments of principal and/or interest (or any combination thereof) to the extent specified in the related Prospectus Supplement. Although subordination is intended to reduce the risk to holders of Senior Bonds of delinquent payments or ultimate losses, the amount of subordination will be limited. In addition, if principal payments on one or more Classes of Bonds of a Series are made in a specified order of priority, any limits with respect to the aggregate amount of claims under any related credit enhancement may be exhausted before the principal of the lower priority Classes of Bonds of such Series has been repaid. As a result, the impact of significant losses on the Mortgage Collateral may be borne first by any Class of Subordinated Bonds of a Series and thereafter by the Classes of Senior Bonds of such Series, in each case to the extent described in the related Prospectus Supplement. LIMITATIONS, REDUCTION AND SUBSTITUTION OF CREDIT ENHANCEMENT. The Prospectus Supplement for a Series of Bonds will describe any credit enhancement for such Series, which may include cash accounts, insurance policies, surety bonds, reinvestment income, guarantees, letters of credit or other assets to the extent described herein and therein. Although credit enhancement is intended to reduce the risk of delinquent payments or losses to holders of Bonds entitled to the benefit thereof, the amount of such credit enhancement will be limited, as set forth in the related Prospectus Supplement, and may be subject to periodic reduction in accordance with a schedule or formula or otherwise decline, and could be depleted under certain circumstances prior to the payment in full of the related Series of Bonds, and as a result Bondholders of the related Series may suffer losses. Moreover, such credit enhancement may not cover all potential losses or risks. For example, credit enhancement may or may not cover fraud or negligence by a loan originator or other parties. 24 124 In addition, the Trustee will generally be permitted to reduce, terminate or substitute all or a portion of the credit enhancement for any Series of Bonds, provided each applicable Rating Agency indicates that the then-current rating of the Bonds of such Series will not be adversely affected. See "CREDIT ENHANCEMENT" herein. The amount of applicable credit enhancement supporting one or more Classes of Bonds of a Series, including the subordination of one or more Classes of Bonds, will be determined on the basis of criteria established by each Rating Agency rating such Classes of Bonds based on, among other things, assumptions regarding levels of defaults, delinquencies and losses. There can be no assurance that the default, delinquency and loss experience on the related Mortgage Collateral will not exceed such assumed levels. See "-- Rating of the Bonds" herein. DELINQUENT LOANS MAY ADVERSELY AFFECT INVESTMENT. Certain of the Pledged Mortgages or mortgage loans underlying the Certificates securing a Series of Bonds may be past due or non-performing as of the related Cut-off Date. Investors should consider the risk that the inclusion of such loans in the Mortgage Collateral for a Series of Bonds may affect the rate of defaults and prepayments on such Mortgage Collateral and the yield on the Bonds of such Series. PLEDGE OF ADDITIONAL COLLATERAL MAY VARY POOL CHARACTERISTICS Subject to certain conditions set forth herein and in the Prospectus Supplement for a Series of Bonds, the Issuer may pledge additional Pledged Mortgages or Certificates ("Additional Mortgage Collateral") to the Bond Trustee and issue Additional Bonds of that Series within five years of the date of initial issuance of the Bonds of such Series. Although the pledge of any Additional Mortgage Collateral generally will not result in any change in the interest rate, Stated Maturity or Payment Dates of any outstanding Bonds of such Series, the pledge of Additional Mortgage Collateral may result in a variance in the weighted average life of any outstanding Class of Bonds of such Series at the prepayment rate assumed for the pricing of the initial issuance of such Class, and the characteristics of the Mortgage Collateral may vary within the parameters specified in the related Prospectus Supplement. Furthermore, no assurance can be given that any pledge of Additional Mortgage Collateral and issuance of Additional Bonds would not affect the timing or amount of payments received by holders of the outstanding Bonds of that Series. Provided that the conditions described in the related Prospectus Supplement are satisfied, the pledge of Additional Mortgage Collateral and the issuance of Additional Bonds will not be subject to the prior consent of the holders of the outstanding Bonds of such Series. See "SECURITY FOR THE BONDS -- Pledge of Additional Mortgage Collateral and Issuance of Additional Bonds" herein. PRE-FUNDING ACCOUNTS MAY RESULT IN REINVESTMENT RISK If so specified in the related Prospectus Supplement, on the related Closing Date the Depositor will deposit cash in an amount (the "Pre-Funded Amount") specified in such Prospectus Supplement into an account (the "Pre-Funding Account"). The Pre-Funded Amount will be used to purchase additional Pledged Mortgages and/or Certificates ("Subsequent Mortgage Collateral") during a period from the related Closing Date to a date not more than one year after such Closing Date (such period, the "Funding Period") from the Depositor (which, in turn, will acquire such Subsequent Mortgage Collateral from Redwood Trust). The Pre-Funding Account will be maintained with the Bond Trustee for the related Series of Bonds and is designed solely to hold funds to be applied by such Bond Trustee during the Funding Period to pay to the Depositor the purchase price for Subsequent Mortgage Collateral. Monies on deposit in the Pre-Funding Account will not be available to cover losses on or in respect of the related Mortgage Collateral. To the extent that the entire Pre-Funded Amount has not been applied to the purchase of Subsequent Mortgage Collateral by the end of the related Funding Period, any amounts remaining in the Pre-Funding Account will be distributed as a prepayment of principal to Bondholders on the Distribution Date immediately following the end of the Funding Period in the amounts and pursuant to the priorities set forth in the related Prospectus Supplement. Any reinvestment risk resulting from such prepayment will be borne entirely by the holders of one or more Classes of the related Series of Bonds. See "SECURITY FOR THE BOND -- Pre-Funding Account" herein. 25 125 CONSEQUENCES OF OWNING ORIGINAL ISSUE DISCOUNT BONDS All of the Deferred Interest Bonds will be, and certain of the other Bonds may be, issued with original issue discount for federal income tax purposes. A holder of a Bond 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 the Deferred Interest Bonds generally will be treated as original issue discount for this purpose. See "FEDERAL INCOME TAX CONSEQUENCES -- Original Issue Discount" and "-- Market Discount" herein. CONSOLIDATED TAX RETURN Whether or not the Bonds are treated as debt for federal income tax purposes, so long as such Bonds are not deemed to have two or more maturities, the Issuer will be treated as a branch of Redwood Trust or a partnership for federal income tax purposes. However, if the Issuer is deemed to have issued debt with two or more maturities, it will be treated as a taxable mortgage pool that is a "qualified REIT subsidiary" of Redwood Trust. If such an Issuer were to fail to be treated for federal income tax purposes as a "qualified REIT subsidiary" by reason of Redwood Trust's failure to continue to qualify as a real estate investment trust ("REIT") for federal income tax purposes or for any other reason, the net income of the Issuer would be subject to corporate income tax and the Issuer would not be permitted to be included on a consolidated income tax return of another corporate entity. No assurance can be given with regard to the prospective qualification of an Issuer as a qualified REIT subsidiary or of Redwood Trust as a REIT for federal income tax purposes. See "FEDERAL INCOME TAX CONSEQUENCES" herein. INTRODUCTION Sequoia Mortgage Funding Corporation, a Delaware corporation (the "Company"), proposes to establish one or more trusts to issue and sell Bonds from time to time under this Prospectus and related Prospectus Supplements. The Company is a limited purpose finance corporation whose capital stock is wholly owned by Redwood Trust, Inc. ("Redwood Trust"). Redwood Trust, a Maryland corporation, has elected to be treated as a real estate investment trust under the Internal Revenue Code of 1986, as amended (the "Code"). The Company was formed for the sole purpose of acting as the depositor of one or more trusts to be formed for the purpose of issuing the Bonds offered hereby and by the related Prospectus Supplements. Each trust that is formed to act as an Issuer will be created pursuant to an agreement between the Company acting as depositor (in such capacity, the "Depositor"), and a bank, trust company or other fiduciary, acting as owner trustee (the "Owner Trustee"). Each trust will be established solely for the purpose of issuing one Series of Bonds and engaging in transactions relating thereto. Each Series of Bonds will be separately secured by the collateral described in the Prospectus Supplement relating to such Series, which collateral will constitute the only significant assets available to make payments on the Bonds of such Series. Accordingly, the investment characteristics of a Series of Bonds will be determined by the collateral pledged to secure such Series and will not be affected by the identity of the obligor with respect to such Series of Bonds. The term "Issuer," as used herein, with respect to a Series of Bonds refers to the trust established by the Company for the sole purpose of issuing such Series of Bonds. Each Series of Bonds will be issued pursuant to a separate Indenture (the "Indenture") between the Issuer of such Series and a bank or trust company acting as trustee for the holders of such Bonds (the "Bond Trustee"). A form of the Indenture has been filed as an exhibit to the Registration Statement of which this Prospectus forms a part. The Indenture relating to each Series of Bonds will be filed with the Securities and Exchange Commission as soon as practicable following the issuance of such Series of Bonds. 26 126 THE ISSUER GENERAL Any trust established to act as Issuer of a Series of Bonds will be created pursuant to a deposit trust agreement between the Company and a bank, trust company or other fiduciary acting as Owner Trustee. Under the terms of each deposit trust agreement, the Company initially will retain the entire beneficial interest in the trust created thereunder unless otherwise specified in the related Prospectus Supplement. The Company may thereafter sell or assign all or a portion of such beneficial ownership to another entity or entities unless prohibited from doing so by the related deposit trust agreement. The beneficial owners of each Issuer will have no liability for the obligations of the Issuer under the Bonds issued by it. Unless otherwise specified in the related Prospectus Supplement, each Issuer will be managed by Redwood Trust. The Mortgage Collateral for each Series of Bonds will have been deposited with the Issuer of such Series by the Company which, in turn, will have either (i) received such collateral from Redwood Trust (or an affiliate) as a contribution to the Company's capital or (ii) acquired such collateral from Redwood Trust (or an affiliate) or another entity or entities (in such capacity, each a "Seller"), as provided in the related Prospectus Supplement, in exchange for the net proceeds from the issuance of such Series plus the beneficial interest in the Issuer issuing such Series. (References herein to Redwood Trust in its capacity as Seller shall be deemed to include any affiliate of Redwood Trust acting in such capacity.) Redwood Trust acquires mortgage loans in the normal course of its business from persons who have originated or otherwise acquired such loans. Upon the issuance of each Series of Bonds, the related Mortgage Collateral will be deposited by the Company with the Issuer of such Series and pledged by such Issuer to the Bond Trustee under the related Indenture to secure such Series of Bonds. The Indenture with respect to each Series of Bonds will prohibit the incurrence of further indebtedness by the Issuer of such Series of Bonds. The Bond Trustee will hold the Mortgage Collateral for a Series of Bonds as security pledged only for that Series, and holders of the Bonds of that Series will be entitled to the equal and proportionate benefits of such security. Each deposit trust agreement will provide that the related trust may not conduct any activities other than those related to the issuance and sale of the Bonds of the particular Series issued by it and such other limited activities as may be required in connection with reports and distributions to holders of beneficial interests in the trust. No deposit trust agreement will be subject to amendment without the prior written consent of the Bond Trustee for the related Series, which consent may not be unreasonably withheld if such amendment would not adversely affect the interests of the Bondholders of such Series. The holders of the beneficial interest in each Issuer will not be liable for payment of principal and interest on the Bonds, and holders of Bonds of each Series will be deemed to have released the holders of beneficial interest from any claim, liability or obligation on or with respect to the Bonds of such Series. THE COMPANY The Company was incorporated in the State of Delaware on January 31, 1997 and is a limited purpose finance subsidiary of Redwood Trust. The Company is a qualified real estate investment trust subsidiary. Redwood Trust is a publicly owned real estate investment trust. The Company's principal executive offices are located at 591 Redwood Highway, Suite 3125, Mill Valley, California 94941. The Company's telephone number is 415-381-1765. Redwood Trust has agreed with the Company that Redwood Trust will not file or cause to be filed any voluntary petition in bankruptcy against the Company or any trust created by it until at least one year after the date on which the Bonds have been paid in full, if at all. USE OF PROCEEDS The net proceeds to be received from the sale of the Bonds of each Series will be applied by the Company to the purchase or acquisition of the related Mortgage Collateral or the payment of expenses incurred in 27 127 connection with the issuance of Bonds and otherwise incurred in connection with the conduct of the Company's operations. The Mortgage Collateral pledged to secure a Series of Bonds will either be contributed to the Company's capital by Redwood Trust (or an affiliate) or acquired by the Company from Redwood Trust (or an affiliate) or another Seller and deposited with the Issuer of such Series by the Company. MORTGAGE LOAN PROGRAM The Pledged Mortgages will have been purchased by the Depositor, either directly or through affiliates, from Sellers. Unless otherwise specified in the related Prospectus Supplement, the Pledged Mortgages so acquired by the Depositor will have been originated in accordance with the underwriting criteria specified below under "Underwriting Standards." UNDERWRITING STANDARDS Unless otherwise specified in the related Prospectus Supplement, each Seller will represent and warrant that all Pledged Mortgages originated and/or sold by it to the Depositor or one of its affiliates will have been underwritten in accordance with standards consistent with those utilized by mortgage lenders generally during the period of origination. The related Prospectus Supplement will include detailed information with respect to the underwriting standards employed by the applicable originators of the Pledged Mortgages, to the extent such information is available to the Depositor. Such information may include, as applicable, underwriting guidelines with respect to required borrower income, debt to income ratios, credit histories, loan-to-value ratios and documentation and verification requirements. 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 conditions, 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. 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. In determining the adequacy of the Mortgaged Property as collateral, an appraisal is made of each property considered for financing. The appraiser is required to inspect the property and verify that it is in good condition 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. The value of the property being financed, as indicated by the appraisal, must be such that it currently supports, and is anticipated to support in the future, the outstanding loan balance. Generally, most loans with Loan-to-Value Ratios in excess of 80% at origination must be covered by private mortgage insurance insuring the balance thereof down to a 75% Loan-to-Value Ratio. The method of calculating the "Loan-to-Value Ratio" of a Pledged Mortgage will be described in the Prospectus Supplement for a Series of Bonds secured by Pledged Mortgages. 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 (i) to meet the borrower's monthly obligations on the proposed mortgage loan (determined on the basis of the monthly payments due in the year of origination) and other expenses related to the Mortgaged Property (such as property taxes and hazard insurance) and (ii) to meet monthly housing expenses and other financial obligations and monthly living expenses. The underwriting standards applied by Sellers may be varied in appropriate cases where factors such as low Loan-to-Value Ratios or other favorable credit issues exist. 28 128 The Depositor expects that a substantial portion of the Pledged Mortgages it purchases will be "jumbo" loans, i.e., loans that exceed the maximum balance for purchase by FNMA or FHLMC. Under current regulations, the maximum principal balance allowed on loans eligible for purchase by FNMA or FHLMC ranges from $214,600 ($321,900 for mortgage loans secured by mortgaged properties located in either Alaska or Hawaii) for one-unit to $412,450 ($618,675 for mortgage loans secured by mortgaged properties located in either Alaska or Hawaii) for four-unit residential loans. A lender may originate mortgage loans under a reduced documentation program. A reduced documentation program is designed to facilitate the loan approval process and thereby improve the lender's competitive position among other loan originators. Under a reduced documentation program, relatively more emphasis is placed on property underwriting than on credit underwriting and certain underwriting documentation concerning income and employment verification is waived. In the case of a loan secured by a leasehold interest in a real property, the title to which is held by a third party lessor, generally, the Seller will be required to represent and warrant, among other things, that the remaining term of the lease and any sublease is at least five years longer than the remaining term of the mortgage loan. Certain of the types of loans which may be included in the Mortgage Collateral are recently developed and may involve additional uncertainties not present in traditional types of loans. For example, certain of such Pledged Mortgages may provide for escalating or variable payments by the mortgagor or obligor. These types of Pledged Mortgages are underwritten on the basis of a judgment that mortgagors or obligors will have the ability to make monthly payments required initially. In some instances, however, a mortgagor's or obligor'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 Loan-to-Value Ratios or other favorable credit factors. QUALITY CONTROL The Depositor's parent, Redwood Trust, has developed a quality control program to monitor the quality of loan underwriting at the time of acquisition and on an ongoing basis. All loans purchased by the Depositor 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 mortgage loans sold by such Seller and included in the Pledged Mortgages securing a Series of Bonds. Such representations and warranties generally include, among other things: (i) that title insurance (or in the case of Mortgaged Properties located in areas where such policies are generally not available, an attorney's certificate of title) and any required hazard insurance policy and Primary Mortgage Insurance Policy (as defined herein) were effective at the origination of each mortgage loan other than Cooperative Loans, and that each policy (or certificate of title as applicable) remained in effect on the date of purchase of the mortgage loan from the Seller by or on behalf of the Company; (ii) that the Seller had good title to each such mortgage loan and such mortgage loan was subject to no offsets, defenses, counterclaims or rights of rescission except to the extent that any buydown agreement described herein may forgive certain indebtedness of the obligors on such Pledged Mortgages (each, a "Mortgagor"); (iii) that each mortgage loan constituted a valid first or junior lien, as the case may be, on the Mortgaged Property (subject only to permissible title insurance exceptions, if applicable, and certain other exceptions described in the Master Servicing Agreement) and that the Mortgaged Property was free from damage and was in good repair; (iv) that there were no delinquent tax or assessment liens against the Mortgaged Property; (v) that no required payment on a mortgage loan was 60 or more days delinquent at 29 129 any time during the twelve months prior to the date it is pledged to secure the related Series of Bonds; and (vi) that each mortgage loan was made in compliance with, and is enforceable under, all applicable local, state and federal laws and regulations in all material respects. If the Seller cannot cure a breach of any representation or warranty made by it in respect of a Pledged Mortgage that materially and adversely affects the interests of the Bondholders in such Pledged Mortgage within 90 days after notice of such breach, then such Seller will be obligated to either (i) substitute a similar mortgage loan for such Pledged Mortgage under the conditions specified in the related Prospectus Supplement or (ii) repurchase such Pledged Mortgage from the Issuer at a price (the "Purchase Price") equal to 100% of the outstanding principal balance thereof as of the date of the repurchase plus accrued interest thereon to the first day of the month following the month in which such Pledged Mortgage is repurchased at the Mortgage Rate (less any unreimbursed advances or amount payable as related master servicing compensation if the Seller is the Master Servicer with respect to such Pledged Mortgage). The Master Servicer will be required under the applicable Master Servicing Agreement and Indenture to enforce this obligation for the benefit of the Bond Trustee and the Bondholders, following the practices it would employ in its good faith business judgment were it the owner of such Pledged Mortgage. These substitution or repurchase obligations will constitute the sole remedies available to Bondholders or the Bond Trustee for a breach of representation by a Seller. DESCRIPTION OF THE BONDS GENERAL Each Series of Bonds offered hereby and by the related Prospectus Supplement will be issued pursuant to a separate Indenture between the Issuer of such Series and the Bond Trustee for such Series. The following summaries describe certain provisions common to each Series of Bonds. The summaries are subject to, and are qualified in their entirety by reference to, the Prospectus Supplement and the provisions of the Indenture relating to each Series of Bonds. Summaries of particular provisions or terms used in the Indenture incorporate by reference the actual provisions (including definitions of terms) as part of such summaries, and are qualified in their entirety by reference to the actual provisions of the Indenture. The Bonds are issuable in Series. Each Series may include one or more Classes of Bonds ("Deferred Interest Bonds") upon which interest will accrue but will not be payable, except in certain circumstances upon the optional redemption thereof or as otherwise provided in the related Prospectus Supplement. Prior to such time, the amount of interest so accrued will be added to the principal of such Class of Deferred Interest Bonds on each Payment Date. (Indenture, Section 2.03) A Series of Bonds may include one or more Classes that are senior in right of payment to one or more other Classes of Bonds of such Series. A Series of Bonds may also include one or more Classes of zero coupon bonds. The Bonds of each Series will be issued in either fully registered or book-entry form in the authorized denominations specified in the related Prospectus Supplement. (Indenture, Section 2.04) The transfer of the Bonds will be registered and the Bonds may be exchanged without the payment of any service charge other than any tax or governmental charge payable in connection with such registration of transfer or exchange. (Indenture, Section 2.07) Payments of principal of, and interest on, each Series of Bonds will be made on the Payment Dates set forth in the Prospectus Supplement relating to such Series by check mailed to Bondholders of such Series registered as such on the related Record Date preceding such Payment Date at their addresses appearing on the Bond Register, except that final payments of principal in retirement of each Bond will be made only upon presentation and surrender of such Bond at the office or agency of the Issuer maintained for that purpose. (Indenture, Section 2.09(a) and (b)) Notice will be mailed before the Payment Date on which the final principal payment on any Bond is expected to be made by the Bond Trustee to the holder of such Bond. (Indenture, Section 2.09(b)) Payments in respect of interest and principal on the Bonds will be made by the Bond Trustee, or such other bank, trust company or other fiduciary identified in the related Prospectus Supplement, as the paying agent of the Issuer. (Indenture, Section 3.03) 30 130 The Bond Trustee will include with each payment on a Bond which includes principal and interest a statement showing the allocation of such payment to principal and interest and the remaining unpaid principal amount of such Bond. Payments on Bonds which include only interest will be accompanied by a statement showing the aggregate unpaid principal amount of the Bonds of each Class of the same Series. On each Payment Date before payments of principal are first made on a particular Class of Deferred Interest Bonds of a Series, the Bond Trustee for such Series will furnish to each holder of a Bond of such Class a statement showing the aggregate unpaid principal amount of such Class of Bonds and the new principal balance of such holder's Deferred Interest Bond. PAYMENTS OF INTEREST The Bonds of each Class will bear interest on their unpaid principal amounts from the date and at the rates per annum specified or determined in the manner set forth in the related Prospectus Supplement (calculated on the basis of a 360-day year of twelve 30-day months unless otherwise specified in the related Prospectus Supplement) until the principal amount of the Bonds of such Class is paid in full. Interest on a Series of Bonds or on a Class of Bonds within a Series may accrue at a fixed rate, a variable rate or a combination thereof, as determined or reset in the manner specified in the related Prospectus Supplement. Interest on the Bonds other than Deferred Interest Bonds will be due and payable on the Payment Dates specified in the related Prospectus Supplement. Payments of interest on each Class of Deferred Interest Bonds will commence as specified in the related Prospectus Supplement. Prior to such time, interest on such Class of Deferred Interest Bonds will accrue and the amount of interest so accrued will be added to the principal thereof on each Payment Date. Such Class of Deferred Interest Bonds will thereafter accrue interest on the outstanding principal amount thereof as so adjusted. Each such payment or accrual of interest will include all interest accrued either to, but not including, the related Payment Date or through a date prior to such Payment Date as specified in the related Prospectus Supplement. In the latter case, the effective yield to the Bondholders will be reduced to a level below the yield that would apply if interest were accrued to, but not including, the respective Payment Date. A Series of Bonds or one or more Classes of Bonds within a Series may bear interest at a variable rate (the "Floating Rate Bonds") which may have an interest rate cap or an interest rate floor, or both, as specified in the related Prospectus Supplement. The interest payment dates on Floating Rate Bonds will be set forth in the related Prospectus Supplement and may not be the same as the interest payment dates for the other Bonds of such Series, but may be either more or less frequent. The variable interest rate formula for any Series or Class of Floating Rate Bonds will generally be based off a financial index recognized in the national or international financial markets. The Prospectus Supplement for any Series or Class within a Series of Floating Rate Bonds will set forth the initial interest rate, the index upon which adjustments thereto will be computed, the formula for such computation, the intervals at which such computations will be made, the maximum and minimum interest rates, if any, and other characteristics common to such Bonds. PAYMENTS OF PRINCIPAL Principal payments on each Series of Bonds will be made on each Payment Date in an amount equal to the sum of (a) if specified in the related Prospectus Supplement, the amount of interest, if any, accrued but not then payable on the Deferred Interest Bonds of such Series from the prior Payment Date or, if specified in the related Prospectus Supplement, from a date prior to such prior Payment Date and (b) either (i) the percentage or percentages specified in the related Prospectus Supplement of the funds available for such purpose ("Available Funds") for such Payment Date or (ii) the sum of (x) an amount determined by reference to the aggregate decline in the Bond Values of the Mortgage Collateral securing such Series of Bonds in the related Due Period and (y) the amount, if any, of the Spread specified in such Prospectus Supplement. The Prospectus Supplement for each Series of Bonds will specify the manner in which the Available Funds or the Bond Values, as applicable, will be determined. The aggregate amount of principal payments required to be made on a Series of Bonds on any Payment Date will be reduced by the principal amount of the Bonds of such Series redeemed pursuant to any special redemption and certain optional 31 131 redemptions occurring subsequent to the preceding Payment Date. See "DESCRIPTION OF THE BONDS -- Special Redemption" and " -- Optional Redemption" herein. The Bond Value of Mortgage Collateral securing the Bonds of a Series represents the principal amount of Bonds of such Series that, based on certain assumptions and irrespective of prepayments on such Mortgage Collateral, can be supported by scheduled distributions on such Mortgage Collateral, together with (depending on the method used to determine the Bond Value of the Mortgage Collateral) the reinvestment earnings thereon at the rate described in the related Prospectus Supplement (the "Assumed Reinvestment Rate") and, if applicable, the cash available to be withdrawn from a related Reserve Fund, if any. For convenience of calculation with respect to each Series of Bonds, Certificates securing a Series of Bonds that are backed by a pool of mortgage loans sharing similar payment characteristics, or Pledged Mortgages which secure a Series of Bonds and share similar payment characteristics, may be aggregated into one or more groups (each, a "Collateral Group") each of which will be assigned an aggregate Bond Value. If so specified in the related Prospectus Supplement, the aggregate Bond Value of a Collateral Group consisting of Pledged Mortgages or Certificates sharing similar payment characteristics will be calculated as if such Pledged Mortgages or the mortgage loans underlying such Certificates constituted a single mortgage loan having such of the payment characteristics of such Pledged Mortgages or of the mortgage loans underlying the Certificates included in such Collateral Group as would result in the lowest Bond Value being assigned to the Pledged Mortgages or Certificates included in such Collateral Group. There are a number of alternative means of determining the Bond Value of a mortgage loan or of collateral backed by mortgage loans, including determinations based on the discounted present value of the remaining scheduled distributions on such mortgage loans and determinations based on the relationship of the interest rate borne by such mortgage loans and by the related Bonds. If applicable, the Prospectus Supplement for a Series of Bonds will specify the method or methods used to determine the Bond Values of the Collateral Groups securing such Series of Bonds. The aggregate of the Bond Values on any Payment Date of all such Collateral Groups will be at least equal to the outstanding principal amount of the Bonds of such Series. If applicable, the Assumed Reinvestment Rate for a Series of Bonds will be described in the related Prospectus Supplement and may be any rate permitted by each applicable Rating Agency or a rate provided under a guaranteed investment contract, surety bond or similar arrangement satisfactory to each applicable Rating Agency. If the Assumed Reinvestment Rate is so provided, the related Prospectus Supplement will describe the terms of such arrangement. Unless the related Prospectus Supplement provides otherwise, the Spread, if applicable, for each Series of Bonds as of any Payment Date will be the excess, if any, of the sum of (i) all distributions received with respect to the Mortgage Collateral securing such Series of Bonds in the related Due Period, (ii) the reinvestment income thereon and (iii) amounts which are required or are permitted to be withdrawn from a Reserve Fund, if any, less the sum of (i) all interest payable on the Bonds of such Series on such Payment Date, (ii) the Basic Principal Payment required to be made on such Series of Bonds on such Payment Date and (iii) an amount reflecting the redemption price of any Bonds of such Series redeemed during the related Due Period and the expenses accrued by the Issuer during the related Due Period relating to the administration of such Series of Bonds. Payments of principal will be allocated among the Classes of Bonds comprising a Series in the manner specified in the related Prospectus Supplement and, with respect to a particular Class of Bonds, will be applied on a pro rata basis, unless otherwise specified in the related Prospectus Supplement. Each Class of Bonds will be scheduled to be fully paid no later than the Stated Maturity for such Class of Bonds specified in the related Prospectus Supplement. If so specified in the related Prospectus Supplement, holders of one or more Classes of Bonds of a Series may have the right, at their option, to receive full payment in respect of such Bonds prior to Stated Maturity, in each case to the extent and under the circumstances specified in their related Prospectus Supplement. 32 132 SPECIAL REDEMPTION If so specified in the related Prospectus Supplement, the Bonds of each Series or Class may be subject to special redemption, in whole or in part, under the circumstances and in the manner described below or in the related Prospectus Supplement. If applicable, the Issuer will be required to redeem, on the day of any month specified in the related Prospectus Supplement, outstanding Bonds of a Series in the amount described below if, as a result of substantial payments of principal on the Pledged Mortgages or the mortgage loans underlying the Certificates pledged as security for such Series of Bonds or low reinvestment yields, or both, the Bond Trustee determines, based on the procedures and assumptions specified in the Indenture, that, in the absence of such special redemption, the amount of cash to be on deposit in the related Bond Account on the next Payment Date for such Series of Bonds would be insufficient to make required payments on the Bonds of such Series on such Payment Date. (Indenture, Section 10.01) The amount of Bonds required to be so redeemed will not exceed the distributions on the Mortgage Collateral securing such Series of Bonds received during the Due Period that would otherwise be required to be applied to the payment of principal of such Series of Bonds on the following Payment Date. All payments of principal pursuant to any special redemption will be made in the priority and manner specified in the related Prospectus Supplement. Bonds of the same Class will be redeemed in the manner specified in the related Prospectus Supplement. Notice of any such redemption must be mailed by the Issuer or the Bond Trustee at least five days prior to the special redemption date. (Indenture, Section 10.02) The redemption price required to be paid for any Bond to be so redeemed will be equal to 100% of the principal amount thereof together with accrued interest. (Indenture, Section 10.01) OPTIONAL REDEMPTION If so provided in the related Prospectus Supplement, the Bonds of any Class of a Series may be subject to redemption at the option of the Issuer or another entity or entities. Unless otherwise provided in the related Prospectus Supplement, notice of any such redemption must be given by the Issuer or such other entity to the Bond Trustee not less than 30 days prior to the redemption date and must be mailed by the Issuer, such other entity or the Bond Trustee to affected Bondholders at least five days prior to the redemption date. (Indenture, Sections 10.01 and 10.02) The Prospectus Supplement for each Series will specify the circumstances, if any, under which the Bonds of such Series may be so redeemed, the manner of effecting such redemption, the conditions to which such redemption are subject and the redemption prices for each Class of Bonds to be redeemed. CALL PROTECTION AND GUARANTEES The Issuer also may, at its option, obtain for any Series of Bonds one or more guarantees from a company or companies acceptable to each applicable Rating Agency, which guarantees may provide for (i) call protection (which may include yield maintenance) for any Class of Bonds of such Series, (ii) a guarantee of a certain prepayment rate with respect to some or all of the Pledged Mortgages or mortgage loans underlying the Certificates pledged as collateral for such Series or (iii) such other guarantees as may be specified in the related Prospectus Supplement. Any call protection or guarantees may affect the weighted average life of the Bonds of such Series. WEIGHTED AVERAGE LIFE OF THE BONDS All of the Pledged Mortgages securing a Series of Bonds will consist of mortgage loans which are neither insured nor guaranteed by any governmental agency ("Conventional Loans"). See "SECURITY FOR THE BONDS -- The Pledged Mortgages" herein. The mortgage loans underlying the Private Mortgage-Backed Securities, FHLMC Certificates and FNMA Certificates securing a Series of Bonds will consist of either Conventional Loans, FHA Loans (as defined herein) or VA Loans (as defined herein), or any combination thereof. The mortgage loans underlying the GNMA Certificates securing a Series of Bonds will consist of FHA Loans or VA Loans. Each Pledged Mortgage and each Certificate will provide by its terms for monthly payments (or, in the case of Private Mortgage-Backed Securities, such other period as may be specified in the 33 133 related Prospectus Supplement) of principal and interest in the amounts described in "SECURITY FOR THE BONDS -- The Pledged Mortgages," " -- Agency Securities," and " -- Private Mortgage-Backed Securities" herein. Since the aggregate amount of the principal payment required to be made on a Series of Bonds on a Payment Date will depend on the amount of the principal payments (including for this purpose prepayments resulting from refinancing or liquidations due to defaults, casualties, condemnations and repurchases by the Seller, the Issuer or Redwood Trust or purchases by the Master Servicer or the Company) received on the related Pledged Mortgages or Certificates, as the case may be, in the related Due Period, the prepayment experience on the underlying mortgage loans (with respect to a Series of Bonds secured by Certificates) or on the Pledged Mortgages (with respect to a Series of Bonds secured by Pledged Mortgages) will affect (i) the weighted average life of each Class of Bonds and (ii) the extent to which such Class is paid prior to its Stated Maturity. The prepayment experience on the Pledged Mortgages which secure a Series of Bonds may be affected by recoveries on foreclosures or other liquidations of Pledged Mortgages and by losses from defaults and delinquencies on Pledged Mortgages. See "SERVICING OF THE PLEDGED MORTGAGES" herein. The weighted average life of each outstanding Class of Bonds also may be affected by the actual reinvestment income earned on the payments on the Mortgage Collateral, if applicable, if a portion of the Spread is paid as a principal payment on such Bonds and by the exercise by the Issuer of its right to substitute other Mortgage Collateral for the Mortgage Collateral originally pledged as security for such Bonds. Although any substitute Mortgage Collateral will have payment terms anticipated to result in a cash flow substantially similar to, but in no event less than, the anticipated cash flow of the Mortgage Collateral it replaces, such substitutions may, individually or in the aggregate, affect the weighted average life of such Bonds. See "SECURITY FOR THE BONDS -- Substitution of Mortgage Collateral" herein. In addition, the exercise by the Issuer of its right to pledge Additional Mortgage Collateral and issue Additional Bonds may result in a variance in the weighted average life of any Class of Bonds of the related Series as described herein under "SECURITY FOR THE BONDS -- Pledge of Additional Mortgage Collateral and Issuance of Additional Bonds." Further, the weighted average life of each Class of a Series of Bonds secured by FNMA Certificates may be affected by the exercise by FNMA of its right to repurchase the mortgage loans backing such FNMA Certificates, as described under "SECURITY FOR THE BONDS -- Agency Securities" herein. Any Private Mortgage-Backed Securities may also be redeemed or otherwise subject to early prepayment in accordance with their terms. The Stated Maturity for each Class of Bonds is the date determined by the Company to fall a specified period after the date on which the principal thereof will be fully paid, assuming (i) timely receipt of scheduled payments (with no prepayments) on the Mortgage Collateral, (ii) if applicable, such scheduled payments are reinvested at the Assumed Reinvestment Rate for such Series, (iii) no Mortgage Collateral is substituted by the Issuer or the Seller in place of the Mortgage Collateral initially pledged to secure such Bonds and (iv) if applicable, no portion of the Spread is applied to the payment of the Bonds, unless the related Prospectus Supplement provides otherwise, in which event such Stated Maturities will be based on the assumptions specified in such Prospectus Supplement. If so provided in the related Prospectus Supplement, holders of one or more Classes of Bonds of a Series may have the right, at their option, to receive full payment in respect of such Bonds prior to Stated Maturity, in each case to the extent and subject to the conditions specified in such Prospectus Supplement. The rate of principal prepayments on pools of mortgage loans is influenced by a variety of economic, geographic, social and other factors including, without limitation, homeowner mobility, economic conditions, the presence and enforceability of "due-on-sale" clauses, mortgage market interest rates and the availability of mortgage funds, and no assurance can be given as to the actual prepayment experience of the Mortgage Collateral. In general, however, if interest rates vary significantly from those prevailing when the Pledged Mortgages or the mortgage loans underlying the Certificates pledged as security for a Series of Bonds were originated, such Pledged Mortgages and mortgage loans are likely to be subject to higher or lower principal prepayments than if interest rates remain at or near those prevailing when such Pledged Mortgages and mortgage loans were originated. It should be noted that certain Certificates pledged as security for a Series of Bonds may be backed by mortgage loans with different interest rates, and, similarly, that not all of the Pledged Mortgages securing a Series of Bonds are likely to bear the same interest rate. Accordingly, the prepayment experience of these Certificates and Pledged Mortgages will to some extent be a function of the mix of interest 34 134 rates of the underlying mortgage loans and of the Pledged Mortgages. Furthermore, the stated certificate rate on certain Certificates may be less than the weighted average interest rate of the underlying mortgage loans. See "SECURITY FOR THE BONDS" herein. BOOK-ENTRY BONDS As described in the related Prospectus Supplement, if not issued in fully registered form, one or more Classes of Bonds of any Series (each, a Class of "Book-Entry Bonds") will be registered as book-entry certificates. Persons acquiring beneficial ownership interests in the Bonds ("Bond Owners") will 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 balance 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"). 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 are only permitted to exercise their rights indirectly through 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 distributions 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 distributions of principal of, and interest on, the Bonds. Participants and 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 distributions 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 distributions 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 35 135 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. 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 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. 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 "Belgian 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. Morgan 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. 36 136 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. 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. Distributions 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 distributions 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" herein. 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 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, and to the Financial Intermediaries to whose DTC accounts the Book-Entry Bonds or such beneficial owners are credited. DTC has advised 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 with respect to some Bonds, at the direction of the related Participants, which conflict with actions taken with respect to other Bonds. 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. 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 Depositor, 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. 37 137 SECURITY FOR THE BONDS GENERAL Each Series of Bonds will be secured by assignments to the Bond Trustee of collateral (the "Collateral") consisting of (i) the Mortgage Collateral pledged as security for such Series of Bonds, (ii) funds on deposit in the Bond Account and the Distribution Account under the Indenture for such Series of Bonds representing payments and prepayments on Mortgage Collateral, including, to the extent applicable, all payments which may become due under any applicable hazard, mortgage guaranty, mortgagor bankruptcy, title insurance and bond insurance policies (collectively, the "Insurance Proceeds") and the proceeds (the "Liquidation Proceeds") of foreclosure or settlement of defaulted Pledged Mortgages each as required to be remitted to the Bond Trustee, (iii) cash, certificates of deposit, letters of credit, surety bonds, guaranteed investment contracts or any combination thereof in the aggregate amount, if any, specified in the related Prospectus Supplement to be deposited by the Issuer in a related Reserve Fund, (iv) the amount of cash, if any, specified in the related Prospectus Supplement, to be initially deposited by the Issuer in the related Bond Account, (v) certain other accounts, obligations, insurance policies, guarantees or agreements, as specified herein and in the related Prospectus Supplement, (vi) to the extent applicable, the reinvestment income on all of the foregoing, (vii) to the extent applicable, the Issuer's rights to Additional Mortgage Collateral, (viii) the Issuer's rights under the Master Servicing Agreement with respect to the Series of Bonds, (ix) the Issuer's rights under the Mortgage Loan Purchase Agreement with respect to the Series of Bonds, (x) amounts (excluding any reinvestment income thereon) deposited in the related early remittance account, if any, under the Indenture for such Series of Bonds and (xi) the Issuer's rights under certain of the Mortgage Pool Insurance Policies and/or Bond Insurance Policies obtained for such Series of Bonds. Scheduled payments on the Mortgage Collateral securing a Series of Bonds and amounts, if any, initially deposited in the related Bond Account, together with, to the extent applicable, the earnings thereon at the Assumed Reinvestment Rate for such Series specified in the related Prospectus Supplement and, if applicable, amounts available to be withdrawn from any related Reserve Fund, will be sufficient to make timely payments of interest on the Bonds of such Series and to retire each Class of Bonds comprising such Series not later than the Stated Maturity of such Class of Bonds specified in the related Prospectus Supplement. Each Prospectus Supplement relating to a Series of Bonds will include information as to (i) the approximate aggregate principal amount of the Mortgage Collateral securing such Series and whether the Mortgage Collateral consists of Pledged Mortgages, GNMA Certificates, FNMA Certificates, FHLMC Certificates, Private Mortgage-Backed Securities or some combination of Pledged Mortgages and Certificates and (ii) the approximate weighted average terms to maturity of such Mortgage Collateral. The Collateral securing each Series of Bonds will equally and ratably secure each Class of the Bonds of such Series, and the Collateral securing such Series will serve as collateral only for that Series of Bonds, except to the extent that any Mortgage Pool Insurance Policies, Special Hazard Insurance Policies, Bankruptcy Bonds or some other form of credit enhancement may, if specified herein and in the related Prospectus Supplement, be pledged to secure more than one Series of Bonds. See "CREDIT ENHANCEMENT" herein. The following is a brief description of the Mortgage Collateral expected to secure a Series of Bonds. If specific information respecting the Mortgage Collateral is not known at the time the related Series of Bonds initially is offered, more general information of the nature described below will be provided in the related Prospectus Supplement, and specific information will be set forth in a report on Form 8-K to be filed with the Securities and Exchange Commission within fifteen days after the initial issuance of such Bonds (the "Detailed Description"). A schedule of the Mortgage Collateral relating to such Series of Bonds will be attached to the Indenture delivered to the Bond Trustee upon delivery of the Bonds. THE PLEDGED MORTGAGES General. All of the Pledged Mortgages will be contributed to the Company's capital by Redwood Trust (or an affiliate) or acquired by the Company from Redwood Trust (or an affiliate) or another Seller and will 38 138 be master serviced by the Master Servicer specified in the related Prospectus Supplement. See "SERVICING OF THE PLEDGED MORTGAGES" herein. Pledged Mortgages contributed to or acquired by the Company will have been originated in accordance with the underwriting criteria specified under "MORTGAGE LOAN PROGRAM -- Underwriting Standards" herein and in the related Prospectus Supplement. The Pledged Mortgages securing a Series of Bonds will consist solely of conventional loans secured by first or junior liens on one- to four-family residential properties. See "CERTAIN LEGAL ASPECTS OF PLEDGED MORTGAGES -- General" herein. The real property constituting security for repayment of a Pledged Mortgage (each, a "Mortgaged Property") may be located in any one of the fifty states, the District of Columbia, Guam, Puerto Rico, any other territory of the United States or such other location as may be specified in the related Prospectus Supplement. Pledged Mortgages with certain Loan-to-Value Ratios and/or certain principal balances may be covered wholly or partially by primary mortgage insurance policies (each, a "Primary Mortgage Insurance Policy"). The existence, extent and duration of any such coverage will be described in the applicable Prospectus Supplement. Unless otherwise specified in the related Prospectus Supplement, all of the Pledged Mortgages securing a Series of Bonds will have monthly payments due on the first day of each month. Such monthly installments on each such Pledged Mortgage, net of (i) applicable servicing compensation or master servicing compensation, (ii) amounts retained by the Master Servicer or Servicer (as defined herein) to be applied to the payment of premiums for certain Mortgage Pool Insurance Policies and, if applicable, bond insurance policies and (iii) amounts retained to reimburse the Master Servicer or Servicer for certain advances it has made, will be payable to the Bond Trustee by the Master Servicer on or before the monthly remittance date specified in the Prospectus Supplement relating to the Series of Bonds secured by such Pledged Mortgages (each, a "Remittance Date"). See "SERVICING OF THE PLEDGED MORTGAGES -- Payments on Pledged Mortgages" and " -- Advances and Other Amounts Payable by Master Servicer" herein. The payment terms of the Pledged Mortgages securing a Series of Bonds will be described in the related Prospectus Supplement and may include any of the following features or combination thereof or other features described in the related Prospectus Supplement: (a) Interest may be payable at a fixed rate, a rate adjustable from time to time in relation to an index (which will be specified in the related Prospectus Supplement), 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, or a rate that is convertible from an adjustable rate to a fixed rate. Changes to an adjustable rate may be subject to periodic limitations, maximum rates, minimum rates or a combination of such limitations as set forth in the related Mortgage Note. 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 related Prospectus Supplement. A Mortgage Note may provide for the payment of interest at a rate lower than the Mortgage Rate specified in such Mortgage Note for a period of time or for the life of the loan and the amount of any difference may be contributed from funds supplied by the seller of the Mortgaged Property or another source. (b) Principal may be payable on a level debt service basis to fully amortize the Pledged Mortgage 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 Mortgage Rate or may not be amortized during all or a portion of the original term. Payment of all or a substantial portion of the principal may be due on maturity ("balloon payments"). Principal may include interest that has been deferred and added to the principal balance of the Pledged Mortgage. (c) Monthly payments of principal and interest may be fixed for the life of the Pledged Mortgage, may increase over a specified period of time or may change from period to period. The terms of a Pledged Mortgage may include limits on periodic increases or decreases in the amount of monthly payments and may include maximum or minimum amounts of monthly payments. (d) The Pledged Mortgages may be prepaid (i) at any time without the payment of any prepayment fee or (ii) subject to a prepayment fee, which may be fixed for the life of any such Pledged Mortgage or may decline over time, and may be prohibited for the life of such Pledged Mortgage or for certain periods 39 139 ("lockout periods"). Certain Pledged Mortgages may permit prepayments after expiration of the applicable lockout period and may require the payment of a prepayment fee in connection with any such subsequent prepayment. Other Pledged Mortgages may permit prepayments without payment of a fee unless the prepayment occurs during specified time periods. The loans may include "due-on-sale" clauses that permit the mortgagee to demand payment of the entire Pledged Mortgage in connection with the sale or certain transfers of the related Mortgaged Property. Other Pledged Mortgages may be assumable by persons meeting the then applicable underwriting standards. See "MORTGAGE LOAN PROGRAM -- Underwriting Standards" herein. The Mortgage Collateral securing a Series of Bonds may include certain Pledged Mortgages ("Buydown Loans") that include provisions whereby a third party partially subsidizes the monthly payments of the Mortgagors during the early years of such Pledged Mortgages, the difference to be made up from a fund (a "Buydown Fund") contributed by such third party at the time of origination of the Pledged Mortgage. 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 buydown plans is that the income of the Mortgagor will increase during the buydown period as a result of normal increases in compensation and inflation, so that the Mortgagor will be able to meet the full mortgage payments at the end of the buydown period. To the extent that this assumption as to increased income is not fulfilled, the possibility of defaults on Buydown Loans is increased. The related Prospectus Supplement will contain information with respect to any Buydown Loan concerning limitations on the interest rate paid by the Mortgagor initially, on annual increases in the interest rate and on the length of the buydown period. Each Prospectus Supplement will contain information, as of the date of such Prospectus Supplement and to the extent then specifically known to the Company, with respect to the Pledged Mortgages securing the related Series of Bonds, including (i) the aggregate outstanding principal balance and the average outstanding principal balance of the Pledged Mortgages as of the date pledged to secure the related Series of Bonds, (ii) the types of property securing the Pledged Mortgages, (iii) the original terms to maturity of the Pledged Mortgages, (iv) the earliest origination date and latest maturity date of any of the Pledged Mortgages, (v) the maximum and minimum per annum Mortgage Rates and (vi) the geographical distribution of the Pledged Mortgages. No assurance can be given that values of the Mortgaged Properties have remained or will remain at their levels on the dates of origination of the related Pledged Mortgages. If the residential real estate market should experience an overall decline in property values such that the outstanding principal balances of the Pledged Mortgages, and any secondary financing on the Mortgaged Properties, securing a Series of Bonds become equal to or greater than the value of the Mortgaged Properties, the actual rates of delinquencies, foreclosures and losses could be higher than those now generally experienced in the mortgage lending industry. In addition, adverse economic conditions and other factors (which may or may not affect real property values) may affect the timely payment by Mortgagors of scheduled payments of principal and interest on the Pledged Mortgages and, accordingly, the actual rates of delinquencies, foreclosures and losses with respect to any Mortgage Collateral. To the extent that such losses are not covered by subordination provisions, certain other credit enhancement or alternative arrangements described herein and in the related Prospectus Supplement, such losses will be borne, at least in part, by the holders of the Bonds of the related Series. The Issuer will cause the Pledged Mortgages securing each Series of Bonds to be pledged to the Bond Trustee named in the related Prospectus Supplement for the benefit of the Bondholders of such Series. The Master Servicer will service the Pledged Mortgages, either directly or through other mortgage servicing institutions ("Servicers"), pursuant to a Master Servicing Agreement (as defined herein), and will receive a fee for such services. See "MORTGAGE LOAN PROGRAM" and "SERVICING OF THE PLEDGED MORTGAGES" herein. With respect to Pledged Mortgages serviced by the Master Servicer through a Servicer, the Master Servicer will remain liable for its servicing obligations under the related Master Servicing Agreement as if the Master Servicer alone were servicing such Pledged Mortgages. The obligations of the Master Servicer with respect to the Pledged Mortgages will consist principally of its contractual master servicing obligations under the related Master Servicing Agreement (including its 40 140 obligation to enforce the obligations of the Servicers) as more fully described herein under "MORTGAGE LOAN PROGRAM -- Representations by Sellers; Repurchases" and its obligation to make certain cash advances in the event of delinquencies in payments on or with respect to the Pledged Mortgages in the amounts described herein under "SERVICING OF THE PLEDGED MORTGAGES -- Advances and Other Amounts Payable by Master Servicer" herein. The obligations of the Master Servicer to make advances may be subject to limitations, to the extent provided herein and in the related Prospectus Supplement. Pledged Mortgages will consist of mortgage loans or deeds of trust secured by first or junior liens on one-to four-family residential properties. If provided in the related Prospectus Supplement, certain of the Pledged Mortgages may be secured by junior liens where the related senior liens ("Senior Liens") are not to be included as part of the Mortgage Collateral. Holders of such Pledged Mortgages secured by junior liens are subject to the risk that adequate funds will not be received in connection with a foreclosure of the related Senior Liens to satisfy fully both the Senior Liens and the Pledged Mortgages. In the event that a holder of a Senior Lien forecloses on a Mortgaged Property, the proceeds of the foreclosure or similar sale will be applied first to the payment of court costs and fees in connection with the foreclosure, second to real estate taxes, third in satisfaction of all principal, interest, prepayment or acceleration penalties, if any, and any other sums due and owing to the holder of the Senior Liens. The claims of the holders of the Senior Liens will be satisfied in full out of proceeds of the liquidation of the related Mortgaged Property, if such proceeds are sufficient, before the Issuer as holder of the junior lien receives any payments in respect of the Pledged Mortgage. If the Master Servicer or a Servicer were to foreclose on any such Pledged Mortgage, it would do so subject to any related Senior Liens. In order for the debt related to the Pledged Mortgage to be paid in full at such sale, a bidder at the foreclosure sale of such Pledged Mortgage would have to bid an amount sufficient to pay off all sums due under the Pledged Mortgage and the Senior Liens or purchase the Mortgaged Property subject to the Senior Liens. In the event that such proceeds from a foreclosure or similar sale of the related Mortgaged Property are insufficient to satisfy all Senior Liens and the Pledged Mortgage in the aggregate, the Issuer, as the holder of the junior liens, and, accordingly, holders of one or more classes of the Bonds of the related Series, bear (i) the risk of delay in distributions while a deficiency judgment against the borrower is obtained and (ii) the risk of loss if the deficiency judgment is not realized upon. Moreover, deficiency judgments may not be available in certain jurisdictions or the Pledged Mortgage may be nonrecourse. In addition, a junior mortgagee may not foreclose on the property securing a junior mortgage unless it forecloses subject to the senior mortgages. If so specified in the related Prospectus Supplement, the Pledged Mortgages may include cooperative apartment loans ("Cooperative Loans") secured by security interests in shares issued by private, non-profit, cooperative housing corporations ("Cooperatives") and in the related proprietary leases or occupancy agreements granting exclusive rights to occupy specific dwelling units in such Cooperatives' buildings. The Mortgaged Properties relating to Pledged Mortgages will consist of detached or semi-detached one-family dwelling units, two- to four-family dwelling units, townhouses, rowhouses, individual condominium units, individual units in planned unit developments and certain other dwelling units. Such Mortgaged Properties may include vacation and second homes, investment properties and leasehold interests. In the case of leasehold interests, the term of the leasehold will exceed the scheduled maturity of the Pledged Mortgages by at least five years, or such other period specified in the related Prospectus Supplement. ASSIGNMENT OF PLEDGED MORTGAGES TO BOND TRUSTEE. Assignments of the mortgages or deeds of trust in recordable form, naming the Bond Trustee as assignee, will be executed and, subject to release for recording purposes, delivered to the Bond Trustee along with certain other original documents evidencing the Pledged Mortgages, including the related Mortgage Notes. The original mortgage documents will be held by the Bond Trustee or its custodian, except to the extent released to the Master Servicer or any Servicer from time to time in connection with its respective servicing activities. Except as otherwise specified in the related Prospectus Supplement, the Issuer will promptly cause the assignments of the related Pledged Mortgages to be recorded in the appropriate public office for real property records, except in states in which, in the opinion of counsel acceptable to the Bond Trustee, such recording is not required to protect the Bond Trustee's interest in such Pledged Mortgages against the claim of any subsequent transferee or any successor to or creditor of the Issuer or the originator of such Pledged Mortgage. In the event an assignment of a Pledged Mortgage to the Bond Trustee is not recorded or the opinion referred to above is not delivered to the Bond Trustee within the period 41 141 specified in the related Prospectus Supplement, Redwood Trust, may, if required by the Bond Trustee in accordance with the terms of the Indenture, be obligated to (i) purchase such Pledged Mortgage at a price equal to the outstanding principal balance thereof on the date of such purchase plus accrued and unpaid interest thereon to the first day of the month following the month in which such Pledged Mortgage is purchased and deposit such amount in the Bond Account for such Series of Bonds or (ii) if permitted by the applicable provisions of the Indenture and the Mortgage Loan Purchase Agreement with respect to such Series of Bonds, replace such Pledged Mortgage with an eligible substitute mortgage loan (an "Eligible Substitute Pledged Mortgage"). See " -- Substitution of Mortgage Collateral" herein. AGENCY SECURITIES GENERAL. The Agency Securities securing a Series of Bonds will consist of (i) fully modified pass-through mortgage-backed certificates guaranteed as to timely payment of principal and interest by the Government National Mortgage Association ("GNMA Certificates"), (ii) certificates ("Guaranteed Mortgage Pass-Through Certificates") issued and guaranteed as to timely payment of principal and interest by the Federal National Mortgage Association ("FNMA Certificates"), (iii) mortgage participation certificates issued and guaranteed as to timely payment of interest and, unless otherwise specified in the related Prospectus Supplement, ultimate payment of principal by the Federal Home Loan Mortgage Corporation ("FHLMC Certificates"), (iv) stripped mortgage-backed securities representing an undivided interest in all or a part of either the principal distributions (but not the interest distributions) or the interest distributions (but not the principal distributions) or in some specified portion of the principal and interest distributions (but not all of such distributions) on certain GNMA, FNMA or FHLMC Certificates and, unless otherwise specified in the related Prospectus Supplement, guaranteed to the same extent as the underlying securities, (v) another type of pass-through certificate issued or guaranteed by GNMA, FNMA or FHLMC and described in the related Prospectus Supplement or (vi) a combination of such Agency Securities. GNMA CERTIFICATES. GNMA is a wholly-owned corporate instrumentality of the United States with the Department of Housing and Urban Development. Section 306(g) of Title III of the National Housing Act of 1934, as amended (the "Housing Act"), authorizes GNMA to guarantee the timely payment of the principal of, and interest on, GNMA Certificates that represent an interest in a pool of mortgage loans insured by the FHA under the Housing Act or Title V of the Housing Act of 1949 ("FHA Loans"), or partially guaranteed by the VA under the Servicemen's Readjustment Act of 1944, as amended, or Chapter 37 of Title 38, United States Code ("VA Loans"). Section 306(g) of the Housing Act provides that "the full faith and credit of the United States is pledged to the payment of all amounts which may be required to be paid under any guaranty under this subsection." In order to meet its obligations under such guaranty, GNMA may, under Section 306(d) of the Housing Act, borrow from the United States Treasury in an unlimited amount which is at any time sufficient to enable GNMA to perform its obligations under its guaranty. Each GNMA Certificate pledged to secure a Series of Bonds (which may be issued under either the GNMA I program (each such certificate, a "GNMA I Certificate") or the GNMA II program (each such certificate, a "GNMA II Certificate")) will be a "fully modified pass-through" mortgage-backed certificate issued and serviced by a mortgage banking company or other financial concern ("GNMA Issuer") approved by GNMA or by FNMA as a seller-servicer of FHA Loans and/or VA Loans. The mortgage loans underlying the GNMA Certificates will consist of FHA Loans and/or VA Loans. Each such mortgage loan is secured by a one- to four-family or multifamily residential property. GNMA will approve the issuance of each such GNMA Certificate in accordance with a guaranty agreement (a "Guaranty Agreement") between GNMA and the GNMA Issuer. Pursuant to its Guaranty Agreement, a GNMA Issuer will be required to advance its own funds in order to make timely payments of all amounts due on each such GNMA Certificate if the payments received by the GNMA Issuer on the FHA Loans or VA Loans underlying each such GNMA Certificate are less than the amounts due on each such GNMA Certificate. The full and timely payment of principal of and interest on each GNMA Certificate will be guaranteed by GNMA, which obligation is backed by the full faith and credit of the United States. Each such GNMA 42 142 Certificate will have an original maturity of not more than 30 years (but may have original maturities of substantially less than 30 years). Each such GNMA 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 GNMA Issuer to the registered holder of such GNMA Certificate of 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 such GNMA Certificate, less the applicable servicing and guaranty fee, which together equal the difference between the interest on the FHA Loan or VA Loan and the pass-through rate on the GNMA Certificate. In addition, each payment will include proportionate pass-through payments of any prepayments of principal on the FHA Loans or VA Loans underlying such GNMA Certificate and liquidation proceeds in the event of a foreclosure or other disposition of any such FHA Loans or VA Loans. If a GNMA Issuer is unable to make the payments on a GNMA Certificate as it becomes due, it must promptly notify GNMA and request GNMA to make such payment. Upon notification and request, GNMA will make such payments directly to the registered holder of such GNMA Certificate. In the event no payment is made by a GNMA Issuer and the GNMA Issuer fails to notify and request GNMA to make such payment, the holder of such GNMA Certificate will have recourse only against GNMA to obtain such payment. The Bond Trustee or its nominee, as registered holder of the GNMA Certificates securing a Series of Bonds will have the right to proceed directly against GNMA under the terms of the Guaranty Agreements relating to such GNMA Certificates for any amounts that are not paid when due. All mortgage loans underlying a particular GNMA 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 such GNMA I Certificate will equal the interest rate on the mortgage loans included in the pool of mortgage loans underlying such GNMA I Certificate, less one-half percentage point per annum of the unpaid principal balance of the mortgage loans. Mortgage loans underlying a particular GNMA II Certificate may have per annum interest rates that vary from each other by up to one percentage point. The interest rate on each GNMA II Certificate will be between one-half percentage point and one and one-half percentage points lower than the highest interest rate on the mortgage loans included in the pool of mortgage loans underlying such GNMA II Certificate (except for pools of mortgage loans secured by manufactured homes). Regular monthly installment payments on each GNMA Certificate securing a Series of Bonds will be comprised of interest due as specified on such GNMA Certificate plus the scheduled principal payments on the FHA Loans or VA Loans underlying such GNMA Certificate due on the first day of the month in which the scheduled monthly installments on such GNMA Certificate are due. Such regular monthly installments on each such GNMA Certificate are required to be paid to the registered holder by the 15th day of each month in the case of a GNMA I Certificate and are required to be mailed to the registered holder by the 20th day of each month in the case of a GNMA II Certificate. Any principal prepayments on any FHA Loans or VA Loans underlying a GNMA Certificate securing a Series of Bonds or any other early recovery of principal on such loans will be passed through to the registered holder of such GNMA Certificate. GNMA Certificates may be backed by graduated payment mortgage loans or by Buydown 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 loan. Payments due the registered holders of GNMA Certificates backed by pools containing Buydown Loans will be computed in the same manner as payments derived from other GNMA Certificates and will include amounts to be collected from both the borrower and the related 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 such graduated payment mortgage loans and, together with interest thereon, will be paid in subsequent years. The obligations of GNMA and of a GNMA Issuer will be the same irrespective of whether the GNMA Certificates are backed by graduated payment mortgage loans or Buydown Loans. No statistics comparable to the FHA's prepayment experience on level payment, non-"buydown" mortgage loans are available in respect 43 143 of graduated payment or Buydown Loans. GNMA Certificates related to a Series of Bonds may he held in book-entry form. The GNMA Certificates securing a Series of Bonds, and the related underlying mortgage loans, may have characteristics and terms different from those described above. Any such different characteristics and terms will be described in the related Prospectus Supplement. FNMA CERTIFICATES. FNMA is a federally chartered and privately owned corporation organized and existing under the Federal National Mortgage Association Charter Act, as amended. FNMA originally was 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. FNMA provides funds to the mortgage market primarily by purchasing mortgage loans from lenders, thereby replenishing their funds for additional lending. FNMA 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, FNMA helps to redistribute mortgage funds from capital-surplus to capital-short areas. FNMA Certificates are Guaranteed Mortgage Pass-Through Certificates representing fractional undivided interests in a pool of mortgage loans formed by FNMA. Each mortgage loan generally must meet the applicable standards of the FNMA purchase program. Mortgage loans comprising a pool are either provided by FNMA from its own portfolio or purchased pursuant to the criteria of the FNMA purchase program. Mortgage loans underlying FNMA Certificates securing a Series of Bonds will consist of conventional loans, FHA Loans or VA Loans. Original maturities of substantially all of the conventional, level payment mortgage loans underlying a FNMA Certificate are expected to be between either 8 to 15 years or 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 FNMA Certificate may have annual interest rates that vary by as much as two percentage points from each other. The rate of interest payable on a FNMA Certificate is equal to the lowest interest rate of any mortgage loan in the related pools, less a specified minimum annual percentage representing servicing compensation and FNMA'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 FNMA Certificate will be between 50 basis points and 250 basis points greater than is its annual pass-through rate and under a special servicing option (pursuant to which FNMA assumes the entire risk for foreclosure losses), the annual interest rates on the mortgage loans underlying a FNMA Certificate will generally be between 55 basis points and 255 basis points greater than the annual FNMA Certificate pass-through rate. One "basis point" is equal to one-hundredth of a percentage point (0.01%). If specified in the related Prospectus Supplement, FNMA Certificates may be backed by adjustable rate mortgages. FNMA guarantees to each registered holder of a FNMA Certificate that it will distribute amounts representing such holder's proportionate share of scheduled principal and interest payments at the applicable pass-through rate provided for by such FNMA Certificate on the underlying mortgage loans, whether or not received, and such 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 FNMA under its guaranties are obligations solely of FNMA 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 FNMA up to $2.25 billion outstanding at any time, neither the United States nor any agency thereof is obligated to finance FNMA's operations or to assist FNMA in any other manner. If FNMA were unable to satisfy its obligations, distributions to holders of FNMA Certificates would consist solely of payments and other recoveries on the underlying mortgage loans and accordingly, monthly distributions to holders of FNMA Certificates would be affected by delinquent payments and defaults on such mortgage loans. 44 144 FNMA Certificates evidencing interests in pools of mortgage loans formed on or after May 1, 1985 (other than FNMA 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 FNMA Certificate will be made by FNMA on the 25th day of each month to the persons in whose name the FNMA Certificate is entered in the books of the Federal Reserve Banks (or registered on the FNMA Certificate register in the case of fully registered FNMA Certificates) as of the close of business on the last day of the preceding month. With respect to FNMA Certificates issued in book-entry form, distributions thereon will be made by wire, and with respect to fully registered FNMA Certificates, distributions thereon will be made by check. The FNMA Certificates securing a Series of Bonds, and the related underlying mortgage loans, may have characteristics and terms different from those described above. Any such different characteristics and terms will be described in the related Prospectus Supplement. FHLMC CERTIFICATES. FHLMC is a corporate instrumentality of the United States created pursuant to Title III of the Emergency Home Finance Act of 1970, as amended (the "FHLMC Act"). The common stock of FHLMC is owned by the Federal Home Loan Banks and its preferred stock is owned by stockholders of the Federal Home Loan Banks. FHLMC 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 FHLMC currently consists of the purchase of first lien, conventional mortgage loans or participation interests in such mortgage loans and the sale of the mortgage loans or participations so purchased in the form of guaranteed mortgage securities, primarily FHLMC Certificates. FHLMC 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. Each FHLMC Certificate represents an undivided interest in a pool of mortgage loans that may consist of first lien Conventional Loans, FHA Loans or VA Loans. FHLMC Certificates are sold under the terms of a Mortgage Participation Certificate Agreement. A FHLMC Certificate may be issued under either FHLMC's Cash Program or Guarantor Program. Mortgage loans underlying the FHLMC Certificates securing a Series of Bonds will generally consist of mortgage loans with original terms to maturity of between 10 and 40 years. Each such mortgage loan must meet the applicable standards set forth in the FHLMC Act. A FHLMC Certificate group may include whole loans, participation interests in whole loans and undivided interests in whole loans and/or participations comprising another FHLMC Certificate group. Under the Guarantor Program, any such FHLMC Certificate group may include only whole loans or participation interests in whole loans. FHLMC guarantees to each registered holder of a FHLMC Certificate the timely payment of interest on the underlying mortgage loans to the extent of the applicable certificate interest rate on the registered holder's pro rata share of the unpaid principal balance outstanding on the underlying mortgage loans in the FHLMC Certificate group represented by such FHLMC Certificate, whether or not received. FHLMC also guarantees to each registered holder of a FHLMC Certificate collection by such holder of 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 Bonds, guarantee the timely payment of scheduled principal. Under FHLMC's Gold PC Program, FHLMC 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 guaranties, FHLMC indemnifies holders of FHLMC Certificates against any diminution in principal by reason of charges for property repairs, maintenance and foreclosure. FHLMC 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 45 145 payment of principal. In taking actions regarding the collection of principal after default on the mortgage loans underlying FHLMC Certificates, including the timing of any demand for acceleration, FHLMC reserves the right to exercise its judgment with respect to the mortgage loans in the same manner as for mortgage loans that it has purchased but not sold. The length of time necessary for FHLMC to determine that a mortgage loan should be accelerated varies with the particular circumstances of each mortgagor and FHLMC has not adopted standards which require that the demand be made within any specified period. FHLMC 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 FHLMC under its guaranty are obligations solely of FHLMC and are not backed by, or entitled to, the full faith and credit of the United States. If FHLMC were unable to satisfy such obligations, distributions to holders of FHLMC Certificates would consist solely of payments and other recoveries on the underlying mortgage loans and, accordingly, monthly distributions to holders of FHLMC Certificates would be affected by delinquent payments and defaults on such mortgage loans. Registered holders of FHLMC Certificates are entitled to receive their monthly pro rata share of all principal payments on the underlying mortgage loans received by FHLMC, including any scheduled principal payments, full and partial prepayments of principal and principal received by FHLMC by virtue of condemnation, insurance, liquidation or foreclosure and repurchases of the mortgage loans by FHLMC or the seller thereof. FHLMC is required to remit each registered FHLMC certificateholder's pro rata share of principal payments on the underlying mortgage loans, interest at the FHLMC pass-through rate and any other sums such as prepayment fees, within 60 days of the date on which such payments are deemed to have been received by FHLMC. Under FHLMC's Cash Program, there is no limitation on the amount by which interest rates on the mortgage loans underlying a FHLMC Certificate may exceed the pass-through rate on the FHLMC Certificate. Under such program, FHLMC 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 FHLMC. 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 FHLMC Certificate group under the Cash Program will vary since mortgage loans and participations are purchased and assigned to a FHLMC Certificate group based upon their yield to FHLMC rather than on the interest rate on the underlying mortgage loans. Under FHLMC's Guarantor Program, the pass-through rate on a FHLMC Certificate is established based upon the lowest interest rate on the underlying mortgage loans, minus a minimum servicing fee and the amount of FHLMC's management and guaranty income as agreed upon between the seller and FHLMC. FHLMC 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 FHLMC 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 became a registered holder of such FHLMC Certificate. 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 FHLMC Certificates sold by FHLMC on or after January 2, 1985, and makes payments of principal and interest each month to the registered holders thereof in accordance with such holders' instructions. PRIVATE MORTGAGE-BACKED SECURITIES Private Mortgage-Backed Securities may consist of (a) mortgage pass-through certificates evidencing an undivided interest in a pool of mortgage loans or (b) collateralized mortgage obligations secured by mortgage loans. Private Mortgage-Backed Securities may include stripped mortgage-backed securities representing an undivided interest in all or part of either the principal distributions (but not the interest distributions) or the interest distributions (but not the principal distributions) or in some specified portion of the principal and 46 146 interest distributions (but not all of such distributions) on certain mortgage loans. Private Mortgage-Backed Securities will have been issued pursuant to a pooling and servicing agreement, an indenture or similar agreement (a "PMBS Agreement"). Unless otherwise specified in the related Prospectus Supplement, the seller/servicer of the underlying mortgage loans will have entered into the PMBS Agreement with the trustee under such PMBS Agreement (the "PMBS Trustee"). The PMBS Trustee or its agent, or a custodian will possess the mortgage loans underlying such Private Mortgage-Backed Security. Mortgage loans underlying a Private Mortgage-Backed Security will be serviced by a servicer (the "PMBS Servicer") directly or by one or more subservicers who may be subject to the supervision of the PMBS Servicer. Private Mortgage-Backed Securities must either (a) have been previously registered under the Securities Act or (b) if not so registered, held for at least the holding period required by Rule 144(k) under the Securities Act or constitute less than 10% of the aggregate Mortgage Collateral securing a Series of Bonds. The issuer of the Private Mortgage-Backed Securities (the "PMBS 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 such trusts and selling beneficial interests in such trusts. If so specified in the related Prospectus Supplement, the PMBS Issuer may be an affiliate of the Depositor. The obligations of the PMBS Issuer will generally be limited to certain representations and warranties with respect to the assets conveyed by it to the related trust. Unless otherwise specified in the related Prospectus Supplement, the PMBS 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 PMBS Agreement. Additionally, although the mortgage 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. 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 PMBS Trustee or the PMBS Servicer. The PMBS Issuer or the PMBS Servicer may have the right to repurchase assets underlying the Private Mortgage-Backed Securities after a certain date or under other circumstances specified in the related Prospectus Supplement. The mortgage 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 mortgage loans or loans having balloon or other special payment features. Such mortgage loans may be secured by single (one- to four-) family property or multifamily property 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 such Cooperative. The Prospectus Supplement for a Series of Bonds for which the Mortgage Collateral includes Private Mortgage-Backed Securities will specify the aggregate approximate principal amount and type of the Private Mortgage-Backed Securities to be included in the Mortgage Collateral and, as to any such Private Mortgage-Backed Securities comprising a significant part of the Mortgage Collateral, to the extent such information is known to the Issuer, will in general include the following: (i) certain characteristics of the mortgage loans that comprise the underlying assets for the Private Mortgage-Backed Securities including (A) the payment features of such mortgage loans, (B) the approximate aggregate principal balance of underlying mortgage loans insured or guaranteed by a governmental entity, (C) the servicing fee or range of servicing fees with respect to the mortgage loans and (D) the minimum and maximum stated maturities of the underlying mortgage loans at origination; (ii) the maximum original term to stated maturity of the Private Mortgage-Backed Securities; (iii) the weighted average term to stated maturity of the Private Mortgage-Backed Securities; (iv) the pass-through or interest rate of the Private Mortgage-Backed Securities; (v) the weighted average pass-through or interest rate of the Private Mortgage-Backed Securities; (vi) the PMBS Issuer, the PMBS Servicer (if other than the PMBS Issuer) and the PMBS Trustee for such Private Mortgage-Backed 47 147 Securities; (vii) certain characteristics of credit support, if any, such as reserve funds, insurance policies, surety bonds, letters of credit or guaranties relating to the mortgage loans underlying the Private Mortgage-Backed Securities or to such Private Mortgage-Backed Securities themselves; (viii) the terms on which the underlying mortgage loans for such 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 the terms of any redemption or other call feature; and (ix) the terms on which mortgage loans may be substituted for those originally underlying the Private Mortgage-Backed Securities. SUBSTITUTION OF MORTGAGE COLLATERAL Substitution of Mortgage Collateral (the "Substitute Collateral") will be permitted in the event of breaches of representations and warranties with respect to any original Mortgage Collateral or in the event the documentation with respect to any Mortgage Collateral is determined by the Bond Trustee to be incomplete. The period during which such substitution will be permitted generally will be indicated in the Prospectus Supplement for a Series of Bonds. The Prospectus Supplement for a Series of Bonds will describe any other conditions upon which Mortgage Collateral may be substituted for Mortgage Collateral initially securing such Series. OPTIONAL PURCHASE OF DEFAULTED PLEDGED MORTGAGES If so provided in the related Prospectus Supplement, the Master Servicer and/or the Company may, at its option, purchase from the Issuer any Pledged Mortgage which is delinquent in payment by more than the number of days specified in such Prospectus Supplement, at a price specified in such Prospectus Supplement. BOND AND DISTRIBUTION ACCOUNTS A separate Bond Account will be established with the Bond Trustee for each Series of Bonds for receipt of (i) all interest and principal payments (including, to the extent applicable, any required advances by the Master Servicer and any Servicers) and all prepayments on the Mortgage Collateral securing such Series required to be remitted to the Bond Trustee (including, to the extent applicable, Insurance Proceeds required to be remitted to the Bond Trustee and Liquidation Proceeds); (ii) the amount of cash, if any, withdrawn from any related Reserve Fund; and (iii) if so specified in the related Prospectus Supplement, the reinvestment income on all of the foregoing. On or prior to the date specified in the related Prospectus Supplement (each, a "Distribution Account Deposit Date"), the Master Servicer shall withdraw from the Bond Account the Bond Distribution Amount for such Payment Date, to the extent of funds available for such purpose on deposit therein, and will deposit such amount in the Distribution Account. The Bond Trustee will invest the funds in the Bond Account and the Distribution Account in Permitted Investments maturing no later than the next Payment Date for the related Series of Bonds. (Indenture, Section 8.02(b)) Unless otherwise provided in the related Prospectus Supplement, "Permitted Investments" may include (i) obligations of the United States or any agency thereof, provided such obligations are backed by the full faith and credit of the United States; (ii) general obligations of or obligations guaranteed by any state of the United States or the District of Columbia receiving the highest long-term debt rating of each applicable Rating Agency, or such lower rating which will not result in a change in the rating then assigned to each related Series of Bonds by each applicable Rating Agency, (iii) commercial paper or finance company paper which is then receiving the highest commercial or finance company paper rating of each applicable Rating Agency, or such lower rating as will not result in a change in the rating then assigned to each related Series of Bonds by each applicable Rating Agency; (iv) certificates of deposit, demand or time deposits, or bankers' acceptances issued by any depository institution or trust company incorporated under the laws of the United States or of any state thereof and subject to supervision and examination by federal and/or state banking authorities, provided that the commercial paper and/or long term unsecured debt obligations of such depository institution or trust company (or in the case of the principal depository institution in a holding company system, the commercial paper or long-term unsecured debt obligations of such holding company, but only if Moody's Investors Service, Inc. ("Moody's") is not an applicable Rating Agency) are then rated one of the two highest long-term and the highest short-term ratings of each such Rating Agency for such 48 148 securities, or such lower ratings as will not result in a change in the rating then assigned to each related Series of Bonds by each Rating Agency; (v) demand or time deposits or certificates of deposit issued by any bank or trust company or savings institution to the extent such deposits are fully insured by the FDIC; (vi) guaranteed reinvestment agreements issued by any bank, insurance company or other corporation containing, at the time of the issuance of such agreements, such terms and conditions as will not result in a change in the rating then assigned to each related Series of Bonds by each applicable Rating Agency; (vii) repurchase obligations with respect to any security described in clauses (i) and (ii) above, in either case entered into with a depository institution or trust company (acting as principal) described in clause (iv) above; (viii) securities (other than stripped bonds, stripped coupons or instruments sold at a purchase price in excess of 115% of the face amount thereof) bearing interest or sold at a discount issued by any corporation incorporated under the laws of the United States or any state thereof which, at the time of such investment, have one of the two highest ratings of each applicable Rating Agency (except if the Rating Agency is Moody's, such rating shall be the highest commercial paper rating of Moody's for any such securities), or such lower rating as will not result in a change in the rating then assigned to each related Series of Bonds by each applicable Rating Agency, as evidenced by a signed writing delivered by each such Rating Agency; (ix) 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 the highest applicable rating by each applicable Rating Agency or such lower rating as will not result in a change in the rating then assigned to each related Series of Bonds by each such Rating Agency; and (x) short term investment funds 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 each applicable Rating Agency in their respective highest applicable rating category or such lower rating as will not result in a change in the rating then assigned to each related Series of Bonds by each such Rating Agency; provided that no such instrument shall be a Permitted Investment if such instrument evidences the right to receive interest only payments with respect to the obligations underlying such instrument; and provided, further, that no investment specified in clause (ix) or clause (x) above shall be a Permitted Investment for any Pre-Funding Account or any related Capitalized Interest Account (as defined herein). If a letter of credit is deposited with the Bond Trustee, such letter of credit will be irrevocable, will name the Bond Trustee, in its capacity as trustee for the Bondholders, as the sole beneficiary and will be issued by a bank acceptable to each applicable Rating Agency. (Indenture, Section 1.01) Unless an Event of Default or an event which if not timely cured will constitute an Event of Default with respect to a Series of Bonds has occurred and is continuing, funds remaining in the related Bond Account following a Payment Date for such Bonds (other than certain amounts not constituting Available Funds if so specified in the related Prospectus Supplement or any funds required to be deposited in a related Reserve Fund) will be subject to withdrawal upon the order of the Issuer free from the lien of the Indenture. PLEDGE OF ADDITIONAL MORTGAGE COLLATERAL AND ISSUANCE OF ADDITIONAL BONDS If so specified in the related Prospectus Supplement, the Issuer may pledge additional Mortgage Collateral ("Additional Mortgage Collateral") to the Bond Trustee and issue additional Bonds ("Additional Bonds") of that Series within five years of the date of initial issuance of the Bonds of such Series. Such Additional Bonds may represent additional Bonds of one or more outstanding Classes of Bonds or may represent one or more new Classes of Bonds of such Series. Any such Additional Bonds will be issued pursuant to a Prospectus Supplement, which will describe the characteristics of the Additional Mortgage Collateral and the material terms of the Additional Bonds. Unless otherwise specified in the related Prospectus Supplement, any pledge of Additional Mortgage Collateral and issuance of Additional Bonds will be subject to satisfaction of the following conditions: (a) each Rating Agency rating any outstanding Class of Bonds of the related Series will confirm that the pledge of Additional Mortgage Collateral and other additional Collateral, if any, and the corresponding issuance of Additional Bonds will not result in the downgrading of the credit rating of any outstanding Class of Bonds of such Series, (b) the pledge of Additional Mortgage Collateral will not affect the interest rate, Stated Maturity Date or Payment Dates of any outstanding Bonds of such Series, (c) the weighted average life of each outstanding Class of Bonds calculated at the prepayment rate assumed for the pricing of the initial issuance of such Class of Bonds will not vary by more than the non-material amount disclosed in the Prospectus Supplement for the initial issuance of the Bonds of such Series, 49 149 and (d) the characteristics of the Additional Mortgage Collateral and the Mortgage Collateral as augmented by the Additional Mortgage Collateral will conform to the parameters for Mortgage Collateral disclosed in the Prospectus Supplement for the initial issuance of Bonds of such Series. However, there can be no assurance that any pledge of Additional Mortgage Collateral and issuance of Additional Bonds would not affect the timing or amount of payments received by holders of the outstanding Bonds of that Series. Provided that the conditions described in the related Prospectus Supplement for the outstanding Bonds are satisfied, the pledge of Additional Mortgage Collateral and the issuance of Additional Bonds will not be subject to the prior consent of the holders of the outstanding Bonds of such Series. Certain information with respect to the Additional Mortgage Collateral will be filed with the Commission on Form 8-K within fifteen days after the date of issuance of the related Additional Bonds. PRE-FUNDING ACCOUNT If so specified in the related Prospectus Supplement, the Master Servicer will establish and maintain a Pre-Funding Account, in the name of the related Bond Trustee on behalf of the related Bondholders, into which the Depositor will deposit cash in an amount equal to the Pre-Funded Amount on the related Closing Date. The Pre-Funding Account will be maintained with the Bond Trustee for the related Series of Bond and is designed solely to hold funds to be applied by such Bond Trustee during the Funding Period to pay to the Depositor the purchase price for Subsequent Mortgage Collateral. Monies on deposit in the Pre-Funding Account will not be available to cover losses on or in respect of the related Mortgage Collateral. The Pre-Funded Amount will not exceed 50% of the initial aggregate principal amount of the Bonds of the related Series. The Pre-Funded Amount will be used by the related Bond Trustee to purchase Subsequent Mortgage Collateral from the Depositor from time to time during the Funding Period. The Funding Period, if any, for a Series of Bonds will begin on the related Closing Date and will end on the date specified in the related Prospectus Supplement, which in no event will be later than the date that is one year after the related Closing Date. Monies on deposit in the Pre-Funding Account may be invested in Permitted Investments (as such term is defined above under "-- Bond and Distribution Accounts") under the circumstances and in the manner described in the related Agreement. Earnings on investment of funds in the Pre-Funding Account will be deposited into the related Bond Account or such other trust account as is specified in the related Prospectus Supplement and losses will be charged against the funds on deposit in the Pre-Funding Account. Any amounts remaining in the Pre-Funding Account at the end of the Funding Period will be paid to the related Bondholders in the manner and priority specified in the related Prospectus Supplement, as a prepayment of principal of the related Bonds. Certain information with respect to the Subsequent Mortgage Collateral will be filed with the Commission on Form 8-K within fifteen days after the date such Subsequent Mortgage Collateral is conveyed to the related Trust. In addition, if so specified in the related Prospectus Supplement, on the related Closing Date the Depositor will deposit in an account (the "Capitalized Interest Account") cash in such amount as is necessary to cover shortfalls in interest on the related Series of Bonds that may arise as a result of utilization of the Pre-Funding Account as described above. The Capitalized Interest Account shall be maintained with the Bond Trustee for the related Series of Bonds and is designed solely to cover the above-mentioned interest shortfalls. Monies on deposit in the Capitalized Interest Account will not be available to cover losses on or in respect of the related Mortgage Collateral. To the extent that the entire amount on deposit in the Capitalized Interest Account has not been applied to cover shortfalls in interest on the related Series of Bonds by the end of the Funding Period, any amounts remaining in the Capitalized Interest Account will be paid to the Depositor. CREDIT ENHANCEMENT GENERAL Credit enhancement may be provided with respect to one or more Classes of a Series of Bonds or with respect to the related Mortgage Collateral. Credit enhancement may be in the form of the subordination of one or more Classes of such Series, the establishment of one or more Reserve Funds, use of a Mortgage Pool Insurance Policy, a Special Hazard Insurance Policy, Bankruptcy Bond, surety bond, letter of credit, 50 150 guaranteed investment contract or other method of credit enhancement described herein and in the related Prospectus Supplement, or any combination of the foregoing. Unless otherwise specified in the related Prospectus Supplement, no credit enhancement will provide protection against all risks of loss or guarantee repayment of the entire principal balance of the Bonds and interest thereon. If losses occur which exceed the amount covered by credit enhancement or which are not covered by the credit enhancement, Bondholders will bear their allocable share of any deficiencies. SUBORDINATION If so specified in the related Prospectus Supplement, a Series of Bonds may consist of one or more Classes of Senior Bonds and one or more Classes of Subordinated Bonds. The rights of the holders of the Subordinated Bonds of a Series (the "Subordinated Bondholders") to receive payments of principal and/or interest (or any combination thereof) will be subordinated to such rights of the holders of the Senior Bonds of the same Series (the "Senior Bondholders") to the extent described in the related Prospectus Supplement. This subordination is intended to enhance the likelihood of regular receipt by the Senior Bondholders of the full amount of their scheduled payments of principal and/or interest. The protection afforded to the Senior Bondholders of a Series by means of the subordination feature will be accomplished by (i) the preferential right of such holders to receive, prior to any payment being made on the related Subordinated Bonds, the amounts of principal and/or interest due them on each Payment Date out of the funds available for payment on such date in the related Distribution Account and, to the extent described in the related Prospectus Supplement, by the right of such holders to receive future payments that would otherwise have been payable to the Subordinated Bondholders; or (ii) as otherwise described in the related Prospectus Supplement. If so specified in the related Prospectus Supplement, subordination may apply only in the event of certain types of losses not covered by other forms of credit support, such as hazard losses not covered by standard hazard insurance policies or losses due to the bankruptcy or fraud of the borrower. The related Prospectus Supplement will set forth information concerning, among other things, the amount of subordination of a Class or Classes of Subordinated Bonds in a Series, the circumstances in which such subordination will be applicable and the manner, if any, in which the amount of subordination will decrease over time. If so specified in the related Prospectus Supplement, delays in receipt of scheduled payments on the Mortgage Collateral and losses with respect to the Mortgage Collateral will be borne first by the various Classes of Subordinated Bonds and thereafter by the various Classes of Senior Bonds, in each case under the circumstances and subject to the limitations specified in such Prospectus Supplement. The aggregate payments in respect of delinquent payments on the Mortgage Collateral over the lives of the Bonds or at any time, the aggregate losses in respect of Mortgage Collateral which must be borne by the Subordinated Bonds by virtue of subordination and the amount of payments otherwise distributable to the Subordinated Bondholders that will be distributable to Senior Bondholders on any Payment Date may be limited as specified in the related Prospectus Supplement. If aggregate payments in respect of delinquent payments on the Mortgage Collateral or aggregate losses in respect of such Mortgage Collateral were to exceed the amount specified in the related Prospectus Supplement, Senior Bondholders would experience losses on the Bonds. If so specified in the related Prospectus Supplement, various Classes of Senior Bonds and Subordinated Bonds may themselves be subordinate in their right to receive certain payments to other Classes of Senior and Subordinated Bonds, respectively. As between Classes of Senior Bonds and as between Classes of Subordinated Bonds, payments may be allocated among such Classes (i) in accordance with a schedule or formula, (ii) in relation to the occurrence of events or (iii) otherwise, in each case as specified in the related Prospectus Supplement. As between Classes of Subordinated Bonds, payments to Senior Bondholders on account of delinquencies or losses and payments to the Reserve Fund will be allocated as specified in the related Prospectus Supplement. RESERVE FUNDS If so specified in the related Prospectus Supplement, the Issuer will deposit in one or more accounts to be established with the Bond Trustee (each, a "Reserve Fund") cash, certificates of deposit, letters of credit, 51 151 surety bonds, guaranteed investment contracts or any combination thereof, which may be used by the Bond Trustee to make payments on such Series of Bonds to the extent funds are not otherwise available. Reserve Funds will be established if they are deemed by the Issuer to be required to assure timely payment of principal of, and interest on, its Series of Bonds or are otherwise required as a condition to the rating of such Bonds by any Rating Agency, or if the Issuer chooses to reduce the likelihood of a special redemption of such Bonds. The Bond Trustee will invest any cash in any Reserve Fund in Permitted Investments maturing no later than the dates specified in the related Prospectus Supplement. If a letter of credit is deposited with the Bond Trustee, such letter of credit will be irrevocable, will name the Bond Trustee, in its capacity as trustee for the Bondholders, as the sole beneficiary and will be issued by a bank acceptable to each Rating Agency. If a surety bond is deposited with the Bond Trustee, such surety bond will represent an obligation of an insurance company or other corporation whose credit standing is acceptable to each Rating Agency and will provide that the Bond Trustee may exercise all of the rights of the Issuer under such surety bond without the necessity of the taking of any action by the Issuer. Following each Payment Date for such Series of Bonds, amounts may be withdrawn from the related Reserve Funds and remitted to the Issuer free from the lien of the Indenture under the conditions and to the extent specified in the related Prospectus Supplement. Additional information concerning any Reserve Fund securing a Series of Bonds, including without limitation the manner in which such Reserve Fund shall be funded and the conditions under which the amounts on deposit therein will be used to make payments to holders of Bonds of a particular Class of the related Series will be set forth in the related Prospectus Supplement. MORTGAGE POOL INSURANCE POLICIES If so specified in the related Prospectus Supplement, a separate mortgage pool insurance policy or policies ("Mortgage Pool Insurance Policy") may be obtained for a Series of Bonds secured by Pledged Mortgages and issued by the insurer (the "Pool Insurer") named in such Prospectus Supplement. Each Mortgage Pool Insurance Policy will, subject to the limitations described below, cover loss by reason of default in payment on the related Pledged Mortgages in an amount equal to a percentage specified in such Prospectus Supplement of the aggregate principal balance of such Pledged Mortgages on the Cut-off Date which are not covered as to their entire outstanding principal balances by Primary Mortgage Insurance Policies. As more fully described below, the Master Servicer will present claims thereunder to the Pool Insurer on behalf of itself, the Bond Trustee and the Bondholders. The Mortgage Pool Insurance Policies, however, are not blanket policies against loss, since claims thereunder may be made only respecting particular defaulted Pledged Mortgages and only upon satisfaction of certain conditions precedent described below. Unless otherwise specified in the related Prospectus Supplement, the Mortgage Pool Insurance Policies will not cover losses due to a failure to pay or denial of a claim under a Primary Mortgage Insurance Policy. Unless otherwise specified in the related Prospectus Supplement, each Mortgage Pool Insurance Policy will provide that no claims may be validly presented unless (i) any required Primary Mortgage Insurance Policy is in effect for the defaulted Pledged Mortgage and a claim thereunder has been submitted and settled; (ii) hazard insurance on the related Mortgaged Property has been kept in force and real estate taxes and other protection and preservation expenses have been paid; (iii) if there has been physical loss or damage to the Mortgaged Property, it has been restored to its physical condition (reasonable wear and tear excepted) at the time of issuance of the policy; and (iv) the insured has acquired good and merchantable title to the Mortgaged Property free and clear of liens except certain permitted encumbrances. Upon satisfaction of these conditions, the Pool Insurer will have the option either (a) to purchase the Mortgaged Property at a price equal to the principal balance of the related Pledged Mortgage plus accrued and unpaid interest at the Mortgage Rate to the date of such purchase and certain expenses incurred by the Master Servicer on behalf of the Bond Trustee and Bondholders or (b) to pay the amount by which the sum of the principal balance of the defaulted Pledged Mortgage plus accrued and unpaid interest at the Mortgage Rate to the date of payment of the claim and the aforementioned expenses exceeds the proceeds received from an approved sale of the Mortgaged Property, in either case net of certain amounts paid or assumed to have been paid under the related Primary Mortgage Insurance Policy. If any Mortgaged Property is damaged, and proceeds, if any, from the related standard 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 Mortgage Pool Insurance Policy, the 52 152 Master Servicer will not be required to expend its own funds to restore the damaged property unless it determines that (i) such restoration will increase the proceeds to Bondholders on liquidation of the Pledged Mortgage after reimbursement of the Master Servicer for its expenses and (ii) such expenses will be recoverable by it through proceeds of the sale of the Mortgaged Property or proceeds of the related Mortgage Pool Insurance Policy or any related Primary Mortgage Insurance Policy. Unless otherwise specified in the related Prospectus Supplement, no Mortgage Pool Insurance Policy will insure (and many Primary Mortgage Insurance Policies do not insure) against loss sustained by reason of a default arising from, among other things, (i) fraud or negligence in the origination or servicing of a Pledged Mortgage, including misrepresentation by the Mortgagor, the originator or persons involved in the origination thereof, or (ii) failure to construct a Mortgaged Property in accordance with plans and specifications. A failure of coverage attributable to one of the foregoing events might result in a breach of the related Seller's representations described above and, in such event, might give rise to an obligation on the part of such Seller to repurchase the defaulted Pledged Mortgage if the breach cannot be cured by such Seller. No Mortgage Pool Insurance Policy will cover (and many Primary Mortgage Insurance Policies do not cover) a claim in respect of a defaulted Pledged Mortgage occurring when the servicer of such Pledged Mortgage, at the time of default or thereafter, was not approved by the applicable insurer. Unless otherwise specified in the related Prospectus Supplement, the original amount of coverage under each Mortgage Pool Insurance Policy will be reduced over the life of the related Bonds by the aggregate dollar amount of claims paid less the aggregate of the net amounts realized by the Pool Insurer upon disposition of all foreclosed properties. The amount of claims paid will include certain expenses incurred by the Master Servicer as well as accrued interest on delinquent Pledged Mortgages to the date of payment of the claim, unless otherwise specified in the related Prospectus Supplement. Accordingly, if aggregate net claims paid under any Mortgage Pool Insurance Policy reach the original policy limit, coverage under that Mortgage Pool Insurance Policy will be exhausted and any further losses will be borne by the Bondholders. SPECIAL HAZARD INSURANCE POLICIES If so specified in the related Prospectus Supplement, a separate Special Hazard Insurance Policy may be obtained for a Series of Bonds secured by Pledged Mortgages and will be issued by the insurer (the "Special Hazard Insurer") named in such Prospectus Supplement. Each Special Hazard Insurance Policy will, subject to limitations described below, protect holders of the related Bonds from (i) loss by reason of damage to Mortgaged Properties caused by certain hazards (including earthquakes and, to a limited extent, tidal waves and related water damage or as otherwise specified in the related Prospectus Supplement) not insured against under the standard form of hazard insurance policy for the respective states in which the Mortgaged Properties are located or under a flood insurance policy (unless the Mortgaged Property is located in a federally designated flood area) and (ii) loss caused by reason of the application of the coinsurance clause contained in standard hazard insurance policies. No Special Hazard Insurance Policy will cover losses occasioned by fraud or conversion by the Bond Trustee or Master Servicer, war, insurrection, civil war, certain governmental action, errors in design, faulty workmanship or materials (except under certain circumstances), nuclear or chemical reaction, flood (if the Mortgaged Property is located in a federally designated flood area), nuclear or chemical contamination and certain other risks. The amount of coverage under any Special Hazard Insurance Policy will be specified in the related Prospectus Supplement. Each Special Hazard Insurance Policy will provide that no claim may be paid unless hazard and, if applicable, flood insurance on the property securing the Pledged Mortgage have been kept in force and other protection and preservation expenses have been paid. Subject to the foregoing limitations, and unless otherwise specified in the related Prospectus Supplement, each Special Hazard Insurance Policy will provide that where there has been damage to property securing a foreclosed Pledged Mortgage (title to which has been acquired by the insured) and to the extent such damage is not covered by the standard hazard insurance policy or flood insurance policy, if any, maintained by the mortgagor or the Master Servicer, the Special Hazard Insurer will pay the lesser of (i) the cost of repair or replacement of such property or (ii) upon transfer of the property to the Special Hazard Insurer, the unpaid principal balance of such Pledged Mortgage at the time of acquisition of such property by foreclosure or deed in lieu of foreclosure, plus accrued interest to the date of claim settlement and certain expenses incurred by the 53 153 Master Servicer with respect to such property. If the unpaid principal balance of a Pledged Mortgage plus accrued interest and certain expenses is paid by the Special Hazard Insurer, the amount of further coverage under the related Special Hazard Insurance Policy will be reduced by such amount less any net proceeds from the sale of the property. Any amount paid as the cost of repair of such property will further reduce coverage by such amount. So long as a Mortgage Pool Insurance Policy remains in effect, the payment by the Special Hazard Insurer of the cost of repair or of the unpaid principal balance of the related Pledged Mortgage plus accrued interest and certain expenses will not affect the total insurance proceeds paid to Bondholders, but will affect the relative amounts of coverage remaining under the related Special Hazard Insurance Policy and Mortgage Pool Insurance Policy. To the extent specified in the related Prospectus Supplement, the Master Servicer may deposit cash, an irrevocable letter of credit or any other instrument acceptable to each applicable Rating Agency in a special trust account to provide protection in lieu of or in addition to that provided by a Special Hazard Insurance Policy. The amount of any Special Hazard Insurance Policy or of the deposit to the special trust account in lieu thereof relating to such Bonds may be reduced so long as any such reduction will not result in a downgrading of the rating of such Bonds by any applicable Rating Agency. BANKRUPTCY BONDS If so specified in the related Prospectus Supplement, a bankruptcy bond or bonds (the "Bankruptcy Bond") may be obtained for a Series of Bonds secured by Pledged Mortgages to cover losses resulting from proceedings under the federal Bankruptcy Code with respect to a Pledged Mortgage will be issued by an insurer named in such Prospectus Supplement. Each Bankruptcy Bond will cover, to the extent specified in the related Prospectus Supplement, certain losses resulting from a reduction by a bankruptcy court of scheduled payments of principal and interest on a Pledged Mortgage or a reduction by such court of the principal amount of a Pledged Mortgage and will cover certain unpaid interest on the amount of such a principal reduction from the date of the filing of a bankruptcy petition. The required amount of coverage under each Bankruptcy Bond will be set forth in the related Prospectus Supplement. Coverage under a Bankruptcy Bond may be cancelled or reduced by the Master Servicer if such cancellation or reduction would not adversely affect the then current rating or ratings of the related Bonds. See "CERTAIN LEGAL ASPECTS OF THE PLEDGED MORTGAGES -- Anti-Deficiency Legislation and Other Limitations on Lenders" herein. To the extent specified in the related Prospectus Supplement, the Master Servicer may deposit cash, an irrevocable letter of credit or any other instrument acceptable to each applicable Rating Agency in a special trust account to provide protection in lieu of or in addition to that provided by a Bankruptcy Bond. The amount of any Bankruptcy Bond or of the deposit to the special trust account in lieu thereof relating to such Bonds may be reduced so long as any such reduction will not result in a downgrading of the then current rating of such Bonds by any such Rating Agency. BOND INSURANCE POLICIES, SURETY BONDS AND GUARANTIES If specified in the related Prospectus Supplement, deficiencies in amounts otherwise payable on Bonds of a Series or certain Classes thereof will be covered by insurance policies and/or surety bonds provided by one or more insurance companies or sureties. Such instruments may cover, with respect to one or more Classes of Bonds of the related Series, timely payments of interest and/or full payments of principal on the basis of a schedule of principal payments set forth in or determined in the manner specified in the related Prospectus Supplement. In addition, if specified in the related Prospectus Supplement, a Series of Bonds may also be covered by other insurance or guaranties for the purpose of (i) maintaining timely payments or providing additional protection against losses on the Mortgage Collateral pledged to secure such Series, (ii) paying administrative expenses or (iii) establishing a minimum reinvestment rate on the payments made in respect of such Mortgage Collateral or principal payment rate on such Mortgage Collateral. Such arrangements may include agreements under which Bondholders are entitled to receive amounts deposited in various accounts held by the Bond Trustee upon the terms specified in such Prospectus Supplement. A copy of any such 54 154 instrument for a Series will be filed with the Commission as an exhibit to a Current Report on Form 8-K to be filed within 15 days of issuance of the Bonds of the related Series. LETTER OF CREDIT If so specified in the related Prospectus Supplement, credit enhancement may be provided by a letter of credit. The letter of credit, if any, with respect to a Series of Bonds will be issued by the bank or financial institution specified in the related Prospectus Supplement (the "L/C Bank"). Under the letter of credit, the L/C 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 related Prospectus Supplement of the aggregate principal balance of the Mortgage Collateral pledged to secure the related Series of Bonds on the related Cut-off Date or of one or more Classes of Bonds (the "L/C Percentage"). If so specified in the related 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 Pledged Mortgage. 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 L/C Bank under the letter of credit for each Series of Bonds will expire at the date specified in the related Prospectus Supplement. A copy of the letter of credit for a Series, if any, will be filed with the Commission 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. OVER-COLLATERALIZATION If so specified in the related Prospectus Supplement, credit enhancement may consist of over-collateralization whereby the aggregate principal balance of the related Mortgage Collateral exceeds the aggregate principal balance of the Bonds of the related Series. Such over-collateralization may exist on the related Closing Date or develop thereafter as a result of the application of a portion of the interest payments on each Pledged Mortgage or Certificate, as the case may be, as an additional payment in respect of principal to reduce the principal balance of a certain Class or Classes of Bonds and, thus, accelerate the rate of payment of principal on such Class or Classes of Bonds. CROSS-COLLATERALIZATION If so specified in the related Prospectus Supplement, separate groups of Mortgage Collateral may be pledged to secure separate Classes of the related Series of Bonds. In such case, credit support may be provided by a cross-collateralization feature which requires that payments be made with respect to Bonds secured by one or more groups of Mortgage Collateral prior to distributions to Subordinated Bonds secured by one or more other groups of Mortgage Collateral. Cross-collateralization may be provided by (i) the allocation of certain excess amounts generated by one or more groups of Mortgage Collateral to one or more other groups of Mortgage Collateral or (ii) the allocation of losses with respect to one or more groups of Mortgage Collateral, to one or more other groups of Mortgage Collateral. Such excess amounts will be applied and/or such losses will be allocated to the Class or Classes of Subordinated Bonds of the related Series then outstanding having the lowest rating assigned by any applicable Rating Agency or the lowest payment priority, in each case to the extent and in the manner more specifically described in the related Prospectus Supplement. The Prospectus Supplement for a Series which includes a cross-collateralization feature will describe the manner and conditions for applying such cross-collateralization feature. If so specified in the related 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 Series of Bonds. If applicable, the related Prospectus Supplement will identify the Series of Bonds to which such credit enhancement relates and the manner of determining the amount of coverage provided to such Series of Bonds thereby and of the application of such coverage to the identified Series of Bonds. 55 155 MINIMUM PRINCIPAL PAYMENT AGREEMENT If so specified in the related Prospectus Supplement, an Issuer may enter into an agreement with an institution pursuant to which such institution will provide such funds as may be necessary to enable such Issuer to make principal payments on the Bonds of the related Series at a minimum rate set forth in such Prospectus Supplement. OTHER ARRANGEMENTS If so specified in the related Prospectus Supplement, other types of credit enhancement may be provided with respect to one or more Classes of Bonds of a Series or with respect to the Mortgage Collateral securing a Series of Bonds. Such credit enhancement may be in the form of insurance policies, guaranties, surety bonds, letters of credit, guaranteed investment contracts, cross support, cash accounts or reinvestment income for the purpose of (i) maintaining timely payments or providing additional protection against losses on the Collateral securing such Series of Bonds, (ii) paying administrative expenses or (iii) establishing a minimum reinvestment rate on the payments made in respect of such Collateral or principal payment rate on such Collateral. Such arrangements may include agreements under which Bondholders are entitled to receive amounts deposited in various accounts held by the Bond Trustee upon the terms specified in such Prospectus Supplement. In addition, if so specified in the related Prospectus Supplement, other arrangements may also include derivative arrangements. A derivative arrangement is a contract or agreement, the price of which is directly dependent upon (i.e., "derived from") the value of one or more underlying assets, including securities, equity indices, debt instruments, commodities, other derivative instruments, or any agreed upon pricing index or arrangement (e.g., the movement over time of the Consumer Price Index or interest rates). Derivatives involve rights or obligations based on the underlying asset, but do not necessarily result in a transfer of the underlying asset. Examples of derivative arrangements include swap agreements, interest rate swaps, interest rate caps, interest rate floors, interest rate collars and currency swap agreements. A "swap agreement" is a contractual agreement providing for a series of exchanges of principal and/or interest in the same or different currencies. At a more general level, the term "swap agreement" includes the exchange of fixed-for-floating payments on a given quantity of a specified commodity, security or other asset. An "interest rate swap" is a swap agreement between two parties to engage in a series of exchanges of interest payments on the same notional principal amount denominated in the same currency based, respectively, on variable and fixed rates of interest. An "interest rate cap" is an agreement providing for multi-period cash settled options on interest rates. The cap purchaser receives a cash payment whenever the reference rate exceeds the ceiling rate on a fixing date. An "interest rate floor" is an agreement providing for a multi-period interest rate option that provides a cash payment to the holder of the option whenever the reference rate is below the floor on a fixing date. An "interest rate collar" is an agreement providing for a combination of an interest rate cap and an interest rate floor such that a cap is purchased and a floor is sold or vice versa. The effect of an interest rate collar is to place upper and lower bounds on the cost of funds. A "currency swap agreement" is a swap agreement between two parties for the exchange of a future series of interest and principal payments in which one party pays in one currency and the other party pays in a different currency. The exchange rate is fixed over the life of the currency swap agreement. The arrangements described above will support the payments on the Bonds and may be used for other purposes, to the extent and under the conditions specified in the related Prospectus Supplement. Unless otherwise specified in the related Prospectus Supplement, no credit enhancement will provide protection against all risks of loss or guarantee repayment of the entire principal balance of the Bonds and interest thereon. If losses occur which exceed the amount covered by credit enhancement or which are not covered by the credit enhancement, Bondholders will bear their allocable share of any deficiencies. 56 156 SERVICING OF THE PLEDGED MORTGAGES GENERAL The Master Servicer of the Pledged Mortgages, if any, securing a Series of Bonds will be responsible for servicing such Pledged Mortgages in accordance with the terms set forth in a master servicing agreement (the "Master Servicing Agreement") among the Issuer, the Master Servicer and the Bond Trustee. The Master Servicer with respect to a Series of Bonds will be identified in the related Prospectus Supplement. The Master Servicer will perform certain of its servicing obligations under the Master Servicing Agreement through one or more servicers (each, a "Servicer") pursuant to one or more mortgage servicing agreements (each, a "Servicing Agreement"). Notwithstanding any such servicing arrangements, unless otherwise provided in the related Prospectus Supplement, the Master Servicer will remain liable for its servicing duties and obligations under the Master Servicing Agreement. No Servicing Agreement will contain any terms inconsistent with the related Master Servicing Agreement. While each Servicing Agreement will typically be a contract solely between Redwood Trust and the Servicer, Redwood Trust will assign all of its rights under each Servicing Agreement to the Depositor under the related Mortgage Loan Purchase Agreement and such rights will be assigned to the Bond Trustee pursuant to the Indenture. The Master Servicing Agreement relating to a Series of Bonds will provide that the Master Servicer and, if for any reason such Master Servicer is no longer the Master Servicer of the related Pledged Mortgages, the Bond Trustee or any successor Master Servicer must recognize the Servicer's rights and obligations under such Servicing Agreement. As an independent contractor, each Servicer will perform servicing functions for the Pledged Mortgages including collection and remittance of principal and interest payments, administration of mortgage escrow accounts, collection of certain insurance claims and, if necessary, foreclosure. The Master Servicer may permit Servicers to contract with subservicers to perform some or all of the Servicer's servicing duties, but the Servicer will not thereby be released from its obligations under the related Servicing Agreement. The Master Servicer also may enter into servicing contracts directly with an affiliate of a Servicer or permit a Servicer to transfer its servicing rights and obligations to a third party. In such instances, the affiliate or third party, as the case may be, will perform servicing functions comparable to those normally performed by the Servicer as described above, and the Servicer will not be obligated to perform such servicing functions. When used herein with respect to servicing obligations, the term Servicer includes any such affiliate or third party. The Master Servicer may perform certain supervisory functions with respect to servicing by the Servicers directly or through an agent or independent contractor. On or before the related Closing Date, the Master Servicer will establish one or more accounts (the "Custodial Account") into which each Servicer will remit collections on the Pledged Mortgages serviced by it (net of its related servicing compensation, amounts retained to pay certain insurance premiums and amounts retained by such Servicer as reimbursement for certain advances it has made). For purposes of the Master Servicing Agreement, the Master Servicer will be deemed to have received any amounts with respect to the Pledged Mortgages that are received by a Servicer regardless of whether such amounts are remitted by the Servicer to the Master Servicer. The Master Servicer will have the right under the Master Servicing Agreement to remove the Servicer servicing any Pledged Mortgages in the event such Servicer defaults under its Servicing Agreement and will exercise that right if the Master Servicer 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 continue to be responsible for servicing the related Pledged Mortgages. A form of Master Servicing Agreement has been filed as an exhibit to the Registration Statement of which this Prospectus forms a part. The Master Servicing Agreement with respect to a Series of Bonds secured by Pledged Mortgages will be assigned to the Bond Trustee as security for such Series. The following summaries describe certain provisions of the form of Master Servicing Agreement. The summaries are qualified in their entirety by reference to the form of Master Servicing Agreement. Where particular provisions or terms used in the form of Master Servicing Agreement are referred to, the actual provisions (including definitions of terms) are incorporated by reference as part of such summaries. 57 157 PAYMENTS ON PLEDGED MORTGAGES Pursuant to the Master Servicing Agreement with respect to a Series of Bonds, the Master Servicer will be required to establish and maintain a separate Eligible Account or Eligible Accounts (collectively, the "Bond Account") into which it will deposit or cause to be deposited on a daily basis, or such other basis as may be specified in the related Prospectus Supplement, payments of principal and interest (net of servicing compensation, amounts retained to pay certain insurance premiums and amounts retained by the Master Servicer or any Servicer as reimbursement for certain advances it has made) received with respect to the related Pledged Mortgages. Such amounts will include principal prepayments, certain Insurance Proceeds and Liquidation Proceeds and amounts paid by the Servicer or the Company in connection with any optional purchase by the Servicer or the Company of any defaulted Pledged Mortgages. An "Eligible Account" is an account either (i) 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 which, but only if Moody's is not an applicable Rating Agency) are rated in the highest short-term rating category by each applicable Rating Agency, (ii) an account or accounts the deposits in which are fully insured by either the BIF or SAIF, (iii) an account or accounts the deposits in which are insured by the BIF or SAIF 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, the Bondholders have a claim with respect to the funds in the Bond Account or a perfected first priority security interest against any collateral securing such funds that is superior to the claims of any other depositors or general creditors of the depository institution with which the Bond Account is maintained, (iv) a trust account or accounts maintained with the trust department of a federal or a state chartered depository institution or trust company, acting in a fiduciary capacity or (v) an account or accounts otherwise acceptable to each applicable Rating Agency. The collateral eligible to secure amounts in the Bond Account is limited to Permitted Investments. A Bond 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. If so specified in the related Prospectus Supplement, the Master Servicer or its designee will be entitled to receive any such interest or other income earned on funds in the Bond Account as additional compensation and will be obligated to deposit in the Bond Account the amount of any loss immediately as realized. Pursuant to the Master Servicing Agreement, the Master Servicer will be required to remit to the Bond Trustee (to the extent not previously remitted), on or before each Distribution Account Deposit Date, the Bond Distribution Amount for the related Payment Date for deposit in the Distribution Account for such Series of Bonds maintained with the Bond Trustee. Any amounts received by the Master Servicer as Insurance Proceeds or as Liquidation Proceeds, net of any expenses and other amounts reimbursable to the Master Servicer pursuant to the Master Servicing Agreement, will (unless applied to the repair or restoration of a Mortgaged Property) be deemed to be payments received with respect to the Pledged Mortgages securing the related Series of Bonds and will be deposited in the related Bond Account. Prior to each Payment Date for a Series of Bonds, the Master Servicer will furnish to the Bond Trustee a statement setting forth certain information with respect to payments received with respect to the Pledged Mortgages. COLLECTION PROCEDURES The Master Servicer, directly or through one or more Servicers, will make reasonable efforts to collect all payments called for under the Pledged Mortgages and will, consistent with each Master Servicing Agreement and any Mortgage Pool Insurance Policy, Primary Mortgage Insurance Policy and Bankruptcy Bond or alternative arrangements, follow such collection procedures as are customary with respect to mortgage loans that are comparable to the Pledged Mortgages. Consistent with the above, the Master Servicer or applicable Servicer may, in its discretion, (i) waive any assumption fee, late payment or other charge in connection with a Pledged Mortgage and (ii) to the extent not inconsistent with the coverage of such Pledged Mortgage by a Mortgage Pool Insurance Pool Policy, Primary Mortgage Insurance Policy or Bankruptcy Bond or alternative 58 158 arrangements, if applicable, arrange with a Mortgagor a schedule for the liquidation of delinquencies running for no more than 180 days (unless a longer period is specified in the related Prospectus Supplement) after the applicable due date for each payment. To the extent the Master Servicer is obligated to make or to cause to be made advances, such obligation will remain during any period of such an arrangement. Unless otherwise specified in the related Prospectus Supplement, in any case in which property securing a Pledged Mortgage has been, or is about to be, conveyed by the Mortgagor, the Master Servicer will, to the extent it has knowledge of such conveyance or proposed conveyance, exercise or cause to be exercised its rights to accelerate the maturity of such Pledged Mortgage under any due-on-sale clause applicable thereto, but only if the exercise of such rights is permitted by applicable law and will not impair or threaten to impair any recovery under any related Primary Mortgage Insurance Policy. If these conditions are not met or if the Master Servicer reasonably believes it is unable under applicable law to enforce such due-on-sale clause, the Master Servicer will enter into or cause to be entered into an assumption and modification agreement with the person to whom such property has been or is about to be conveyed, pursuant to which such person becomes liable for repayment of the Pledged Mortgage and, to the extent permitted by applicable law, the Mortgagor also remains liable thereon. If a Mortgaged Property is sold or transferred, the Master Servicer will be required promptly to notify the Bond Trustee and the respective issuers of any hazard insurance policies, mortgagor bankruptcy insurance and mortgage insurance policies to assure that all required endorsements to each insurance policy are obtained and that coverage under each such policy will remain in effect after the occurrence of such sale or transfer. Any fee collected by or on behalf of the Master Servicer for entering into an assumption agreement will be retained by or on behalf of the Master Servicer as additional servicing compensation. See "CERTAIN LEGAL ASPECTS OF PLEDGED MORTGAGES -- 'Due-on-Sale' Clauses" herein. In connection with any such assumption, the terms of the related Pledged Mortgage may not be changed. With respect to Cooperative Loans, any prospective purchaser will generally have to obtain the approval of the board of directors of the relevant Cooperative before purchasing the shares and acquiring rights under the related proprietary lease or occupancy agreement. See "CERTAIN LEGAL ASPECTS OF PLEDGED MORTGAGES" herein. This approval is usually based on the purchaser's income and net worth and numerous other factors. Although the Cooperative's approval is unlikely to be unreasonably withheld or delayed, the necessity of acquiring such approval could limit the number of potential purchasers for those shares and otherwise limit the ability to sell and realize the value of those shares. In general, a "tenant-stockholder" (as defined in Code Section 216(b)(2)) of a corporation that qualifies as a "cooperative housing corporation" within the meaning of Code Section 216(b)(1) is allowed a deduction for amounts paid or accrued within his taxable year to the corporation representing his proportionate share of certain interest expenses and certain real estate taxes allowable as a deduction under Code Section 216(a) to the corporation under Code Sections 163 and 164. In order for a corporation to qualify under Code Section 216(b)(1) for its taxable year in which such items are allowable as a deduction to the corporation, such Section requires, among other things, that at least 80% of the gross income of the corporation be derived from its tenant-stockholders (as defined in Code Section 216(b)(2)). By virtue of this requirement, the status of a corporation for purposes of Code Section 216(b)(1) must be determined on a year-to-year basis. Consequently, there can be no assurance that Cooperatives relating to the Cooperative Loans will qualify under such Section for any particular year. In the event that such a Cooperative fails to qualify for one or more years, the value of the collateral securing any related Cooperative Loans could be significantly impaired because no deduction would be allowable to tenant-stockholders under Code Section 216(a) with respect to those years. In view of the significance of the tax benefits accorded tenant-stockholders of a corporation that qualifies under Code Section 216(b)(1), the likelihood that such a failure would be permitted to continue over a period of years appears remote. JUNIOR MORTGAGES In the case of single family loans secured by junior liens on the related Mortgaged Properties, the Master Servicer will be required to file (or cause to be filed) of record a request for notice of any action by a superior lienholder under the Senior Lien for the protection of the related Bond Trustee's interest, where permitted by 59 159 local law and whenever applicable state law does not require that a junior lienholder be named as a party defendant in foreclosure proceedings in order to foreclose such junior lienholder's equity of redemption. The Master Servicer also will be required to notify any superior lienholder in writing of the existence of the Pledged Mortgage and request notification of any action (as described below) to be taken against the Mortgagor or the Mortgaged Property by the superior lienholder. If the Master Servicer is notified that any superior lienholder has accelerated or intends to accelerate the obligations secured by the related Senior Lien, or has declared or intends to declare a default under the mortgage or the promissory note secured thereby, or has filed or intends to file an election to have the related Mortgaged Property sold or foreclosed, then the Master Servicer will be required to take, on behalf of the related Issuer, whatever actions are necessary to protect the interests of the related Bondholders, and/or to preserve the security of the related Pledged Mortgage. The Master Servicer will generally be required to advance the necessary funds to cure the default or reinstate the superior lien, if such advance is in the best interests of the related Bondholders and the Master Servicer determines such advances are recoverable out of payments on or proceeds of the related Pledged Mortgage. SERVICING AND OTHER COMPENSATION AND PAYMENT OF EXPENSES The principal servicing compensation to be paid to the Master Servicer in respect of its master servicing activities for each Series of Bonds will be equal to the percentage per annum described in the related Prospectus Supplement (which may vary under certain circumstances) of the outstanding principal balance of each Pledged Mortgage securing such Series of Bonds and such compensation will be retained by it from collections of interest on such Pledged Mortgage (the "Master Servicing Fee"). As compensation for its servicing duties, any Servicer or subservicer will generally be entitled to a monthly servicing fee as described in the related Prospectus Supplement. In addition, the Master Servicer, any Servicer or any subservicer will retain as additional compensation all prepayment charges, assumption fees and late payment charges, to the extent collected from Mortgagors, and any benefit that may accrue as a result of the investment of funds in the applicable Bond Account (unless otherwise specified in the related Prospectus Supplement). The Master Servicer will pay or cause to be paid certain ongoing expenses associated with each Series of Bonds and incurred by it in connection with its responsibilities under the related Master Servicing Agreement, including, without limitation, payment of any fee or other amount payable in respect of any credit enhancement arrangements, payment of the fees and disbursements of the Bond Trustee, any custodian appointed by the Bond Trustee, the certificate registrar and any paying agent, and payment of expenses incurred in enforcing the obligations of Servicers and Sellers. The Master Servicer will be entitled to reimbursement of expenses incurred in enforcing the obligations of Servicers under certain limited circumstances. In addition, as indicated in the preceding section, the Master Servicer will be entitled to reimbursement of expenses incurred by it in connection with any defaulted Pledged Mortgage as to which it has determined that all recoverable Liquidation Proceeds and Insurance Proceeds have been received (a "Liquidated Mortgage"), and in connection with the restoration of Mortgaged Properties, such right of reimbursement being prior to the rights of Bondholders to receive any related Liquidation Proceeds (including Insurance Proceeds). PREPAYMENTS In general, 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. In the event such prepayments, together with other prepayments (including for this purpose prepayments resulting from refinancing or liquidations of the Pledged Mortgages or the mortgage loans underlying the Certificates, as the case may be, due to defaults, casualties, condemnations, repurchases by the Seller, the Issuer or Redwood Trust or purchases thereof by the Master Servicer or the Company), result in a shortfall in the amount of interest available on a Payment Date for the Bonds of a Series, the Master Servicer may be required to cover the shortfall, but only if and to the extent specified in the related Prospectus Supplement. 60 160 EVIDENCE AS TO COMPLIANCE Each Master Servicing Agreement and Indenture will provide that on or before a specified date in each year, a firm of independent public accountants will furnish a statement to the 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 Audit Program for Mortgages serviced for FHLMC or such other procedures as may be specified in the related Prospectus Supplement, the servicing by or on behalf of the Master Servicer of Pledged Mortgages under agreements substantially similar to each other (including the related Master Servicing Agreement) was conducted in compliance with such agreements except for any significant exceptions or errors in records that, in the opinion of the firm, the Audit Program for Mortgages serviced for FHLMC, the Uniform Single Attestation Program for Mortgage Bankers or such other procedure, requires it to report. In rendering its statement such firm may rely, as to matters relating to the direct servicing of Pledged Mortgages by Servicers, upon comparable statements for examinations conducted substantially in compliance with the Uniform Single Attestation Program for Mortgage Bankers, the Audit Program for Mortgages serviced for FHLMC or such other procedure, (rendered within one year of such statement) of firms of independent public accountants with respect to the related Servicer. Each Master Servicing Agreement and Indenture will also provide for delivery to the Issuer and the Bond Trustee, on or before a specified date in each year, of an annual statement signed by two officers of the Master Servicer to the effect that the Master Servicer has fulfilled its obligations under the Master Servicing Agreement throughout the preceding year. Copies of the annual accountants' statement and the statement of officers of the Master Servicer may be obtained by Bondholders of the related Series without charge upon written request to the Issuer at its principal executive offices. ADVANCES AND OTHER AMOUNTS PAYABLE BY MASTER SERVICER Subject to any limitations set forth in the related Prospectus Supplement, each Master Servicing Agreement will require the Master Servicer to advance on or before each Payment Date (from its own funds, funds advanced by Servicers or funds held in the Bond Account for future distribution to Bondholders), an amount equal to the aggregate of payments of principal and interest that were delinquent on the related Determination Date, subject to the Master Servicer's determination that such advances will be recoverable out of late payments by obligors on the Mortgage Collateral, Liquidation Proceeds, Insurance Proceeds or otherwise. In the case of Cooperative Loans, the Master Servicer also will be required to advance any unpaid maintenance fees and other charges under the related proprietary leases as specified in the related Prospectus Supplement. In making Advances, the Master Servicer will endeavor to maintain a regular flow of scheduled interest and principal payments to Bondholders, rather than to guarantee or insure against losses. If Advances are made by the Master Servicer from cash being held for future distribution to Bondholders, the Master Servicer will replace such funds on or before any future Payment Date to the extent that funds in the applicable Bond Account on such Payment Date would be less than the amount required to be available for distributions to Bondholders on such date. Any Advances will be reimbursable to the Master Servicer out of recoveries on the specific Mortgage Collateral with respect to which such Advances were made (e.g., late payments made by the related obligors, any related Insurance Proceeds, Liquidation Proceeds or proceeds of any Pledged Mortgage repurchased pursuant to the related Master Servicing Agreement). In addition, Advances by the Master Servicer (and any advances by a Servicer) also will be reimbursable to the Master Servicer (or Servicer) from cash otherwise distributable to Bondholders to the extent that the Master Servicer determines that any such Advances previously made are not ultimately recoverable as described in the immediately preceding sentence. The Master Servicer also will be obligated to make Advances, to the extent recoverable out of Insurance Proceeds, Liquidation Proceeds or otherwise, in respect of certain taxes and insurance premiums not paid by Mortgagors on a timely basis. Funds so advanced are reimbursable to the Master Servicer to the extent permitted by the Master Servicing Agreement. If specified in the related Prospectus 61 161 Supplement, the obligations of the Master Servicer to make Advances may be supported by a cash advance reserve fund, a surety bond or other arrangement, in each case as described in such Prospectus Supplement. RESIGNATION OF MASTER SERVICER A Master Servicer may not resign from its obligations and duties under a Master Servicing Agreement or assign or transfer such duties or obligations except (i) upon a determination that its duties thereunder are no longer permissible under applicable law or (ii) upon a sale of its servicing rights with respect to the Pledged Mortgages with the prior written consents of the Bond Trustee, the Issuer and any applicable Mortgage Insurer. No such resignation will become effective until the Bond Trustee, as Stand-by Master Servicer, or a Successor Master Servicer (as such terms are defined below) has assumed the Master Servicer's obligations and duties under such Master Servicing Agreement. Each Master Servicing Agreement will provide that such a successor master servicer (the "Successor Master Servicer") must be satisfactory to the Issuer, the Bond Trustee and any applicable Mortgage Insurer, in the exercise of their reasonable discretion and must be approved to act as a mortgage servicer for FHLMC or FNMA. STAND-BY SERVICER If so specified in the related Prospectus Supplement, the Bond Trustee will act as stand-by Master Servicer (the "Stand-by Master Servicer") with respect to each Series of Bonds secured by Pledged Mortgages. As Stand-by Master Servicer, the Bond Trustee will succeed to the rights and obligations of the Master Servicer with respect to the Pledged Mortgages securing such Series upon a default by the Master Servicer or upon resignation by the Master Servicer until the appointment of a Successor Master Servicer. SPECIAL SERVICING AGREEMENT The Company may appoint a Special Servicer to undertake certain responsibilities with respect to certain defaulted Pledged Mortgages securing a Series. The Special Servicer may engage various independent contractors to perform certain of its responsibilities, provided, however, the Special Servicer remains fully responsible and liable for all its requirements under the special servicing agreement (the "Special Servicing Agreement"). As may be further specified in the related Prospectus Supplement, the Special Servicer, if any, may be entitled to various fees, including, but not limited to, (i) a monthly engagement fee applicable to each Pledged Mortgage, (ii) a special servicing fee, or (iii) a performance fee applicable to each liquidated Pledged Mortgage, in each case calculated as set forth in the related Prospectus Supplement. CERTAIN MATTERS REGARDING THE MASTER SERVICER AND THE COMPANY Each Master Servicing Agreement will provide that neither the Master Servicer, the Company, the Owner Trustee nor any director, officer, employee or agent of the Master Servicer, the Company or the Owner Trustee will be under any liability to the related Bondholders for any action taken or for refraining from the taking of any action in good faith pursuant to the Master Servicing Agreement, or for errors in judgment; provided, however, that neither the Master Servicer, the Company, the Owner Trustee nor any such person will be protected against any liability that would otherwise be imposed by reason of willful misfeasance, bad faith or negligence in the performance of duties thereunder or by reason of reckless disregard of obligations and duties thereunder. Each Master Servicing Agreement will further provide that the Master Servicer, the Company, the Owner Trustee and any director, officer, employee or agent of the Master Servicer, the Company or the Owner Trustee will be entitled to indemnification by the related Issuer and will be held harmless against any loss, liability or expense incurred in connection with any legal action relating to the Master Servicing Agreement or the Bonds, other than any loss, liability or expense related to any specific Mortgage Collateral (except any such loss, liability or expense otherwise reimbursable pursuant to the Master Servicing Agreement) and any loss, liability or expense incurred by reason of willful misfeasance, bad faith or negligence in the performance of duties thereunder or by reason of reckless disregard of obligations and duties thereunder. In addition, each Master Servicing Agreement will provide that neither the Master Servicer, the 62 162 Company nor the Owner Trustee will be under any obligation to appear in, prosecute or defend any legal action which is not incidental to its respective responsibilities under the Master Servicing Agreement and which in its opinion may involve it in any expense or liability. The Master Servicer, the Company or the Owner Trustee may, however, in its discretion undertake any such action which it may deem necessary or desirable with respect to the Master Servicing Agreement and the rights and duties of the parties thereto and the interests of the Bondholders thereunder. In such event, the legal expenses and costs of such action and any liability resulting therefrom will be expenses, costs and liabilities of the related Issuer, and the Master Servicer, the Company or the Owner Trustee, as the case may be, will be entitled to be reimbursed therefor out of funds otherwise distributable to Bondholders. Any person into which the Master Servicer may be merged or consolidated, or any person resulting from any merger or consolidation to which the Master Servicer is a party, or any person succeeding to the business of the Master Servicer, will be the successor of the Master Servicer under each Master Servicing Agreement, provided that such person is qualified to sell mortgage loans to, and service mortgage loans on behalf of, FNMA or FHLMC and further provided that such merger, consolidation or succession does not adversely affect the then current rating or ratings of the Bonds of such Series. SERVICING DEFAULTS Events of default under the Master Servicing Agreement (each, a "Servicing Default") for a Series of Bonds will include (i) any failure of the Master Servicer to deposit in the Bond Account or remit to the Bond Trustee any required payment (other than an Advance) which continues unremedied for one business day after the giving of written notice of such failure to the Master Servicer by the Bond Trustee or the Issuer; (ii) any failure by the Master Servicer to make an Advance as required under the Master Servicing Agreement, unless cured as specified therein; (iii) any failure by the Master Servicer duly to observe or perform in any material respect any of its other covenants or agreements in the Master Servicing Agreement which continues unremedied for thirty days after the giving of written notice of such failure to the Master Servicer by the Bond Trustee or the Issuer; and (iv) certain events of insolvency, readjustment of debt, marshalling of assets and liabilities or similar proceeding and certain actions by or on behalf of the Master Servicer indicating its insolvency, reorganization or inability to pay its obligations. RIGHTS UPON SERVICING DEFAULT If a Servicing Default under a Master Servicing Agreement shall have occurred and be continuing, the Bond Trustee may terminate all of the rights and obligations of the Master Servicer under such Master Servicing Agreement, including the Master Servicer's rights to receive any Master Servicing Fees. Upon such termination, the Bond Trustee, as Stand-by Master Servicer, or any Successor Master Servicer duly appointed by the Bond Trustee will succeed to all the responsibilities, duties and liabilities of the Master Servicer under such Master Servicing Agreement and will be entitled to similar compensation arrangements. Neither the Issuer nor the Bond Trustee shall have any right to waive any Servicing Default, except under certain circumstances specified in the Master Servicing Agreement. AMENDMENT OF MASTER SERVICING AGREEMENT A Master Servicing Agreement with respect to any Series of Bonds secured by Pledged Mortgages may not be amended, changed, modified, terminated or discharged, except by an instrument in writing signed by all parties thereto, and with prior written notice to any applicable Mortgage Insurer. THE INDENTURE The following is a general summary of certain provisions of the Indenture for each Series of Bonds not described elsewhere in this Prospectus. The summaries are qualified in their entirety by reference to the provisions of the Indenture. Where particular provisions or terms used in the Indenture are referred to, the actual provisions (including definitions of terms) are incorporated by reference as part of such summaries. 63 163 The Indenture relating to each Series of Bonds will be filed with the Securities and Exchange Commission within fifteen days of the closing of the sale of such Series of Bonds. GENERAL The Indenture does not limit the amount of Bonds that can be issued thereunder and provides that Bonds may be issued up to the aggregate principal amount authorized from time to time by the Issuer. The Indenture provides that additional Bonds may be issued for any outstanding Class of Bonds or Series up to the aggregate principal amount authorized from time to time by the Issuer, subject to the provisions of the related Indenture. MODIFICATION OF INDENTURE With the consent of the holders of not less than 66 2/3% of the then outstanding principal amount of the Class of Bonds of the related Series specified in the related Prospectus Supplement to be the "Controlling Class", the Bond Trustee and the Issuer may execute a supplemental indenture to add provisions to, or change in any manner or eliminate any provisions of, the Indenture with respect to the Bonds of such Series or modify (except as provided below) in any manner the rights of the Bondholders. Without the consent of the holder of each outstanding Bond affected, however, no supplemental indenture shall (a) change the Stated Maturity of the principal of, or any installment of interest on, any Bond or reduce the principal amount thereof, the interest rate specified thereon or the redemption price with respect thereto, or change the earliest date on which any Bond may be redeemed at the option of the Issuer, or any place of payment where, or the coin or currency in which, any affected Bond or any interest thereon is payable, or impair the right to institute suit for the enforcement of the provisions of the Indenture regarding payment, (b) reduce the percentage of the aggregate amount of the outstanding 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 the Indenture or certain defaults thereunder and their consequences provided for in the Indenture, (c) modify the provisions of the Indenture specifying the circumstances under which such a supplemental indenture may not change the provisions of the Indenture without the consent of each outstanding Bond affected thereby, or the provisions of the Indenture with respect to certain remedies available in an Event of Default (as defined herein), except to increase any percentage specified therein or to provide that certain other provisions of the Indenture cannot be modified or waived without the consent of the holder of each outstanding Bond affected thereby, (d) modify or alter the provisions of the Indenture defining when Bonds are outstanding, (e) permit the creation of any lien (other than certain permitted liens) ranking prior to or on a parity with the lien of the Indenture with respect to any part of the property subject to lien under the Indenture, or terminate the lien of the Indenture on any property at any time subject thereto or deprive the holder of any Bond of the security afforded by the lien of the Indenture (other than in connection with a permitted substitution of Mortgage Collateral) or (f) modify any of the provisions of the Indenture in such manner as to affect the calculation of the debt service requirement for any Bond or the rights of the Bondholders to the benefits of any provisions for the mandatory redemption of Bonds contained therein. (Indenture, Section 9.02) The Issuer and the Bond Trustee may also enter into supplemental indentures, without obtaining the consent of Bondholders, to cure ambiguities or make minor corrections, and to do such other things as would not adversely affect the interests of Bondholders. (Indenture, Section 9.01) EVENTS OF DEFAULT An event of default (an "Event of Default") with respect to any Series of Bonds is defined in the Indenture as being: (a) the failure (i) to pay any principal of, or interest on, any Bond of such Series then due, (ii) if applicable, to call for special redemption any Bonds that are required to be so redeemed or (iii) to pay the redemption price of any Bonds called for redemption; (b) a default in the observance of certain negative covenants in the Indenture; (c) a default in the observance of any other covenant of the Issuer, and the continuation of any such default for a period of 30 days after notice thereof is given to the Issuer by the Bond Trustee or by the holders of more than 50% in outstanding principal amount of the Controlling Class of Bonds 64 164 of such Series; (d) any representation or warranty made by the Issuer in the Indenture or in any certificate delivered pursuant thereto being incorrect in a material respect as of the time made, and the circumstances in respect of which such representation or warranty is incorrect are not cured within 30 days after notice thereof is given to the Issuer by the Bond Trustee or by the holders of more than 50% in outstanding principal amount of the Controlling Class of Bonds of such Series; or (e) certain events of bankruptcy, insolvency, receivership or reorganization of the Issuer. (Indenture, Section 5.01) RIGHTS UPON EVENTS OF DEFAULT In case an Event of Default shall occur and be continuing with respect to a Series of Bonds, the Bond Trustee or holders of more than 50% in outstanding principal amount of the Controlling Class of Bonds of such Series may declare the principal of such Series of Bonds to be due and payable. Such declaration may under certain circumstances be rescinded by the holders of a majority in principal amount of the outstanding Bonds of such Series. (Indenture, Section 5.02) Upon an Event of Default the Bond Trustee may, in its discretion, sell the Collateral for such Series, in which event the Bonds of such Series will be payable pro rata, without regard to their Stated Maturities, or in such other manner as is specified in the related Prospectus Supplement, out of the collections on, or the proceeds from the sale of, such Collateral and will, to the extent permitted by applicable law, bear interest at the interest rate specified in the Indenture. (Indenture, Section 5.08) If so specified in the related Prospectus Supplement, following an Event of Default, if a Series of Bonds has been declared to be due and payable, the Bond Trustee may, in its discretion, refrain from selling the Collateral, including the Mortgage Collateral, for such Series and continue to apply all amounts received on the Collateral to payments due on the Bonds of such Series in accordance with their terms, notwithstanding the acceleration of the maturity of such Bonds. (Indenture, Section 5.05) In case an Event of Default shall occur and be continuing, the Bond Trustee shall be under no obligation to expend or risk its own funds or otherwise incur any financial liability in the performance of its duties under the Indenture if it has reasonable grounds for believing that it has not been assured of adequate security or indemnity. (Indenture, Section 6.01(e)) Subject to such provisions for indemnification and certain limitations contained in the Indenture, the holders of a majority in principal amount outstanding of the Controlling Class of outstanding 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 Bond Trustee or exercising any trust or power conferred on the Bond Trustee with respect to the Bonds of such Series; and the holders of a majority in principal amount of the Controlling Class of Bonds of a Series then outstanding may, in certain cases, waive any default with respect thereto, except a default in payment of principal or interest or a default in respect of a covenant or provision of the Indenture that cannot be modified without the consent of each holder of Bonds affected. (Indenture, Sections 5.14 and 5.15) No holder of Bonds will have the right to institute any proceeding with respect to the Indenture, unless (a) such holder previously has given to the Bond Trustee written notice of an Event of Default, (b) the holders of more than 50% in outstanding principal amount of the Controlling Class of Class of Bonds of the Series have made written request upon the Bond Trustee to institute such proceedings in its own name as Bond Trustee and have offered the Bond Trustee indemnity in full, (c) the Bond Trustee has for 60 days neglected or refused to institute any such proceeding and (d) no direction inconsistent with such written request has been given to the Bond Trustee during such 60-day period by the holders of a majority in principal amount of the outstanding Bonds of such Series. (Indenture, Section 5.09) CERTAIN COVENANTS OF THE ISSUER The Issuer covenants in the Indenture, among other matters, that it will not (a) sell, exchange or otherwise dispose of any portion of the Collateral for a Series of Bonds except as expressly permitted by the Indenture or the Master Servicing Agreement, (b) amend Sections 2.03 or 11.01 of the Issuer's Deposit Trust Agreement without the consent of the holders of 66 2/3% in outstanding principal amount of each Class of Bonds affected thereby or (c) incur, assume or guarantee any indebtedness other than in connection with the 65 165 issuance of the Bonds. (Indenture, Section 3.09) Section 2.03 of the Issuer's Deposit Trust Agreement provides that the trust shall not have the power to perform any act or engage in any business whatsoever except to issue and administer the Bonds of a Series, to receive and own the Collateral, to maintain and administer the Collateral, to pledge the Collateral to support such Bonds pursuant to the Indenture and to take certain other actions incidental thereto. Section 11.01 of the Issuer's Deposit Trust Agreement prohibits the amendment of the Deposit Trust Agreement if the Owner Trustee determines that such amendment will adversely affect any right, duty or liability of, or immunity or indemnity in favor of, the Owner Trustee under the Issuer's Deposit Trust Agreement, or will cause or result in any conflict with or breach of any terms of, or default under, the charter documents or bylaws of the Owner Trustee or any document to which the Owner Trustee is a party. ISSUER'S ANNUAL COMPLIANCE STATEMENT The Issuer will be required to file annually with the Bond Trustee a written statement as to fulfillment of its obligations under the Indenture. (Indenture, Section 3.10) BOND TRUSTEE'S ANNUAL REPORT The Bond Trustee will be required to mail each year to all Bondholders a brief report relating to its eligibility and qualifications to continue as the Bond Trustee under the Indenture, any amounts advanced by it under the Indenture, the amount, interest rate and maturity date of certain indebtedness owing by the Issuer to the Bond Trustee in its individual capacity, the property and funds physically held by the Bond Trustee as such, and any action taken by it which materially affects the Bonds and which has not been previously reported. (Indenture, Section 7.03) SATISFACTION AND DISCHARGE OF INDENTURE The Indenture will be discharged with respect to the Collateral securing the Bonds of a Series upon the delivery to the Bond Trustee for cancellation of all of the Bonds of such Series or, with certain limitations, upon deposit with the Bond Trustee of funds sufficient for the payment in full of all of the Bonds of such Series. (Indenture, Section 4.01) REPORT BY BOND TRUSTEE TO BONDHOLDERS On each Payment Date, the Bond Trustee will send a report to each Bondholder setting forth the amount of such payment representing interest, the amount thereof, if any, representing principal, the amount of any related Advance and the outstanding principal amount of Bonds of each Class (the aggregate principal amount of the Bonds of each Class in the case of holders of Bonds on which payments of interest only are then being made) after giving effect to the payments made on such Payment Date. (Indenture, Section 8.06) THE BOND TRUSTEE The Bond Trustee under each Indenture will be identified in the related Prospectus Supplement. CERTAIN LEGAL ASPECTS OF PLEDGED MORTGAGES The following discussion contains general summaries of certain legal aspects of mortgage loans. Because such legal aspects are governed primarily by applicable state law (which laws may differ substantially from state to state), the summaries do not purport to be complete nor to reflect the laws of any particular state, nor to encompass the laws of all states in which Mortgaged Properties may be located. The summaries are qualified in their entirety by reference to the applicable federal and state laws governing the Pledged Mortgages. 66 166 GENERAL The Pledged Mortgages will consist of notes and either mortgages, deeds of trust, security deeds or deeds to secure debts, depending upon the prevailing practice in the state in which the underlying Mortgaged Property 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 a mortgage instrument, the mortgagor delivers to the mortgagee (i) a note or bond evidencing the loan and (ii) the mortgage. Although a deed of trust is similar to a mortgage, a deed of trust 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 a debt are governed by law, and, with respect to some deeds of trust, the directions of the beneficiary. COOPERATIVES. Certain of the Pledged Mortgages may be Cooperative Loans. The Cooperative owns all the real property that comprises the project, including the land, separate dwelling units and all common areas. The Cooperative is directly responsible for project management and, in most cases, payment of real estate taxes and hazard and liability insurance. If there is a blanket mortgage on the Cooperative and/or underlying land, as is generally the case, the Cooperative, as project mortgagor, is also responsible for meeting these mortgage obligations. A blanket mortgage is ordinarily incurred by the Cooperative in connection with the construction or purchase of the Cooperative's apartment building. The interest of the occupant under proprietary leases or occupancy agreements to which that Cooperative is a party are generally subordinate to the interest of the holder of the blanket mortgage in that building. If the Cooperative is unable to meet the payment obligations arising under its blanket mortgage, the mortgagee holding the blanket mortgage could foreclose on that mortgage and terminate all subordinate proprietary leases and occupancy agreements. In addition, the blanket mortgage on a Cooperative may provide financing in the form of a mortgage that does not fully amortize with a significant portion of principal being due in one lump sum at final maturity. The inability of the Cooperative to refinance this mortgage and its consequent inability to make such final payment could lead to foreclosure by the mortgagee providing the financing. A foreclosure in either event by the holder of the blanket mortgage could eliminate or significantly diminish the value of any collateral held by the lender who financed the purchase by an individual tenant-stockholder of Cooperative shares or, in the case of any Mortgage Collateral securing a Series of Bonds that includes Cooperative Loans, the collateral securing the Cooperative Loans. The Cooperative is owned by tenant-stockholders who, through ownership of stock, shares or membership certificates in the corporation, receive proprietary leases or occupancy agreements which confer exclusive rights to occupy specific units. Generally, a tenant-stockholder of a Cooperative must make a monthly payment to the Cooperative representing such tenant-stockholder's pro rata share of the Cooperative's payments for its blanket mortgage, real property taxes, maintenance expenses and other capital or ordinary expenses. An ownership interest in a Cooperative and accompanying rights is financed through a Cooperative share loan evidenced by a promissory note and secured by a security interest in the occupancy agreement or proprietary lease and in the related Cooperative shares. The lender takes possession of the share certificate and a counterpart of the proprietary lease or occupancy agreement, and a financing statement covering the proprietary lease or occupancy agreement and the Cooperative shares if filed in the appropriate state and local offices to perfect the lender's interest in its collateral. Subject to the limitations discussed below, upon default of the tenant-stockholder, the lender may sue for judgment on the promissory note, dispose of the collateral at a public or private sale or otherwise proceed against the collateral or tenant-stockholder as an individual as 67 167 provided in the security agreement covering the assignment of the proprietary lease or occupancy agreement and the pledge of Cooperative shares. JUNIOR MORTGAGES Certain of the Pledged Mortgages may be secured by junior mortgages or deeds of trust, which are junior to senior mortgages or deeds of trust which are not part of the Mortgage Collateral. The rights of the Bondholders as the holders of a junior deed of trust or a junior mortgage are subordinate in lien priority and in payment priority to those of the holder of the senior mortgage or deed of trust, including the prior rights of the senior mortgagee or beneficiary to receive and apply hazard insurance and condemnation proceeds and, upon default of the mortgagor, to cause a foreclosure on the property. Upon completion of the foreclosure proceedings by the holder of the senior mortgage or the sale pursuant to the deed of trust, the junior mortgagee's or junior beneficiary's lien will be extinguished unless the junior lienholder satisfies the defaulted senior loan or asserts its subordinate interest in a property in foreclosure proceedings. See " -- Foreclosure/Repossession" below. Furthermore, the terms of the junior mortgage or deed of trust are subordinate to the terms of the senior mortgage or deed of trust. In the event of a conflict between the terms of the senior mortgage or deed of trust and the junior mortgage or deed of trust, the terms of the senior mortgage or deed of trust will govern generally. Upon a failure of the mortgagor or trustor to perform any of its obligations, the senior mortgagee or beneficiary, subject to the terms of the senior mortgage or deed of trust, may have the rights to perform the obligation itself. Generally, all sums so expended by the mortgagee or beneficiary become part of the indebtedness secured by the mortgage or deed of trust. To the extent a senior mortgagee expends such sums, such sums will generally have priority over all sums due under the junior mortgage. 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, such foreclosure 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, such as California, the trustee must record a notice of default and send a copy to the borrower-trustor and to any person who has recorded a request for a copy of 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 68 168 appoints a referee or other court officer to conduct the sale of the 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 such judgment is 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 such repairs at its own expense as are necessary to render the property suitable for sale. The lender will commonly obtain the services of a real estate broker and pay the broker's commission in connection with the sale of the property. Depending upon market conditions, the ultimate proceeds of the sale of the property may not equal the lender's investment in the property. See "SECURITY FOR THE BONDS" herein. A junior mortgagee may not foreclose on the property securing a junior mortgage unless it forecloses subject to the senior mortgages, in which case it must either pay the entire amount due on the senior mortgages to the senior mortgagees prior to or at the time of the foreclosure sale or undertake the obligation to make payments on the senior mortgages in the event the mortgagor is in default thereunder, in either event adding the amounts expended to the balance due on the junior loan, and may be subrogated to the rights of the senior mortgagees. In addition, in the event that the foreclosure of a junior mortgage triggers the enforcement of a "due-on-sale" clause, the junior mortgagee may be required to pay the full amount of the senior mortgages to the senior mortgagees. Accordingly, with respect to those mortgage loans which are junior mortgage loans, if the lender purchases the property, the lender's title will be subject to all senior liens and claims and certain governmental liens. The proceeds received by the referee or trustee from the sale are applied first to the costs, fees and expenses of sale and then in satisfaction of the indebtedness secured by the mortgage or deed of trust under which the sale was conducted. Any remaining proceeds are generally payable to the holders of junior mortgages or deeds of trust and other liens and claims in order of their priority, whether or not the borrower is in default. Any additional proceeds are generally payable to the mortgagor or trustor. The payment of the proceeds to the holders of junior mortgages may occur in the foreclosure action of the senior mortgagee or may require the institution of separate legal proceeds. 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. 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 statute. 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. 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 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. 69 169 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 (the "UCC") and the security agreement relating to those shares. Article 9 of the UCC requires that a sale be conducted in a "commercially reasonable" manner. Whether a foreclosure sale has been conducted in a "commercially reasonable" manner will depend on the facts in each case. In determining commercial reasonableness, a court will look to the notice given the debtor and the method, manner, time, place and terms of the foreclosure. Generally, a sale conducted according to the usual practice of banks selling similar collateral will be considered reasonably conducted. Article 9 of the UCC provides that the proceeds of the sale will be applied first to pay the costs and expenses of the sale and then to satisfy the indebtedness secured by the lender's security interest. The recognition agreement, however, generally provides that the lender's right to reimbursement is subject to the right of the 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 responsible for the deficiency. See " -- Anti-Deficiency Legislation and Other Limitations on Lenders" 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. RIGHTS OF REDEMPTION In some states, after sale pursuant to a deed of trust or foreclosure of a mortgage, the borrower and certain foreclosed junior lienholders 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 a payment of the foreclosure purchase price, accrued interest and taxes. In some states, the right to redeem is an equitable right. The effect of a 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 at a foreclosure sale, or of any purchaser from the lender subsequent to judicial 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. ANTI-DEFICIENCY LEGISLATION AND OTHER LIMITATIONS ON LENDERS Certain states have imposed statutory 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 limit the right of the beneficiary or mortgagee to obtain a deficiency judgment against the borrower following foreclosure or sale under a deed of trust. A deficiency judgment is a personal judgment against the former borrower equal in most 70 170 cases to the difference between the amount due to the lender and the current fair market value of the property at the time of the foreclosure sale. As a result of these prohibitions, it is anticipated that in most instances the Master Servicer will utilize the non-judicial foreclosure remedy and will not seek deficiency judgments against defaulting mortgagors. Some state statutes may 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 such security; however, in some of these states, the lender, 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, the federal Soldiers' and Sailors' Civil Relief Act of 1940 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. In certain instances, a rehabilitation plan proposed by the debtor may reduce 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 such proceedings under the federal Bankruptcy Code, including but not limited to any automatic stay, could result in delays in receiving payments on the Pledged Mortgages securing a Series of Bonds and possible reductions in the aggregate amount of such payments. The federal tax laws provide priority to certain tax liens over the lien of a mortgage or secured party. Numerous federal and state consumer protection laws impose substantive requirements upon mortgage lenders in connection with the origination, servicing and enforcement of mortgage loans. These laws include the federal Truth-in-Lending Act, Real Estate Settlement Procedures Act, Equal Credit Opportunity Act, Fair Credit Billing Act, Fair Credit Reporting Act and related statutes and regulations. These federal and state laws impose specific statutory liabilities upon lenders who fail to comply with the provisions of the law. In some cases, this liability may affect assignees of the loans. Generally, Article 9 of the UCC governs foreclosure on Cooperative shares and the related proprietary lease or occupancy agreement. Some courts have interpreted section 9-504 of the UCC to prohibit a deficiency award unless the creditor establishes that the sale of the collateral (which, in the case of a Cooperative Loan, would be the shares of the Cooperative and the related proprietary lease or occupancy agreement) was conducted in a commercially reasonable manner. ENVIRONMENTAL RISKS Real property pledged as security to a lender may be subject to unforeseen environmental risks. 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, such a lien has priority over the lien of an existing mortgage against such property. In addition, under the federal Comprehensive Environmental Response, Compensation and Liability Act of 1980 ("CERCLA"), the United States Environmental Protection Agency ("EPA") may 71 171 impose a lien on property where the EPA has incurred cleanup 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 even though the environmental damage or threat was caused by a prior or current owner or operator or a third-party. CERCLA imposes liability for such 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 the facility," 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. 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. This ambiguity appears to have been resolved by the enactment of the Asset Conservation, Lender Liability and Deposit Insurance Protection Act of 1996, which was signed into law by President Clinton on September 30, 1996. The new 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 exemption only if it exercises decision-making control over the day-to-day management of all operational functions of the mortgaged property. 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. The costs associated with environmental cleanup may be substantial. It is conceivable that such costs arising from the circumstances set forth above would become a liability of the Issuer and occasion a loss to Bondholders. 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 such 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 petroleum is not added to, stored in or dispensed from the tank. In addition, under the Asset Conservation, Lender Liability and Deposit Insurance Protection Act of 1996, the protections accorded to lenders under CERCLA are also accorded to the holders of security interests in underground storage tanks. It should be noted, however, that liability for cleanup of petroleum contamination may be governed by state law, which may not provide for any specific protection for secured creditors. Except as otherwise specified in the applicable Prospectus Supplement, at the time the Pledged Mortgages or the mortgage loans underlying the Certificates, as the case may be, were originated, no environmental assessment or a very limited environmental assessment of the Mortgage Properties or the real property constituting security for such mortgage loans, respectively, was conducted. 72 172 DUE-ON-SALE CLAUSES Unless otherwise provided in the related Prospectus Supplement, each Pledged Mortgage will contain a due-on-sale clause which will generally provide that if the mortgagor or obligor sells, transfers or conveys the Mortgaged Property, the loan may be accelerated by the mortgagee. In recent years, court decisions and legislative actions have placed substantial restriction on the right of lenders to enforce such 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 have become generally enforceable except in those states whose legislatures exercised their authority to regulate the enforceability of such clauses with respect to mortgage loans that were (i) 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 (ii) originated by lenders other than national banks, federal savings institutions and federal credit unions. FHLMC 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, for 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 Mortgaged 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 Pledged Mortgages and the number of Pledged Mortgages which may extend to maturity. ENFORCEABILITY OF PREPAYMENT CHARGES 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. Since many of the Mortgaged Properties will be owner-occupied, it is anticipated that prepayment charges may not be imposed with respect to many of the Pledged Mortgages. The absence of such a restraint on prepayment, particularly with respect to Fixed Rate Pledged Mortgages having higher interest rates, may increase the likelihood of refinancing or other early retirement of such 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. The statute authorized the states to reimpose interest rate limits by adopting, before April 1, 1983, a law or constitutional provision which expressly rejects an application 73 173 of the federal law. In addition, even where Title V is not so rejected, any state is authorized by the law to adopt a provision limiting discount points or other charges on mortgage loans covered by Title V. Certain states have taken action to reimpose interest rate limits and/or to limit discount points or other charges. SOLDIERS' AND SAILORS' CIVIL RELIEF ACT Generally, under the terms of the Soldiers' and Sailors' Civil Relief Act of 1940, as amended (the "Relief Act"), a borrower who enters military service after the origination of such borrower's mortgage 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 mortgage loan and is later called to active duty) may not be charged interest above an annual rate of 6% during the period of such borrower's active duty status, unless a court orders otherwise upon application of the lender. It is possible that such interest rate limitation could have an effect, for an indeterminate period of time, on the ability of the Master Servicer to collect full amounts of interest on certain of the Pledged Mortgages. Any shortfall in interest collections resulting from the application of the Relief Act could result in losses to the holders of the Bonds. In addition, the Relief Act imposes limitations which would impair the ability of the Master Servicer to foreclose on an affected Pledged Mortgage during the borrower's period of active duty status. Thus, in the event that such a Pledged Mortgage goes into default, there may be delays and losses occasion by the inability to realize upon the Mortgaged Property in a timely fashion. SUBORDINATE FINANCING When the mortgagor encumbers mortgaged property with one or more junior liens, the senior lender is subjected to additional risk. First, the mortgagor may have difficulty servicing and repaying multiple loans. In addition, if the junior loan permits recourse to the mortgagor (as junior loans often do) and the senior loan does not, a mortgagor may be more likely to repay sums due on the junior loan than those on the senior loan. Second, acts of the senior lender that prejudice the junior lender or impair the junior lender's security may create a superior equity in favor of the junior lender. For example, if the mortgagor and the senior lender agree to an increase in the principal amount of or the interest rate payable on the senior loan, the senior lender may lose its priority to the extent an existing junior lender is harmed or the mortgagor is additionally burdened. Third, if the mortgagor defaults on the senior loan and/or any junior loan or loans, the existence of junior loans and actions taken by junior lenders can impair the security available to the senior lender and can interfere with or delay the taking of action by the senior lender. Moreover, the bankruptcy of a junior lender may operate to stay foreclosure or similar proceeds by the senior lender. FEDERAL INCOME TAX CONSEQUENCES The following is a general discussion of the anticipated material federal income tax consequences of the purchase, ownership and disposition of the Bonds. The summary is based on the Internal Revenue Code of 1986, as amended (the "Code"), regulations, rulings and decisions in effect as of the date of this Prospectus, all of which are subject to change. The discussion also takes into account regulations issued on February 2, 1994, regarding the taxation of debt instruments with original issue discount (the "OID Regulations"). The discussion below does not purport to address federal income tax consequences applicable to all categories of investors, some of which may be subject to special rules. In addition, the summary is limited to investors who will hold the Bonds 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 Bonds. As applied to any particular Bond, the summary is subject to further discussion or change as provided in the related Prospectus Supplement. CLASSIFICATION OF THE ISSUER AND THE BONDS No regulations, published rulings or judicial decisions discuss the characterization for federal income tax purposes of securities with terms substantially the same as the Bonds. Upon the issuance of each Series of Bonds, however, Giancarlo & Gnazzo, A Professional Corporation, tax counsel to the Issuer, will advise the 74 174 Issuer that in its opinion such Bonds will be treated for federal income tax purposes as indebtedness and not as an ownership interest in the Collateral, or an equity interest in the Issuer or in a separate association taxable as a corporation. Under the taxable mortgage pool ("TMP") rules in the Code, certain entities that issue debt secured by real estate mortgages are subject to special tax treatment that can result in entity level federal income taxation. An entity will be classified as a TMP if it does not make an election to be classified as a "real estate mortgage investment conduit" (a "REMIC") and (i) substantially all of its assets consist of debt obligations and more than 50% of such debt obligations are real estate mortgages or interests therein, (ii) the entity issues debt obligations with two or more maturities and (iii) payments on the debt obligations issued by it bear a relationship to payments received on the debt obligations owned by it. In certain situations, pools of assets within an entity can also be treated as a separate TMPs. The Company does not intend to make an election for any Issuer to be classified as a REMIC. Further, the Company intends to structure all issuances of Bonds, unless otherwise specified in the related Prospectus Supplement, so as to not constitute a TMP. However, it is possible that the Issuer or a portion of the Issuer relating to a specific pool of Mortgage Collateral and the Bonds related thereto could be treated as a TMP. If the Issuer was classified as a TMP, it is anticipated that it would nonetheless qualify as a "qualified REIT subsidiary" (within the meaning of Section 856 (i) of the Code) and thus would not be subject to entity level federal income taxes. If so, only Redwood Trust or its shareholders would be required to include in income any "excess inclusion income" generated by the TMP. On the other hand, if the Issuer was classified as a TMP but did not maintain its status as a "qualified REIT subsidiary", it would not be permitted to be included in the consolidated federal income tax return of any other corporation and its net income would be subject to entity level federal income taxes. Each Prospectus Supplement will specify whether or not the Issuer for that Series of Bonds is expected to be classified as a TMP, and if so, whether it will qualify as a "qualified REIT subsidiary" for federal income tax purposes. No assurance can be given that any Issuer classified as a TMP will continue to qualify as a "qualified REIT subsidiary" or that Redwood Trust will continue to qualify as a REIT for federal income tax purposes. Because, in counsel's opinion, the Bonds will be treated as indebtedness of the Issuer for federal income tax purposes, (i) Bonds 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 Bonds 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 Bonds will not constitute "real estate assets" or "Government securities" within the meaning of Code Section 856(c)(5)(A), and (iii) Bonds held by a regulated investment company will not constitute "Government securities" within the meaning of Code Section 851(b)(4)(A)(i). ORIGINAL ISSUE DISCOUNT GENERAL. The Prospectus Supplement for each Series of Bonds will disclose whether such Bonds are anticipated to be issued with "original issue discount" within the meaning of Code Section 1273(a). Holders of any Class of Bonds having original issue discount must generally 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. Each Issuer will indicate on the face of each Bond issued by it information concerning the application of the original issue discount rules to such Bond 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 Bonds information with respect to the original issue discount accruing on such Bonds during the reporting period. Rules governing original issue discount are set forth in Code Sections 1271 through 1273, 1275 and 1281 through 1283. In addition, the discussion of federal income tax consequences set forth below is based in part on 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 Bonds, that are subject to 75 175 prepayment. Therefore, there is some uncertainty as to the manner in which the original issue discount rules of the Code will be applied to the Bonds. ORIGINAL ISSUE DISCOUNT DEFINED. In general, each Bond will be treated as a single installment obligation for purposes of determining the original issue discount includible in a Bondholder's income. The amount of original issue discount on such a Bond is the excess of the stated redemption price at maturity of the Bond over its issue price. The issue price of a Bond is the initial offering price to the public at which a substantial amount of the Bonds 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 Bonds. (The portion of the initial offering price which consists of interest accrued on the Bonds from the date of issuance to the Closing Date may, at the option of the Bondholder, be subtracted from the issue price of the Bonds and treated as an offset of interest received on the first Payment Date.) The stated redemption price at maturity of a Bond is equal to the total of all payments to be made on the Bond other than "qualified stated interest payments." "Qualified stated interest payments" are payments on the Bonds 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 Bond 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 Bond. Generally, the stated redemption price at maturity of a Bond (other than a Deferred Interest Bond or a Payment Lag Bond, as defined below) is its stated principal amount; the stated redemption price at maturity of a Deferred Interest Bond is the sum of all payments (regardless of how denominated) scheduled to be received on such Bond under the Tax Prepayment Assumption (as defined below). Any payment of interest that is not a qualified stated interest payment is a "contingent interest payment." The related Prospectus Supplement will discuss whether the payments of interest on a Bond 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 Bond will be considered to be zero if such discount is less than 0.25% of the stated redemption price at maturity of the Bond multiplied by its weighted average life (a "de minimis" amount). The weighted average life of a Bond for this purpose is the sum of the following amounts (computed for each payment included in the stated redemption price at maturity of the Bond): (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 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 Bond's stated redemption price at maturity. Bondholders generally must report de minimis original issue discount pro rata as principal payments are received, and such income will be capital gain if the Bond is held as a capital asset. However, accrual method holders may elect to accrue all interest on a Bond, 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 amount and rate of accrual of original issue discount must be calculated based on a reasonable assumed prepayment rate for the Pledged Mortgages, the mortgage loans underlying the Certificates and/or other Mortgage Collateral securing the Bonds (the "Tax Prepayment Assumption") and to prescribe a method for adjusting the amount and rate of accrual of such discount. 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 will 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 Bonds. The related Prospectus Supplement for each Series of Bonds 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. 76 176 Generally, a Bondholder must include in gross income the sum of the "daily portions," as determined below, of the original issue discount that accrues on a Bond for each day the Bondholder holds that Bond, including the purchase date but excluding the disposition date. In the case of an original holder of a Bond, 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 Bonds (or the date prior to each such date). This will be done, in the case of each full accrual period, by adding (A) the present value at the end of the accrual period of all remaining payments to be received (based on (i) the yield to maturity of the Bond 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 subtracting from that total the "adjusted issue price" of the Bonds at the beginning of such accrual period. The adjusted issue price of a Bond at the beginning of the initial accrual period is its issue price; the adjusted issue price of a Bond 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 the 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 that 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 Bonds. With respect to any Bond 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 Bonds should be calculated as if the interest index remained at its value as of the issue date of such Bonds. Because the proper method of adjusting accruals of OID 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 Bonds for federal income tax purposes. Purchasers of Bonds with the above key features for which the period between the Closing Date and the first Payment Date does not exceed the Payment Date Interval would nevertheless pay upon purchase of the Bonds an additional amount of accrued interest as compared with the accrued interest that would be paid if interest accrued from Payment Date to Payment Date. This accrued interest (together with any accrued interest with respect to which the Bondholder chooses not to treat as an offset to interest paid on the first Payment Date, as described above) should be treated for federal income tax purposes as part of the initial purchase price of the Bonds. Bonds described in this paragraph issued or purchased at a discount would be treated as being issued or purchased at a smaller discount or at a premium, and such Bonds issued or purchased at a premium would be treated as being issued or purchased at a larger premium. SUBSEQUENT PURCHASERS. A subsequent purchaser of a Deferred Interest Bond or a subsequent purchaser of any other Bond issued with original issue discount who purchases the Bond 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 Bond is held, the sum of the daily portions of original issue discount on the Bond. In computing the daily portions of original issue discount with respect to a Bond 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 Bond 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 Bond at a cost greater than its stated redemption price at maturity generally will be considered to have purchased the Bond at a premium, which it may elect to amortize as an offset to 77 177 interest income on such Bond (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 Bonds 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 Bonds 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 Bond, such election will apply to 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 Bonds should consult their tax advisers regarding the election to amortize premium and the method to be employed. ELECTION TO TREAT ALL INTEREST AS ORIGINAL ISSUE DISCOUNT The OID Regulations permit a holder of a Bond 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 Bonds acquired on or after April 4, 1994. If such an election were to be made with respect to a Bond with market discount, the holder of the Bond 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 Bonds acquires during the year of the election or thereafter. Similarly, a holder of a Bond that makes this election for a Bond that is acquired at a premium will be deemed to have made an election to amortize bond premium with respect to all debt instruments having amortizable bond premium that such holder owns or acquires. The election to accrue interest, discount and premium on a constant yield method with respect to a Bond is irrevocable. REALIZED LOSSES Bondholders generally are required to accrue interest and original issue discount with respect to the Bonds without giving effect to any reductions in distributions attributable to defaults or delinquencies on the Mortgage Collateral until it can be established that any such reductions ultimately will not be recoverable. Although a holder of a Bond will eventually be entitled to recognize a loss or reduce income attributable to the Bonds if distribution reductions are ultimately not recovered, the law is unclear with respect to the timing and the character thereof and mismatches may result that further compound the economic losses associated with reduced distributions on the Bonds. SALE OR REDEMPTION If a Bond is sold, 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 Bond. Such adjusted basis generally will equal the cost of the Bond to the seller, increased by any original issue discount and market discount included in the seller's gross income with respect to the Bond and reduced by payments, other than payments of qualified stated interest, previously received by the seller and by any amortized premium. If a Bondholder 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 Bond will be taxable as ordinary income or loss. Any such gain or loss recognized by any other seller will be capital gain or loss, provided that the Bond is held by the seller as a "capital asset" (generally, property held for investment) within the meaning of Code Section 1221. MARKET DISCOUNT The Bonds are subject to the market discount provisions of Code Sections 1276 through 1278. These rules provide that if a subsequent holder of a Bond purchases it at a market discount, some or all of any principal payment or of any gain recognized upon the disposition of the Bond will be taxable as ordinary interest income. Market discount on a Bond 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 Bond prior to the acquisition by the subsequent holder (presumably adjusted to reflect prior principal payments), over (2) 78 178 the price paid by the holder for the Bond. Market discount on a Bond will be considered to be zero if such discount is less than .25% of the stated redemption price at maturity of such Bond 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 Bond by the subsequent purchaser. If market discount on a Bond is treated as zero under this rule, the actual amount of such discount must be allocated to the remaining principal distributions on such Bond 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 bond 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 Bonds 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 bond may elect to accrue market discount either on the basis of a constant interest rate or using one of the following methods. For bonds 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 bonds 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 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 Bonds) 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 bond 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 Bond, 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 Bond who acquired the Bond at a market discount also may be required to defer, until the maturity date of the Bond or the earlier disposition of the Bond 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 Bond 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 Bond. The amount of such net interest expense deferred in a taxable year may not exceed the amount of market discount accrued on the Bond for the days during the taxable year on which the subsequent holder held the Bond, and the amount of such deferred deduction to be taken into account in the taxable year in which the Bond 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 Bond purchased at a discount or premium in the secondary market. 79 179 WITHHOLDING WITH RESPECT TO CERTAIN FOREIGN INVESTORS Pursuant to Code Sections 871(h), 881(c), 1441(c)(9) and 1442(a), interest and original issue discount income received with respect to the Bonds by Bondholders who are nonresident alien individuals, foreign corporations or other non-United States persons unrelated to the Issuer ("foreign persons") generally will not be subject to the 30% withholding tax imposed by Code Sections 1441 and 1442 on certain income of foreign persons, provided the procedural requirements of Code Section 871(h)(5) are met. The 30% withholding tax will apply, however, in certain situations where contingent interest is paid or the IRS determines that withholding is required in order to prevent tax evasion by United States persons. If the 30% withholding tax were applicable, interest payments made to Bondholders who are foreign persons would be subject to withholding. In addition, a tax equal to 30% of the original issue discount accrued with respect to a Bond since the last payment of interest thereon would be withheld from each interest payment made to a foreign person. The Code provides, for purposes of determining the amount of original issue discount subject to the withholding tax on foreign persons, that original issue discount shall accrue at a constant interest rate pursuant to the rules applicable to United States persons described above, rather than on a straight-line basis as under previous law. Bondholders to whom withholding with respect to foreign persons applies also would be subject to a 30% tax on a portion of the gain, if any, recognized upon the payment by the Issuer of principal on a Bond or upon the sale or exchange of a Bond. In the case of such a disposition of a Bond, Code Sections 871 and 881 provide, for purposes of determining the amount of original issue discount subject to the withholding tax, that the 30% tax would apply to the amount of gain not in excess of the original issue discount that accrued, on a constant interest basis, while the foreign person held the Bond (reduced by the accrued original issue discount on account of which the tax had already been withheld). The 30% withholding tax imposed on a foreign person is subject to reduction or elimination under applicable tax treaties and does not apply if the interest, original issue discount or gain treated as ordinary income, as the case may be, is effectively connected with the conduct by such foreign person of a trade or business within the United States. Foreign persons who hold a Bond should consult their tax advisors regarding their qualification for reduced rate of, or exemption from, withholding and the procedure for obtaining such a reduction or exemption. BACKUP WITHHOLDING Federal income tax law provides for "backup withholding" of tax at a rate of 31% in certain circumstances on "reportable payments," which include payments of principal, interest and original issue discount (determined in any case as if the Bondholder were the original holder of the Bond), but not market discount, on a Bond and of the proceeds of the disposition of a Bond. Persons subject to the requirement to backup withhold include, in certain circumstances, the Issuer, the paying agent of the Issuer, a person who collects a payment of interest or original issue discount as a custodian or nominee on behalf of the Bondholder, and a "broker" (as defined in applicable Treasury regulations) through which the Bondholder receives the proceeds of the retirement or other disposition of a Bond. Backup withholding applies only if the Bondholder, among other things, (1) fails to furnish a social security number or other taxpayer identification number ("TIN") to the person subject to the requirement to backup withhold, (2) furnishes an incorrect TIN to such person, (3) fails to report properly interest or dividends or (4) under certain circumstances, fails to provide to such person a certified statement, signed under penalty of perjury, that the TIN furnished is the correct number and that such Bondholder is not subject to backup withholding. Backup withholding will not apply, however, with respect to certain payments made to Bondholders, including payments to certain exempt recipients (such as corporations and tax-exempt organizations) and to certain foreign persons. Bondholders should consult their tax advisors regarding their qualification for exemption from backup withholding and the procedure for obtaining such an exemption. 80 180 Each Issuer will report to the Bondholders and the IRS for each calendar year the amount of any "reportable payments" by the Issuer during such year and the amount of tax withheld, if any, with respect to payments on the Bonds issued by it. DUE TO THE COMPLEXITY OF THE FEDERAL INCOME TAX RULES APPLICABLE TO BONDHOLDERS AND THE CONSIDERABLE UNCERTAINTY THAT EXISTS WITH RESPECT TO MANY ASPECTS OF THOSE RULES, POTENTIAL INVESTORS SHOULD CONSULT THEIR OWN TAX ADVISORS REGARDING THE TAX TREATMENT OF THE ACQUISITION, OWNERSHIP, AND DISPOSITION OF THE BONDS. STATE TAX CONSIDERATIONS In addition to the federal income tax consequences described above under "FEDERAL INCOME TAX CONSEQUENCES," potential investors should consider the state income tax consequences of the acquisition, ownership, and disposition of the Bonds. State income tax law may differ substantially from the corresponding federal law, and this discussion does not purport to describe any 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 Bonds. LEGAL INVESTMENT The Prospectus Supplement for each Series of Bonds will specify which, if any, of the Classes of Bonds offered thereby will constitute "mortgage related securities" for purposes of SMMEA. Classes of Bonds 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 any state (including the District of Columbia and Puerto Rico) whose authorized investments are subject to state regulation 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 enacts legislation prior to October 4, 1991 specifically limiting the legal investment authority of any of such entities with respect to "mortgage related securities," the Bonds 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 any such legislation affect the validity of any contractual commitment to purchase, hold or invest in Bonds, or require the sale or other disposition of Bonds, so long as such contractual commitment was made or such Bonds were acquired prior to the enactment of such legislation. SMMEA also amended the legal investment authority of federally-chartered depository institutions as follows: federal savings and loan associations and federal savings banks may invest in, sell or otherwise deal in Bonds 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 Bonds 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 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" (12 C.F.R. Part 703) (whether or not the Class of Bonds under consideration for purchase constitutes a "mortgage related security"). All depository institutions considering an investment in the Bonds (whether or not the Class of Bonds under consideration for purchase constitutes a "mortgage related security") should review the Federal Financial Institutions Examination Council's Supervisory Policy Statement on Securities Activities (to the extent adopted by their respective regulators) (the "Policy Statement"), setting forth, in relevant part, certain securities trading and sales practices deemed unsuitable for an institution's investment portfolio, and 81 181 guidelines for (and restrictions on) investing in mortgage derivative products, including "mortgage related securities" that are "high-risk mortgage securities" as defined in the Policy Statement. According to the Policy Statement, such "high-risk mortgage securities" include securities such as Bonds not entitled to distributions allocated to principal or interest, or Subordinated Bonds. 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 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, percentage-of-assets limits and provisions that may restrict or prohibit investment in securities that are not "interest bearing" or "income paying." There may be other restrictions on the ability of certain investors, including depository institutions, either to purchase Bonds or to purchase Bonds 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 Bonds constitute legal investments for such investors. ERISA MATTERS GENERAL The Employee Retirement Income Security Act of 1974, as amended ("ERISA") and section 4975 of the Code impose certain restrictions on employee benefit plans subject to ERISA or plans or arrangements subject to Section 4975 of the Code ("Plans") and on persons who are parties in interest or disqualified persons ("parties in interest") with respect to such Plans. Certain employee benefit plans, such as governmental plans and church plans (if no election has been made under section 410(d) of the Code), are not subject to the restrictions of ERISA, and assets of such plans may be invested in the Bonds without regard to the ERISA considerations described below, subject to other applicable federal and state law. However, any such governmental or church plan which is qualified under section 401(a) of the Code and exempt from taxation under section 501(a) of the Code is subject to the prohibited transaction rules set forth in section 503 of the Code. Any Plan fiduciary which proposes to cause a Plan to acquire any of the Bonds should consult with its counsel with respect to the potential consequences under ERISA, and the Code, of the Plan's acquisition and ownership of the Bonds. Investments by Plans are also subject to ERISA's general fiduciary requirements, including the requirement of investment prudence and diversification and the requirement that a Plan's investments be made in accordance with the documents governing the Plan. PROHIBITED TRANSACTIONS GENERAL. Section 406 of ERISA prohibits parties in interest with respect to a Plan from engaging in certain transactions (including loans) involving a Plan and its assets unless a statutory or administrative exemption applies to the transaction. Section 4975 of the Code imposes certain excise taxes (or, in some cases, a civil penalty may be assessed pursuant to section 502(i) of ERISA) on parties in interest which engage in non-exempt prohibited transactions. PLAN ASSET REGULATION. The United States Department of Labor ("Labor") has issued final regulations concerning the definition of what constitutes the assets of a Plan for purposes of ERISA and the prohibited transaction provisions of the Code (the "Plan Asset Regulation"). The Plan Asset Regulation describes the circumstances under which the assets of an entity in which a Plan invests will be considered to be "plan assets" such that any person who exercises control over such assets would be subject to ERISA's fiduciary standards. Under the Plan Asset Regulation, generally when a Plan invests in another entity, the Plan's assets do not include, solely by reason of such investment, any of the underlying assets of the entity. However, the Plan Asset Regulation provides that, if a Plan acquires an "equity interest" in an entity that is neither a "publicly-offered security" (as defined therein) nor a security issued by an investment company registered under the Investment Company Act of 1940, the assets of the entity will be treated as assets of the Plan 82 182 investor unless certain exceptions apply. If the Bonds were deemed to be equity interests and no statutory, regulatory or administrative exemption applies, the Issuer could be considered to hold plan assets by reason of a Plan's investment in the Bonds. Such plan assets would include an undivided interest in any assets held by the Issuer. In such an event, the Bond Trustee and other persons, in providing services with respect to the Issuer's assets, may be parties in interest with respect to such Plans, subject to the fiduciary responsibility provisions of Title I of ERISA, including the prohibited transaction provisions of section 406 of ERISA, and section 4975 of the Code with respect to transactions involving the Issuer's assets. 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." Although the Plan Assets Regulation is silent with respect to the question of which law constitutes "applicable local law" for this purpose, Labor has stated that this determination should be made under the state law governing interpretation of the instrument in question. In the preamble to the Plan Assets Regulation, Labor declined to provide a precise definition of what features are equity features or the circumstances under which such features would be considered "substantial," noting that the question of whether a plan's interest has substantial equity features is an inherently factual one, but that in making a determination it would be appropriate to take into account whether the equity features are such that a Plan's investment would be a practical vehicle for the indirect provision of investment management services. If the Bonds are deemed to be equity interests in the Issuer and no statutory, regulatory or administrative exemption applies, the Issuer could be considered to hold plan assets by reason of a Plan's investment in the Bonds. Those exemptions potentially include Prohibited Transaction Class Exemption ("PTCE") 90-1, regarding investments by insurance company pooled separate accounts, PTCE 91-38, regarding investments by bank collective investment funds, PTCE 84-14, regarding transactions effected by a "qualified professional asset manager," PTCE 95-60, regarding investments by insurance company general accounts, or PTCE 96-23, regarding transactions effected by an "in-house asset manager". REVIEW BY PLAN FIDUCIARIES. Any Plan fiduciary considering whether to purchase any Bonds 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. Among other things, before purchasing any Bonds, a fiduciary of a Plan should make its own determination as to whether the Issuer, as obligor on the Bonds, is a party in interest with respect to the Plan, the availability of the exemptive relief provided in the Plan Asset Regulations and the availability of any other prohibited transaction exemptions. RATING It is a condition to the issuance of the Bonds of each Series offered hereby and by the Prospectus Supplement that they shall have been rated in one of the four highest rating categories by the nationally recognized statistical rating agency or agencies (each, a "Rating Agency") specified in the related Prospectus Supplement. Any such rating would be based on, among other things, the adequacy of the value of the Mortgage Collateral securing a Series of Bonds and any credit enhancement with respect to such Class and will reflect such Rating Agency's assessment solely of the likelihood that holders of a Class of Bonds will receive payments to which such Bondholders are entitled under the related Bond. Such rating will not constitute an assessment of the likelihood that principal prepayments on the related Mortgage Collateral will be made, the degree to which the rate of such prepayments might differ from that originally anticipated or the likelihood of early optional termination of the Series of Bonds. Such rating should not be deemed a recommendation to purchase, hold or sell Bonds, inasmuch as it does not address market price or suitability for a particular investor. Each security rating should be evaluated independently of any other security rating. Such rating will not address the possibility that prepayment at higher or lower rates than anticipated by an investor may cause such investor to experience a lower than anticipated yield or that an investor purchasing a security at a significant premium might fail to recoup its initial investment under certain prepayment scenarios. There is also no assurance that any such rating will remain in effect for any given period of time or that it may not be lowered or withdrawn entirely by the applicable Rating Agency in the future if in its judgment 83 183 circumstances in the future so warrant. In addition to being lowered or withdrawn due to any erosion in the adequacy of the value of the Mortgage Collateral securing a Series of Bonds or any credit enhancement with respect to a Series of Bonds, such rating might also be lowered or withdrawn among other reasons, because of an adverse change in the financial or other condition of a credit enhancement provider or a change in the rating of such credit enhancement provider's long term debt. The amount, type and nature of credit enhancement, if any, established with respect to a Series of Bonds will be determined on the basis of criteria established by each Rating Agency rating Classes of such Series of Bonds. Such criteria are sometimes based upon an actuarial analysis of the behavior of mortgage loans in a larger group. Such analysis is often the basis upon which each Rating Agency determines the amount of credit enhancement required with respect to each such Class. There can be no assurance that the historical data supporting any such actuarial analysis will accurately reflect future experience nor any assurance that the data derived from a large actuarial analysis will accurately reflect future experience nor any assurance that the data derived from a large pool of mortgage loans accurately predicts the delinquency, foreclosure or loss experience of any particular pool of Mortgage Collateral. No assurance can be given that values of any Mortgaged Properties or mortgaged properties securing the mortgage loans underlying any Certificates, as the case may be, have remained or will remain at their levels on the respective dates of origination of the related mortgage loans. If the residential real estate markets should experience an overall decline in property values such that the outstanding principal balances of the Mortgage Collateral securing a particular Series of Bonds and any secondary financing on the related Mortgaged Properties become equal to or greater than the value of the Mortgaged Properties or mortgaged properties securing the mortgage loans underlying any Certificates, as the case may be, the rates of delinquencies, foreclosures and losses could be higher than those now generally experienced in the mortgage lending industry. In addition, adverse economic conditions (which may or may not affect real property values) may affect the timely payment by mortgagors of scheduled payments of principal and interest on the Mortgage Collateral and, accordingly, the rates of delinquencies, foreclosures and losses with respect to any Mortgage Collateral securing a particular Series of Bonds. To the extent that such losses are not covered by credit enhancement, such losses will be borne, at least in part, by the holders of one or more Classes of Bonds. PLAN OF DISTRIBUTION The Issuer may sell the Bonds offered hereby either directly or through an underwriter or underwriters or through underwriting syndicates managed by an underwriter or underwriters. The Prospectus Supplement for each Series will set forth the terms of the offering of such Series and of each Class within such Series, including the name or names of the underwriters, the proceeds to and their use by the Issuer, and either the initial public offering price, the discounts and commissions to the underwriters and any discounts or concessions allowed or reallowed to certain dealers or the method by which the price at which the underwriters will sell the Bonds will be determined. The Bonds of a Series may be acquired by underwriters for their own account 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. The obligations of any underwriters will be subject to certain conditions precedent, and such underwriters will be severally obligated to purchase all the Bonds of a Series described in the related Prospectus Supplement, if any are purchased. If Bonds of a Series are offered other than through underwriters, the related Prospectus Supplement will contain information regarding the nature of such offering and any agreements to be entered into between the Issuer and purchasers of Bonds of such Series. The place and time of delivery for the Bonds of a Series in respect of which this Prospectus is delivered will be set forth in the related Prospectus Supplement. 84 184 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 Giancarlo & Gnazzo, A Professional Corporation, San Francisco, California. Brown & Wood LLP, New York, New York will act as counsel for the underwriters. 85 185 INDEX OF CERTAIN DEFINITIONS Set forth below is a list of certain terms used in this Prospectus, together with the pages on which the terms are defined herein. Additional Bonds..................................................................... 1, 49 Additional Mortgage Collateral..................................................1, 13, 22, 49 Advance.............................................................................. 17 Agency Securities.................................................................... 1, 4 Assumed Reinvestment Rate............................................................ 31 Available Funds...................................................................... 6, 31 Balloon payments..................................................................... 9, 39 Bankruptcy Bond........................................................................15, 53 Basic Principal Payment.............................................................. 6 Belgian Cooperative.................................................................. 36 Beneficial owner..................................................................... 34 Bond Account...........................................................................12, 57 Bond Distribution Amount............................................................. 12 Bond Insurance Policy................................................................ 15 Bond Owners.......................................................................... 34 Bond Trustee......................................................................... 4, 26 Bond Value........................................................................... 6 Bond Values.......................................................................... 6 Bondholders.......................................................................... 4, 34 Bonds................................................................................ 1, 4 Book-Entry Bonds..................................................................... 34 Buydown Fund......................................................................... 39 Buydown Loans........................................................................ 39 Capitalized Interest Account......................................................... 50 CEDEL Participants................................................................... 35 CERCLA.................................................................................24, 70 Certificates......................................................................... 1, 4 Closing Date......................................................................... 12 Code............................................................................5, 18, 26, 73 Collateral........................................................................... 37 Collateral Group..................................................................... 31 Commission........................................................................... 2 Company..............................................................................1, 5, 26 Controlling Class.................................................................... 64 Conventional Loans................................................................... 33 Cooperative Loans.................................................................... 9, 41 Cooperatives......................................................................... 9, 41 Custodial Account.................................................................... 56 Cut-off Date......................................................................... 14 Deferred Interest Bonds.............................................................. 30 Definitive Bond...................................................................... 34 Depositor............................................................................ 5, 26 Detailed Description................................................................. 38 Distribution Account................................................................. 12 Distribution Account Deposit Date......................................................12, 48
86 186 DTC.................................................................................. 19, 34 Due Period........................................................................... 6 Eligible Substitute Pledged Mortgage................................................. 41 EPA.................................................................................. 70 ERISA..................................................................................18, 80 Euroclear Operator................................................................... 36 Euroclear Participants............................................................... 36 European Depositaries................................................................ 34 Event of Default..................................................................... 63 Exchange Act......................................................................... 3 FHA Loans............................................................................ 42 FHLMC................................................................................ 1, 4 FHLMC Act............................................................................ 44 FHLMC Certificates.....................................................................10, 41 Financial Intermediary............................................................... 35 Fixed Rate Pledged Mortgages......................................................... 1, 4 Floating Rate Bonds.................................................................. 31 Floating Rate Pledged Mortgages...................................................... 1, 4 FNMA................................................................................. 1, 4 FNMA Certificates......................................................................10, 41 Funding Period.........................................................................13, 23 Garn-St Germain Act.................................................................. 72 GNMA................................................................................. 1, 4 GNMA Certificates......................................................................10, 41 GNMA I Certificate................................................................... 42 GNMA II Certificate.................................................................. 42 GNMA Issuer.......................................................................... 42 Guaranteed Mortgage Pass-Through Certificates..........................................10, 41 Guaranty Agreement................................................................... 42 Housing Act.......................................................................... 42 Indenture............................................................................ 26 Insurance Proceeds................................................................... 37 IRS.................................................................................. 74 Issuer............................................................................... 1, 26 L/C Bank...............................................................................15, 54 L/C Percentage.........................................................................16, 54 Labor................................................................................ 81 Liquidated Mortgage.................................................................. 59 Liquidation Proceeds................................................................. 37 Lockout periods........................................................................10, 39 Master Servicer...................................................................... 5 Master Servicing Agreement........................................................... 5, 56 Master Servicing Fee................................................................. 59 Moody's.............................................................................. 48 Morgan............................................................................... 36 Mortgage Collateral.................................................................. 1, 4 Mortgage Note........................................................................ 9 Mortgage Pool Insurance Policy.........................................................14, 51 Mortgage Rate........................................................................ 9
87 187 Mortgaged Property.....................................................................10, 38 Mortgagor............................................................................ 29 NCUA................................................................................. 80 OID Regulations...................................................................... 73 Owner Trustee........................................................................ 5, 26 Parties in interest.................................................................. 80 Payment Date......................................................................... 5 Permitted Investments................................................................ 48 Plan Asset Regulation................................................................ 81 Plans................................................................................ 80 Pledged Mortgages.................................................................... 1, 4 PMBS Agreement....................................................................... 46 PMBS Issuer.......................................................................... 12, 46 PMBS Servicer........................................................................ 12, 46 PMBS Trustee......................................................................... 12, 46 Policy Statement..................................................................... 80 Pool Insurer......................................................................... 51 Pre-Funded Amount.................................................................... 22 Pre-Funding Account.................................................................. 13, 23 Primary Mortgage Insurance Policy.................................................... 38 Private Mortgage-Backed Securities................................................... 4 PTCE................................................................................. 81 Purchase Price....................................................................... 29 Qualified REIT subsidiary............................................................ 26 Rating Agency........................................................................ 7, 82 RCRA................................................................................. 71 Record Date.......................................................................... 5 Redwood Trust........................................................................ 5, 26 REIT................................................................................. 17, 26 Relevant Depositary.................................................................. 34 Relief Act........................................................................... 73 Remittance Date...................................................................... 38 Reserve Fund......................................................................... 51 Rules................................................................................ 35 Securities Act....................................................................... 2 Seller............................................................................... 27 Senior Bondholders................................................................... 14, 50 Senior Bonds......................................................................... 4 Senior Liens......................................................................... 40 Servicer............................................................................. 5, 56 Servicers............................................................................ 40 Servicing Agreement.................................................................. 56 Servicing Default.................................................................... 62 SMMEA................................................................................ 18 Special Hazard Insurance Policy...................................................... 14 Special Hazard Insurer............................................................... 52 Special Servicer..................................................................... 5 Special Servicing Agreement.......................................................... 61 Spread............................................................................... 6
88 188 Stand-by Master Servicer............................................................. 61 Subordinated Bondholders...............................................................13, 50 Subordinated Bonds................................................................... 4 Subsequent Mortgage Collateral....................................................... 23 Substitute Collateral................................................................ 47 Successor Master Servicer............................................................ 61 Tax Prepayment Assumption............................................................ 75 Terms and Conditions................................................................. 36 TIN.................................................................................. 79 Title V.............................................................................. 72 UCC.................................................................................. 69 VA Loans............................................................................. 42
89 189 ====================================================== NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON. THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS DO NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY, NOR AN OFFER OF BONDS IN ANY STATE OR JURISDICTION IN WHICH, OR TO ANY PERSON TO WHOM, SUCH OFFER WOULD BE UNLAWFUL. THE DELIVERY OF THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS AT ANY TIME DOES NOT IMPLY THAT THE INFORMATION CONTAINED HEREIN OR THEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE; HOWEVER, IF ANY MATERIAL CHANGE OCCURS WHILE THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS IS REQUIRED BY LAW TO BE DELIVERED, THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS WILL BE AMENDED OR SUPPLEMENTED ACCORDINGLY. ------------------------ TABLE OF CONTENTS
PAGE ---- PROSPECTUS SUPPLEMENT Incorporation of Certain Documents by Reference............................... S-2 Summary................................... S-3 Risk Factors.............................. S-10 The Issuer................................ S-14 Description of the Bonds.................. S-15 Credit Enhancement........................ S-25 Security for the Bonds.................... S-28 Servicing of the Pledged Mortgages........ S-37 Use of Proceeds........................... S-39 Federal Income Tax Consequences........... S-39 State Tax Consideration................... ERISA Matters............................. S-40 Method of Distribution.................... S-41 Legal Matters............................. S-41 Ratings................................... S-41 Index of Defined Terms.................... S-43 PROSPECTUS Prospectus Supplements.................... 2 Available Information..................... 2 Incorporation of Certain Documents by Reference............................... 3 Summary of Terms.......................... 4 Risk Factors.............................. 19 Introduction.............................. 26 The Issuer................................ 27 Use of Proceeds........................... 27 Mortgage Loan Program..................... 28 Description of the Bonds.................. 30 Security for the Bonds.................... 38 Credit Enhancement........................ 50 Servicing of the Pledged Mortgages........ 57 The Indenture............................. 63 Certain Legal Aspects of the Pledged Mortgages............................... 66 Federal Income Tax Consequences........... 74 State Tax Considerations.................. 81 Legal Investment.......................... 81 ERISA Matters............................. 82 Rating.................................... 83 Plan of Distribution...................... 84 Legal Matters............................. 85 Index of Certain Definitions.............. 86
====================================================== ====================================================== SEQUOIA MORTGAGE TRUST 19__ - ________ COLLATERALIZED MORTGAGE BONDS ------------------------------------------- PROSPECTUS SUPPLEMENT ------------------------------------------- [LOGO] , 199 ====================================================== 190 PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.** SEC Registration Fee............................................... $303.03 Printing and Engraving Expenses.................................... * Accounting Fees and Expenses....................................... * Legal Fees and Expenses............................................ * Trustee Fees and Expenses.......................................... * Blue Sky Fees and Expenses......................................... * Rating Agency Fees................................................. * Miscellaneous...................................................... * -------- Total.................................................... $ * ========
- --------------- * To be filed by Amendment. ** All amounts except the SEC Registration Fee are estimates of expenses incurred in connection with the issuance and distribution of a Series of Bonds in an aggregate principal amount assumed for these purposes to be equal to $ of Bonds registered hereby. ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS. Section 145 of the General Corporation Law of Delaware empowers a corporation to indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the corporation) by reason of the fact that he is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise. Depending on the character of the proceeding, a corporation may indemnify against expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred in connection with such action, suit or proceeding if the person indemnified acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe his or her conduct was unlawful. In the case of an action by or in the right of the corporation, no indemnification may be made in respect of any claim, issue or matter as to which such person shall have been adjudged to be liable to the corporation unless and only to the extent that the Court of Chancery or the court in which such action or suit was brought shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses which the Court of Chancery or other such court shall deem proper. Section 145 further provides that to the extent a director, officer, employee or agent of a corporation has been successful on the merits or otherwise in the defense of any action, suit or proceeding referred to above or in the defense of any claim, issue or matter therein, he or she shall be indemnified against expenses (including attorneys' fees) actually and reasonably incurred by him in connection therewith. The Certificate of Incorporation and Bylaws of the Company provide, in effect, that, to the extent and under the circumstances permitted by Section 145 of the General Corporation Law of Delaware, the Company shall indemnify any person who was or is a party or is threatened to be made a party to any action, suit or proceeding of the type described above by reason of the fact that he or she is or was a director, officer, employee or agent of the Company. The Underwriting Agreement for any Series of Bonds may provide that the Company and Redwood Trust will indemnify the related Underwriter or Underwriters against, or make contributions to such Underwriter or Underwriters with respect to, certain liabilities, including liabilities under the Securities Act of 1933. II-1 191 ITEM 16. EXHIBITS. 1.1 Form of Underwriting Agreement. 4.1 Form of Indenture in substantially the form to be entered into between each Issuer and the Bond Trustee. 4.2 Form of Deposit Trust Agreement in substantially the form to be entered into between Sequoia Mortgage Funding Corporation and the Owner Trustee creating each Issuer. 4.3 Form of Master Servicing Agreement in substantially the form to be entered into among each Issuer, the Bond Trustee and each Master Servicer. 5.1 Opinion of Tobin & Tobin regarding legality.* 8.1 Opinion of Giancarlo & Gnazzo regarding certain tax matters. 23.1 Consent of Tobin & Tobin (included in Exhibit 5.1).* 23.2 Consent of Giancarlo & Gnazzo (included in Exhibit 8.1). 24.1 Power of Attorney.** 25.1 Statement of Eligibility and Qualification of Trustee under the Trust Indenture Act of 1939 for .*
- --------------- * To be filed by Amendment ** Previously filed. ITEM 17. UNDERTAKINGS. (a) The undersigned 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) To reflect in the prospectus any facts or events arising after the effective date of this Registration Statement (or the most recent post-effective amendment hereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in this 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 and 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 no more than 20 percent 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 this Registration Statement or any material change to such information in this 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. (b) The undersigned Registrant hereby undertakes that, for purposes of determining any liability under the Securities Act of 1933, each filing of the Registrant's annual report pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 that is incorporated by reference in this Registration Statement shall be II-2 192 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. (c) Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the Registrant pursuant to the foregoing provisions, or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act of 1933 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 Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act of 1933 and will be governed by the final adjudication of such issue. (d) The undersigned Registrant hereby undertakes that: (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 this Registration Statement in reliance upon Rule 430A and contained in a form of prospectus filed by the Registrant pursuant to Rule 424(b)(l) or (4) or 497(h) under the Securities Act of 1933 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. (e) The undersigned 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 in accordance with the rules and regulations prescribed by the Securities and Exchange Commission under Section 305(b)(2) of the Trust Indenture Act. II-3 193 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the 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 Amendment No. 1 to Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of San Francisco, State of California, on April 28, 1997. SEQUOIA MORTGAGE FUNDING CORPORATION* By /s/ DOUGLAS B. HANSEN -------------------------------------- Name: Douglas B. Hansen Title: President Pursuant to the requirements of the Securities Act of 1933, this Amendment No. 1 to Registration Statement has been signed by the following persons in the capacities as officers and directors of the Company and on the dates indicated.
SIGNATURES TITLE DATE - --------------------------------------------- ---------------------------- ------------------ /s/ GEORGE G. BULL III Chairman of the Board of April 28, 1997 - --------------------------------------------- Directors George G. Bull III (Principal Executive Officer) /s/ DOUGLAS B. HANSEN President and Director April 28, 1997 - --------------------------------------------- (Principal Financial Douglas B. Hansen Officer) /s/ FREDERICK H. BORDEN Security and Director April 28, 1997 - --------------------------------------------- Frederick H. Borden /s/ JOHN CONNOLLY IV Director April 28, 1997 - --------------------------------------------- John Connolly IV /s/ CRAIG A. SEVERANCE Director April 28, 1997 - --------------------------------------------- Craig A. Severance /s/ VICKIE L. RATH Treasurer (Principal April 28, 1997 - --------------------------------------------- Accounting Officer) Vickie L. Rath
- --------------- * For itself and on behalf of each trust acting as an Issuer hereunder. II-4 194 EXHIBIT INDEX
EXHIBIT - -------- 1.1 -- Form of Underwriting Agreement. 4.1 -- Form of Indenture in substantially the form to be entered into between each Issuer and the Bond Trustee. 4.2 -- Form of Deposit Trust Agreement in substantially the form to be entered into between Sequoia Mortgage Funding Corporation and the Owner Trustee creating each Issuer. 4.3 -- Form of Master Servicing Agreement in substantially the form to be entered into among each Issuer, the Bond Trustee and each Master Servicer. 5.1 -- Opinion of Tobin & Tobin regarding legality. 8.1 -- Opinion of Giancarlo & Gnazzo regarding certain tax matters. 23.1 -- Consent of Tobin & Tobin (included in Exhibit 5.1). 23.2 -- Consent of Giancarlo & Gnazzo (included in Exhibit 8.1). 24.1 -- Power of Attorney.** 25.1 -- Statement of Eligibility and Qualification of Trustee under the Trust Indenture Act of 1939 for .*
- --------------- * To be filed by Amendment ** Previously filed. EX-1.1 2 FORM OF UNDERWRITING AGREEMENT 1 EXHIBIT 1.1 SEQUOIA MORTGAGE TRUST ______ Collateral Mortgage Bonds UNDERWRITING AGREEMENT ________ __, 199_ The Firm or Firms of Underwriters named on the signature page hereof Ladies and Gentlemen: Sequoia Mortgage Funding Corporation, a Delaware corporation (the "Company") and a wholly-owned limited purpose subsidiary of Redwood Trust, Inc., a Maryland corporation ("Redwood Trust"), proposes to cause Sequoia Mortgage Trust _______ (the "Issuer") to issue and sell to you (each, an "Underwriter") the Issuer's Collateralized Mortgage Bonds (the "Bonds") having the characteristics set forth in the Prospectus Supplement (as defined below), secured by a trust estate consisting primarily of [mortgage notes and the related mortgages acquired by the Issuer (the "Pledged Mortgages")] and related property (collectively, the "Trust Estate"). The [Pledged Mortgages] will be of the type and will have the characteristics described in the Prospectus Supplement, subject to the variances, 2 ranges, minimums and maximums set forth in the Prospectus Supplement. The Issuer is a statutory business trust established under the laws of the State of Delaware pursuant to the Amended and Restated Deposit Trust Agreement, dated as of ________ __, 199_ (the "Trust Agreement"), between the Company and _________________, as owner trustee (the "Owner Trustee"). The Issuer was formed for the sole purpose of issuing the Bonds [and the Investor Certificate (as defined in the Prospectus Supplement)]. The Bonds will be issued pursuant to the Indenture, dated as of _________ 1, 199_ (the "Indenture"), between the Issuer and ________________________________, as bond trustee (the "Bond Trustee"). The [Pledged Mortgages] will be serviced pursuant to the Master Servicing Agreement, dated as of _________ 1, 199_ (the "Master Servicing Agreement"), among the Issuer, the Bond Trustee and ______________, a ____________ corporation, as master servicer (in such capacity, the "Master Servicer"). Certain administrative and clerical services will be provided to the Issuer by Redwood Trust (in such capacity, the "Manager") pursuant to the Management Agreement, dated as of ________ 1, 199_ (the "Management Agreement"), between the Issuer 2 3 and the Manager. The Trust Agreement, the Management Agreement, the Indenture, the Master Servicing Agreement and this Agreement are sometimes referred to herein collectively as the "Transaction Documents." Capitalized terms used but not otherwise defined herein shall have the respective meanings ascribed thereto in the Indenture. 1. Representations and Warranties. The Company and Redwood Trust, jointly and severally, represent and warrant to, and agree with, each Underwriter that: (i) A registration statement on Form S-3 (File No. 333-22681), including a prospectus, has been filed with the Securities and Exchange Commission (the "Commission") and has become effective under the Securities Act of 1933, as amended (the "Act"). Such registration statement, as amended at the date of this Agreement, meets the requirements set forth in Rule 415(a)(1)(x) under the Act. As of the Closing Date (as hereinafter defined), no stop order suspending the effectiveness of such registration statement has been issued and no proceedings for that purpose have been initiated or, to the knowledge of the Company or Redwood Trust, threatened by the Commission. The 3 4 prospectus in the form in which it will be used in connection with the offering of the Bonds is proposed to be supplemented by a prospectus supplement dated the date hereof relating to the Bonds and, as so supplemented, to be filed with the Commission pursuant to Rule 424 under the Act. (Such registration statement is hereinafter referred to as the "Registration Statement"; such prospectus supplement, as first filed with the Commission, is hereinafter referred to as the "Prospectus Supplement"; and such prospectus, in the form in which it will first be filed with the Commission in connection with the offering of the Bonds, including the documents incorporated therein as of the time of such filing and as supplemented by the Prospectus Supplement, is hereinafter referred to as the "Prospectus"). Any reference herein to the Registration Statement, a preliminary prospectus or the Prospectus shall be deemed to refer to and include the documents incorporated by reference therein pursuant to Item 12 of Form S-3 which were filed under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), on or before the date on which the Registration Statement, as amended, became effective or 4 5 the issue date of any preliminary prospectus or the date on which the Prospectus is filed pursuant to Rule 424(b) under the Act, as the case may be, deemed to be incorporated therein by reference. (ii) The Registration Statement, the Prospectus and the Indenture, as of the date of the Prospectus Supplement will conform, and the Registration Statement, the Prospectus as revised, amended or supplemented and filed with the Commission prior to the termination of the offering of the Bonds, and the Indenture, as of their respective effective or issue dates, will conform in all material respects to the requirements of the Act and the Trust Indenture Act of 1939, as amended (the "TIA"), and the respective rules and 5 6 regulations of the Commission thereunder applicable to such documents as of such respective dates, and the Registration Statement, the Prospectus as revised, amended or supplemented and filed with the Commission as of the Closing Date, and the Indenture will conform in all material respects to the requirements of the Act and the TIA and the respective rules and regulations of the Commission thereunder applicable to such documents as of the Closing Date. The Registration Statement, at the time it became effective, did not include any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading; and the Prospectus as of the date of the Prospectus Supplement, and the Prospectus as revised, amended or supplemented and filed prior to the Closing Date, as of the Closing Date, will not include any untrue statement of a material fact and will not omit to state a material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading; provided, however, that the Company and Redwood Trust make 6 7 no representations, warranties or agreements as to (x) the part of the Registration Statement which shall constitute the Statement of Eligibility and Qualification on Form T-1 (with respect to the Bonds) of the Bond Trustee under the TIA, except statements therein or omissions therefrom made in reliance upon information furnished in writing to the Bond Trustee by or on behalf of the Company or Redwood Trust expressly for use therein or (y) the information contained in or omitted from the Prospectus or any revision or amendment thereof or supplement thereto in reliance upon and in conformity with information furnished in writing to the Company by or on behalf of any Underwriter specifically for use in connection with the preparation of the Prospectus or any revision or amendment thereof or supplement thereto, such information being defined as the "Underwriter Information" in Section 10 hereof. (iii) The Bonds conform in all material respects to the description thereof contained in the Prospectus, and each of the Bonds, when validly executed, authenticated, issued and delivered in accordance with the Indenture and paid for in accordance with this Agreement, will be duly and 7 8 validly issued and outstanding and entitled to the benefits and security afforded by the Indenture and will constitute legal, valid and binding obligations of the Issuer, enforceable in accordance with their terms and the terms of the Indenture, except as the same may be limited by bankruptcy, insolvency, reorganization or other similar laws affecting enforcement of creditors' rights generally and by general principles of equity. Each Bond of the Classes indicated to be "mortgage related securities" under the heading "Summary--Legal Investment" in the Prospectus Supplement will, when issued, be a "mortgage related security" as such term is defined in Section 3(a)(41) of the Exchange Act. (iv) This Agreement has been duly authorized, executed and delivered by each of the Company and Redwood Trust. The Trust Agreement has been, and as of the Closing Date, each of the other Transaction Documents to which the Company or Redwood Trust is a party, will have been, duly authorized, executed and delivered by the Company or Redwood Trust, as applicable, and will conform in all material respects to the descriptions thereof contained in the Prospectus and, 8 9 assuming the valid execution and delivery thereof by the other parties thereto, each Transaction Document to which the Company or Redwood Trust is a party will constitute a legal, valid and binding agreement of the Company or Redwood Trust, as applicable, enforceable in accordance with its terms, except as the same may be limited by bankruptcy, insolvency, reorganization or other similar laws affecting creditors' rights generally and by general principles of equity. (v) Each of the Company and Redwood Trust has been duly incorporated and is validly existing as a corporation in good standing under the laws of its respective State of incorporation, and each of the Company and Redwood Trust is duly qualified to do business as a foreign corporation and is in good standing under the laws of each jurisdiction where the character of its respective properties or the nature of its respective activities makes such qualification necessary, except such jurisdictions, if any, in which the failure to be so qualified will not have a material adverse effect on the condition (financial or otherwise), earnings, regulatory affairs, business affairs, business prospects or 9 10 properties of Redwood Trust or the Company; each of Redwood Trust and the Company holds all material licenses, certificates and permits from all governmental authorities necessary for the conduct of its respective business as described in the Prospectus; and each of the Company and Redwood Trust have the corporate power and authority to own its respective properties and conduct its respective business as described in the Prospectus and to enter into and perform its respective obligations under each Transaction Document to which it is a party. (vi) Neither the issuance, delivery or sale of the Bonds, nor the consummation of any other of the transactions contemplated herein, nor the execution and delivery of the Transaction Documents by the Company and Redwood Trust and compliance with the provisions of the Transaction Documents, will conflict with or result in the breach of any material term or provision of the certificate of incorporation or by-laws of the Company or Redwood Trust, and neither the Company nor Redwood Trust is in breach or violation of or in default (nor has an event occurred which with notice or lapse of time or both would constitute a default) under the 10 11 terms of (i) any indenture, contract, lease, mortgage, deed of trust, note, agreement or other evidence of indebtedness or other agreement, obligation or instrument to which the Company or Redwood Trust is a party or by which it or its respective properties are bound, or (ii) any law, decree, order, rule or regulation applicable to the Company or Redwood Trust of any court or supervisory, regulatory, administrative or governmental agency, body or authority, or arbitrator having jurisdiction over the Company or Redwood Trust, or its respective properties, the default in or the breach or violation of which would have a material adverse effect on the Company or Redwood Trust, the Issuer or the Bonds or on the ability of the Company or Redwood Trust to perform its respective obligations under the Transaction Documents to which it is a party; and neither the delivery of the Bonds, nor the consummation of any other of the transactions contemplated herein, nor the compliance with the provisions of the Transaction Documents will result in such a breach, violation or default which would have such a material adverse effect. 11 12 (vii) No filing or registration with, notice to, or consent, approval, authorization or order or other action of any court or governmental authority or agency is required for the consummation by the Company and Redwood Trust of the transactions contemplated by the Transaction Documents to which it is a party (other than as required under "blue sky" or state securities laws, as to which no representations and warranties are made by the Company or Redwood Trust), except such as have been, or will have been prior to the Closing Date, obtained under the Act and the TIA[, and such recordations of the assignment of the Pledged Mortgages to the Bond Trustee (to the extent such recordations are required pursuant to the Master Servicing Agreement or the Indenture) that have not yet been completed]. (viii) There is no action, suit or proceeding before or by any court, administrative or governmental agency now pending to which the Company or Redwood Trust is a party, or to the best knowledge of the Company or Redwood Trust, threatened against the Company or Redwood Trust, which could reasonably result individually or in the aggregate in any material adverse change in the condition (financial or 12 13 otherwise), earnings, regulatory affairs, business affairs, business prospects or properties of the Company or Redwood Trust or could reasonably interfere with or materially and adversely affect the consummation of the transactions contemplated in the Transaction Documents. (ix) At the time of execution and delivery of the Indenture, (1) the Issuer will own the [Pledged Mortgages] being pledged to the Bond Trustee pursuant thereto, free and clear of any lien, mortgage, pledge, charge, encumbrance, adverse claim or other security interest (collectively, "Liens"), except to the extent permitted in the Indenture, and will not have assigned to any person other than the Bond Trustee any of its right, title or interest in the [Pledged Mortgages], (2) the Issuer will have the power and authority to pledge the Trust Estate to the Bond Trustee and to transfer the Bonds to you and will have duly authorized such action by all necessary corporate action, (3) upon execution and delivery by the Issuer to the Bond Trustee of the Indenture, and delivery of the Bonds to the Issuer, the Bond Trustee will have a valid, perfected security interest of first priority in the Trust Estate free of Liens other than 13 14 Liens permitted by the Indenture and (4) upon payment and delivery of the Bonds to you, you will acquire ownership of the Bonds, free of Liens other than Liens permitted by the Indenture or created or granted by you. (x) Any taxes, fees and other governmental charges in connection with the execution, delivery and issuance of the Transaction Documents and the Bonds have been or will be paid by the Issuer, the Company or Redwood Trust at or prior to the Closing Date[, except for fees for recording assignments of the Pledged Mortgages to the Bond Trustee pursuant to the Master Servicing Agreement or the Indenture that have not yet been completed, which fees will be paid by or on behalf of Redwood Trust in accordance with the Master Servicing Agreement]. [(xi) The Master Servicer or any subservicer who will be servicing any Pledged Mortgages pursuant to the Master Servicing Agreement is qualified to do business in all jurisdictions in which its activities as servicer or subservicer of the Pledged Mortgages serviced by it require such qualification except where failure to be so qualified 14 15 will not have a material adverse effect on such servicing activities.] [(xii) The execution and delivery by the Master Servicer of the Master Servicing Agreement is within the corporate power of the Master Servicer and has been duly authorized by all necessary corporate action on the part of the Master Servicer. Neither the execution and delivery by the Master Servicer of such instrument, nor the consummation by the Master Servicer of the transactions therein contemplated, nor compliance by the Master Servicer with the provisions thereof, will conflict with or result in a material breach of, or constitute a material default (or an event which with notice or lapse of time, or both, would constitute such a default) under any of the provisions of any statute, rule, regulation, judgment, decree or order of any court or any public, governmental or regulatory agency or body having jurisdiction over the Master Servicer, or any of the terms or provisions of any material indenture, mortgage, contract, agreement, franchise, license, permit or other instrument to which the Master Servicer is a party or by which it or any of its properties or businesses may be 15 16 bound, or result in the creation or imposition of any lien, charge or encumbrance upon any of its properties pursuant to the terms of any such indenture, mortgage, contract or other instrument.] [(xiii) The Master Servicing Agreement when executed and delivered as contemplated thereby, will have been duly executed and delivered by the Master Servicer; and the Master Servicing Agreement will constitute, when so executed and delivered, a legal, valid and binding instrument enforceable against the Master Servicer in accordance with its terms, except as the same may be limited by bankruptcy, reorganization, insolvency or other similar laws affecting creditors' rights generally and by general principles of equity.] [(xiv) The representations and warranties made by the Master Servicer in the Master Servicing Agreement will be true and correct at the time made and at the Closing Date.] (xv) At the Closing Date, the execution and delivery of the Indenture by the Owner Trustee will have been duly authorized by the Company and upon due execution and delivery thereof by the parties thereto the Indenture will 16 17 constitute a legal, valid and binding agreement enforceable in accordance with its terms, except as the same may be limited by bankruptcy, reorganization, insolvency or other similar laws affecting creditors' rights generally and by general principles of equity. (xvi) As of the Closing Date, the Owner Trustee will have assigned, pledged and delivered to the Bond Trustee under the Indenture all of its right, title and interest in and to, among other things, (i) the [Pledged Mortgages], and (ii) cash and/or other assets, if any, in the amount set forth in the Indenture. (xvii) The [Pledged Mortgages] conform in all material respects to the description thereof contained in the Prospectus. (xviii) At the Closing Date, the Owner Trustee will own (i) the [Pledged Mortgages] listed in Schedule A to the Indenture and (ii) the money or other assets specified or referred to in the granting clauses of such Indenture (to the extent specified therein) as being pledged to the Bond Trustee at the Closing Date (together, the "Initial Collateral"), free and clear of any liens or encumbrances, 17 18 other than liens in favor of the Underwriters or any of their affiliates which will be released upon consummation of, or concurrently with, the Closing and the lien of the Indenture and the Trust Agreement; the Owner Trustee has corporate power and authority to assign, pledge and deliver the Initial Collateral to the Bond Trustee under the Indenture, and will have duly authorized such assignment, pledge and delivery to the Bond Trustee by all necessary corporate action. (xix) At the Closing Date, each [Pledged Mortgage] listed on Schedule A to the Indenture relating to the Bonds will have been duly and validly assigned, pledged and delivered to the Bond Trustee, or its nominee, and together with such assignment, pledge and delivery of each [Pledged Mortgage], the filing of a UCC-1 financing statement with respect to the Indenture in the office of the Secretary of State of the State of ___________ and in such other jurisdictions, if any, as the Company deems appropriate and the possession by the Bond Trustee, or its nominee, of the Initial Collateral not represented by contract rights or insurance policies and of the monies and/or other assets, if 18 19 any, specified in the Indenture, will create as security for repayment of the Bonds a valid, perfected first security interest in the Initial Collateral. The information set forth with respect to the [Pledged Mortgages] in Schedule A to the Indenture will be, as of the Closing Date, true and correct in all material respects. (xx) The Trust Agreement is effective to establish the Issuer as a statutory business trust under and pursuant to the laws of the State of Delaware. (xxi) None of the Company, Redwood Trust or the Issuer is doing business with Cuba. 2. Purchase and Sale. Subject to the terms and conditions and in reliance upon the representations and warranties herein set forth, the Company agrees to direct the Owner Trustee, on behalf of the Issuer, to sell, and each Underwriter agrees, severally and not jointly, to purchase from the Issuer, the respective initial Class Principal Amount of each Class of Bonds to be purchased by such Underwriter as specified in the Prospectus Supplement. The purchase price at which each Underwriter will purchase its Bonds shall be as set forth in a separate pricing letter dated the date hereof between such 19 20 Underwriter and the Company (each, a "Pricing Letter"), and the terms of each such Pricing Letter are hereby incorporated herein by reference as if such terms were stated herein in their entirety. References herein to this "Agreement" shall include the terms of each Pricing Letter. 3. Delivery and Payment. The Bonds shall be delivered at the office, on the date and at the time specified in the Prospectus Supplement, which place, date and time may be changed by agreement between the Underwriters and the Company (such date and time of delivery of and payment for the Bonds being hereinafter referred to as the "Closing Date"). Delivery of the Bonds shall be made to each of the Underwriters as against their respective payment of the purchase price therefor to or upon the order of the Issuer [in immediately available federal funds]. The Bonds shall be registered in such names and in such denominations as the respective Underwriters may have requested or as required by book-entry registration not less than two full business days prior to the Closing Date. The Company agrees to cause the Bonds to be made available for inspection, checking and packaging in New York, New York, on the business day prior to the Closing Date. 20 21 4. Offering by Underwriters. It is understood that the Underwriters propose to offer the Bonds for sale as set forth in the Prospectus and that you will not offer, sell or otherwise distribute the Bonds (except for the sale thereof in exempt transactions) in any state in which the Bonds are not exempt from registration under "blue sky" or state securities laws (except where the Bonds will have been qualified for offering and sale at your direction under such "blue sky" or state securities laws). 5. Agreements. The Company agrees with each Underwriter that: (a) The Company will cause the Prospectus to be filed with the Commission pursuant to Rule 424 under the Act and, if necessary, within 15 days of the Closing Date, will file a report on Form 8-K setting forth specific information concerning the [Pledged Mortgages], and will promptly advise each Underwriter when the Prospectus has been so filed, and, prior to the termination of the offering of the Bonds, will also promptly advise each Underwriter (i) when any amendment to the Registration Statement has become effective or any revision of or supplement to the Prospectus has been so filed (unless such amendment, revision or supplement does not relate to the Bonds or 21 22 the Issuer), (ii) of any request by the Commission for any amendment of the Registration Statement or the Prospectus or for any additional information (unless such amendment or request for additional information does not relate to the Bonds or the Issuer), (iii) of any written notification received by the Company of the suspension of qualification of the Bonds for sale in any jurisdiction or the initiation or threatening of any proceeding for such purpose and (iv) of the issuance by the Commission of any stop order suspending the effectiveness of the Registration Statement or the institution or, to the knowledge of the Company, the threatening of any proceeding for that purpose. The Company will use its best efforts to prevent the issuance of any such stop order and, if issued, to obtain as soon as possible the withdrawal thereof. Except as otherwise provided in Section 5(b) hereof, the Company will not file prior to the termination of such offering any amendment to the Registration Statement or any revision of or supplement to the Prospectus (other than any such amendment, revision or supplement which does not relate to Bonds or the Issuer) which shall be disapproved by the Underwriters after reasonable notice and review of such filing. 22 23 (b) If, at any time when a prospectus relating to the Bonds is required to be delivered under the Act (i) any event occurs as a result of which the Prospectus as then amended or supplemented would include any untrue statement of a material fact or omit to state a material fact necessary to make the statements therein in the light of the circumstances under which they were made not misleading, or (ii) it shall be necessary to revise, amend or supplement the Prospectus to comply with the Act or the rules and regulations of the Commission thereunder, the Company promptly will notify each Underwriter and will, upon the request of any Underwriter, or may, after consultation with each Underwriter, prepare and file with the Commission a revision, amendment or supplement which will correct such statement or omission or effect such compliance, and furnish without charge to each Underwriter as many copies as such Underwriter may from time to time reasonably request of an amended Prospectus or a supplement to the Prospectus which will correct such statement or omission or effect such compliance. (c) The Company will furnish to each Underwriter and counsel to the Underwriters, without charge, conformed copies of the Registration Statement (including exhibits thereto) and, so 23 24 long as delivery of a prospectus relating to the Bonds is required under the Act, as many copies of the Prospectus and any revisions or amendments thereof or supplements thereto as may be reasonably requested. (d) The Company will, as between itself and the Underwriters, pay all expenses incidental to the performance of the obligations of the Company or the Issuer under this Agreement, including without limitation (i) expenses of preparing, printing and reproducing the Registration Statement, the Prospectus, the Transaction Documents and the Bonds, (ii) the cost of delivering the Bonds to the Underwriters, (iii) the fees charged by securities rating agencies for rating the Bonds, (iv) all transfer taxes, if any, with respect to the sale and delivery of the Bonds to the Underwriters, (v) the fees and expenses of the Owner Trustee and the Bond Trustee, (vi) any expenses for the qualification of the Bonds under "blue sky" or state securities laws, including filing fees and the fees and disbursements of counsel for such Underwriter in connection therewith and in connection with the preparation of any Blue Sky Survey and (vii) all other costs and expenses incidental to the performance by the Company or the Issuer of their respective obligations hereunder 24 25 which are not otherwise specifically provided for in this subsection. It is understood that, except as provided in this paragraph (d) and in Section 9 hereof, each Underwriter will pay all of its own expenses, including (i) the fees of any counsel to such Underwriter, (ii) any transfer taxes on resale of any of the Bonds by it and (iii) any advertising expenses connected with any offers that such Underwriter may make. (e) So long as any Bonds are outstanding, upon request of any Underwriter, the Company will furnish, or will cause to be furnished, to such Underwriter, as soon as available, a copy of (i) the annual statement of compliance delivered by the Master Servicer to the Bond Trustee under the Master Servicing Agreement, (ii) the annual independent public accountants' servicing report furnished to the Bond Trustee pursuant to the Master Servicing Agreement, (iii) the annual statement of compliance delivered to the Bond Trustee pursuant to the Indenture, (iv) each report regarding the Bonds filed with the Commission under the Exchange Act or mailed to the holders of the Bonds and (v) from time to time, such other information concerning the Bonds which may be furnished by the Company or the 25 26 Master Servicer without undue expense and without violation of applicable law. (f) The Company will file or cause to be filed a current report on Form 8-K for purposes of filing any Computational Materials furnished to the Company by any Underwriter prior to the time of filing of the Prospectus as provided in Section 5(a) hereof and will include therein all Computational Materials so furnished. In addition, the Company will file or cause to be filed all reports with respect to the Trust Estate required to be filed under the Exchange Act when the same are required thereby to be so filed. (g) For a period ending on the later of the Closing Date or the date on which any price restrictions on the sale of the Bonds are terminated, the Company shall not offer or sell, or announce the offering of, or cause any trust created by the Company to offer or sell, or announce the offering of, any debt securities, without the prior written consent of the Underwriters. (h) Redwood Trust covenants with each Underwriter and with the Company that it shall notify you and the Company of the occurrence of any material events respecting the activities, 26 27 affairs or condition, financial or otherwise, of Redwood Trust and its subsidiaries and, if as a result of any such event it is necessary, in the opinion of counsel, to amend or supplement the Prospectus in order to make the Prospectus not misleading in the light of the circumstances existing at the time it is delivered to a purchaser, Redwood Trust will forthwith supply such information to the Company as shall be necessary for the Company to prepare an amendment or supplement to the Prospectus so that, as so amended or supplemented, the Prospectus will not contain an untrue statement of a material fact or omit to state a material fact necessary in order to make the statements therein, in the light of the circumstances existing at the time it is delivered to a purchaser, not misleading. 6. Conditions to the Obligations of Underwriters. The obligation of each Underwriter to purchase the Bonds to be purchased by it as indicated in the related Pricing Letter shall be subject to the accuracy in all material respects of the representations and warranties on the part of the Company and Redwood Trust contained herein as of the date hereof and as of the Closing Date, to the accuracy of the statements of the Company and Redwood Trust made in any officer's certificate 27 28 pursuant to the provisions hereof, to the performance in all material respects by the Company and Redwood Trust of its obligations hereunder and to the following additional conditions: (a) No stop order suspending the effectiveness of the Registration Statement shall have been issued and no proceedings for that purpose shall have been instituted and be pending or shall have been threatened, any requests for additional information on the part of the Commission (to be included in the Registration Statement or in the Prospectus or otherwise) shall have been complied with to the reasonable satisfaction of the Underwriters, and the Prospectus shall have been filed or transmitted for filing with the Commission not later than the time the same is required to be filed or transmitted for filing pursuant to the rules and regulations of the Commission. (b) The Company shall have furnished to the Underwriters a certificate, dated the Closing Date, of the Company, signed by the Chairman of the Board or the President and the principal financial or accounting officer of the Company, to the effect that each signer of such certificate has carefully examined the Registration Statement, the Prospectus and this Agreement and that: 28 29 (i) The representations and warranties of the Company herein are true and correct in all material respects on and as of the Closing Date with the same effect as if made on the Closing Date, and the Company has complied with all agreements and satisfied all the conditions on its part to be performed or satisfied at or prior to the Closing Date; (ii) No stop order suspending the effectiveness of the Registration Statement has been issued, and no proceedings for that purpose have been instituted and are pending or, to the knowledge of such officer, have been threatened as of the Closing Date; and (iii) Nothing has come to the attention of such officer that would lead such officer to believe that the Prospectus (other than any Computational Materials incorporated therein by reference) contains any untrue statement of a material fact or omits to state any material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. (c) Redwood Trust shall have furnished to the Underwriters a certificate, dated the Closing Date, of Redwood Trust, signed by the Chairman of the Board or President and the 29 30 principal financial or accounting officer of Redwood Trust, to the effect that each signer of such certificate has carefully examined the Registration Statement, the Prospectus and this Agreement and that: (i) The representations and warranties of Redwood Trust herein are true and correct in all material respects on and as of the Closing Date with the same effect as if made on the Closing Date, and Redwood Trust has complied with all agreements and satisfied all the conditions on its part to be performed or satisfied at or prior to the Closing Date; (ii) No stop order suspending the effectiveness of the Registration Statement has been issued, and no proceedings for that purpose have been instituted and are pending or, to the knowledge of such officer, have been threatened as of the Closing Date; and (iii) Nothing has come to the attention of such officer that would lead such officer to believe that the Prospectus (other than any Computational Materials incorporated therein by reference) contains any untrue statement of a material fact or omits to state any material fact necessary in order 30 31 to make the statements therein, in the light of the circumstances under which they were made, not misleading. (d) The Company shall have furnished to you an opinion, dated the Closing Date, of Tobin & Tobin, special counsel to the Company, in form and substance satisfactory to the Underwriters and counsel to the Underwriters, to the effect that: (i) The Company has been duly incorporated, is validly existing as a corporation in good standing under the laws of the State of Delaware and is duly qualified to do business in, and is in good standing as a foreign corporation under the laws of, each jurisdiction where the character of its properties or the nature of its activities makes such qualification necessary, except such jurisdictions, if any, in which the failure to be so qualified will not have a material adverse effect on the condition (financial or otherwise), earnings, regulatory affairs, business affairs, business prospects or properties of the Company; and the Company holds all material licenses, certificates and permits from all governmental authorities necessary for the conduct of its business as described in the Prospectus; 31 32 (ii) Each Transaction Document to which the Company is a party has been duly authorized, executed and delivered by the Company; (iii) No filing or registration with, notice to, or consent, approval, authorization, order or other action of any governmental agency or body or any court is required for the consummation by the Company or the Issuer of the transactions contemplated by the terms of the Transaction Documents to which each is a party except such as may be required under the "blue sky" or state securities laws of any jurisdiction in connection with the offering, sale or acquisition of the Bonds[, any recordations of the [Pledged Mortgages] to the Bond Trustee (to the extent such recordations are required pursuant to the Master Servicing Agreement or the Indenture) that have not yet been completed and such other approvals as have been obtained]; (iv) The issuance, delivery and sale of the Bonds to be purchased by the Underwriters pursuant to this Agreement, the execution and delivery of the Transaction Documents by the Company and the consummation of any of the transactions contemplated by the terms of the Transaction Documents do 32 33 not conflict with or result in a breach or violation of any material term or provision of, or constitute a default under, the certificate of incorporation or by-laws of the Company, or any indenture, contract, lease, mortgage, deed of trust, note, agreement or other evidence of indebtedness or other agreement, obligation or instrument to which the Company is a party or by which it or its property is bound, or any statute or any law, decree, order, rule or regulation applicable to the Company of any court, regulatory body, administrative agency or governmental body having jurisdiction over the Company or its properties; (v) There are no legal or governmental actions, investigations or proceedings pending to which the Company or the Issuer is a party, or, to the best knowledge of such counsel, threatened against the Company or the Issuer, (A) asserting the invalidity of any Transaction Document or the Bonds, (B) seeking to prevent the issuance of the Bonds or the consummation of any of the transactions contemplated by any Transaction Document, (C) which might materially and adversely affect the performance by the Company or the Issuer of its respective obligations under, or the validity 33 34 or enforceability of, any Transaction Document or the Bonds or (D) seeking to affect adversely the Federal income tax attributes of the Bonds as described in the Prospectus under the heading "Federal Income Tax Consequences" or the state income tax attributes of the Bonds as described in the Prospectus under the heading "State Tax Considerations;" (vi) The Registration Statement and any amendments thereto have become effective under the Act; to the best knowledge of such counsel, no stop order suspending the effectiveness of the Registration Statement has been issued and not withdrawn, no proceedings for that purpose have been instituted or threatened and not terminated; and the Registration Statement, the Prospectus and each amendment or supplement thereto and the Indenture, as of their respective effective or issue dates (other than the financial and statistical information contained therein as to which such counsel need express no opinion), complied as to form in all material respects with the applicable requirements of the Act and the TIA and the respective rules and regulations thereunder; 34 35 (vii) To the best knowledge of such counsel, there are no material contracts, indentures or other documents of a character required to be described or referred to in the Registration Statement or the Prospectus or to be filed as exhibits to the Registration Statement other than those described or referred to therein or filed or incorporated by reference as exhibits thereto; (viii) Assuming that the Transaction Documents to which the Company is a party have each been duly authorized, executed and delivered by the parties thereto, each such Transaction Document constitutes a valid, legal and binding agreement of the Company enforceable against the Company in accordance with its terms, subject, as to enforceability to bankruptcy, insolvency, reorganization, moratorium or other similar laws affecting creditors' rights generally and to general principles of equity regardless of whether enforcement is sought in a proceeding in equity or at law; (ix) Assuming that each of the Management Agreement and the Indenture has been duly authorized, executed and delivered by the parties thereto, each of the Management Agreement and the Indenture constitutes the valid, legal and 35 36 binding obligation of the parties thereto, enforceable against such parties in accordance with their respective terms, subject, as to enforceability to bankruptcy, insolvency, reorganization, moratorium or other similar laws affecting creditors' rights generally and to general principles of equity regardless of whether enforcement is sought in a proceeding in equity or at law; (x) The Bonds have been duly and validly authorized, executed and delivered by the Issuer and, assuming due authorization, execution and delivery of the Indenture by the parties thereto, when authenticated by the Bond Trustee and delivered and paid for by you as provided in this Agreement, the Bonds will constitute the legal, valid and binding obligations of the Issuer, enforceable against the Issuer in accordance with their terms, subject to applicable bankruptcy, insolvency, reorganization, moratorium or similar laws affecting creditors' rights generally and to general principles of equity regardless of whether enforcement is sought in a proceeding in equity or at law; and the Bonds are entitled to the benefits of the Indenture; 36 37 (xi) The Bonds and the Transaction Documents conform in all material respects to the descriptions thereof contained in the Prospectus; (xii) The statements in the Prospectus and the Prospectus Supplement, as the case may be, under the headings "Certain Legal Aspects of the [Pledged Mortgages]," "ERISA Considerations" and "Legal Investment," to the extent that they constitute matters of law or legal conclusions with respect thereto, have been reviewed by such counsel and are correct in all material respects; (xiii) The Bonds indicated under the heading "Summary--Legal Investment" in the Prospectus Supplement to be "mortgage related securities" will be mortgage related securities, as defined in Section 3(a)(41) of the Exchange Act, so long as such Bonds are rated in one of the two highest rating categories by at least one nationally recognized statistical rating organization; and (xiv) The Trust Estate created by the Indenture is not required to be registered under the Investment Company Act of 1940, as amended. 37 38 Such counsel shall also state that nothing has come to its attention that would lead such counsel to believe that the Registration Statement, at the time it became effective, contained an untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading or that the Prospectus, as of the date of the Prospectus Supplement, and on the Closing Date, contained or contains an untrue statement of a material fact or omitted or omits to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading; it being understood that such counsel need express no view as to (i) financial and statistical information contained therein or (ii) any description in the Prospectus of any third party providing credit enhancement to the Bonds. Such opinion may express its reliance as to factual matters on the representations and warranties made by, and on certificates or other documents furnished by officers of, the parties to the Transaction Documents. Such opinion may be qualified as an opinion only on the laws of the State of New York, the State of California, the State of Delaware and the 38 39 federal law of the United States. To the extent that such firm relies upon the opinion of other counsel in rendering any portion of its opinion, the opinion of such other counsel shall be attached to and delivered with the opinion of such firm that is delivered to you. (e) The Company shall have furnished to the Underwriters an opinion, dated the Closing Date, of Giancarlo & Gnazzo, A Professional Corporation, special tax counsel to the Company, in form and substance satisfactory to the Underwriters and counsel to the Underwriters, to the effect that: (i) The statements in the Prospects and the Prospectus Supplement, as the case may be, under the headings "Summary -- Federal Income Tax Consequences," "-- ERISA Matters," "Federal Income Tax Consequences," "State Tax Considerations" and "ERISA Matters," to the extent that they constitute matters of law or legal conclusions with respect thereto, have been reviewed by such counsel and are correct in all material respects; and (ii) For Federal and California income tax purposes, the Bonds will be treated as indebtedness. 39 40 (f) Redwood Trust shall have furnished to the Underwriters an opinion, dated the Closing Date, of Tobin & Tobin, special counsel to Redwood Trust, in form and substance satisfactory to the Underwriters and counsel to the Underwriters, to the effect that: (i) Redwood Trust has been duly incorporated and is validly existing as a corporation in good standing under the laws of the State of Delaware and is duly qualified to do business in, and is in good standing as a foreign corporation under the laws of, each jurisdiction where the character of its properties or the nature of its activities makes such qualification necessary, except such jurisdictions, if any, in which the failure to be so qualified will not have a material adverse effect on the condition (financial or otherwise), earnings, regulatory affairs, business affairs, business prospects or properties of Redwood Trust; and Redwood Trust holds all material licenses, certificates and permits from all governmental authorities necessary for the conduct of its business as described in the Prospectus; 40 41 (ii) Each Transaction Document to which Redwood Trust is a party has been duly authorized, executed and delivered by Redwood Trust; (iii) Assuming that the Transaction Documents to which Redwood Trust is a party have each been duly authorized, executed and delivered by the parties thereto, each such Transaction Document constitutes a valid, legal and binding agreement of Redwood Trust, enforceable against Redwood Trust in accordance with its terms, subject, as to enforceability to bankruptcy, insolvency, reorganization, moratorium or other similar laws affecting creditors' rights generally and to general principles of equity regardless of whether enforcement is sought in a proceeding in equity or at law; (iv) No consent, approval, authorization or order of any court or governmental agency or body is required for the consummation by Redwood Trust of the transactions contemplated by the terms of the Transaction Documents to which Redwood Trust is a party except such as may be required under the "blue sky" or state securities laws of any jurisdiction in connection with the offering, sale or 41 42 acquisition of the Bonds[, any recordations of the assignment of the Pledged Mortgages to the Bond Trustee (to the extent such recordations are required pursuant to the Master Servicing Agreement or the Indenture) that have not yet been completed] and such other approvals as have been obtained; (v) The consummation of any of the transactions contemplated by the terms of the Transaction Documents do not conflict with or result in a breach or violation of any material term or provision of, or constitute a default under, the charter or by-laws of Redwood Trust, or, to the best knowledge of such counsel, any indenture or other agreement or instrument to which Redwood Trust is a party or by which it is bound, or any statute or regulation applicable to Redwood Trust or any order of any court, regulatory body, administrative agency or governmental body having jurisdiction over Redwood Trust; and (vi) There are no legal or governmental actions, investigations or proceedings pending to which Redwood Trust is a party, or, to the best knowledge of such counsel, threatened against Redwood Trust, (A) asserting the 42 43 invalidity of any Transaction Document or (B) which might materially and adversely affect the performance by Redwood Trust of its obligations under, or the validity or enforceability of, any Transaction Document to which Redwood Trust is a party. Such opinion may express its reliance as to factual matters on the representations and warranties made by, and on certificates or other documents furnished by officers of, the parties to the Transaction Documents. Such opinion may assume the due authorization, execution and delivery of the instruments and documents referred to therein by the parties thereto other than Redwood Trust. Such opinion may be qualified as an opinion only on the laws of the States of Maryland, Delaware and California and the federal law of the United States. To the extent that such counsel relies upon the opinion of other counsel in rendering any portion of its opinion, the opinion of such other counsel shall be attached to and delivered with the opinion of such counsel that is delivered to the Underwriters. (g) The Master Servicer shall have furnished to the Underwriters an opinion, dated the Closing Date, of _____________, counsel to the Master Servicer, in form and 43 44 substance satisfactory to the Underwriters and counsel to the Underwriters, to the effect that: (i) The Master Servicer has been duly incorporated and is validly existing as a corporation in good standing under the laws of the State of __________ and is duly qualified to do business in, and is in good standing as a foreign corporation under the laws of each jurisdiction where the character of its properties or the nature of its activities makes such qualification necessary, except such jurisdictions, if any, in which the failure to be so qualified will not have a material adverse effect on the condition (financial or otherwise), earnings, regulatory affairs, business affairs, business prospects or properties of the Master Servicer; and the Master Servicer holds all material licenses, certificates and permits from all governmental authorities necessary for the conduct of its business as described in the Prospectus; (ii) Each Transaction Document to which the Master Servicer is a party has been duly authorized, executed and delivered by the Master Servicer; 44 45 (iii) No consent, approval, authorization or order of any _________ court or governmental agency or body is required for the consummation by the Master Servicer of the transactions contemplated by the terms of the Transaction Documents to which the Master Servicer is a party except any such as may be required under the "blue sky" or state securities laws of any jurisdiction in connection with the offering, sale or acquisition of the Bonds[, any recordations of the assignment of the Pledged Mortgages to the Bond Trustee (to the extent such recordations are required pursuant to the Master Servicing Agreement or the Indenture) that have not yet been completed] and such other approvals as have been obtained; (iv) The consummation of any of the transactions contemplated by the terms of the Transaction Documents do not conflict with or result in a breach or violation of any material term or provision of, or constitute a default under, the charter or by-laws of the Master Servicer, or, to the best knowledge of such counsel, any indenture or other agreement or instrument to which the Master Servicer is a party or by which it is bound, or any statute or regulation 45 46 applicable to the Master Servicer or any order of any court, regulatory body, administrative agency or governmental body having jurisdiction over the Master Servicer; and (v) There are no legal or governmental actions, investigations or proceedings pending to which the Master Servicer is a party, or, to the best knowledge of such counsel, threatened against the Master Servicer, (A) asserting the invalidity of any Transaction Document or (B) which might materially and adversely affect the performance by the Master Servicer of its obligations under, or the validity or enforceability of, any Transaction Document to which the Master Servicer is a party. Such opinion may express its reliance as to factual matters on the representations and warranties made by, and on certificates or other documents furnished by officers of, the parties to the Transaction Documents. Such opinion may assume the due authorization, execution and delivery of the instruments and documents referred to therein by the parties thereto other than the Master Servicer. Such opinion may be qualified as an opinion only on the laws of the States of Delaware and _________ and the federal law of the United States. 46 47 To the extent that such counsel relies upon the opinion of other counsel in rendering any portion of its opinion, the opinion of such other counsel shall be attached to and delivered with the opinion of such counsel that is delivered to the Underwriters. (h) The Underwriters shall have received a copy of each opinion delivered to the Bond Trustee pursuant to Section 2.12 of the Indenture together with a letter, addressed to the Underwriters and dated the Closing Date, permitting the Underwriters to rely on such opinions as if the same were addressed to the Underwriters. (i) The Underwriters shall have received from their counsel such opinion or opinions, dated the Closing Date, with respect to the issuance and sale of the Bonds, the Registration Statement and the Prospectus, and such other related matters as you may reasonably require. (j) The Company's independent accountants, [Deloitte & Touche LLP] shall have furnished to the Underwriters a letter or letters addressed to the Underwriters and dated as of or prior to the date of first use of the Prospectus Supplement in the form and reflecting the performance of the procedures previously agreed to by the Company and the Underwriters. 47 48 (k) Subsequent to the date hereof, there shall not have occurred any change, or any development involving a prospective change in or affecting the business or properties of Redwood Trust, the Company or the Issuer which in your reasonable judgment materially impairs the investment quality of the Bonds so as to make it impractical or inadvisable to proceed with the public offering or the delivery of the Bonds as contemplated by the Prospectus. (l) The Bonds shall be rated not lower than the required ratings set forth under the heading "Ratings" in the Prospectus Supplement, such ratings shall not have been rescinded and no public announcement shall have been made that any such required rating of the Bonds has been placed under review (otherwise than for possible upgrading). (m) The Underwriters shall have received copies of any opinions of counsel supplied to the rating agencies relating to certain matters with respect to the Bonds. Any such opinions shall be dated the Closing Date and addressed to the Underwriters or accompanied by reliance letters addressed to the Underwriters. 48 49 (n) The Investor Certificate shall have been duly and validly issued and shall be outstanding under the Trust Agreement. (o) The Bond Trustee shall have furnished to the Underwriters an opinion dated the Closing Date, of counsel to the Bond Trustee (who may be an employee of the Bond Trustee), in form and substance satisfactory to the Underwriters and counsel to the Underwriters, to the effect that: (i) The Bond Trustee has full corporate power and authority to execute and deliver the Indenture and the Master Servicing Agreement and to perform its obligations thereunder and to authenticate and deliver the Bonds; (ii) The Indenture and the Master Servicing Agreement have been duly authorized, executed and delivered by the Bond Trustee; (iii) Each of the Indenture and the Master Servicing Agreement is a legal, valid and binding obligation of the Bond Trustee, enforceable against the Bond Trustee in accordance with its respective terms, subject to applicable bankruptcy, insolvency, reorganization, moratorium, receivership, conservatorship and similar laws affecting the 49 50 rights of creditors generally, and subject, as to enforceability, to general principles of equity, regardless of whether such enforcement is considered in a proceeding at law or in equity; and [(iv) In the event that the Master Servicer defaults in its obligation to make Advances pursuant to the Master Servicing Agreement, the Bond Trustee is not, as of the date hereof, prohibited by any provision of its articles of incorporation or by-laws from assuming, pursuant to the Master Servicing Agreement, the obligation to make such Advances.] Such opinion may express its reliance as to factual matters on the representations and warranties made by, and on certificates or other documents furnished by officers of, the parties to the Transaction Documents. Such opinion may assume the due authorization, execution and delivery of the instruments and documents referred to therein by the parties thereto other than the Bond Trustee or its affiliates. Such opinion may be qualified as an opinion only on the laws of _________________ ________________ and the federal law of the United States. To the extent that such counsel relies upon the opinion of other 50 51 counsel in rendering any portion of its opinion, the opinion of such other counsel shall be attached to and delivered with the opinion of such counsel that is delivered to the Underwriters. (p) The Owner Trustee shall have furnished to the Underwriters an opinion dated the Closing Date, of counsel to the Owner Trustee (who may be an employee of the Owner Trustee), in form and substance satisfactory to the Underwriters and counsel to the Underwriters, to the effect that: (i) The Owner Trustee has full corporate power and authority to execute and deliver the Transaction Documents to which it is a party and to perform its obligations thereunder and to execute and deliver the Bonds and the Investor Certificate; (ii) The Transaction Documents to which the Owner Trustee is a party and the Investor Certificate have been duly authorized, executed and delivered by the Owner Trustee; and (iii) Each of the Trust Agreement and the Investor Certificate is a legal, valid and binding obligation of the Owner Trustee, enforceable against the Owner Trustee in accordance with its respective terms, subject to applicable 51 52 bankruptcy, insolvency, reorganization, moratorium, receivership, conservatorship and similar laws affecting the rights of creditors generally, and subject, as to enforceability, to general principles of equity, regardless of whether such enforcement is considered in a proceeding at law or in equity. Such opinion may express its reliance as to factual matters on the representations and warranties made by, and on certificates or other documents furnished by officers of, the parties to the Transaction Documents. Such opinion may assume the due authorization, execution and delivery of the instruments and documents referred to therein by the parties thereto other than the Owner Trustee or its affiliates. Such opinion may be qualified as an opinion only on the laws of the State of Delaware and the federal law of the United States. To the extent that such counsel relies upon the opinion of other counsel in rendering any portion of its opinion, the opinion of such other counsel shall be attached to and delivered with the opinion of such counsel that is delivered to the Underwriters. (q) The Company shall have furnished to the Underwriters such further information, certificates and documents 52 53 as the Underwriters may reasonably have requested, and all proceedings in connection with the transactions contemplated by this Agreement and all documents incident hereto shall be in all material respects satisfactory in form and substance to the Underwriters and their counsel. If any of the conditions specified in this Section 6 shall not have been fulfilled in all material respects when and as provided in this Agreement, this Agreement and all obligations of an Underwriter hereunder may be canceled at, or at any time prior to, the Closing Date by such Underwriter. Notice of such cancellation shall be given to the Company in writing, or by telephone or telegraph confirmed in writing. 7. Termination. This Agreement shall be subject to termination in your absolute discretion, by notice given to the Company prior to delivery of and payment for the Bonds, if prior to such time (i) trading in securities generally on the New York Stock Exchange shall have been suspended or materially limited, (ii) a general moratorium on commercial banking activities in New York shall have been declared by either Federal or New York State authorities, or (iii) there shall have occurred any material outbreak or escalation of hostilities or other calamity or crisis 53 54 the effect of which on the financial markets is such as to make it, in your judgment after consultation with the Company, impracticable to market the Bonds on the terms specified in this Agreement. 8. Representations and Indemnities to Survive. The respective agreements, representations, warranties, indemnities and other statements of the Company and Redwood Trust and their respective officers and of each Underwriter set forth in or made pursuant to this Agreement will remain in full force and effect, regardless of any investigation made by or on behalf of any Underwriter or the Company and Redwood Trust, and will survive delivery of and payment for the Bonds. The provisions of Section 5(d), Section 9, Section 12 and Section 13 hereof shall survive the termination or cancellation of this Agreement. 9. Reimbursement of Underwriter Expenses. If for any reason, other than default by any Underwriter in its obligation to purchase the Bonds or termination by any Underwriter pursuant to Section 7 hereof, the Bonds are not delivered as provided herein, the Company and Redwood Trust jointly and severally agree to reimburse each Underwriter for all out-of-pocket expenses of such Underwriter, including reasonable fees and disbursements of 54 55 its counsel, reasonably incurred by such Underwriter in making preparations for the purchase, sale and delivery of the Bonds, but the Company and Redwood Trust shall then be under no further liability to any Underwriter with respect to the Bonds, except as provided in Section 5(d) hereof. 10. Certain Definitions. For purposes of this Agreement, the following terms shall have the respective meanings set forth below: Computational Materials: Computer generated tables and/or charts displaying, with respect to any Class or Classes of Bonds, any of the following: yield; average life; duration; expected maturity; interest rate sensitivity; loss sensitivity; cash flow characteristics; background information regarding the [Pledged Mortgages]; proposed structure; decrement tables; or similar information (tabular or otherwise) of a statistical, mathematical, tabular or computational nature. Company Prospectus Information: All information contained or incorporated in the Prospectus other than the Underwriter Information. 55 56 Company Registration Information: All information contained or incorporated in the Registration Statement other than the Underwriter Information. Seller Mortgage Loan Information: Information relating to the [Pledged Mortgages] furnished by or on behalf of the Company or Redwood Trust to the Underwriters, upon which the mathematical calculations reflected in the Computational Materials of such Underwriter are based. Spread: The excess, if any, of (i) the purchase prices paid by investors to an Underwriter for the Bonds over (ii) the purchase price paid by such Underwriter to the Issuer for the Bonds purchased by such Underwriter. Underwriter Information: The only written information furnished by or on behalf of an Underwriter to the Company specifically for use in connection with the preparation of the Registration Statement or the Prospectus, such information being (i) the information relating to the Underwriter set forth in the Prospectus Supplement in [the last two paragraphs of the cover page thereof and in the second sentence in the first paragraph and the second paragraph under the caption "Method of Distribution"] therein and (ii) any Computational Materials 56 57 prepared by the Underwriter, furnished to the Company and included in the Form 8-K; provided, however, that such Computational Materials shall not include any Seller Mortgage Loan Information or any errors in the mathematical calculations reflected in such Computational Materials to the extent such errors result from such Seller Mortgage Loan Information. 11. Computational Materials. Each Underwriter which desires to furnish Computational Materials to the Company shall furnish [two (2)] copies thereof[, together with a computer diskette therefor in EDGAR format,] to Tobin & Tobin no later than 3:00 p.m. New York City time on the business day prior to the day on which the Prospectus Supplement is being cleared for printing. In addition, each Underwriter which has so furnished Computational Materials to the Company hereby represents as to the materials it has furnished as follows: (a) The Computational Materials so furnished by such Underwriter include all Computational Materials prepared by such Underwriter that: (i) are generated based on assumptions regarding the payment priorities and characteristics of a Class of Bonds that is actually issued and purchased by an Underwriter; and 57 58 (ii) are provided to prospective investors under the following conditions prior to the time of filing of the Prospectus pursuant to Rule 424(b): (A) in the case of each prospective investor that has orally indicated to such Underwriter that it will purchase all or a portion of the Class of Bonds to which such Computational Materials relate, the Computational Materials relating to such Class that are sent to such prospective investor; and (B) for any other prospective investor, all Computational Materials that are sent to such prospective investor after the structure for the Bonds is finalized; provided, however, that the Computational Materials so furnished need not include any Computational Materials that relate to abandoned structures or that are furnished to prospective investors prior to the time that the structure of the Bonds is finalized where such investors have not indicated to such Underwriter their intention to purchase the Class or Classes of Bonds described in such Computational Materials. 58 59 (b) The Computational Materials included in the Underwriter Information pursuant to the definition thereof do not contain an untrue statement of a material fact or, when read in conjunction with the Prospectus as an integral document, omit to state a material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading; provided, however, that no representation is made that the Prospectus (exclusive of such Computational Materials and the Underwriter Information provided by such Underwriter) does not include any untrue statement of a material fact and does not omit to state any material fact necessary to make the statements contained therein, in the light of the circumstances under which they were made, not misleading. (c) The Computational Materials contain customary legends regarding the assumptions on which they are based and the absence of assurances or representations as to the actual rate or timing of principal payments or prepayments on any of the [Pledged Mortgages] or the performance characteristics of the Bonds, and a statement to the effect that the Computational Materials were prepared by the applicable Underwriter in reliance 59 60 on information regarding the [Pledged Mortgages] furnished by the Company. (d) Neither the Company nor any of its affiliates participated in the preparation of the Computational Materials other than by supplying the Seller Mortgage Loan Information to the Underwriter. (e) At or prior to the time any Computational Materials are furnished to the Company for filing on the Form 8-K, the Underwriter furnishing such Computational Materials will provide to the Company and such Underwriter a letter, in form and substance reasonably satisfactory to the Company and such Underwriter, of a firm of independent public accountants of national reputation to the effect that such accountants have performed certain specified procedures with respect to such Computational Materials and have found no exceptions, other than such exceptions as are acceptable to the Company and the Underwriter. The costs and expenses of such letter will be borne by _________. 12. Indemnification. (a) The Company and Redwood Trust jointly and severally agree to indemnify and hold harmless 60 61 each Underwriter and each person who controls an Underwriter within the meaning of either the Act or the Exchange Act against any and all losses, claims, damages or liabilities, joint or several, to which they may become subject under the Act, the Exchange Act, or other federal or state statutory law or regulation, at common law or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon any untrue statement or alleged untrue statement of a material fact contained in the Company Prospectus Information or the Company Registration Information or in any revision or amendment thereof or supplement thereto or arise out of or are based upon the omission or alleged omission to state in the Company Registration Information or the Company Prospectus Information or in any revision or amendment thereof or supplement thereto a material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading, and agrees to reimburse each such indemnified party for any legal or other expenses reasonably incurred by it or him, as incurred, in connection with investigating or defending any such loss, claim, damage, liability or action; provided, however, that the Company 61 62 and Redwood Trust shall not be liable to a particular Underwriter or any person who controls such Underwriter to the extent that any misstatement or alleged misstatement or omission or alleged omission was (i) made in reliance upon and in conformity with the Underwriter Information and (ii) in the case of the Company Prospectus Information, to the extent that such misstatement or omission was corrected and such Underwriter did not deliver, at or prior to the written confirmation of such sale, a copy of the Prospectus as then revised, amended or supplemented in any case where such delivery is required by the Act or the Exchange Act, if the Company has previously furnished copies thereof to the Underwriters in accordance with the terms of this Agreement. This indemnity agreement will be in addition to any liability which the Company or Redwood Trust may otherwise have. (b) Each Underwriter severally agrees to indemnify and hold harmless the Company, Redwood Trust and the Issuer, the officers of the Company who signed the Registration Statement or any amendment thereof, the directors of the Company, and each person who controls the Company, Redwood Trust or the Issuer within the meaning of either the Act or the Exchange Act, to the same extent as the foregoing indemnities from the Company and 62 63 Redwood Trust to each Underwriter; provided, however, that an Underwriter will be liable in any such case only to the extent that such untrue statement or alleged untrue statement or omission or alleged omission was made in reliance upon and in conformity with the Underwriter Information; and provided, further, that any such omission or alleged omission relating to the Computational Materials included in the Underwriter Information pursuant to the definition thereof shall be determined by reading such Computational Materials in conjunction with the Prospectus as an integral document and in the light of the circumstances under which such statements in the Computational Materials and Prospectus were made. This indemnity agreement will be in addition to any liability which any Underwriter may otherwise have. (c) Promptly after receipt by an indemnified party under this Section 12 of notice of the commencement of any action, such indemnified party shall, if a claim in respect thereof is to be made against the indemnifying party under this Section 12, notify the indemnifying party in writing of the commencement thereof; but the omission so to notify the indemnifying party will not relieve the indemnifying party from 63 64 any liability which it may have to any indemnified party otherwise than under this Section 12. In case any such action is brought against any indemnified party and it notifies the indemnifying party of the commencement thereof, the indemnifying party shall be entitled to participate therein, and to the extent that it may elect by written notice delivered to the indemnified party promptly after receiving the aforesaid notice from such indemnified party, to assume the defense thereof, with counsel satisfactory to such indemnified party; provided, however, that if the defendants in any such action include both the indemnified party and the indemnifying party and the indemnified party or parties shall have reasonably concluded that there may be legal defenses available to it or them and/or other indemnified parties that are different from or additional to those available to the indemnifying party, the indemnified party or parties shall have the right to elect separate counsel to assert such legal defenses and to otherwise participate in the defense of such action on behalf of such indemnified party or parties. Upon receipt of notice from the indemnifying party to such indemnified party of its election so to assume the defense of such action and approval by the indemnified party of counsel, the indemnifying party will 64 65 not be liable for any legal or other expenses subsequently incurred by such indemnified party in connection with the defense thereof, unless (i) the indemnified party shall have employed separate counsel in connection with the assertion of legal defenses in accordance with the proviso to the next preceding sentence (it being understood, however, that the indemnifying party shall not be liable for the expenses of more than one separate counsel for each of, and approved by, the Underwriter in the case of paragraph (a) of this Section 12, representing the related indemnified parties under such paragraph (a) who are parties to such action), (ii) the indemnifying party shall not have employed counsel satisfactory to the indemnified party to represent the indemnified party within a reasonable time after notice of commencement of the action or (iii) the indemnifying party has authorized the employment of counsel for the indemnified party at the expense of the indemnifying party; and except that, if clause (i) or (iii) is applicable, such liability shall only be in respect of the counsel referred to in such clause (i) or (iii). No indemnifying party shall, without the consent of the indemnified party, effect any settlement of any pending or threatened proceeding in respect of which any 65 66 indemnified party is or could have been a party and indemnity could have been sought hereunder by such indemnified party, unless such settlement includes an unconditional release of such indemnified party from all liability on claims that are the subject matter of such proceeding. 13. Contribution. (a) If the indemnification provided for in Section 12 is unavailable or insufficient to hold harmless an indemnified party under Section 12, then each indemnifying party shall contribute to the amount paid or payable by such indemnified party as a result of the losses, claims, damages or liabilities referred to in Section 12 above in such proportion as is appropriate to reflect the relative benefits received by the Company and Redwood Trust on the one hand and the Underwriter on the other from the offering of the Bonds or (ii) if the allocation provided by clause (i) above is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause (i) above but also the relative fault of the Company and Redwood Trust on the one hand and the Underwriter on the other in connection with the statements or omissions or alleged statements or alleged omissions which resulted in such losses, claims, 66 67 damages or liabilities as well as any other relevant equitable considerations. The relative benefits received by the Company and Redwood Trust on the one hand and the Underwriters on the other shall be in such proportion so that the Underwriters are responsible for an amount equal to the Spreads, and the Company and Redwood Trust are responsible for the balance. The relative fault shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omissions or alleged omission to state a material fact relates to information supplied by the Company or Redwood Trust or by the Underwriters and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such untrue statement or omission. The amount paid by an indemnified party as a result of the losses, claims, damages or liabilities referred to in the first sentence of this Section 13(a) shall be deemed to include any legal or other expenses reasonably incurred by such indemnified party in connection with investigating or defending any action or claim which is the subject of this Section 13(a). An Underwriter shall not be required to contribute any amount in excess of (x) the Spread of such Underwriter, over (y) the amount of any damages which the 67 68 applicable Underwriter has otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission. The obligation of any Underwriter to contribute under this Section 13 is several in proportion to the portion of the Spread applicable to it. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. 14. Successors. This Agreement will inure to the benefit of and be binding upon the parties hereto and their respective successors and assigns, and no other person will have any right or obligation hereunder. 15. Applicable Law. This Agreement will be governed by and construed in accordance with the laws of the State of New York. 16. Miscellaneous. Time shall be of the essence of this Agreement. This Agreement supersedes all prior or contemporaneous agreements and understandings relating to the subject matter hereof. Neither this Agreement nor any term hereof may be changed, waived, discharged or terminated except by a writing signed by the party against whom enforcement of such 68 69 change, waiver, discharge or termination is sought. This Agreement may be signed in any number of counterparts, each of which shall be deemed an original, which taken together shall constitute one and the same instrument. 17. Notices. All communications hereunder shall be in writing and effective only on receipt and, if sent to an Underwriter, shall be delivered to the address specified on the signature page hereof; or if sent to the Company or Redwood Trust, shall be delivered to 591 Redwood Highway, Mill Valley, California 94941, attention of Douglas B. Hansen. * * * 69 70 If the foregoing is in accordance with your understanding of our agreement please sign and return to the undersigned a counterpart hereof, whereupon this Agreement and your acceptance shall represent a binding agreement by and among the Company, Redwood Trust and each Underwriter relating to the Issuer's Collateralized Mortgage Bonds _____. Very truly yours, SEQUOIA MORTGAGE FUNDING CORPORATION By:__________________________ Name: Title: REDWOOD TRUST, INC. By:__________________________ Name: Title: The foregoing Agreement is hereby confirmed and accepted. [Underwriters] By: ____________________________ Name: Title: Address: 70 EX-4.1 3 FORM OF INDENTURE 1 EXHIBIT 4.1 SEQUOIA MORTGAGE TRUST 199_-_, Issuer and _________________________________, Trustee INDENTURE Dated as of _____________ __, 199__ Relating to SEQUOIA MORTGAGE TRUST 199_-_ COLLATERALIZED MORTGAGE BONDS 2 Cross-reference sheet showing the location in the indenture of the provisions inserted pursuant to Sections 310 through 318(a) inclusive of the Trust Indenture Act of 1939.
TIA Indenture Section --- ----------------- Section 310 (a) (1) . . . . . . . . . . . . . . . . . . . . . . . . . 6.08 (a) (2) . . . . . . . . . . . . . . . . . . . . . . . . . 6.09 (a) (3) . . . . . . . . . . . . . . . . . . . . . . . . . 6.14(2) (a) (4) . . . . . . . . . . . . . . . . . . . . . . . . . Not Applicable (a) (5) . . . . . . . . . . . . . . . . . . . . . . . . . 6.08 (b) . . . . . . . . . . . . . . . . . . . . . . . . . 6.08 . . . . . . . . . . . . . . . . . . . . . . . . . 6.10 . . . . . . . . . . . . . . . . . . . . . . . . . 11.05 (c) . . . . . . . . . . . . . . . . . . . . . . . . . Not Applicable Section 311 (a) . . . . . . . . . . . . . . . . . . . . . . . . . 6.13 (b) . . . . . . . . . . . . . . . . . . . . . . . . . 6.13 Section 312 (a) . . . . . . . . . . . . . . . . . . . . . . . . . 7.01(a) . . . . . . . . . . . . . . . . . . . . . . . . . 7.02(a) (b) . . . . . . . . . . . . . . . . . . . . . . . . . 7.02(b) (c) . . . . . . . . . . . . . . . . . . . . . . . . . 7.02(c) Section 313 (a) . . . . . . . . . . . . . . . . . . . . . . . . . 7.03(a) (b) . . . . . . . . . . . . . . . . . . . . . . . . . 7.03(a) (c) . . . . . . . . . . . . . . . . . . . . . . . . . 7.03(a) . . . . . . . . . . . . . . . . . . . . . . . . . 11.05 (d) . . . . . . . . . . . . . . . . . . . . . . . . . 7.03(b) Section 314 (a) . . . . . . . . . . . . . . . . . . . . . . . . . 7.04 . . . . . . . . . . . . . . . . . . . . . . . . . 11.05 . . . . . . . . . . . . . . . . . . . . . . . . . 3.10 (b) (1) . . . . . . . . . . . . . . . . . . . . . . . . . 2.12(c)(viii) (b) (2) . . . . . . . . . . . . . . . . . . . . . . . . . 3.06 (c) (1) . . . . . . . . . . . . . . . . . . . . . . . . . 2.12(d) . . . . . . . . . . . . . . . . . . . . . . . . . 4.01 . . . . . . . . . . . . . . . . . . . . . . . . . 11.01
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TIA Indenture Section --- ----------------- (c) (2) . . . . . . . . . . . . . . . . . . . . . . . . . 2.12(c)(ii) . . . . . . . . . . . . . . . . . . . . . . . . . 4.01 . . . . . . . . . . . . . . . . . . . . . . . . . 11.01 (c) (3) . . . . . . . . . . . . . . . . . . . . . . . . . 1.01 . . . . . . . . . . . . . . . . . . . . . . . . . 2.12(f) (d) (1) . . . . . . . . . . . . . . . . . . . . . . . . . 1.01 . . . . . . . . . . . . . . . . . . . . . . . . . 8.12 (d) (2) . . . . . . . . . . . . . . . . . . . . . . . . . 1.01 . . . . . . . . . . . . . . . . . . . . . . . . . Not Applicable (d) (3) . . . . . . . . . . . . . . . . . . . . . . . . . 1.01 . . . . . . . . . . . . . . . . . . . . . . . . . 2.12(f) (e) . . . . . . . . . . . . . . . . . . . . . . . . . 11.01 Section 315 (a) . . . . . . . . . . . . . . . . . . . . . . . . . 6.01(b) . . . . . . . . . . . . . . . . . . . . . . . . . 6.01(c)(1) (b) . . . . . . . . . . . . . . . . . . . . . . . . . 6.02 . . . . . . . . . . . . . . . . . . . . . . . . . 11.05 (c) . . . . . . . . . . . . . . . . . . . . . . . . . 6.01(a) (d) . . . . . . . . . . . . . . . . . . . . . . . . . 6.01(c) (d) (1) . . . . . . . . . . . . . . . . . . . . . . . . . 6.01(b) (d) (2) . . . . . . . . . . . . . . . . . . . . . . . . . 6.01(c)(2) (d) (3) . . . . . . . . . . . . . . . . . . . . . . . . . 6.01(c)(3) (e) . . . . . . . . . . . . . . . . . . . . . . . . . 5.16 Section 316 (a) (1) (A) . . . . . . . . . . . . . . . . . . . . . . . . 5.14 . . . . . . . . . . . . . . . . . . . . . . . . . 8.01 (a) (1) (B) . . . . . . . . . . . . . . . . . . . . . . . . 5.02 . . . . . . . . . . . . . . . . . . . . . . . . . 5.15 (a) (2) . . . . . . . . . . . . . . . . . . . . . . . . . Not Applicable (b) . . . . . . . . . . . . . . . . . . . . . . . . . 5.10 (c) . . . . . . . . . . . . . . . . . . . . . . . . . Not Applicable Section 317 (a) (1) . . . . . . . . . . . . . . . . . . . . . . . . . 5.03 (a) (2) . . . . . . . . . . . . . . . . . . . . . . . . . 5.06 (b) . . . . . . . . . . . . . . . . . . . . . . . . . 3.03 Section 318 (a) . . . . . . . . . . . . . . . . . . . . . . . . . 11.07
ii 4 TABLE OF CONTENTS
Page PARTIES PRELIMINARY STATEMENT GRANTING CLAUSE ARTICLE I DEFINITIONS SECTION 1.01. General Definitions . . . . . . . . . . . . . . I-1 "Accountant" . . . . . . . . . . . . . . . . . . . . . . . . . . . I-1 "Accrual Date" . . . . . . . . . . . . . . . . . . . . . . . . . . I-1 "Act" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I-1 "Additional Mortgage Collateral" . . . . . . . . . . . . . . . . . I-1 "Adjusted Net Mortgage Rate" . . . . . . . . . . . . . . . . . . . I-2 "Adjustment Date" . . . . . . . . . . . . . . . . . . . . . . . . I-2 "Advance" . . . . . . . . . . . . . . . . . . . . . . . . . . . . I-2 "Affiliate" . . . . . . . . . . . . . . . . . . . . . . . . . . . I-2 "Agent" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I-2 "Appraised Value" . . . . . . . . . . . . . . . . . . . . . . . . I-2 "Assignments" . . . . . . . . . . . . . . . . . . . . . . . . . . I-2 "Authenticating Agent" . . . . . . . . . . . . . . . . . . . . . . I-3 "Authorized Officer" . . . . . . . . . . . . . . . . . . . . . . . I-3 "Available Funds" . . . . . . . . . . . . . . . . . . . . . . . . I-3 "Bank" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I-3 "Bankruptcy Code" . . . . . . . . . . . . . . . . . . . . . . . . I-3 "Beneficial Owner" . . . . . . . . . . . . . . . . . . . . . . . . I-3 "Bond Account" . . . . . . . . . . . . . . . . . . . . . . . . . . I-3 "Bond Distribution Amount" . . . . . . . . . . . . . . . . . . . . I-3 "Bond Payment Amount" . . . . . . . . . . . . . . . . . . . . . . I-4 "Bondholder" or "Holder" . . . . . . . . . . . . . . . . . . . . . I-4 "Bond Insurance Policy" . . . . . . . . . . . . . . . . . . . . . I-4 "Bond Insurer" . . . . . . . . . . . . . . . . . . . . . . . . . . I-4 "Bond Interest Rate" . . . . . . . . . . . . . . . . . . . . . . . I-4 "Bond Register" and "Bond Registrar" . . . . . . . . . . . . . . . I-4 "Bonds" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I-4 "Book Entry Bonds" . . . . . . . . . . . . . . . . . . . . . . . . I-4
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Page "Business Day" . . . . . . . . . . . . . . . . . . . . . . . . . . I-4 "Certificate Interest Rate" . . . . . . . . . . . . . . . . . . . I-4 "Class" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I-4 "Class B-1 Interest Carryover Shortfall" . . . . . . . . . . . . . I-5 "Class B-1 Interest Payment Amount" . . . . . . . . . . . . . . . I-5 "Class B-1 Percentage" . . . . . . . . . . . . . . . . . . . . . . I-5 "Class B-1 Principal Amount" . . . . . . . . . . . . . . . . . . . I-5 "Class B-1 Principal Carryover Shortfall" . . . . . . . . . . . . I-5 "Class B-1 Principal Payment Amount" . . . . . . . . . . . . . . . I-5 "Class B-2 Interest Carryover Shortfall" . . . . . . . . . . . . . I-6 "Class B-2 Interest Payment Amount" . . . . . . . . . . . . . . . I-6 "Class B-2 Percentage" . . . . . . . . . . . . . . . . . . . . . . I-6 "Class B-2 Principal Amount" . . . . . . . . . . . . . . . . . . . I-6 "Class B-2 Principal Carryover Shortfall" . . . . . . . . . . . . I-6 "Class B-2 Principal Payment Amount" . . . . . . . . . . . . . . . I-6 "Class Interest Shortfall" . . . . . . . . . . . . . . . . . . . . I-7 "Class Principal Amount" . . . . . . . . . . . . . . . . . . . . . I-7 "Closing Date" . . . . . . . . . . . . . . . . . . . . . . . . . . I-7 "Code" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I-7 "Combined Prepayment Percentage" . . . . . . . . . . . . . . . . . I-7 "Commission" . . . . . . . . . . . . . . . . . . . . . . . . . . . I-7 "Controlling Class" . . . . . . . . . . . . . . . . . . . . . . . . . "Cooperative Loan" . . . . . . . . . . . . . . . . . . . . . . . . I-7 "Cooperative Shares" . . . . . . . . . . . . . . . . . . . . . . . I-7 "Corporate Trust Office" . . . . . . . . . . . . . . . . . . . . . I-8 "Cut-Off Date" . . . . . . . . . . . . . . . . . . . . . . . . . . I-8 "Debt Service Reduction" . . . . . . . . . . . . . . . . . . . . . I-8 "Default" . . . . . . . . . . . . . . . . . . . . . . . . . . . . I-8 "Defaulted Pledged Mortgage" . . . . . . . . . . . . . . . . . . . I-8 "Deficient Valuation" . . . . . . . . . . . . . . . . . . . . . . I-8 "Definitive Bonds" . . . . . . . . . . . . . . . . . . . . . . . . I-8 "Deleted Pledged Mortgage" . . . . . . . . . . . . . . . . . . . . I-8 "Denomination" . . . . . . . . . . . . . . . . . . . . . . . . . . I-8 "Depositor" . . . . . . . . . . . . . . . . . . . . . . . . . . . I-8 "Depository" . . . . . . . . . . . . . . . . . . . . . . . . . . . I-8 "Depository Participants" . . . . . . . . . . . . . . . . . . . . I-9 "Deposit Trust Agreement" . . . . . . . . . . . . . . . . . . . . I-9 "Determination Date" . . . . . . . . . . . . . . . . . . . . . . . I-9 "Distribution Account" . . . . . . . . . . . . . . . . . . . . . . I-9 "Distribution Account Deposit Date" . . . . . . . . . . . . . . . I-9
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Page "Due Date" . . . . . . . . . . . . . . . . . . . . . . . . . . . . I-9 "Eligible Account" . . . . . . . . . . . . . . . . . . . . . . . . I-9 "Escrow Account" . . . . . . . . . . . . . . . . . . . . . . . . I-10 "Event of Default" . . . . . . . . . . . . . . . . . . . . . . . I-10 "Expense Rate" . . . . . . . . . . . . . . . . . . . . . . . . . I-10 "FDIC" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I-10 "FHLMC" . . . . . . . . . . . . . . . . . . . . . . . . . . . . I-10 "FIRREA" . . . . . . . . . . . . . . . . . . . . . . . . . . . . I-10 "Fitch" . . . . . . . . . . . . . . . . . . . . . . . . . . . . I-10 "FNMA" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I-10 "Grant" . . . . . . . . . . . . . . . . . . . . . . . . . . . . I-10 "Highest Lawful Rate" . . . . . . . . . . . . . . . . . . . . . I-11 "Holder" . . . . . . . . . . . . . . . . . . . . . . . . . . . . I-11 "Indenture" or "this Indenture" . . . . . . . . . . . . . . . . I-11 "Independent" . . . . . . . . . . . . . . . . . . . . . . . . . I-11 "Index" . . . . . . . . . . . . . . . . . . . . . . . . . . . . I-11 "Indirect Participant" . . . . . . . . . . . . . . . . . . . . . I-12 "Individual Bond" . . . . . . . . . . . . . . . . . . . . . . . I-12 "Insurance Policy" . . . . . . . . . . . . . . . . . . . . . . . I-12 "Insurance Proceeds" . . . . . . . . . . . . . . . . . . . . . . I-12 "Insured Expenses" . . . . . . . . . . . . . . . . . . . . . . . I-12 "Interest Accrual Period" . . . . . . . . . . . . . . . . . . . I-12 "Interest Conversion Date" . . . . . . . . . . . . . . . . . . . I-12 "Interest Payment Amount" . . . . . . . . . . . . . . . . . . . I-12 "Invested Amount" . . . . . . . . . . . . . . . . . . . . . . . I-12 "Investor Certificate" . . . . . . . . . . . . . . . . . . . . . I-12 "Investor Percentage" . . . . . . . . . . . . . . . . . . . . . I-13 "Investor Prepayment Percentage" . . . . . . . . . . . . . . . . I-13 "Issuer" . . . . . . . . . . . . . . . . . . . . . . . . . . . . I-13 "Issuer Order" and "Issuer Request" . . . . . . . . . . . . . . I-13 "Letter Agreement" . . . . . . . . . . . . . . . . . . . . . . . I-13 "Liquidated Pledged Mortgage" . . . . . . . . . . . . . . . . . I-13 "Liquidation Proceeds" . . . . . . . . . . . . . . . . . . . . . I-13 "Loan-to-Value Ratio" . . . . . . . . . . . . . . . . . . . . . I-13 "Margin" . . . . . . . . . . . . . . . . . . . . . . . . . . . . I-13 "Master Servicer" . . . . . . . . . . . . . . . . . . . . . . . I-14 "Master Servicing Agreement" . . . . . . . . . . . . . . . . . . I-14 "Master Servicing Fee" . . . . . . . . . . . . . . . . . . . . . I-14 "Master Servicing Fee Rate" . . . . . . . . . . . . . . . . . . I-14 "Maturity" . . . . . . . . . . . . . . . . . . . . . . . . . . . I-14
iii 7
Page "Maximum Rate" . . . . . . . . . . . . . . . . . . . . . . . . . I-14 "Moody's" . . . . . . . . . . . . . . . . . . . . . . . . . . . I-14 "Mortgage" . . . . . . . . . . . . . . . . . . . . . . . . . . . I-14 "Mortgage Documents" . . . . . . . . . . . . . . . . . . . . . . I-14 "Mortgage Note" . . . . . . . . . . . . . . . . . . . . . . . . I-15 "Mortgage Rate" . . . . . . . . . . . . . . . . . . . . . . . . I-15 "Mortgaged Property" . . . . . . . . . . . . . . . . . . . . . . I-15 "Mortgagor" . . . . . . . . . . . . . . . . . . . . . . . . . . I-15 "Net Mortgage Rate" . . . . . . . . . . . . . . . . . . . . . . I-15 "Net Interest Shortfalls" . . . . . . . . . . . . . . . . . . . I-15 "Nonrecoverable Advance" . . . . . . . . . . . . . . . . . . . . I-15 "Officers' Certificate" . . . . . . . . . . . . . . . . . . . . I-15 "Officer's Certificate of the Master Servicer" . . . . . . . . . I-15 "Operative Agreements" . . . . . . . . . . . . . . . . . . . . . I-15 "Opinion of Counsel" . . . . . . . . . . . . . . . . . . . . . . I-16 "Optional Redemption Date" . . . . . . . . . . . . . . . . . . . I-16 "Optional Redemption Record Date" . . . . . . . . . . . . . . . I-16 "Original Class B-1 Principal Amount" . . . . . . . . . . . . . I-16 "Original Class B-2 Principal Amount" . . . . . . . . . . . . . I-16 "Original Invested Amount" . . . . . . . . . . . . . . . . . . . I-16 "Original Pledged Mortgages" . . . . . . . . . . . . . . . . . . I-16 "Original Senior Class Principal Amount" . . . . . . . . . . . . I-16 "Original Subordination Amount" . . . . . . . . . . . . . . . . I-16 "OTS" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I-16 "Outstanding" . . . . . . . . . . . . . . . . . . . . . . . . . I-16 "Outstanding Pledged Mortgage" . . . . . . . . . . . . . . . . . I-17 "Owner" . . . . . . . . . . . . . . . . . . . . . . . . . . . . I-17 "Owner Trustee" . . . . . . . . . . . . . . . . . . . . . . . . I-17 "Paying Agent" . . . . . . . . . . . . . . . . . . . . . . . . . I-17 "Payment Date" . . . . . . . . . . . . . . . . . . . . . . . . . I-17 "Payment Date Statement" . . . . . . . . . . . . . . . . . . . . I-17 "Periodic Rate Cap" . . . . . . . . . . . . . . . . . . . . . . I-18 "Permitted Encumbrance" . . . . . . . . . . . . . . . . . . . . I-18 "Permitted Investments" . . . . . . . . . . . . . . . . . . . . I-18 "Person" . . . . . . . . . . . . . . . . . . . . . . . . . . . . I-20 "Pledged Accounts" . . . . . . . . . . . . . . . . . . . . . . . I-20 "Pledged Mortgage Schedule" . . . . . . . . . . . . . . . . . . I-20 "Pledged Mortgages" . . . . . . . . . . . . . . . . . . . . . . I-21 "Pool Stated Principal Balance" . . . . . . . . . . . . . . . . I-21 "Predecessor Bonds" . . . . . . . . . . . . . . . . . . . . . . I-21
iv 8
Page "Prepayment Interest Shortfall" . . . . . . . . . . . . . . . . I-21 "Prepayment Period" . . . . . . . . . . . . . . . . . . . . . . I-21 "Primary Mortgage Insurance Policy" . . . . . . . . . . . . . . I-21 "Principal Prepayment" . . . . . . . . . . . . . . . . . . . . . I-21 "Principal Prepayment in Full" . . . . . . . . . . . . . . . . . I-21 "Proceeding" . . . . . . . . . . . . . . . . . . . . . . . . . . I-21 "Proprietary Lease" . . . . . . . . . . . . . . . . . . . . . . I-21 "Prospectus Supplement" . . . . . . . . . . . . . . . . . . . . I-21 "Purchase Price" . . . . . . . . . . . . . . . . . . . . . . . . I-22 "Rating Agency" . . . . . . . . . . . . . . . . . . . . . . . . I-22 "Realized Loss" . . . . . . . . . . . . . . . . . . . . . . . . I-22 "Record Date" . . . . . . . . . . . . . . . . . . . . . . . . . I-22 "Redemption Date" . . . . . . . . . . . . . . . . . . . . . . . I-23 "Redemption Price" . . . . . . . . . . . . . . . . . . . . . . . I-23 "Refinancing Pledged Mortgage" . . . . . . . . . . . . . . . . . I-23 "Relief Act" . . . . . . . . . . . . . . . . . . . . . . . . . . I-23 "Relief Act Reductions" . . . . . . . . . . . . . . . . . . . . I-23 "REO Property" . . . . . . . . . . . . . . . . . . . . . . . . . I-23 "Replacement Pledged Mortgage" . . . . . . . . . . . . . . . . . I-23 "Request for Release" . . . . . . . . . . . . . . . . . . . . . I-24 "Responsible Officer" . . . . . . . . . . . . . . . . . . . . . I-24 "S&P" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I-24 "SAIF" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I-24 "Sale" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I-24 "Scheduled Payment" . . . . . . . . . . . . . . . . . . . . . . I-24 "Securities Act" . . . . . . . . . . . . . . . . . . . . . . . . I-24 "Seller/Servicer Guide" . . . . . . . . . . . . . . . . . . . . I-24 "Senior Bond Interest Rate" . . . . . . . . . . . . . . . . . . I-24 "Senior Bonds" . . . . . . . . . . . . . . . . . . . . . . . . . I-24 "Senior Class Principal Amount" . . . . . . . . . . . . . . . . I-25 "Senior Interest Payment Amount" . . . . . . . . . . . . . . . . I-25 "Senior Interest Shortfall" . . . . . . . . . . . . . . . . . . I-25 "Senior Percentage" . . . . . . . . . . . . . . . . . . . . . . I-25 "Senior Principal Payment Amount" . . . . . . . . . . . . . . . I-25 "Servicer" . . . . . . . . . . . . . . . . . . . . . . . . . . . I-25 "Servicer Advance" . . . . . . . . . . . . . . . . . . . . . . . I-26 "Servicing Advances" . . . . . . . . . . . . . . . . . . . . . . I-26 "Servicing Agreement" . . . . . . . . . . . . . . . . . . . . . I-26 "Servicing Default" . . . . . . . . . . . . . . . . . . . . . . I-26 "Servicing Fee" . . . . . . . . . . . . . . . . . . . . . . . . I-26
v 9
Page "Servicing Fee Rate" . . . . . . . . . . . . . . . . . . . . . . . . . . . I-26 "Servicing Officer" . . . . . . . . . . . . . . . . . . . . . . . . . . . I-26 "Stated Maturity" . . . . . . . . . . . . . . . . . . . . . . . . . . . . I-26 "Stated Principal Balance" . . . . . . . . . . . . . . . . . . . . . . . . I-26 "Subordinated Bond Interest Rate" . . . . . . . . . . . . . . . . . . . . I-27 "Subordinated Bonds" . . . . . . . . . . . . . . . . . . . . . . . . . . . I-27 "Substitution Adjustment Amount" . . . . . . . . . . . . . . . . . . . . . I-27 "Successor Master Servicer" . . . . . . . . . . . . . . . . . . . . . . . I-27 "Trust Estate" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I-27 "Trust Indenture Act" or "TIA" . . . . . . . . . . . . . . . . . . . . . . I-27 "Trustee" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I-27 "Trustee Fee" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I-27 "Trustee Fee Rate" . . . . . . . . . . . . . . . . . . . . . . . . . . . . I-27 "Trustee Mortgage File" . . . . . . . . . . . . . . . . . . . . . . . . . I-27 "Withdrawal Date" . . . . . . . . . . . . . . . . . . . . . . . . . . . . I-28 ARTICLE II THE BONDS SECTION 2.01. Forms Generally . . . . . . . . . . . . . . . . . . . . II-1 SECTION 2.02. Forms of Bonds and Certificate of Authentication . . . II-1 SECTION 2.03. Bonds Issuable in Classes; Provisions with Respect to Principal and Interest Payments . . . . . . . . . . II-2 SECTION 2.04. Denominations . . . . . . . . . . . . . . . . . . . . . II-5 SECTION 2.05. Execution, Authentication, Delivery and Dating . . . . II-5 SECTION 2.06. Temporary Bonds . . . . . . . . . . . . . . . . . . . . II-6 SECTION 2.07. Registration, Registration of Transfer and Exchange . . II-6 SECTION 2.08. Mutilated, Destroyed, Lost or Stolen Bonds . . . . . . II-7 SECTION 2.09. Payments of Principal and Interest . . . . . . . . . . II-8 SECTION 2.10. Persons Deemed Owners . . . . . . . . . . . . . . . . . II-10 SECTION 2.11. Cancellation . . . . . . . . . . . . . . . . . . . . . II-10 SECTION 2.12. Authentication and Delivery of Bonds . . . . . . . . . II-10 SECTION 2.13. Matters Relating to Book Entry Bonds . . . . . . . . . II-15 SECTION 2.14. Termination of Book Entry System . . . . . . . . . . . II-16 SECTION 2.15. Additional Bonds . . . . . . . . . . . . . . . . . . . II-17
vi 10 ARTICLE III COVENANTS Page SECTION 3.01. Payment of Bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . III-1 SECTION 3.02. Maintenance of Office or Agency . . . . . . . . . . . . . . . . . . . . . . . . . . . . III-1 SECTION 3.03. Money for Bond Payments to Be Held in Trust . . . . . . . . . . . . . . . . . . . . . . III-1 SECTION 3.04. Corporate Existence of Owner Trustee . . . . . . . . . . . . . . . . . . . . . . . . . III-4 SECTION 3.05. Protection of Trust Estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . III-4 SECTION 3.06. Opinions as to Trust Estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . III-6 SECTION 3.07. Performance of Obligations; Master Servicing Agreement . . . . . . . . . . . . . . . . III-6 SECTION 3.08. Investment Company Act . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . III-7 SECTION 3.09. Negative Covenants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . III-7 SECTION 3.10. Annual Statement as to Compliance . . . . . . . . . . . . . . . . . . . . . . . . . . . III-9 SECTION 3.11. Recording of Assignments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . III-9 SECTION 3.12. Limitation of Liability of . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . III-9 ARTICLE IV SATISFACTION AND DISCHARGE SECTION 4.01. Satisfaction and Discharge of Indenture . . . . . . . . . . . . . . . . . . . . . . . . IV-1 SECTION 4.02. Application of Trust Money . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IV-2 ARTICLE V DEFAULTS AND REMEDIES SECTION 5.01. Event of Default . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . V-1 SECTION 5.02. Acceleration of Maturity; Rescission and Annulment . . . . . . . . . . . . . . . . . . . . V-3 SECTION 5.03. Collection of Indebtedness and Suits for Enforcement by Trustee . . . . . . . . . . . . . V-4 SECTION 5.04. Remedies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . V-5 SECTION 5.05. [Reserved] . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . V-5
vii 11 Page SECTION 5.06. Trustee May File Proofs of Claim . . . . . . . . . . . . . . . . . . . . . . . . . . . . V-7 SECTION 5.07. Trustee May Enforce Claims without Possession of Bonds . . . . . . . . . . . . . . . . . V-8 SECTION 5.08. Application of Money Collected . . . . . . . . . . . . . . . . . . . . . . . . . . . . . V-8 SECTION 5.09. Limitation on Suits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . V-8 SECTION 5.10. Unconditional Rights of Bondholders to Receive Principal and Interest . . . . . . . . . . V-9 SECTION 5.11. Restoration of Rights and Remedies . . . . . . . . . . . . . . . . . . . . . . . . . . V-10 SECTION 5.12. Rights and Remedies Cumulative . . . . . . . . . . . . . . . . . . . . . . . . . . . . V-10 SECTION 5.13. Delay or Omission Not Waiver . . . . . . . . . . . . . . . . . . . . . . . . . . . . . V-10 SECTION 5.14. Control by Bondholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . V-10 SECTION 5.15. Waiver of Past Defaults . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . V-11 SECTION 5.16. Undertaking for Costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . V-11 SECTION 5.17. Waiver of Stay or Extension Laws . . . . . . . . . . . . . . . . . . . . . . . . . . . V-12 SECTION 5.18. Sale of Trust Estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . V-12 SECTION 5.19. Action on Bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . V-14 ARTICLE VI THE TRUSTEE SECTION 6.01. Duties of Trustee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . VI-1 SECTION 6.02. Notice of Default . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . VI-2 SECTION 6.03. Rights of Trustee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . VI-3 SECTION 6.04. Not Responsible for Recitals or Issuance of Bonds . . . . . . . . . . . . . . . . . . . VI-5 SECTION 6.05. May Hold Bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . VI-5 SECTION 6.06. Money Held in Trust . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . VI-5 SECTION 6.07. Compensation and Reimbursement . . . . . . . . . . . . . . . . . . . . . . . . . . . . VI-5 SECTION 6.08. Eligibility; Disqualification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . VI-6 SECTION 6.09. Trustee's Capital and Surplus . . . . . . . . . . . . . . . . . . . . . . . . . . . . . VI-7 SECTION 6.10. Resignation and Removal; Appointment of Successor . . . . . . . . . . . . . . . . . . . VI-7 SECTION 6.11. Acceptance of Appointment by Successor . . . . . . . . . . . . . . . . . . . . . . . . VI-8 SECTION 6.12. Merger, Conversion, Consolidation or Succession to Business of Trustee . . . . . . . . VI-9 SECTION 6.13. Preferential Collection of Claim Against Issuer . . . . . . . . . . . . . . . . . . . . VI-9
viii 12 Page SECTION 6.14. Co-trustees and Separate Trustees . . . . . . . . . . . . . . . . . . . . . . . . . . . VI-9 SECTION 6.15. Authenticating Agents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . VI-11 SECTION 6.16. Review of Mortgage Documents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . VI-12 SECTION 6.17. Payment of Certain Insurance Premiums . . . . . . . . . . . . . . . . . . . . . . . . . VI-13 SECTION 6.18. Substitution of Insurance Policies, Etc.; Notification of Rating Agencies . . . . . . . VI-13 ARTICLE VII BONDHOLDERS' LISTS AND REPORTS SECTION 7.01. Issuer to Furnish Trustee Names and Addresses of Bondholders . . . . . . . . . . . . . VII-1 SECTION 7.02. Preservation of Information; Communications to Bondholders . . . . . . . . . . . . . . VII-1 SECTION 7.03. Reports by Trustee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . VII-1 SECTION 7.04. Reports by Issuer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . VII-2 SECTION 7.05. Notice to the Rating Agencies [and to Bond Insurer.] . . . . . . . . . . . . . . . . . VII-2
ix 13 ARTICLE VIII ACCOUNTS, PAYMENTS OF INTEREST AND PRINCIPAL, AND RELEASES Page SECTION 8.01. Collection of Moneys . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . VIII-1 SECTION 8.02. Distribution Account . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . VIII-1 SECTION 8.03. General Provisions Regarding Pledged Accounts . . . . . . . . . . . . . . . . . . . . VIII-2 SECTION 8.04. Purchases of Defective Pledged Mortgages . . . . . . . . . . . . . . . . . . . . . . VIII-3 SECTION 8.05. Grant of Replacement Pledged Mortgage . . . . . . . . . . . . . . . . . . . . . . . . VIII-5 SECTION 8.06. Reports by Trustee to Bondholders . . . . . . . . . . . . . . . . . . . . . . . . . . VIII-5 SECTION 8.07. Reports by Trustee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . VIII-7 SECTION 8.08. Trust Estate; Release and Delivery of Mortgage Documents . . . . . . . . . . . . . . VIII-8 SECTION 8.09. Amendments to the Master Servicing Agreement . . . . . . . . . . . . . . . . . . . . VIII-9 SECTION 8.10. Servicers and Master Servicer as Agents and Bailees of Trustee . . . . . . . . . . . VIII-9 SECTION 8.11. Opinion of Counsel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . VIII-10 SECTION 8.12. Release of Pledged Mortgages . . . . . . . . . . . . . . . . . . . . . . . . . . . . VIII-10 ARTICLE IX SUPPLEMENTAL INDENTURES SECTION 9.01. Supplemental Indentures Without Consent of Bondholders . . . . . . . . . . . . . . . . IX-1 SECTION 9.02. Supplemental Indentures With Consent of Bondholders . . . . . . . . . . . . . . . . . . IX-2 SECTION 9.03. Execution of Supplemental Indentures . . . . . . . . . . . . . . . . . . . . . . . . . IX-4 SECTION 9.04. Effect of Supplemental Indentures . . . . . . . . . . . . . . . . . . . . . . . . . . . IX-4 SECTION 9.05. Conformity with Trust Indenture Act . . . . . . . . . . . . . . . . . . . . . . . . . . IX-4 SECTION 9.06. Reference in Bonds to Supplemental Indentures . . . . . . . . . . . . . . . . . . . . . IX-5
x 14 Page SECTION 9.07. Amendments to Deposit Trust Agreement or Master Servicing Agreement . . . . . . . . . . IX-5 ARTICLE X REDEMPTION OF BONDS SECTION 10.01. Special Redemption; Redemption . . . . . . . . . . . . . . . . . . . . . . . . . . . . . X-1 SECTION 10.02. Form of Redemption Notice . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . X-1 SECTION 10.03. Bonds Payable on Optional Redemption Date . . . . . . . . . . . . . . . . . . . . . . . X-2
xi 15 Page ARTICLE XI MISCELLANEOUS SECTION 11.01. Compliance Certificates and Opinions . . . . . . . . . . . . . . . . . . . . . . . . . XI-1 SECTION 11.02. Form of Documents Delivered to Trustee . . . . . . . . . . . . . . . . . . . . . . . . XI-1 SECTION 11.03. Acts of Bondholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . XI-3 SECTION 11.04. Notices, etc. to Trustee and Issuer . . . . . . . . . . . . . . . . . . . . . . . . . XI-3 SECTION 11.05. Notices and Reports to Bondholders; Waiver of Notices . . . . . . . . . . . . . . . . XI-4 SECTION 11.06. Rules by Trustee and Agents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . XI-5 SECTION 11.07. Conflict with Trust Indenture Act . . . . . . . . . . . . . . . . . . . . . . . . . . XI-5 SECTION 11.08. Effect of Headings and Table of Contents . . . . . . . . . . . . . . . . . . . . . . . XI-5 SECTION 11.09. Successors and Assigns . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . XI-5 SECTION 11.10. Separability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . XI-5 SECTION 11.11. Benefits of Indenture . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . XI-6 SECTION 11.12. Legal Holidays . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . XI-6 SECTION 11.13. Governing Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . XI-6 SECTION 11.14. Counterparts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . XI-6 SECTION 11.15. Recording of Indenture . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . XI-6 SECTION 11.16. Issuer Obligation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . XI-6 SECTION 11.17. Inspection . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . XI-7 SECTION 11.18. Usury . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . XI-7 SECTION 11.19. No Petition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . XI-8 ARTICLE XII THE BOND INSURER SECTION 12.01. Certain Matters Regarding the Bond Insurer and The Bond Insurance Policy . . . . . . . XII-1 TESTIMONIUM . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-1 SIGNATURES AND SEALS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-1
xii 16 Page ACKNOWLEDGMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-3 SCHEDULE A - Schedule of Pledged Mortgages . . . . . . . . . . . . . . . . A-1 EXHIBIT I - Letter Agreement with the Depository EXHIBIT II - Form of Senior Bond EXHIBIT III - Form of Class B-1 Bond EXHIBIT IV - Form of Class B-2 Bond EXHIBIT V - Form of Bond Insurance Policy xiii 17 PARTIES INDENTURE, dated as of ___________ ___, 199__ (as amended or supplemented from time to time as permitted hereby, the "Indenture"), between Sequoia Mortgage Trust 199_-_ (herein, together with its permitted successors and assigns, called the "Issuer"), a statutory business trust created under the Deposit Trust Agreement (as defined herein), and _____________________________, a _____________ corporation, as trustee (together with its permitted successors in the trusts hereunder, the "Trustee"). PRELIMINARY STATEMENT The Issuer has duly authorized the execution and delivery of this Indenture to provide for its Collateralized Mortgage Bonds, (the "Bonds"), issuable as provided in this Indenture. All covenants and agreements made by the Issuer herein are for the benefit and security of the Holders of the Bonds. The Issuer is entering into this Indenture, and the Trustee is accepting the trusts created hereby, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged. All things necessary to make this Indenture a valid agreement of the Issuer in accordance with its terms have been done. GRANTING CLAUSE The Issuer hereby Grants to the Trustee, for the exclusive benefit of the Holders of the Bonds [and the Bond Insurer], all of the Issuer's right, title and interest in and to (a) the Pledged Mortgages identified in Schedule A to this Indenture, including the related Mortgage Documents, which the Issuer has caused to be delivered to the Trustee herewith, and all interest and principal received or receivable by the Issuer on or with respect to the Pledged Mortgages after the Cut-Off Date and all interest and principal payments on the Pledged Mortgages received prior to the Cut-off Date in respect of installments of interest and principal due thereafter, but not including payments of interest and principal due and payable on the Pledged Mortgages on or before the Cut-off Date, and all 1 18 other proceeds received in respect of such Pledged Mortgages, (b) the Issuer's rights under the Master Servicing Agreement, (c) the Insurance Policies, (d) all cash, instruments or other property held or required to be deposited in the Bond Account or the Distribution Account (exclusive of any earnings on investments made with funds deposited in the Distribution Account or the Bond Account) and (e) all proceeds of the conversion, voluntary or involuntary, of any of the foregoing into cash or other liquid assets, including, without limitation, all Insurance Proceeds, Liquidation Proceeds and condemnation awards. Such Grants are made, however, in trust, to secure the Bonds equally and ratably without prejudice, priority or distinction between any Bond and any other Bond by reason of difference in time of issuance or otherwise, and to secure (i) the payment of all amounts due on the Bonds in accordance with their terms, (ii) the payment of all other sums payable under this Indenture with respect to the Bonds and (iii) compliance with the provisions of this Indenture, all as provided in this Indenture. All terms used in the foregoing granting clauses that are defined in Section 1.01 are used with the meanings given in said Section. The Trustee acknowledges such Grant, accepts the trusts hereunder in accordance with the provisions of this Indenture and agrees to perform the duties herein required to the best of its ability to the end that the interests of the Holders of the Bonds [and the Bond Insurer] may be adequately and effectively protected. [The Trustee agrees that it will hold any proceeds of any claim made upon the Bond Insurance Policy, solely for the use and benefit of the Bondholders in accordance with the terms hereof and of the Bond Insurance Policy.] 2 19 ARTICLE I DEFINITIONS SECTION 1.01. GENERAL DEFINITIONS. Except as otherwise specified or as the context may otherwise require, the following terms have the respective meanings set forth below for all purposes of this Indenture, and the definitions of such terms are applicable to the singular as well as to the plural forms of such terms and to the masculine as well as to the feminine and neuter genders of such terms. Whenever reference is made herein to an Event of Default or a Default known to the Trustee or of which the Trustee has notice or knowledge, such reference shall be construed to refer only to an Event of Default or Default of which the Trustee is deemed to have notice or knowledge pursuant to Section 6.01(d). All other terms used herein which are defined in the Trust Indenture Act (as hereinafter defined), either directly or by reference therein, have the meanings assigned to them therein. "ACCOUNTANT": A Person engaged in the practice of accounting who (except when this Indenture provides that an Accountant must be Independent) may be employed by or affiliated with the Issuer or an Affiliate of the Issuer. "ACCRUAL DATE": The date upon which interest begins accruing on the Bonds, such date being ____________ ___, 199__. "ACT": With respect to any Bondholder, as defined in Section 11.03. "ADDITIONAL MORTGAGE COLLATERAL": Pledged Mortgages pledged to the Trustee following the Closing Date in connection with the issuance of Additional Bonds pursuant to Section hereof, provided that following such pledge, aggregate Pledged Mortgages then pledged to secure the Bonds are within the following parameters: (i) the percentage of the Pledged Mortgages which are [fixed interest rate] mortgage loans will not exceed __%, (ii) the percentage of Pledged Mortgages which are [adjustable rate] mortgage loans will not exceed __%, (iii) the percentage of Pledged Mortgages that contain "due-on-sale" clauses will not exceed __%, (iv) the percentage of Pledged I-1 20 Mortgages secured by investor properties will not exceed __%, (v) the weighted average original Loan-to-Value Ratio of the Pledged Mortgages will not exceed __%, (vi) the percentage of Pledged Mortgages originated pursuant to a "limited documentation" program will not exceed __%, (vii) the percentage of Pledged Mortgages having an original Loan-to-Value Ratio in excess of 80% that will be covered by a primary mortgage loan insurance policy will equal at least __%, (viii) the percentage of Pledged Mortgages which are cash-out refinance mortgages will not exceed __% and (ix) the percentage of Pledged Mortgages that are delinquent by one or more scheduled payments will not exceed __%. "ADJUSTED NET MORTGAGE RATE": As to each Pledged Mortgage and at any time, the per annum rate equal to the Mortgage Rate less the sum of the Master Servicing Fee Rate and the related Servicing Fee Rate. "ADJUSTMENT DATE": As to any Pledged Mortgage, the date on which the related Mortgage Rate adjusts [annually] after a period of ___ year[s] following origination, in accordance with the terms of the related Mortgage Note. "ADVANCE": The payment required to be made by the Master Servicer with respect to any Payment Date pursuant to Section 4 of the Master Servicing Agreement, the amount of any such payment being equal to the aggregate of the payments of principal and interest (net of the Master Servicing Fee and the applicable Servicing Fee and net of any net income in the case of any REO Property) on the Pledged Mortgages that were due on the related Due Date and not received as of the close of business on the related Determination Date, less the aggregate amount of any such delinquent payments that the Master Servicer has determined would constitute a Nonrecoverable Advance if advanced. "AFFILIATE": With respect to any Person, any other Person controlling or controlled by or under common control with such specified Person. For the purposes of this definition, "control" when used with respect to any specified Person means the power to direct the management and policies of such Person, directly or indirectly, whether through the ownership of voting securities, by contract or otherwise; and the terms "controlling" and "controlled" have meanings correlative to the foregoing. I-2 21 "AGENT": Any Bond Registrar, Paying Agent or Authenticating Agent. "APPRAISED VALUE": With respect to any Pledged Mortgage, the Appraised Value of the related Mortgaged Property shall be: (i) with respect to a Pledged Mortgage other than a Refinancing Pledged Mortgage, the lesser of (a) the value of the Mortgaged Property based upon the appraisal made at the time of the origination of such Pledged Mortgage and (b) the sales price of the Mortgaged Property at the time of the origination of such Pledged Mortgage; (ii) with respect to a Refinancing Pledged Mortgage, the value of the Mortgaged Property based upon the appraisal made at the time of the origination of such Refinancing Pledged Mortgage. "ASSIGNMENTS": Collectively (i) the original instrument of assignment of a Mortgage, including any interim assignments from the originator or any other holder of any Pledged Mortgage, and (ii) the original instrument of assignment of such Mortgage, made by the Issuer to the Trustee (which in either case may, to the extent permitted by the laws of the state in which the related Mortgaged Property is located, be a blanket instrument of assignment covering other Mortgages as well and which may also, to the extent permitted by the laws of the state in which the related Mortgaged Property is located, be an instrument of assignment running directly from the mortgagee of record under the related Mortgage to the Trustee). "AUTHENTICATING AGENT": The Person, if any, appointed as Authenticating Agent by the Trustee at the request of the Issuer pursuant to Section 6.15, until any successor Authenticating Agent for the Bonds is named, and thereafter "Authenticating Agent" shall mean such successor. "AUTHORIZED OFFICER": Any officer of the Owner Trustee who is authorized to act for the Owner Trustee in respect of the Issuer and whose name appears on a list of such authorized officers furnished by the Owner Trustee to the Trustee, as such list may be amended or supplemented from time to time, and any officer of the Issuer who is authorized to act pursuant to the Deposit Trust Agreement and whose name appears on a list furnished by the Depositor to the Owner Trustee and the Trustee, as such list may be amended or supplemented from time to time. I-3 22 "AVAILABLE FUNDS": As defined in Section 1 of the Master Servicing Agreement. "BANK": ________________________, a Delaware banking corporation, in its individual capacity and not as Owner Trustee. "BANKRUPTCY CODE": The United States Bankruptcy Reform Act of 1978, as amended. "BENEFICIAL OWNER": With respect to a Book Entry Bond, the Person who is the beneficial owner of such Book Entry Bond. "BOND ACCOUNT": The separate Eligible Account or Accounts created and maintained by the Master Servicer pursuant to Section 3(h)(v) of the Master Servicing Agreement with a depository institution in the name of the Master Servicer for the benefit of the Trustee on behalf of Bondholders and designated "Sequoia Mortgage Holdings, Inc. in trust for the registered holders of Sequoia Mortgage Trust 199_-_ Collateralized Mortgage Bonds, Series 199_-_". "BOND DISTRIBUTION AMOUNT": As to any Payment Date, an amount equal to the sum of (i) the Senior Interest Payment Amount, (ii) the Senior Principal Payment Amount, (iii) the Class B-1 Interest Payment Amount, (iv) the Class B-1 Principal Payment Amount, (v) the Class B-2 Interest Payment Amount and (vi) the Class B-2 Principal Payment Amount. "BOND PAYMENT AMOUNT": As to any Payment Date, an amount equal to the sum of (i) the Senior Interest Payment Amount, (ii) the Senior Principal Payment Amount, (iii) the Class B-1 Interest Payment Amount, (iv) the Class B- 1 Principal Payment Amount, (v) the Class B-2 Interest Payment Amount and (vi) the Class B-2 Principal Payment Amount, in each case for such Payment Date. "BONDHOLDER" OR "HOLDER": The Person in whose name a Bond is registered in the Bond Register. "BOND INSURANCE POLICY": Any financial guaranty insurance policy covering any Bonds or Class of Bonds of any Series. I-4 23 "BOND INSURER": The issuer of any Bond Insurance Policy. "BOND INTEREST RATE": The Senior Bond Interest Rate, the Class B-1 Bond Interest Rate or the Class B-2 Bond Interest Rate, as applicable. "BOND REGISTER" AND "BOND REGISTRAR": As defined in Section 2.07. "BONDS": Any bonds authorized by, and authenticated and delivered under, this Indenture. "BOOK ENTRY BONDS": The Bonds shall be registered in the name of the Depository or its nominee, ownership of which is reflected on the books of the Depository or on the books of a Person maintaining an account with such Depository (directly or as an indirect participant in accordance with the rules of such Depository). "BUSINESS DAY": Any day other than (i) a Saturday or a Sunday, or (ii) a day on which banking institutions in the City of New York, New York or the State of California or the city in which the Corporate Trust Office of the Trustee is located are authorized or obligated by law or executive order to be closed. "CERTIFICATE INTEREST RATE": As defined in Section 1 of the Master Servicing Agreement. "CLASS": Collectively, all of the Bonds bearing the same class designation. The Bonds are divided into Classes as provided in Section 2.03. "CLASS B-1 INTEREST CARRYOVER SHORTFALL": The amount by which sum of (i) the interest at the Class B-1 Bond Interest Rate on the Class B-1 Principal Amount and (ii) the interest at the Class B-1 Bond Interest Rate on any Class B-1 Principal Carryover Shortfall, on each prior Payment Date, exceeded the amount actually distributed as interest on such prior Payment Dates and not subsequently distributed. "CLASS B-1 BOND INTEREST RATE": With respect to any Interest Accrual Period, the annual rate at which interest I-5 24 accrues on the Class B-1 Bonds as specified in such Bonds and in Section 2.03(c). "CLASS B-1 INTEREST PAYMENT AMOUNT": As to any Payment Date, the sum of (i) interest at the Class B-1 Bond Interest Rate on the Class B-1 Principal Amount, (ii) interest at the Class B-1 Bond Interest Rate on any Class B-1 Principal Carryover Shortfall, (iii) the Class B-1 Interest Carryover Shortfall and (iv) interest at the Class B-1 Bond Interest Rate on any Class B-1 Interest Carryover Shortfall. "CLASS B-1 PERCENTAGE": As to any Payment Date, the percentage equivalent of a fraction the numerator of which is the Class B-1 Principal Amount immediately prior to such date and the denominator of which is the sum of (i) the Senior Class Principal Amount, (ii) the Class B-1 Principal Amount, (iii) the Class B-2 Principal Amount and (iv) the Invested Amount, in each case immediately prior to such date. "CLASS B-1 PRINCIPAL AMOUNT": As to any Payment Date is the lesser of (i) the aggregate of the Stated Principal Balances of the Pledged Mortgages, less the Senior Class Principal Amount immediately prior to such date, and (ii) the Original Class B-1 Principal Amount reduced by all amounts previously distributed to holders of the Class B-1 Bonds as payments of principal. "CLASS B-1 PRINCIPAL CARRYOVER SHORTFALL": As to any Payment Date, the excess of (i) the Original Class B-1 Principal Amount reduced by all amounts previously distributed to holders of the Class B-1 Bonds as payments of principal or Class B-1 Principal Carryover Shortfall, over (ii) the Class B-1 Principal Amount immediately prior to such date. "CLASS B-1 PRINCIPAL PAYMENT AMOUNT": As to any Payment Date, the sum of (i) the Class B-1 Percentage of the sum of (a) the principal portion of the Schedules Payment due on each Pledged Mortgage [on the related Due Date], (b) the principal portion of the purchase price of each Pledged Mortgage that was purchased by Redwood Trust or another person pursuant to the Mortgage Loan Purchase Agreement [or by the Master Servicer in connection with any optional purchase by the Master Servicer of a defaulted Pledged Mortgage] as of such Payment Date, (c) the I-6 25 Substitution Adjustment Amount in connection with any Deleted Pledged Mortgage received with respect to such Payment Date, (d) any Insurance Proceeds or Liquidation Proceeds allocable to recoveries of principal of Pledged Mortgages that are not yet Liquidated Pledged Mortgages received during the [calendar month] preceding the month of such Payment Date, (e) with respect to each Pledged Mortgage that became a Liquidated Pledged Mortgage during the [calendar month] preceding the month of such Payment Date, the Stated Principal Balance of such Pledged Mortgage and (f) all partial and full principal prepayments by borrowers received during the related Prepayment Period and (ii) any Class B-1 Principal Carryover Shortfall. CLASS B-2 BOND INTEREST RATE": With respect to any Interest Accrual Period, the annual rate at which interest accrues on the Class B-2 Bonds as specified in such Bonds and in Section 2.03(c). "CLASS B-2 INTEREST CARRYOVER SHORTFALL": The amount by which sum of (i) the interest at the Class B-2 Bond Interest Rate on the Class B-2 Principal Amount and (ii) the interest at the Class B-2 Bond Interest Rate on any Class B-2 Principal Carryover Shortfall, on each prior Payment Date, exceeded the amount actually distributed as interest on such prior Payment Dates and not subsequently distributed. "CLASS B-2 INTEREST PAYMENT AMOUNT": As to any Payment Date, the sum of (i) interest at the Class B-2 Bond Interest Rate on the Class B-2 Principal Amount, (ii) interest at the Class B-2 Bond Interest Rate on any Class B-2 Principal Carryover Shortfall, (iii) the Class B-2 Interest Carryover Shortfall and (iv) interest at the Class B-2 Bond Interest Rate on any Class B-2 Interest Carryover Shortfall. "CLASS B-2 PERCENTAGE": As to any Payment Date, the percentage equivalent of a fraction the numerator of which is the Class B-2 Principal Amount immediately prior to such date and the denominator of which is the sum of (i) the Senior Class Principal Amount, (ii) the Class B-1 Principal Amount, (iii) the Class B-2 Principal Amount and (iv) the Invested Amount, in each case immediately prior to such date. I-7 26 "CLASS B-2 PRINCIPAL AMOUNT": As to any Payment Date is the lesser of (i) the aggregate of the Stated Principal Balances of the Pledged Mortgages, less the sum of the Senior Class Principal Amount and the Class B-1 Principal Amount, in each case immediately prior to such date, and (ii) the Original Class B-2 Principal Amount reduced by all amounts previously distributed to holders of the Class B-2 Bonds as payments of principal. "CLASS B-2 PRINCIPAL CARRYOVER SHORTFALL": As to any Payment Date, the excess of (i) the Original Class B-2 Principal Amount reduced by all amounts previously distributed to holders of the Class B-2 Bonds as payments of principal or Class B-2 Principal Carryover Shortfall, over (ii) the Class B-2 Principal Amount immediately prior to such date. "CLASS B-2 PRINCIPAL PAYMENT AMOUNT": As to any Payment Date, the sum of (i) the Class B-2 Percentage of the sum of (a) the principal portion of the Scheduled Payment due on each Pledged Mortgage [on the related Due Date], (b) the principal portion of the purchase price of each Pledged Mortgage that was purchased by Redwood Trust or another person pursuant to the Mortgage Loan Purchase Agreement [or by the Master Servicer in connection with any optional purchase by the Master Servicer of a defaulted Pledged Mortgage] as of such Payment Date, (c) the Substitution Adjustment Amount in connection with any Deleted Pledged Mortgage received with respect to such Payment Date, (d) any Insurance Proceeds or Liquidation Proceeds allocable to recoveries of principal of Pledged Mortgages that are not yet Liquidated Pledged Mortgages received during the [calendar month] preceding the month of such Payment Date, (e) with respect to each Pledged Mortgage that became a Liquidated Pledged Mortgage during the [calendar month] preceding the month of such Payment Date, the Stated Principal Balance of such Pledged Mortgage and (f) all partial and full principal prepayments by borrowers received during the related Prepayment Period and (ii) any Class B-2 Principal Carryover Shortfall. "CLASS INTEREST SHORTFALL": As to any Payment Date, the Senior Interest Shortfall, the Class B-1 Interest Carryover Shortfall or the Class B-2 Interest Carryover Shortfall, as applicable. I-8 27 "CLASS PRINCIPAL AMOUNT": The Senior Class Principal Amount, the Class B-1 Principal Amount or the Class B-2 Principal Amount, as applicable. "CLOSING DATE": ____________ ___, 199__. "CODE": The Internal Revenue Code of 1986, including any successor or amendatory provisions. "COMMISSION": Securities and Exchange Commission, as from time to time constituted, created under the Securities Exchange Act of 1934, or if at any time such Commission is not existing and performing the duties now assigned to it under the Trust Indenture Act, then the body performing such duties at such time under the Trust Indenture Act or similar legislation replacing the Trust Indenture Act. "CONTROLLING CLASS": The Class A-1 Bonds or, if the Class A-1 Bonds are no longer Outstanding, the most senior Class of Subordinated Bonds then Outstanding. "COOPERATIVE LOAN": As defined in Section 1 of the Master Servicing Agreement. "COOPERATIVE SHARES": As defined in Section 1 of the Master Servicing Agreement. "CORPORATE TRUST OFFICE": The principal corporate trust office of the Trustee located at ______________ ______________________________________, or at such other address as the Trustee may designate from time to time by notice to the Bondholders and the Issuer, or the principal corporate trust office of any successor Trustee. "CUT-OFF DATE": _____________ ___, 199__. "DEBT SERVICE REDUCTION": With respect to any Pledged Mortgage, a reduction by a court of competent jurisdiction in a proceeding under the Bankruptcy Code in the Scheduled Payment for such Pledged Mortgage which became final and non-appealable, except such a reduction resulting from a Deficient Valuation or any reduction that results in a permanent forgiveness of principal. I-9 28 "DEFAULT": Any occurrence which is, or with notice or the lapse of time or both would become, an Event of Default. "DEFAULTED PLEDGED MORTGAGE": The meaning specified in Section 8.04(e). "DEFICIENT VALUATION": With respect to any Pledged Mortgage, a valuation by a court of competent jurisdiction of the Mortgaged Property in an amount less than the then outstanding indebtedness under the Pledged Mortgage, or any reduction in the amount of principal to be paid in connection with any Scheduled Payment that results in a permanent forgiveness of principal, which valuation or reduction results from an order of such court which is final and non-appealable in a proceeding under the Bankruptcy Code. "DEFINITIVE BONDS": Bonds other than Book Entry Bonds. "DELETED PLEDGED MORTGAGE": As defined in Section 5 of the Master Servicing Agreement. "DENOMINATION": With respect to each Bond, the amount set forth on the face thereof as the "Initial Principal Amount of this Bond". "DEPOSITOR": Sequoia Mortgage Funding Corporation, a Delaware corporation. "DEPOSITORY": The initial Depository with respect to each Class of Book Entry Bonds shall be The Depository Trust Company of New York, the nominee for which is Cede & Co. The Depository shall at all times be a "clearing corporation" as defined in Section 8-102(3) of the Uniform Commercial Code of the State of New York. "DEPOSITORY PARTICIPANTS": A broker, dealer, bank or other financial institution or other Person for whom from time to time a Depository effects book-entry transfers and pledges of securities deposited with the Depository. "DEPOSIT TRUST AGREEMENT": The Amended and Restated Deposit Trust Agreement, dated as of ____________ _ _, 199__, between the Bank and the Depositor, creating the Issuer, as such I-10 29 Deposit Trust Agreement may be amended or supplemented from time to time. "DETERMINATION DATE": As to any Payment Date, the ___th day of each month or if such ___th day is not a Business Day the next succeeding Business Day; provided, however, that if such next succeeding Business Day is less than two Business Days prior to the related Payment Date, then the Determination Date shall be the next Business Day preceding the ___th day of such month. "DISTRIBUTION ACCOUNT": The separate Eligible Account created and maintained by the Trustee pursuant to Section 8.02 in the name of the Trustee for the benefit of the Bondholders and designated "____________________ in trust for registered holders of Sequoia Mortgage Trust 199_-_, Collateralized Mortgage Bonds. Funds in the Distribution Account shall be held in trust for the Bondholders for the uses and purposes set forth in this Indenture. "DISTRIBUTION ACCOUNT DEPOSIT DATE": As to any Payment Date, [12:30 p.m. Pacific time] on the Business Day immediately preceding such Payment Date. "DUE DATE": The first day of each month. ["DUFF & PHELPS": Duff & Phelps Credit Rating Company, or any successor thereto. For purposes of Section 11.04 the address for notices to Duff & Phelps shall be Duff & Phelps Credit Rating Company, 55 E. Monroe Street, 35th Floor, Chicago, Illinois 60603, Attention: MBS Monitoring, or such other address as Duff & Phelps may hereafter furnish to the Issuer and the Master Servicer.] "ELIGIBLE ACCOUNT": Any of (i) an account or accounts maintained with a federal or state chartered depository institution or trust company the short-term unsecured debt obligations of which (or, in the case of a depository institution or trust company that is the principal subsidiary of a holding company, the debt obligations of such holding company) have the highest short-term ratings of each Rating Agency at the time any amounts are held on deposit therein, or (ii) an account or accounts in a depository institution or trust company in which such accounts I-11 30 are insured by the FDIC or the SAIF (to the limits established by the FDIC or the SAIF) and the uninsured deposits in which accounts are otherwise secured such that, as evidenced by an Opinion of Counsel delivered to the Trustee and to each Rating Agency, the Bondholders have a claim with respect to the funds in such account or a perfected first priority security interest against any collateral (which shall be limited to Permitted Investments) securing such funds that is superior to claims of any other depositors or creditors of the depository institution or trust company in which such account is maintained, or (iii) a trust account or accounts maintained with the trust department of a federal or state chartered depository institution or trust company, acting in its fiduciary capacity or (iv) any other account acceptable to each Rating Agency. Eligible Accounts may bear interest, and may include, if otherwise qualified under this definition, accounts maintained with the Trustee. "ESCROW ACCOUNT": As defined in Section 1 of the Master Servicing Agreement. "EVENT OF DEFAULT": The meaning specified in Section 5.01. "EXPENSE RATE": As to each Pledged Mortgage, the sum of the related Servicing Fee Rate, the Master Servicing Fee Rate and Trustee Fee Rate. "FDIC": The Federal Deposit Insurance Corporation, or any successor thereto. "FHLMC": The Federal Home Loan Mortgage Corporation, a corporate instrumentality of the United States created and existing under Title III of the Emergency Home Finance Act of 1970, as amended, or any successor thereto. "FIRREA": The Financial Institutions Reform, Recovery and Enforcement Act of 1989. ["FITCH": Fitch Investors Service, L.P., or any successor thereto. For purposes of Section 11.04 the address for notices to Fitch shall be Fitch Investors Service, L.P., One State Street Plaza, New York, New York 10004, Attention: Residential Mortgage Surveillance Group, or such other address as I-12 31 Fitch may hereafter furnish to the Issuer and the Master Servicer.] "FNMA": The Federal National Mortgage Association, a federally chartered and privately owned corporation organized and existing under the Federal National Mortgage Association Charter Act, or any successor thereto. "GRANT": To grant, bargain, sell, warrant, alienate, remise, release, convey, assign, transfer, mortgage, pledge, create and grant a security interest in, deposit, set-over and confirm. A Grant of a Pledged Mortgage and related Mortgage Documents, a Permitted Investment, the Master Servicing Agreement, an Insurance Policy, or any other instrument shall include all rights, powers and options (but none of the obligations) of the Granting party thereunder, including, without limitation, the immediate and continuing right to claim for, collect, receive and give receipts for principal and interest payments thereunder, Insurance Proceeds, condemnation awards, purchase prices and all other moneys payable thereunder and all proceeds thereof, 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 which the Granting party is or may be entitled to do or receive thereunder or with respect thereto. "HIGHEST LAWFUL RATE": The meaning specified in Section 11.18. "HOLDER": The holder of Bonds issued pursuant to this Indenture. "INDENTURE" or "THIS INDENTURE": This instrument as originally executed and, if from time to time supplemented or amended by one or more indentures supplemental hereto entered into pursuant to the applicable provisions hereof, as so supplemented or amended. All references in this instrument to designated "Articles", "Sections", "Subsections" and other subdivisions are to the designated Articles, Sections, Subsections and other subdivisions of this instrument as originally executed. The words "herein", "hereof" and "hereunder" and other words of similar import refer to this I-13 32 Indenture as a whole and not to any particular Article, Section, Subsection or other subdivision. "INDEPENDENT": When used with respect to any specified Person means such a Person who (i) is in fact independent of the Issuer and any other obligor upon the Bonds, (ii) does not have any direct financial interest or any material indirect financial interest in the Issuer or in any such other obligor or in an Affiliate of the Issuer or such other obligor and (iii) is not connected with the Issuer or any such other obligor as an officer, employee, promoter, underwriter, trustee, partner, director or person performing similar functions. Whenever it is herein provided that any Independent Person's opinion or certificate shall be furnished to the Trustee, such Person shall be appointed by an Issuer Order and with the approval of the Trustee, which approval shall not be unreasonably withheld, and such opinion or certificate shall state that the signer has read this definition and that the signer is Independent within the meaning hereof. "INDEX": As to (a) each Pledged Mortgage, the index from time to time in effect for the adjustment of the Mortgage Rate set forth as such on the related Mortgage Note and (b) either Bond Interest Rate and any Payment Date, the weekly average yield on United States Treasury Securities adjusted to a constant maturity of one year as made available by the Federal Reserve Board and most recently available as of 45 days prior to the first day of the month preceding the month in which such Payment Date occurs. "INDIRECT PARTICIPANT": A broker, dealer, bank or other financial institution or other Person that clears through or maintains a custodial relationship with a Depository Participant. "INDIVIDUAL BOND": A Bond of an original principal amount of $1,000; a Bond of an original principal amount in excess of $1,000 shall be deemed to be a number of Individual Bonds equal to the quotient obtained by dividing such original principal amount by $1,000. "INSURANCE POLICY": With respect to any Pledged Mortgage, any insurance policy, including all riders and I-14 33 endorsements thereto in effect, including any replacement policy or policies for any Insurance Policies. "INSURANCE PROCEEDS": Proceeds paid by an insurer pursuant to any Insurance Policy, in each case other than any amount included in such Insurance Proceeds in respect of Insured Expenses. "INSURED EXPENSES": Expenses covered by an Insurance Policy or any other insurance policy with respect to the Pledged Mortgages. "INTEREST ACCRUAL PERIOD": With respect to each Class of Bonds and any Payment Date, the calendar month prior to the month of such Payment Date. "INTEREST CONVERSION DATE": As to the Pledged Mortgages, the date on which the first Adjustment Date occurs. "INTEREST PAYMENT AMOUNT": The Senior Interest Payment Amount, the Class B-1 Interest Payment Amount, the Class B-2 Interest Payment Amount or the Certificate Interest Payment Amount, as applicable. "INVESTED AMOUNT": As of any Payment Date, the lesser of (i) the aggregate of the Stated Principal Balances of the Pledged Mortgages, less the sum of (x) the Senior Class Principal Amount, (y) the Class B-1 Principal Amount and (z) the Class B-2 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. "INVESTOR CERTIFICATE": As defined in Section 1.01 of the Deposit Trust Agreement. "INVESTOR PERCENTAGE": As of any Payment Date, the difference between 100% and the sum of the Senior Percentage, the Class B-1 Percentage and the Class B-2 Percentage for such date. "ISSUER": Sequoia Mortgage Trust 199_-_ formed pursuant to the Deposit Trust Agreement. I-15 34 "ISSUER ORDER" and "ISSUER REQUEST": A written order or request that is dated and signed in the name of the Issuer by an Authorized Officer and delivered to the Trustee. "LETTER AGREEMENT": With respect to the Book Entry Bonds, the letter agreement among the Issuer, the Trustee and the Depository governing book entry transfers of, and certain other matters with respect to, such Book Entry Bonds and attached as Exhibit I hereto. "LIQUIDATED PLEDGED MORTGAGE": With respect to any Payment Date, a defaulted Pledged Mortgage (including any REO Property) which was liquidated in the calendar month preceding the month of such Payment Date and as to which the Master Servicer has certified (in accordance with the Master Servicing Agreement) that it has received all amounts it expects to receive in connection with the liquidation of such Pledged Mortgage including the final disposition of an REO Property. "LIQUIDATION PROCEEDS": Amounts, including Insurance Proceeds, received in connection with the partial or complete liquidation of defaulted Pledged Mortgages, whether through trustee's sale, foreclosure sale or otherwise or amounts received in connection with any condemnation or partial release of a Mortgaged Property and any other proceeds received in connection with an REO Property, less the sum of related unreimbursed Master Servicing Fees, Servicing Advances and Advances. "LOAN-TO-VALUE RATIO": With respect to any Pledged Mortgage and as to any date of determination, the fraction (expressed as a percentage) the numerator of which is the principal balance of the related Pledged Mortgage at such date of determination and the denominator of which is the Appraised Value of the related Mortgaged Property. "MARGIN": As to each Pledged Mortgage, the percentage amount set forth on the related Mortgage Note added to the Index in calculating the Mortgage Rate thereon. "MASTER SERVICER": _________________________________, a ____________ corporation, as Master Servicer under the Master Servicing Agreement, and its permitted successors and assigns thereunder. I-16 35 "MASTER SERVICING AGREEMENT": The master servicing agreement dated as of _____________ , 199__, among the Issuer, the Trustee and the Master Servicer, pursuant to which the Master Servicer will be obligated to manage and supervise the administration and servicing of the Pledged Mortgages securing the Bonds and each Servicer of the Pledged Mortgages, or its successors or assigns, as such agreement may be amended or supplemented from time to time as permitted thereby. "MASTER SERVICING FEE": As to each Pledged Mortgage and any Payment Date, an amount equal to one month's interest at the related Master Servicing Fee Rate on the Stated Principal Balance of such Pledged Mortgage or, in the event of any payment of interest which accompanies a Principal Prepayment in Full made by the Mortgagor, interest at the Master Servicing Fee Rate on the Stated Principal Balance of such Pledged Mortgage for the period covered by such payment of interest, subject to reduction as provided in Section 5(a) of the Master Servicing Agreement. "MASTER SERVICING FEE RATE": With respect to each Mortgage Loan, _____% per annum. "MATURITY": With respect to any Bond, the date on which the entire unpaid principal amount of such Bond becomes due and payable as therein or herein provided, whether at the Stated Maturity of the final installment of such principal or by declaration of acceleration, call for redemption or otherwise. "MAXIMUM RATE": As to any Pledged Mortgage, the maximum rate set forth on the related Mortgage Note at which interest can accrue on such Pledged Mortgage. ["MOODY'S": Moody's Investors Service, Inc., or any successor thereto. For purposes of Section 11.04 the address for notices to Moody's shall be Moody's Investors Service, Inc., 99 Church Street, New York, New York 10007, Attention: ____________ or such other address as Moody's may hereafter furnish to the Issuer and the Master Servicer.] "MORTGAGE": The mortgage, deed of trust or other instrument creating a first lien on an estate in fee simple or leasehold interest in real property securing a Mortgage Note. I-17 36 "MORTGAGE DOCUMENTS": The mortgage documents listed in Section 2(a)(i) of the Master Servicing Agreement pertaining to a particular Pledged Mortgage and any additional documents delivered to the Trustee to be added to the Mortgage Documents pursuant to the Master Servicing Agreement. "MORTGAGE NOTE": The original executed note or other evidence of indebtedness evidencing the indebtedness of a Mortgagor under a Pledged Mortgage. "MORTGAGE RATE": The annual rate of interest borne by a Mortgage Note from time to time. "MORTGAGED PROPERTY": The underlying property securing a Pledged Mortgage, which, with respect to a Cooperative Loan, is the related Cooperative Shares and Proprietary Lease. "MORTGAGOR": The obligor(s) on a Mortgage Note. "NET MORTGAGE RATE": As to any Pledged Mortgage and Payment Date, the related Mortgage Rate as of the Due Date in the month preceding the month of such Payment Date reduced by the related Expense Rate. "NET INTEREST SHORTFALLS": As to any Payment Date, the amount by which the sum of (i) the amount of interest which would otherwise have been received with respect to any Pledged Mortgage 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 Certificate Interest Payment Amount, the Invested Amount Payment and any other amounts payable to the holder of the Investor Certificate described in [ ]. "NONRECOVERABLE ADVANCE": Any portion of an Advance or Servicer Advance previously made or proposed to be made by the Master Servicer or the related Servicer, as the case may be, that, in the good faith judgment of the Master Servicer or such Servicer, will not be ultimately recoverable by the Master Servicer from the related Mortgagor, related Liquidation Proceeds or otherwise. I-18 37 "OFFICERS' CERTIFICATE": A certificate signed by two Authorized Officers. "OFFICER'S CERTIFICATE OF THE MASTER SERVICER": A certificate (i) signed by the Chairman of the Board, the Vice Chairman of the Board, the President, a Managing Director, a Vice President (however denominated), an Assistant Vice President, the Treasurer, the Secretary, or one of the Assistant Treasurers or Assistant Secretaries of the Master Servicer, or (ii) if provided for herein, signed by a Servicing Officer, as the case may be, and delivered to the Trustee, as required hereby. "OPERATIVE AGREEMENTS": The meaning ascribed thereto in the Deposit Trust Agreement. "OPINION OF COUNSEL": A written opinion of counsel who may, except as otherwise expressly provided in this Indenture, be counsel for the Issuer, and who shall be reasonably satisfactory to the Trustee. "OPTIONAL REDEMPTION DATE": With respect to the Bonds which are subject to optional redemption, the date on which Bonds may be redeemed pursuant to Section 10.01. "OPTIONAL REDEMPTION RECORD DATE": The meaning specified in Section 10.02. "ORIGINAL CLASS B-1 PRINCIPAL AMOUNT": $____________. "ORIGINAL CLASS B-2 PRINCIPAL AMOUNT": $____________. "ORIGINAL INVESTED AMOUNT": $____________. "ORIGINAL PLEDGED MORTGAGES": The Pledged Mortgages listed on the Pledged Mortgage Schedule and granted to the Trustee on the Closing Date. "ORIGINAL SENIOR CLASS PRINCIPAL AMOUNT": $___________________. "ORIGINAL SUBORDINATION AMOUNT": The sum of the Original Subordinated Class Principal Amount and the Original Invested Amount. I-19 38 "OTS": The Office of Thrift Supervision. "OUTSTANDING": As of the date of determination, all Bonds theretofore authenticated and delivered under this Indenture except: (i) Bonds theretofore cancelled by the Bond Registrar or delivered to the Bond Registrar for cancellation; (ii) Bonds or portions thereof for whose payment or redemption money in the necessary amount has been theretofore deposited with the Trustee or any Paying Agent (other than the Issuer) 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 this Indenture or provision therefor, satisfactory to the Trustee, has been made; (iii) Bonds in exchange for or in lieu of which other Bonds have been authenticated and delivered pursuant to this Indenture unless proof satisfactory to the Trustee is presented that any such Bonds are held by a bona fide purchaser (as defined by the Uniform Commercial Code of the applicable jurisdiction); and (iv) Bonds alleged to have been destroyed, lost or stolen for which replacement Bonds have been issued as provided for in Section 2.08; provided, however, that in determining whether the Holders of the requisite percentage of the aggregate Class Principal Amount of the Outstanding Bonds have given any request, demand, authorization, direction, notice, consent or waiver hereunder, Bonds owned by the Issuer, any other obligor upon the Bonds or any Affiliate of the Issuer or such other obligor shall be disregarded and deemed not to be Outstanding, except that, in determining whether the Trustee shall be protected in relying upon any such request, demand, authorization, direction, notice, consent or waiver, only Bonds which the Trustee knows to be so owned shall be so disregarded. Bonds so owned which have been pledged in good faith may be regarded as Outstanding if the pledgee establishes to the satisfaction of the Trustee the pledgee's right so to act I-20 39 with respect to such Bonds and that the pledgee is not the Issuer, any other obligor upon the Bonds or any Affiliate of the Issuer or such other obligor. "OUTSTANDING PLEDGED MORTGAGE": As of any Due Date, a Pledged Mortgage with a Stated Principal Balance greater than zero which was not the subject of a Principal Prepayment in Full prior to such Due Date and which did not become a Liquidated Pledged Mortgage prior to such Due Date. "OWNER": The meaning ascribed thereto in the Deposit Trust Agreement. "OWNER TRUSTEE": Wilmington Trust Company, a Delaware banking corporation, not in its individual capacity but solely as Owner Trustee under the Deposit Trust Agreement, until a successor Person shall have become the Owner Trustee pursuant to the applicable provisions of the Deposit Trust Agreement, and thereafter "Owner Trustee" shall mean such successor Person. "PAYING AGENT": The Trustee or any other depository institution or trust company that is authorized by the Issuer pursuant to Section 3.03 to pay the principal of, or interest on, any Bonds on behalf of the Issuer. "PAYMENT DATE": The ___th day of each [calendar month] after the initial issuance of the Bonds or, if such ___th day is not a Business Day, the next succeeding Business Day, commencing in ____________ 199__. "PAYMENT DATE STATEMENT": The meaning specified in Section 8.06. ["PERIODIC RATE CAP": As to any Pledged Mortgage and any Adjustment Date, the maximum percentage increase or decrease to the related Mortgage Note on any such Adjustment Date, as specified in the related Mortgage Note.] "PERMITTED ENCUMBRANCE": Any lien, charge, security interest, mortgage or other encumbrance Granted by the Issuer in the Trust Estate, provided that: I-21 40 (i) such lien, charge, security interest, mortgage or encumbrance extends only to a portion of the Trust Estate which is limited to cash deliverable or payable to the Issuer pursuant to Section 8.01 or Section 8.02(d); (ii) such lien, charge, security interest, mortgage or other encumbrance secures indebtedness which the Issuer is permitted to incur under the terms of this Indenture; and (iii) the beneficiary of such lien, charge, security interest, mortgage or other encumbrance has agreed that in connection with the enforcement thereof it will not bring any Proceeding seeking, or which would result in, the sale of any portion of the Trust Estate and will not file any petition for the commencement of insolvency proceedings with respect to the Issuer under the federal bankruptcy laws, as now or hereafter in effect, or any other present or future federal or state bankruptcy, insolvency or similar law, or for the appointment of any receiver, liquidator, assignee, trustee, custodian, sequestrator or other similar official of the Issuer or of any of its property, or seeking an order for the winding up or liquidation of the affairs of the Issuer. "PERMITTED INVESTMENTS": At any time, any one or more of the following obligations and securities: (i) obligations of the United States or any agency thereof, provided that such obligations are backed by the full faith and credit of the United States; (ii) general obligations of or obligations guaranteed by any state of the United States or the District of Columbia receiving the highest long-term debt rating of each Rating Agency, or such lower rating as will not result in the downgrading or withdrawal of the ratings then assigned to the Bonds by the Rating Agencies, as evidenced by a signed writing delivered by each Rating Agency; (iii) commercial or finance company paper which is then receiving the highest commercial or finance company paper rating of each Rating Agency, or such lower rating as will not result in the downgrading or withdrawal of the ratings I-22 41 then assigned to the Bonds by the Rating Agencies, as evidenced by a signed writing delivered by each Rating Agency; (iv) certificates of deposit, demand or time deposits, or bankers' acceptances issued by any depository institution or trust company incorporated under the laws of the United States or of any state thereof and subject to supervision and examination by federal and/or state banking authorities, provided that the commercial paper and/or long-term unsecured debt obligations of such depository institution or trust company (or in the case of the principal depository institution in a holding company system, the commercial paper or long-term unsecured debt obligations of such holding company, but only if Moody's Investor's service, Inc. is not the applicable Rating Agency) are then rated one of the two highest long-term and the highest short-term ratings of each Rating Agency for such securities, or such lower ratings as will not result in the downgrading or withdrawal of the ratings then assigned to the Bonds by the Rating Agencies, as evidenced by a signed writing delivered by each Rating Agency; (v) demand or time deposits or certificates of deposit issued by any bank or trust company or savings institution to the extent that such deposits are fully insured by the FDIC; (vi) guaranteed reinvestment agreements issued by any bank, insurance company or other corporation acceptable to the Rating Agencies at the time of the issuance of such agreements, as evidenced by a signed writing delivered by each Rating Agency; (vii) repurchase obligations with respect to any security described in clauses (i) and (ii) above, in either case entered into with a depository institution or trust company (acting as principal) described in clause (iv) above; (viii) securities (other than stripped bonds, stripped coupons or instruments sold at a purchase price in excess of 115% of the face amount thereof) bearing interest or sold at a discount issued by any corporation incorporated under the I-23 42 laws of the United States or any state thereof which, at the time of such investment, have one of the two highest ratings of each Rating Agency (except if the Rating Agency is Moody's, such rating shall be the highest commercial paper rating of Moody's for any such series), or such lower rating as will not result in the downgrading or withdrawal of the ratings then assigned to the Bonds by the Rating Agencies, as evidenced by a signed writing delivered by each Rating Agency; (ix) 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 the highest applicable rating by each Rating Agency or such lower rating as will not result in a change in the rating then assigned to the Bonds by each Rating Agency; (x) short-term investment funds 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 each applicable Rating Agency in their respective highest applicable rating category or such lower rating as will not result in a change in the rating then specified stated maturity and bearing interest or sold at a discount acceptable to each Rating Agency as will not result in the downgrading or withdrawal of the ratings then assigned to the Bonds by the Rating Agencies; and (xi) such other investments having a specified stated maturity and bearing interest or sold at a discount acceptable to the Rating Agencies as will not result in the downgrading or withdrawal of the ratings then assigned to the Bonds by the Rating Agencies; provided, that no such instrument shall be a Permitted Investment if (i) such instrument evidences the right to receive interest only payments with respect to the obligations underlying such instrument or (ii) such instrument would require the Issuer to register as an investment company under the Investment Company Act of 1940, as amended. I-24 43 "PERSON": Any individual, corporation, partnership, joint venture, association, joint stock company, trust, unincorporated organization or government or any agency or political subdivision thereof. "PLEDGED ACCOUNTS": The Bond Account and the Distribution Account (exclusive of any earnings on investments made with funds deposited in the Distribution Account or the Bond Account). "PLEDGED MORTGAGE SCHEDULE": The list of Pledged Mortgages (as from time to time amended by the Master Servicer to reflect the addition of Replacement Pledged Mortgages and the deletion of Deleted Pledged Mortgages pursuant to the provisions of the Master Servicing Agreement) Granted to the Trustee pursuant to the provisions hereof as part of the Trust Estate and from time to time subject to this Agreement, attached hereto as Schedule I. "PLEDGED MORTGAGES": Such of the mortgage loans Granted to the Trustee pursuant to the provisions hereof as from time to time are held as a part of the Trust Estate (including any REO Property), the mortgage loans so held being identified in the Pledged Mortgage Schedule, notwithstanding foreclosure or other acquisition of title of the related Mortgaged Property. "POOL STATED PRINCIPAL BALANCE": As to any Payment Date, the aggregate of the Stated Principal Balances of the Pledged Mortgages which were Outstanding Pledged Mortgages on the Due Date in the month preceding the month of such Payment Date. "PREDECESSOR BONDS": With respect to any particular Bond of a Class, every previous Bond of that Class evidencing all or a portion of the same debt as that evidenced by such particular Bond; and, for the purpose of this definition, any Bond authenticated and delivered under Section 2.08 in lieu of a lost, destroyed or stolen Bond shall be deemed to evidence the same debt as the lost, destroyed or stolen Bond. "PREPAYMENT INTEREST SHORTFALL": As to any Payment Date, Pledged Mortgage and Principal Prepayment, the amount, if any, by which one month's interest at the related Mortgage Rate I-25 44 on such Principal Prepayment exceeds the amount of interest paid in connection with such Principal Prepayment. "PREPAYMENT PERIOD": As to any Payment Date, the [calendar month] preceding the month of such Payment Date. "PRIMARY MORTGAGE INSURANCE POLICY": Each policy of primary mortgage guaranty insurance or any replacement policy therefor with respect to any Pledged Mortgage. "PRINCIPAL PREPAYMENT": Any payment of principal by a Mortgagor on a Pledged Mortgage that is received in advance of its scheduled Due Date and is not accompanied by an amount representing scheduled interest due on any date or dates in any month or months subsequent to the month of prepayment. "PRINCIPAL PREPAYMENT IN FULL": Any Principal Prepayment made by a Mortgagor of the entire principal balance of a Pledged Mortgage. "PROCEEDING": Any suit in equity, action at law or other judicial or administrative proceeding. "PROPRIETARY LEASE": As defined in Section 1 of the Master Servicing Agreement. "PROSPECTUS SUPPLEMENT": The Prospectus Supplement dated _________ ___, 199__relating to the Bonds. "PURCHASE PRICE": With respect to any Pledged Mortgage required to be purchased by the Master Servicer pursuant to Section 2(a)(ii) or 2(d)(iii) of the Master Servicing Agreement or purchased at the option of the Master Servicer pursuant to Section 3(n) of the Master Servicing Agreement, an amount equal to the sum of (i) 100% of the unpaid principal balance of the Pledged Mortgage on the date of such purchase, and (ii) accrued interest thereon at the applicable Adjusted Net Mortgage Rate from the date through which interest was last paid by the Mortgagor to the Due Date in the month in which the Purchase Price is to be distributed to Bondholders. "RATING AGENCY": Each of [ ] and [ ]. If either such organization or a successor is no longer in I-26 45 existence, "Rating Agency" shall be such nationally recognized statistical rating organization, or other comparable Person, as is designated by the Issuer, notice of which designation shall be given to the Trustee. References herein to a given rating or rating category of a Rating Agency shall mean such rating category without giving effect to any modifiers. "REALIZED LOSS": With respect to each Liquidated Pledged Mortgage, an amount (not less than zero or more than the Stated Principal Balance of the Pledged Mortgage) as of the date of such liquidation, equal to (i) the Stated Principal Balance of the Liquidated Pledged Mortgage as of the date of such liquidation, plus (ii) interest at the Net Mortgage Rate from the Due Date as to which interest was last paid or advanced (and not reimbursed) to Bondholders up to the Due Date in the month in which Liquidation Proceeds are required to be distributed on the Stated Principal Balance of such Liquidated Pledged Mortgage from time to time, minus (iii) the Liquidation Proceeds, if any, received during the month in which such liquidation occurred, to the extent applied as recoveries of interest at the Adjusted Net Mortgage Rate and to principal of the Liquidated Pledged Mortgage. With respect to each Pledged Mortgage which has become the subject of a Deficient Valuation, if the principal amount due under the related Mortgage Note has been reduced, the difference between the principal balance of the Pledged Mortgage outstanding immediately prior to such Deficient Valuation and the principal balance of the Pledged Mortgage as reduced by the Deficient Valuation. With respect to each Pledged Mortgage which has become the subject of a Debt Service Reduction and any Payment Date, the amount, if any, by which the principal portion of the related Scheduled Payment has been reduced. "RECORD DATE": With respect to any Payment Date, the date on which the Persons entitled to receive any payment of principal of, or interest on, any Bonds (or notice of a payment in full of principal) due and payable on such Payment Date are determined; such date shall be the last day of the month preceding the month of such Payment Date. "REDEMPTION DATE": Any Optional Redemption Date or any Payment Date on which Bonds may be redeemed. I-27 46 "REDEMPTION PRICE": With respect to any Class of Bonds to be redeemed, an amount equal to 100% of the related Class Principal Amount of the Bonds (including, in the case of the Subordinated Bonds, any unpaid Subordinated Principal Carryover Shortfall) to be so redeemed, together with interest on such amount at the applicable Bond Interest Rate through the last day of the month immediately preceding the month in which such Redemption Date occurs, together with any unpaid Class Interest Shortfalls. "REFINANCING PLEDGED MORTGAGE": Any Pledged Mortgage originated in connection with the refinancing of an existing mortgage loan. "RELIEF ACT": The Soldiers' and Sailors' Civil Relief Act of 1940, as amended. "RELIEF ACT REDUCTIONS": With respect to any Payment Date and any Pledged Mortgage as to which there has been a reduction in the amount of interest collectible thereon for the most recently ended calendar month as a result of the application of the Relief Act, the amount, if any, by which (i) interest collectible on such Pledged Mortgage for the most recently ended calendar month is less than (ii) interest accrued thereon for such month pursuant to the Mortgage Note. "REO PROPERTY": A Mortgaged Property acquired by the Trustee through foreclosure or deed-in-lieu of foreclosure in connection with a defaulted Pledged Mortgage. "REPLACEMENT PLEDGED MORTGAGE": A Mortgage Loan substituted by the Master Servicer for a Deleted Mortgage Loan which must, on the date of such substitution, as confirmed in a Request for Release, substantially in the form of Exhibit C to the Master Servicing Agreement, (i) have a Stated Principal Balance, after deduction of the principal portion of the Scheduled Payment due in the month of substitution, not in excess of, and not more than 10% less than, the Stated Principal Balance of the Deleted Mortgage Loan; (ii) be accruing interest at a rate no lower than and not more than 1% per annum higher than, that of the Deleted Mortgage Loan; (iii) have a Loan-to-Value Ratio no higher than that of the Deleted Mortgage Loan; (iv) have a Mortgage Rate based upon the same Index and a Margin at least I-28 47 equal to and not greater than 50 basis points higher than that of the Deleted Mortgage Loan; (v) have a Mortgage Rate subject to a Periodic Rate Cap and Maximum Rate that are no less than those applicable to the Deleted Mortgage Loan; (vi) have Adjustment Dates that are no more or less frequent than the Deleted Mortgage Loan; (vii) have a remaining term to maturity no greater than (and not more than one year less than that of) the Deleted Mortgage Loan; (viii) not be a Cooperative Loan unless the Deleted Mortgage Loan was a Cooperative Loan; and (ix) comply with each representation and warranty set forth in Section 2(d)(ii) of the Master Servicing Agreement. "REQUEST FOR RELEASE": The Request for Release submitted by the Master Servicer to the Trustee, substantially in the form of Exhibits C and D to the Master Servicing Agreement, as appropriate. "RESPONSIBLE OFFICER": With respect to the Trustee, any officer in the corporate trust department or similar group of the Trustee and also, with respect to a particular corporate trust matter, any other officer to whom such matter is referred because of his or her knowledge of and familiarity with the particular subject. "S&P": Standard & Poor's Ratings Group, a division of McGraw-Hill Inc. For purposes of Section 11.04 the address for notices to S&P shall be Standard & Poor's Ratings Group, 26 Broadway, 15th Floor, New York, New York 10004, Attention: Mortgage Surveillance Monitoring, or such other address as S&P may hereafter furnish to the Issuer and the Master Servicer. "SAIF": The Savings Association Insurance Fund, or any successor thereto. "SALE": The meaning specified in Section 5.18(a). "SCHEDULED PAYMENT": The scheduled monthly payment on a Pledged Mortgage due on any Due Date allocable to principal and/or interest on such Pledged Mortgage which, unless otherwise specified in the Master Servicing Agreement, shall give effect to any related Debt Service Reduction and any Deficient Valuation that affects the amount of the monthly payment due on such Pledged Mortgage. I-29 48 "SECURITIES ACT": The Securities Act of 1933, as amended. "SENIOR BOND INTEREST RATE": With respect to any Interest Accrual Period, the annual rate at which interest accrues on the Senior Bonds as specified in such Bonds and in Section 2.03(c). "SENIOR BONDS": The Class A-1 Bonds. "SENIOR CLASS PRINCIPAL AMOUNT": As of any Payment Date, the Original Senior Class Principal Amount reduced by all amounts previously distributed to Holders of the Senior Bonds as payments of principal. "SENIOR INTEREST PAYMENT AMOUNT": As to any Payment Date, the sum of (i) one month's interest accrued during the related Interest Accrual Period at the Senior Bond Interest Rate on the Senior Class Principal Amount, subject to reduction pursuant to Section 2.03(d) 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. "SENIOR INTEREST SHORTFALL": As to any Payment Date, the amount by which the amount described in clause (i) of the definition of Senior Interest Payment Amount exceeds the amount of interest actually paid on the Senior Bonds on such Payment Date pursuant to such clause (i). "SENIOR PERCENTAGE": As to any Payment Date, 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 Class B-1 Principal Amount, (iii) the Class B-2 Principal Amount and (iv) the Invested Amount, in each case immediately prior to such date. "SENIOR PRINCIPAL PAYMENT AMOUNT": As to each Payment Date, the Senior Percentage of the sum of (a) the principal portion of the Scheduled Payment due on each Pledged Mortgage [on the related Due Date], (b) the principal portion of the purchase I-30 49 price of each Pledged Mortgage that was purchased by Redwood Trust or another person pursuant to the Mortgage Loan Purchase Agreement [or any optional purchase by the Master Servicer of a defaulted Pledged Mortgage] as of such Payment Date, (c) the Substitution Adjustment Amount in connection with any Deleted Pledged Mortgage received with respect to such Payment Date, (d) any Insurance Proceeds or Liquidation Proceeds allocable to recoveries of principal of Pledged Mortgages that are not yet Liquidated Pledged Mortgages received during the [calendar month] preceding the month of such Payment Date, (e) with respect to each Pledged Mortgage that became a Liquidated Pledged Mortgage during the [calendar month] preceding the month of such Payment Date, the Stated Principal Balance of such Pledged Mortgage, and (f) all partial and full principal prepayments by borrowers received during the related Prepayment Period. "SERVICER": Any person with which the Master Servicer has entered into a Servicing Agreement for the servicing of all or a portion of the Pledged Mortgages pursuant to Section 3(b) of the Master Servicing Agreement. "SERVICER ADVANCE": The meaning ascribed to such term in Section 3(h)(iv) of the Master Servicing Agreement. "SERVICING ADVANCES": All customary, reasonable and necessary "out of pocket" costs and expenses incurred in the performance by the Master Servicer of its servicing obligations, including, but not limited to, the cost of (i) the preservation, restoration and protection of a Mortgaged Property, (ii) any expenses reimbursable to the Master Servicer pursuant to Section 3(n) of the Master Servicing Agreement and any enforcement or judicial proceedings, including foreclosures, (iii) the management and liquidation of any REO Property and (iv) compliance with the obligations under Section 3(l) of the Master Servicing Agreement. "SERVICING AGREEMENT": Any agreement between the Master Servicer and related Servicer relating to servicing and/or administration of certain Pledged Mortgages as provided in Section 3(b) of the Master Servicing Agreement. "SERVICING DEFAULT": As defined in the Master Servicing Agreement. I-31 50 "SERVICING FEE": As to each Pledged Mortgage and any Payment Date, an amount equal to one month's interest at the applicable Servicing Fee Rate on the Stated Principal Balance of such Pledged Mortgage. "SERVICING FEE RATE": With respect to any Pledged Mortgage, the per annum rate set forth in the Pledged Mortgage Schedule for such Pledged Mortgage. "SERVICING OFFICER": Any officer of the Master Servicer involved in, or responsible for, the administration and servicing of the Pledged Mortgages whose name and facsimile signature appear on a list of servicing officers furnished to the Trustee by the Master Servicer on the Closing Date pursuant to the Master Servicing Agreement, as such list may from time to time be amended. "STATED MATURITY": With respect to any and all Bonds _________________. "STATED PRINCIPAL BALANCE": As to any Pledged Mortgage and Due Date, the unpaid principal balance of such Pledged Mortgage 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 allocable to principal (other than with respect to any Liquidated Pledged Mortgage) and to the payment of principal due on such Due Date and irrespective of any delinquency in payment by the related Mortgagor. "SUBORDINATED BOND INTEREST RATE": With respect to any Interest Accrual Period, the annual rate at which interest accrues on the Subordinated Bonds as specified in such Bonds and in Section 2.03(c). "SUBORDINATED BONDS": The Class B-1 and the Class B-2 Bonds. "SUBSTITUTION ADJUSTMENT AMOUNT": The meaning ascribed to such term pursuant to Section 2(d)(iv) of the Master Servicing Agreement. I-32 51 "SUCCESSOR MASTER SERVICER": A Person appointed by the Trustee who succeeds either the Trustee or the Master Servicer, pursuant to the applicable provisions of the Master Servicing Agreement. "TRUST ESTATE": All money, instruments and other property subject or intended to be subject to the lien of this Indenture for the benefit of the Bondholders as of any particular time (including, without limitation, all property and interests Granted to the Trustee), including all proceeds thereof. "TRUST INDENTURE ACT" OR "TIA": The Trust Indenture Act of 1939, as amended, as in force at the Closing Date, unless otherwise specifically provided. "TRUSTEE": ______________________________, a banking corporation organized and existing under the laws of _________________________________, and any Person succeeding as Trustee hereunder pursuant to Section 6.12 or any other applicable provision hereof. "TRUSTEE FEE": As to any Payment Date, an amount equal to one-twelfth of the Trustee Fee Rate multiplied by the Pool Stated Principal Balance with respect to such Payment Date. "TRUSTEE FEE RATE": With respect to each Pledged Mortgage, the per annum rate agreed upon in writing on or prior to the Closing Date by the Trustee and the Issuer. "TRUSTEE MORTGAGE FILE": With respect to each Pledged Mortgage, the original documents and instruments relating thereto to be retained in the custody and possession of the Trustee, as set forth and enumerated in Section 2(a) of the Master Servicing Agreement. "WITHDRAWAL DATE": The ___th day of each month, or if such day is not a Business Day, the next preceding Business Day. I-33 52 ARTICLE II THE BONDS SECTION 2.01. FORMS GENERALLY. The Bonds and the Trustee's certificate of authentication shall be in substantially the form required by this Article II, 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 be required to comply with the rules of any securities exchange on which the Bonds may be listed, or as may, consistently herewith, be determined by the officers executing such Bonds, as evidenced by their execution thereof. Any portion of the text of any Bond may be set forth on the reverse thereof with an appropriate reference on the face of the Bond. The Definitive Bonds may be produced in any manner determined by the officers executing such Bonds, as evidenced by their execution thereof; provided, however, that in the event the Bonds are listed on any securities exchange, the Bonds shall be produced in accordance with the rules of any securities exchange on which the Bonds may be listed. SECTION 2.02. FORMS OF BONDS AND CERTIFICATE OF AUTHENTICATION. (a) The form of Bond which is a Senior Bond is attached hereto as Exhibit II. (b) The form of Bond which is a Class B-1 Bond is attached hereto as Exhibit III. (c) The form of Bond which is a Class B-2 Bond is attached hereto as Exhibit IV. (d) The form of the Trustee's certificate of authentication is as follows: "This is one of the Bonds referred to in the within mentioned Indenture. II-1 53 ----------------------------------- as Trustee By: -------------------------------- Authorized Signatory" (e) The form of assignment is as follows: II-2 54 "FOR VALUE RECEIVED, the undersigned hereby sells, assigns and transfers unto _______________________________________________________________ ______________________________________________________________________________ (Please insert Social Security or other Identifying Number of Assignee) ______________________________________________________________________________ ______________________________________________________________________________ (Please print or type name and address of Assignee) ______________________________________________________________________________ the within Bond of Sequoia Mortgage Trust 199_-_, and does hereby irrevocably constitute and appoint __________ Attorney to transfer such Bond on the books of the within named trust, with full power of substitution in the premises. Dated: ____________________________________ ______________________________ Notice: The signature to this assignment must correspond with the name as written upon the face of this Bond in every particular without alteration or enlargement or any change whatever. The signature must be guaranteed by a member of a signature guaranty medallion program. Notarized or witnessed signatures are not acceptable." [(f) The Bonds shall have a Statement of Insurance printed thereon or attached thereto which essentially sets forth the terms of the Bond Insurance Policy.] II-3 55 SECTION 2.03. BONDS ISSUABLE IN CLASSES; PROVISIONS WITH RESPECT TO PRINCIPAL AND INTEREST PAYMENTS. (a) General. The Bonds shall be designated generally as the Sequoia Mortgage Trust _________, "Collateralized Mortgage Bonds" of the Issuer. Each Bond shall bear upon the face thereof the designation so selected for the Class to which it belongs. Bonds of each Class shall constitute Book Entry Bonds as defined in Section 2.13 hereof. The aggregate principal amount of Bonds that may be authenticated and delivered under the Indenture is unlimited. All of the Bonds shall be issued in the appropriate forms attached as Exhibits hereto with such additions and completions as are appropriate for each such Class. The Class A-1 Bonds shall constitute the sole Class of Senior Bonds and the Class B-1 Bonds and the Class B-2 Bonds shall constitute the sole Classes of Subordinated Bonds. The final installments of principal of the Classes of Bonds shall have the Stated Maturity specified above. The principal of each Bond shall be payable in installments ending no later than the Stated Maturity of the final installment of the principal thereof unless the unpaid principal of such Bond becomes due and payable at an earlier date by declaration of acceleration or call for redemption or otherwise. All payments made with respect to any Bond shall be applied first to the interest then due and payable on such Bond and then to the principal thereof. (b) Payments of Principal of and Interest on the Bonds. On each Payment Date, the Trustee shall withdraw the Bond Payment Amount from the Distribution Account and apply such funds to payments on the Bonds in the following order of priority and, in each case, to the extent of funds remaining: (i) to the Senior Bonds, an amount allocable to interest equal to the Senior Interest Payment Amount for such Payment Date; (ii) to the Senior Bonds, an amount allocable to principal equal to the Senior Principal Payment Amount for such Payment Date; II-4 56 (iii) to the Class B-1 Bonds, an amount allocable to interest equal to the Class B-1 Interest Payment Amount for such Payment Date; (iv) to the Class B-1 Bonds, an amount allocable to principal equal to the Class B-1 Principal Payment Amount for such Payment Date; (v) to the Class B-2 Bonds, an amount allocable to interest equal to the Class B-2 Interest Payment Amount for such Payment Date; and (vi) to the Class B-2 Bonds, an amount allocable to principal to the Class B-2 Principal Payment Amount for such Payment Date. (c) Calculation of the Bond Interest Rate. (i) The Bond Interest Rate for the Senior Bonds (the "Senior Bond Interest Rate") and any Interest Accrual Period will equal ______________; (ii) The Bond Interest Rate for the Class B-1 Bonds (the "Class B-1 Bond Interest Rate") and any Interest Accrual Period will equal ___________________; (iii) The Bond Interest Rate for the Class B-2 Bonds (the "Class B-2 Bond Interest Rate") and any Interest Accrual Period will equal _______________; and (iv) The Senior Interest Payment Amount, the Class B-1 Interest Payment Amount and the Class B-2 Interest Payment Amount shall each be calculated on the basis of a 360-day year of twelve 30-day months. (d) Reduction of Interest Payment Amounts. With respect to each Payment Date, the amounts referred to in clause (i) of the definition of Senior Interest Payment Amount and clauses (i) and (ii) of the definitions of Class B-1 Interest Payment Amount and Class B-2 Interest Payment Amount, as applicable, for such Payment Date shall be reduced by the applicable Class' pro rata share (based on the Interest Payment Amount for such Class before reduction pursuant to this Section 2.03(d)) of Net Interest Shortfalls. II-5 57 (e) Pro Rata Payments. All payments on the Bonds of any Class shall be made pro rata among all Bonds of such Class. (f) Payments to the Senior Bondholders provided for in (b) of this Section 2.03 shall be paid, on each Payment Date after the Subordinated Class Principal Amount and the Invested Amount have been reduced to zero and where the Senior Interest Payment Amount and the Senior Principal Payment Amount exceed the Available Funds, by the Bond Insurer. SECTION 2.04. DENOMINATIONS. Each Class of Book Entry Bonds shall be evidenced initially by a single Bond representing the entire aggregate Class Principal Amount of such Class of Bonds as of the Closing Date, beneficial ownership of which may be held in denominations of $25,000 and increments of $1,000 in excess thereof for all Bonds. All of the Book Entry Bonds shall be initially registered on the Bond Register in the name of Cede & Co., the nominee of the Depository, and no Beneficial Owner will receive a Definitive Bond representing such Beneficial Owner's interest in the Book Entry Bonds, except in the event of Book Entry Termination. SECTION 2.05. EXECUTION, AUTHENTICATION, DELIVERY AND DATING. The Bonds shall be executed by an Authorized Officer of the Issuer. The signature of such officer on the Bonds may be manual or facsimile. Bonds bearing the manual or facsimile signature of an individual who was at any time an Authorized Officer shall bind the Issuer, notwithstanding that such individual has ceased to hold such office prior to the authentication and delivery of such Bonds or did not hold such office at the date of such Bonds. At any time and from time to time after the execution and delivery of this Indenture, the Issuer may deliver Bonds executed on behalf of the Issuer to the Trustee for II-6 58 authentication; and the Trustee shall authenticate and deliver such Bonds as in this Indenture provided and not otherwise. Each Bond authenticated on the Closing Date shall be dated the Closing Date. All other Bonds which are authenticated after the Closing Date for any other purpose hereunder shall be dated the date of their authentication. No Bond shall be entitled to any benefit under this Indenture or be valid or obligatory for any purpose, unless there appears on such Bond a certificate of authentication substantially in the form provided for herein executed by the Trustee or by any Authenticating Agent by the manual signature of one of its authorized officers or employees, and such certificate upon any Bond shall be conclusive evidence, and the only evidence, that such Bond has been duly authenticated and delivered hereunder. SECTION 2.06. TEMPORARY BONDS. So long as the Book Entry Bonds are held by the Depository for the Participants in book-entry form, they may be typewritten or in any other form acceptable to the Issuer, the Trustee and the Depository. At any time during which the Book Entry Bonds are not held by the Depository for the Participants in book-entry form, the Definitive Bonds shall be lithographed or printed with steel engraved borders. Pending the preparation of Definitive Bonds, the Issuer may execute, and upon Issuer Order the Trustee shall authenticate and deliver, temporary Bonds which are printed, lithographed, typewritten, mimeographed or otherwise produced, in any authorized denomination, substantially of the tenor of the definitive Bonds in lieu of which they may be so issued and with such variations as the officers executing such Bonds may determine, as evidenced by their execution of such Bonds. If temporary Bonds are issued, the Issuer will cause definitive Bonds to be prepared without unreasonable delay. After the preparation of definitive Bonds, the temporary Bonds shall be exchangeable for definitive Bonds upon surrender of the temporary Bonds at the office or agency of the Issuer to be maintained as provided in Section 3.02, without charge to the II-7 59 Holder. Upon surrender or cancellation of any one or more temporary Bonds, the Issuer shall execute and the Trustee shall authenticate and deliver and exchange therefor a like principal amount of definitive Bonds of the same Class and of authorized denominations. Until so exchanged, the temporary Bonds shall in all respects be entitled to the same benefits under this Indenture as Definitive Bonds of the same Class. SECTION 2.07. 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 Trustee is hereby initially appointed "Bond Registrar" for the purpose of registering Bonds and transfers of Bonds as herein provided. Upon any resignation of any Bond Registrar appointed by the Issuer, the Issuer shall promptly appoint a successor or, in the absence of such appointment, shall assume the duties of Bond Registrar. At any time the Trustee is not also the Bond Registrar, the Trustee shall be a co-Bond Registrar. The Issuer shall cause each co-Bond Registrar to furnish the Bond Registrar, promptly after each authentication of a Bond by it, appropriate information with respect thereto for entry by the Bond Registrar into the Bond Register. If the Trustee shall at any time not be authorized to keep and maintain the Bond Register, the Trustee shall have the right to inspect such Bond Register at all reasonable times and to rely conclusively upon a certificate of the Person in charge of the Bond Register as to the names and addresses of the Holders of the Bonds and the principal amounts and numbers of such Bonds so held. Upon surrender for registration of transfer of any Bond at the office or agency of the Issuer to be maintained as provided in Section 3.02, the Issuer shall execute, and the Trustee shall authenticate and deliver, in the name of the designated transferee or transferees, one or more new Bonds of any authorized denominations and of a like aggregate principal amount and Class. II-8 60 At the option of the Holder, Bonds may be exchanged for other Bonds of any authorized denominations, and of a like aggregate initial principal amount and Class, upon surrender of the Bonds to be exchanged at such office or agency. Whenever any Bonds are so surrendered for exchange, the Issuer shall execute, and the Trustee shall authenticate and deliver, the Bonds which the Bondholder making the exchange is entitled to receive. 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 duly endorsed, or be accompanied by a written instrument of transfer in form satisfactory to the Trustee duly executed by the Holder thereof or his attorney duly authorized in writing. No service charge shall be made for any registration of transfer or exchange of Bonds, but the Issuer may require payment of a sum sufficient to cover any tax or other governmental charge as may be imposed in connection with any registration of transfer or exchange of Bonds, other than exchanges pursuant to Section 2.08 not involving any transfer. SECTION 2.08. MUTILATED, DESTROYED, LOST OR STOLEN BONDS. If (1) any mutilated Bond is surrendered to the Trustee or the Trustee receives evidence to its satisfaction of the destruction, loss or theft of any Bond and (2) there is delivered to the Trustee such security or indemnity as may be required by the Trustee to save the Issuer and the Trustee harmless, then, in the absence of notice to the Issuer or the Trustee that such Bond has been acquired by a bona fide purchaser, the Issuer shall execute and upon its request the Trustee shall authenticate and deliver, in exchange for or in lieu of any such mutilated, destroyed, lost or stolen Bond, a new Bond or Bonds of the same tenor, aggregate initial principal amount and Class bearing a number not contemporaneously outstanding. If, after the delivery of such new Bond, a bona fide purchaser of the original Bond in lieu of which such new Bond was issued presents for payment such II-9 61 original Bond, the Issuer and the Trustee shall be entitled to recover such new Bond from the person to whom it was delivered or any person taking therefrom, 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 expenses incurred by the Issuer or the Trustee in connection therewith. If any such mutilated, destroyed, lost or stolen Bond shall have become or shall be about to become due and payable, or shall have become subject to redemption in full, instead of issuing a new Bond, the Issuer may pay such Bond without surrender thereof, except that any mutilated Bond shall be surrendered. Upon the issuance of any new Bond under this Section, the Issuer may require the payment 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 Trustee) connected therewith. Every new Bond issued pursuant to this Section in lieu of any destroyed, lost or stolen Bond shall constitute an original additional contractual obligation of the Issuer, whether or not the 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. 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 2.09. PAYMENTS OF PRINCIPAL AND INTEREST. (a) Each payment of principal of and interest on a Book Entry Bond shall be paid to the Depository, which shall credit the amount of such payments to the accounts of its Depository Participants in accordance with its normal procedures. Each Depository Participant shall be responsible for disbursing such payments to the Beneficial Owners of the Book Entry Bonds that it represents and to each indirect participating brokerage firm (a "brokerage firm" or "indirect participating firm") for which it acts as agent. Each brokerage firm shall be responsible II-10 62 for disbursing funds to the Beneficial Owners of the Book Entry Bonds that it represents. All such credits and disbursements are to be made by the Depository and the Depository Participants in accordance with the provisions of the Bonds. Neither the Trustee, the Bond Registrar nor the Issuer shall have any responsibility for such credits and disbursements. Each payment of principal of and interest on a Definitive Bond shall be paid to the Person in whose name such Bond (or one or more Predecessor Bonds) is registered at the close of business on the Record Date or Optional Redemption Record Date, for such Payment Date or Optional Redemption Date, by check mailed to such Person's address as it appears in the Bond Register on such Record Date or the Optional Redemption Record Date, except for the final installment of principal payable with respect to such Bond, which shall be payable as provided in Section 2.09(b). All payments of principal of and interest on the Bonds shall be made only from the Trust Estate and any other assets of the Issuer, and each Holder of the Bonds, by its acceptance of the Bonds, agrees that it will have recourse solely against such Trust Estate and such other assets of the Issuer and that neither the Owner Trustee in its individual capacity, the Owner nor any of their respective partners, beneficiaries, agents, officers, directors, employees or successors or assigns shall be personally liable for any amounts payable, or performance due, under the Bonds or this Indenture. (b) All reductions in the principal amount of a Bond (or one or more Predecessor Bonds) effected by payments of installments of principal made on any Payment Date or Optional Redemption Date shall be binding upon all Holders of such Bond and any Bond issued upon transfer thereof or in exchange therefor or in lieu thereof. The final installment of principal of each Bond (including the Redemption Price of any Bond called for optional redemption, if such optional redemption will result in payment of the entire unpaid principal amount of any such Bond) shall be payable only upon presentation and surrender thereof on or after the Payment Date or Optional Redemption Date therefor at the office or agency of the Issuer maintained by it for such purpose in the Borough of Manhattan, the City of New York, State of New York, pursuant to Section 3.02. Whenever the Trustee II-11 63 expects that the entire remaining unpaid principal amount of any Bond will become due and payable on the next Payment Date, it shall, no later than five days prior to such Payment Date, mail or cause to be mailed to the Holder of each Bond as of the close of the business on such otherwise applicable Record Date a notice to the effect that: (i) the Trustee expects that funds sufficient to pay such final installment will be available in the Distribution Account on such Payment Date; and (ii) if such funds are available, such final installment will be payable on such Payment Date, but only upon presentation and surrender of such Bond at the office or agency of the Issuer maintained for such purpose pursuant to Section 3.02 (the address of which shall be set forth in such notice). Notices in connection with optional redemptions of Bonds shall be mailed to Holders in accordance with Section 10.02. SECTION 2.10. PERSONS DEEMED OWNERS. Prior to due presentment for registration of transfer of any Bond, the Issuer, [the Bond Insurer], the Trustee, any Agent and any other agent of the Issuer, [the Bond Insurer], or the Trustee shall treat the Person in whose name any Bond is registered as the owner of such Bond (a) on the applicable Record Date or Optional Redemption Record Date for the purpose of receiving payments of the principal of, and interest on, such Bond and (b) on any other date for all other purposes whatsoever, whether or not such Bond is overdue, and neither the Issuer, [the Bond Insurer], the Trustee, any Agent nor any other agent of the Issuer or the Trustee shall be affected by notice to the contrary. SECTION 2.11. CANCELLATION. All Bonds surrendered for payment, registration of transfer, exchange or redemption shall, if surrendered to any Person other than the Trustee, be delivered to the Trustee and shall be promptly cancelled by it. The Issuer may at any time II-12 64 deliver to the Trustee for cancellation any Bond previously authenticated and delivered hereunder which the Issuer may have acquired in any manner whatsoever, and all Bonds so delivered shall be promptly cancelled by the Trustee. No Bonds shall be authenticated in lieu of or in exchange for any Bonds cancelled as provided in this Section, except as expressly permitted by this Indenture. All cancelled Bonds held by the Trustee shall be held by the Trustee in accordance with its standard retention policy, unless the Issuer shall direct by an Issuer Order that they be destroyed or returned to it. SECTION 2.12. AUTHENTICATION AND DELIVERY OF BONDS. The Bonds may be executed by the Issuer and delivered to the Trustee for authentication, and thereupon the same shall be authenticated and delivered by the Trustee, upon Issuer Request and upon receipt by the Trustee of the following: (a) an Issuer Order authorizing the execution, authentication and delivery of the Bonds and specifying the Classes, the Stated Maturity of the final installment of principal, the principal amount and the Bond Interest Rate, of each Class of such Bonds to be authenticated and delivered; (b) an Issuer Order authorizing the execution and delivery of this Indenture; (c) One or more Opinions of Counsel addressed to the Trustee, complying with the requirements of Section 11.01, reasonably satisfactory in form and substance to the Trustee, and to the effect that: (i) all instruments furnished to the Trustee by the Issuer pursuant to this Section 2.12 in connection with the Bonds conform in all material respects to the requirements of this Indenture and constitute all the documents required to be delivered under this Section 2.12 for the Trustee to authenticate and deliver the Bonds (counsel rendering such opinion or opinions need not express any opinion as to whether the Pledged Mortgages Granted to the Trustee as security conform to the requirements of this Indenture); II-13 65 (ii) all conditions precedent provided for in this Indenture relating to the authentication and delivery of the Bonds have been complied with in all material respects (counsel rendering such opinion or opinions need not express any opinion as to the matters set forth in the parenthetical clause at the end of paragraph (i) above or as to whether the amount of cash or other collateral, if any, delivered to the Trustee pursuant to any subsection of this Section 2.12 is the requisite amount); (iii) the Bank has corporate power to execute and deliver the Deposit Trust Agreement, the Deposit Trust Agreement authorizes the Issuer to execute and deliver the Bonds and this Indenture, and to issue the Bonds, and the Owner Trustee has duly taken all necessary action under the Deposit Trust Agreement for those purposes; (iv) the Issuer is a statutory business trust created under the laws of the State of Delaware and duly authorized by the Deposit Trust Agreement; (v) assuming due authorization, execution and delivery thereof by the Trustee, this Indenture will be the legally valid and binding obligation of the Issuer, enforceable against the Issuer in accordance with its terms, except as may be limited by bankruptcy, insolvency, reorganization, moratorium or similar laws and equitable principles relating to or limiting creditors' rights generally and such counsel need express no opinion as to the availability of equitable remedies; (vi) the Bonds, when issued, delivered, authenticated and paid for, will be the legally valid and binding obligations of the Issuer, entitled to the benefits of this Indenture, and enforceable against the Issuer in accordance with their terms, except as may be limited by bankruptcy, insolvency, reorganization, moratorium or similar laws and equitable principles relating to or limiting creditors' rights generally and such counsel need express no opinion as to the availability of equitable remedies; II-14 66 (vii) assuming due execution and delivery thereof by the Trustee and by the Master Servicer, the Master Servicing Agreement constitutes the legally valid and binding obligation of the Master Servicer and of the Issuer, respectively, enforceable against the Master Servicer and the Issuer in accordance with its terms, except as may be limited by bankruptcy, insolvency, reorganization, moratorium or similar laws and equitable principles relating to or limiting creditors' rights generally and such counsel need express no opinion as to the availability of equitable remedies; (viii) the Mortgage Notes included in the Original Pledged Mortgages have been duly and validly assigned, delivered and pledged to the Trustee to the extent contemplated by this Indenture, and this Indenture together with such assignment, delivery and pledge to the Trustee, creates as security for the Bonds a valid and perfected security interest of first priority in such Mortgage Notes, except to the extent limited in the event (A) the Trustee relinquishes possession of any such Mortgage Note, (B) the Depositor, the Issuer, the Master Servicer or any Servicer transfers any such Mortgage Note or the related Mortgage to a bona fide purchaser for value without notice prior to notification to the Mortgagor of the assignment to the Trustee of such Mortgage Note or due recordation of the Assignment to the Trustee of the related Mortgage or (C) the Depositor, the Issuer, the Master Servicer or any Servicer discharges any such Mortgage Note or the related Mortgage prior to such notification or recordation; the Mortgages delivered to the Trustee with the Original Mortgage Notes will continue to secure the Mortgage Notes included in the Original Pledged Mortgages, as though, and to the same extent as if, such Mortgage Notes had not been assigned, delivered and pledged; and it is not necessary to record or file this Indenture or to take any other action, except as set forth above, in order to make effective the lien and security interest created by this Indenture in the Mortgage Notes included in the Original Pledged Mortgages; II-15 67 (ix) this Indenture has been duly qualified under the TIA; and (x) the Issuer's registration statement with respect to the Bonds has become effective under the Securities Act of 1933, as amended, and, to the best of such counsel's knowledge, no stop order suspending the effectiveness of such registration statement has been issued and is in effect under such act and no proceedings for that purpose have been instituted or are pending under such act. In rendering the opinions set forth above, such counsel may rely upon officers' certificates of the Depositor, the Owner Trustee, the Issuer, any Servicer, the Master Servicer and the Trustee, without independent confirmation or verification, as to the following matters and as to such other matters as shall be reasonably acceptable to the Trustee: (A) the accuracy of the descriptions of the Mortgage Notes included in the Original Pledged Mortgages and the conformity thereof to the descriptions in this Indenture, (B) the ownership by Sequoia Mortgage Funding Corporation, the Depositor and the Issuer of such Mortgage Notes free and clear of any lien, claim, charge or interest of any kind of any third party, (C) the physical delivery of such Mortgage Notes to the Trustee, (D) the absence of any evidence appearing on any such Mortgage Note of any right or interest inconsistent with the opinions expressed, and (E) the form of endorsement approved by such counsel having been made on each such Mortgage Note. In rendering the opinions set forth above, such counsel need express no opinion as to (A) the perfection of the security interest in any collateral not governed by Article 9 of the Uniform Commercial Code of the State of California, (B) the existence of, or the priority of the security interest created by the Indenture against, any liens or other interests which arise by operation of law and which do not require any filing or similar action in order to take priority over a perfected security interest or (C) the priority of the security interest created by this Indenture with respect to any claim or lien in favor of the United States or any agency or instrumentality thereof (including federal tax liens and liens arising under Title IV of the Employee Retirement Income Security Act of 1974, as amended). II-16 68 (d) an Officers' Certificate complying with the requirements of Section 11.01 and stating that: (i) the Issuer is not in Default under this Indenture and the issuance of the Bonds will not result in any breach of any of the terms, conditions or provisions of, or constitute a default under, the Deposit Trust Agreement or any indenture, mortgage, deed of trust or other agreement or instrument to which the Issuer is a party or by which it is bound, or any order of any court or administrative agency entered in any proceeding to which the Issuer is a party or by which it may be bound or to which it may be subject, and that all conditions precedent provided in this Indenture relating to the authentication and delivery of the Bonds have been complied with; (ii) the Issuer is the owner of each Original Pledged Mortgage, free and clear of any lien, security interest or charge, has not assigned any interest or participation in any such Pledged Mortgage (or, if any such interest or participation has been assigned, it has been released) and has the right to Grant each such Original Pledged Mortgage to the Trustee; (iii) the information set forth in the Pledged Mortgage Schedule attached as Schedule A to this Indenture is true and correct in all material respects as of the Closing Date; (iv) the Issuer has Granted to the Trustee all of its right, title and interest in each Pledged Mortgage; (v) as of the Closing Date, no lien in favor of the United States described in Section 6321 of the Code, or lien in favor of the Pension Benefit Guaranty Corporation described in Section 4068(a) of the Employee Retirement Income Security Act of 1974, as amended, has been filed as described in subsections 6323(f) and 6323(g) of the Code upon any property belonging to the Issuer; and II-17 69 (vi) attached thereto is a true and correct copy of letters signed by the Rating Agencies confirming that the Senior Bonds have been rated AAA by [ ] and [ ] and that the Class B-1 Bonds have been rated [ ] by [ ]. (e) An executed counterpart of the Master Servicing Agreement. (f) A certificate of one or more Independent Persons, whose regular business activity includes valuing securities and mortgage loans similar to the Original Pledged Mortgages, of the fair value of the Original Pledged Mortgages, which fair value, as so certified, will be equal to or in excess of the sum of the Original Senior Class Principal Amount and the Original Subordinated Class Principal Amount, and which determination of fair value shall be as of a date not earlier than three Business Days prior to the Closing Date. SECTION 2.13. MATTERS RELATING TO BOOK ENTRY BONDS. (a) If the Bonds are listed on any stock exchange at any time after the Closing Date, the Issuer shall, if required as a condition to such listing, prepare and deliver to the Trustee Bonds in substantially the same form as the Bonds issued on the Closing Date, but with such other additional features and such modifications, if any, as shall be necessary or appropriate in order to comply with the requirements of such stock exchange for the listing of the Bonds on such exchange. Bonds in the form issued on the Closing Date shall thereafter be exchangeable for Bonds in such revised form to the same extent as temporary Bonds are exchangeable for Definitive Bonds pursuant to Section 2.06. (b) Each Class of Book Entry Bonds will be issued in the form of a single typewritten bond certificate (each, a "DTC Certificate") to be delivered to the Depository by the Issuer substantially in the respective forms for each such Class attached as Exhibits hereto. The DTC Certificate for each such Class of Book Entry Bonds shall be initially registered on the II-18 70 Bond Register in the name of the nominee of such Depository and no Beneficial Owner will receive a certificate representing its interests in any Class of Book Entry Bonds except in the event that the Trustee issues Definitive Bonds, as provided in Section 2.14. Pursuant to the Letter Agreement, while each Class of the Book Entry Bonds remains outstanding and such Depository remains the Holder, it will agree to make book-entry transfers among the Depository Participants and receive and transmit payments of principal and interest on the Book Entry Bonds until and unless the Trustee authenticates and delivers Definitive Bonds to the Beneficial Owners of the Book Entry Bonds or their nominees, as described in Section 2.14. (c) Prior to Book Entry Termination, each Class of Book Entry Bonds will remain registered in the name of the Depository or its nominee and at all times: (i) registration of the Book Entry Bonds may not be transferred by the Trustee or the Bond Registrar except to another Depository; (ii) the Depository shall maintain book-entry records with respect to the Beneficial Owners and with respect to ownership and transfers of such Book Entry Bonds; (iii) ownership and transfers of registration of the Book Entry Bonds on the books of the Depository shall be governed by applicable rules established by the Depository; (iv) the Depository may collect its usual and customary fees, charges and expenses from its Depository Participants; (v) the Trustee shall deal with the Depository, Depository Participants and interest participating firms as representatives of the Beneficial Owners of the Book Entry Bonds for purposes of exercising the rights of holders under the Indenture, and requests and directions for and votes of such representatives shall not be deemed to be inconsistent if they are made with respect to different Beneficial Owners; and (vi) the Trustee may rely and shall be fully protected in relying upon information furnished by the Depository with respect to its Depository Participants and furnished by the Depository Participants with respect to indirect participating firms and Persons shown on the books of such indirect participating firms as direct or indirect Beneficial Owners. All transfers by Beneficial Owners of Book Entry Bonds shall be made in accordance with the procedures established by the Depository Participant or brokerage firm representing such Beneficial Owner. Each Depository Participant shall only II-19 71 transfer Book Entry Bonds of Beneficial Owners it represents or of brokerage firms for which it acts as agent in accordance with the Depository's normal procedures. SECTION 2.14. TERMINATION OF BOOK ENTRY SYSTEM. (a) The book entry system through the Depository with respect to any Class of Book Entry Bonds may be terminated upon the happening of any of the following: (i) The Depository or the Issuer advises the Trustee in writing that the Depository is no longer willing or able to properly discharge its responsibilities as Depository and the Issuer is unable to locate a qualified successor clearing agency satisfactory to the Trustee and the Issuer; (ii) The Issuer at its option advises the Trustee in writing that it elects to terminate the book entry system through the Depository; or (iii) After the occurrence of an Event of Default (at which time the Trustee shall use all reasonable efforts to promptly notify each Beneficial Owner through the Depository of such Event of Default when such notice shall be given pursuant to Section 6.02), the Beneficial Owners of a majority in aggregate Class Principal Amount of the Book Entry Bonds together advise the Trustee and the Depository through the Depository Participants in writing that the continuation of a book entry system through the Depository is no longer in the best interests of the Beneficial Owners. (b) Upon the occurrence of any event described in subsection (a) above, the Trustee shall notify all Beneficial Owners, through the Depository, of the occurrence of any such event and of the availability of Definitive Bond certificates to Beneficial Owners requesting the same, in an aggregate Class Principal Amount representing the interest of each, making such adjustments and allowances as it may find necessary or appropriate as to accrued interest, if any, and previous calls for redemption. Definitive Bond certificates shall be issued II-20 72 only upon surrender to the Trustee of the Book Entry Bond by the Depository, accompanied by registration instructions for the Definitive Bond certificates. Neither the Issuer nor the Trustee shall be liable for any delay in delivery of such instructions and may conclusively rely on, and shall be protected in relying on, such instructions. Upon issuance of the Definitive Bond certificates, all references herein to obligations imposed upon or to be performed by the Depository shall cease to be applicable and the provisions relating to Definitive Bonds shall be applicable. SECTION 2.15. ADDITIONAL BONDS. Notwithstanding the requirements of Article II hereof, the Issuer may without the consent of any Bondholder, pledge additional Mortgage Collateral to the Trust Estate subsequent to the issuance of the Bonds and may issue Additional Bonds of any Class then Outstanding or of one or more additional Classes. The Issuer's right to issue any Additional Bonds is subject to receipt of written confirmation from each Rating Agency to the effect that the issuance of such Additional Bonds will not adversely affect the rating of any Outstanding Bonds of such Series and to satisfaction of the conditions precedent for authentication and delivery of Bonds by the Trustee in Section 2.12. II-21 73 ARTICLE III COVENANTS SECTION 3.01. PAYMENT OF BONDS. The Issuer will pay or cause to be duly and punctually paid the principal of, and interest on, the Bonds in accordance with the terms of the Bonds and this Indenture. SECTION 3.02. MAINTENANCE OF OFFICE OR AGENCY. The Issuer will maintain in the Borough of Manhattan, the City of New York, the State of New York an office or agency where Bonds may be presented or surrendered for payment or may be surrendered for registration of transfer or exchange, and where notices and demands to or upon the Issuer in respect of the Bonds and this Indenture may be served. The Issuer will give prompt written notice to the Trustee of the location and any change in the location, of such office or agency. Until written notice of any change in the location of such office or agency is delivered to the Trustee or if at any time the Issuer shall fail to maintain any such required office or agency or shall fail to furnish the Trustee with the address thereof, Bonds may be so presented and surrendered, and such notices and demands may be made or served, at the office of ___________________________________________ at _________________________________________ ___________________________________. The Issuer may also from time to time designate one or more other offices or agencies (in or outside the City of New York) where the Bonds may be presented or surrendered for any or all such purposes and may from time to time rescind such designations; provided, however, that (i) no such designation or rescission shall in any manner relieve the Issuer of its obligation to maintain an office or agency in the Borough of Manhattan, the City of New York, the State of New York, for the purposes set forth in the preceding paragraph, (ii) presentations or surrenders of Bonds for payment may be made only in the City of New York, the State of New York or at the Corporate Trust Office of the Trustee and (iii) any designation of an office or agency for payment of Bonds shall be subject to Section 3.03. The Issuer will give prompt written notice to the Trustee of any such designation or rescission and of any change in the location of any such other office or agency. III-1 74 SECTION 3.03. MONEY FOR BOND PAYMENTS TO BE HELD IN TRUST. All payments of amounts due and payable with respect to any Bonds which are to be made from amounts withdrawn from the Distribution Account pursuant to Section 8.02(c) or Section 5.08 shall be made on behalf of the Issuer by the Trustee or by a Paying Agent, and no amounts so withdrawn from the Distribution Account for payments of Bonds shall be paid over to the Issuer under any circumstances except as provided in this Section 3.03 or in Section 5.08. If the Issuer shall have a Paying Agent that is not also the Bond Registrar, it shall furnish, or cause the Bond Registrar to furnish, no later than (a) the fifth calendar day after each Record Date, and (b) the first Business Day after the Optional Redemption Record Date applicable to the Optional Redemption Date, a list, in such form as such Paying Agent may reasonably require, of the names and addresses of the Holders of Bonds and of the number of Individual Bonds of each Class held by each such Holder. Whenever the Issuer shall have a Paying Agent other than the Trustee, it will, on or before the Business Day next preceding each Payment Date and Optional Redemption Date, direct the Trustee to deposit with such Paying Agent an aggregate sum sufficient to pay the amounts then becoming due (to the extent funds are then available for such purpose in the Distribution Account), such sum to be held in trust for the benefit of the Persons entitled thereto. Any moneys deposited with a Paying Agent in excess of an amount sufficient to pay the amounts then becoming due on the Bonds with respect to which such deposit was made shall, upon Issuer Order, be paid over by such Paying Agent to the Trustee for application in accordance with Article VIII. III-2 75 Any Paying Agent shall be appointed by Issuer Order. The Issuer shall not appoint any Paying Agent which is not, at the time of such appointment, a depository institution or trust company whose obligations would be Permitted Investments pursuant to clause (iv) of the definition of the term "Permitted Investments". The Issuer will cause each Paying Agent other than the Trustee to execute and deliver to the Trustee an instrument in which such Paying Agent shall agree with the Trustee (and if the Trustee acts as Paying Agent, it hereby so agrees), subject to the provisions of this Section, that such Paying Agent will: (1) allocate all sums received for payment to the Holders of Bonds on each Payment Date and Optional Redemption Date among such Holders in the proportion specified in the applicable Payment Date Statement, as the case may be, in each case to the extent permitted by applicable law; (2) 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; (3) if such Paying Agent is not the Trustee, immediately resign as a Paying Agent and forthwith pay to the Trustee all sums held by it in trust for the payment of the Bonds if at any time it ceases to meet the standards set forth above required to be met by a Paying Agent at the time of its appointment; (4) if such Paying Agent is not the Trustee, give the Trustee notice of any Default by the Issuer (or any other obligor upon the Bonds) in the making of any payment required to be made with respect to any Bonds for which it is acting as Paying Agent; (5) if such Paying Agent is not the Trustee, at any time during the continuance of any such Default, upon the written request of the Trustee, forthwith pay to the Trustee all sums so held in trust by such Paying Agent; and III-3 76 (6) comply with all requirements of the Code, and all regulations thereunder, 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; provided, however, that with respect to withholding and reporting requirements applicable to original issue discount (if any) on any Class of Bonds, the Issuer has provided the calculations pertaining thereto to the Trustee. The Issuer may at any time, for the purpose of obtaining the satisfaction and discharge of this Indenture or any other purpose, by Issuer Order direct any Paying Agent, if other than the Trustee, to pay to the Trustee all sums held in trust by such Paying Agent, such sums to be held by the Trustee upon the same trusts as those upon which such sums were held by such Paying Agent; and upon such payment by any Paying Agent to the Trustee, such Paying Agent shall be released from all further liability with respect to such money. Subject to applicable escheat laws, any money held by the Trustee or any Paying Agent in trust for the payment of any amount due with respect to any Bond and remaining unclaimed for six years after such amount has become due and payable to the Holder of such Bond shall be discharged from such trust and, upon its written request, paid to the Issuer; 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 Trustee or such Paying Agent with respect to such trust money shall thereupon cease. The Trustee may, but shall not be required to, adopt and employ, at the expense of the Issuer, any reasonable means of notification of such repayment (including, but not limited to, mailing notice of such repayment to Holders whose Bonds have been called but have not been surrendered for redemption or whose right to or interest in moneys due and payable but not claimed is determinable from the records of the Trustee or any Agent, at the last address of record for each such Holder). III-4 77 SECTION 3.04. CORPORATE EXISTENCE OF OWNER TRUSTEE. (a) Subject to subsections (b) and (c) below, the Owner Trustee will keep in full effect its existence, rights and franchises as a bank and trust company under the laws of the state of its incorporation. (b) Any corporation into which the Owner Trustee may be merged or with which it may be consolidated, or any corporation resulting from any merger or consolidation to which the Owner Trustee shall be a party, shall be the successor Owner Trustee under this Indenture without the execution or filing of any paper, instrument or further act to be done on the part of the parties hereto, anything herein, or in any agreement relating to such merger or consolidation, by which any such Owner Trustee may seek to retain certain powers, rights and privileges therefore obtaining for any period of time following such merger or consolidation, to the contrary notwithstanding. (c) Any successor to the Owner Trustee appointed pursuant to Section 10.01 of the Deposit Trust Agreement shall be the successor Owner Trustee under this Indenture without the execution or filing of any paper, instrument or further act to be done on the part of the parties hereto. (d) Upon any consolidation or merger of or other succession to the Owner Trustee in accordance with this Section 3.04, the Person formed by or surviving such consolidation or merger (if other than the Issuer) or the Person succeeding to the Owner Trustee under the Deposit Trust Agreement may exercise every right and power of the Owner Trustee, on behalf of the Issuer, under this Indenture with the same effect as if such Person had been named as the Owner Trustee herein. SECTION 3.05. PROTECTION OF TRUST ESTATE. (a) The Issuer will from time to time execute and deliver all such supplements and amendments hereto and all such financing statements, continuation statements, instruments of further assurance and other instruments, and will take such other action as may be necessary or advisable to: (i) Grant more effectively all or any portion of the Trust Estate; III-5 78 (ii) maintain or preserve the lien of 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 Mortgage Documents; or (v) preserve and defend title to the Trust Estate and the rights of the Trustee, and of the Bondholders, in the Pledged Mortgages and the other property held as part of the Trust Estate against the claims of all Persons and parties. The Issuer hereby designates the Trustee its agent and attorney-in-fact to execute any financing statement, continuation statement or other instrument required pursuant to this Section 3.05; provided, however, that such designation shall not be deemed to create a duty in the Trustee to monitor the compliance of the Issuer with the foregoing covenants; and provided further, however, that the duty of the Trustee to execute any instrument required pursuant to this Section 3.05 shall arise only if the Trustee has knowledge pursuant to Section 6.01(d) of the occurrence of a failure of the Issuer to comply with provisions of this Section 3.05. (b) Except as permitted by Section 8.08, the Trustee shall not remove any portion of the Trust Estate that consists of money or is evidenced by an instrument, certificate or other writing from the jurisdiction in which it was held at the date of the most recent Opinion of Counsel delivered pursuant to Section 3.06 (or from the jurisdiction in which it was held, or to which it is intended to be removed, as described in the Opinion of Counsel delivered at the Closing Date pursuant to Section 2.12(c), if no Opinion of Counsel has yet been delivered pursuant to Section 3.06) or cause or permit ownership or the pledge of any portion of the Trust Estate that consists of book-entry securities to be recorded on the books of a Person located in a different jurisdiction from the jurisdiction in which such ownership or pledge was recorded at such time unless the Trustee shall have first received an Opinion of Counsel to the effect that the lien and security interest created by this Indenture III-6 79 with respect to such property will continue to be maintained after giving effect to such action or actions. SECTION 3.06. OPINIONS AS TO TRUST ESTATE. On or before February 15 in each calendar year, beginning with [the first calendar year commencing more than three months after the Closing Date, the Issuer shall furnish to the Trustee an Opinion of Counsel reasonably satisfactory in form and substance to the Trustee either stating that, in the opinion of such counsel, such action has been taken as is 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 interest. Such Opinion of Counsel shall also describe all such actions, if any, that will, in the opinion of such counsel, be required to be taken to maintain the lien and security interest of this Indenture with respect to the Trust Estate until May 15 in the following calendar year. SECTION 3.07. PERFORMANCE OF OBLIGATIONS; MASTER SERVICING AGREEMENT. (a) The Issuer shall punctually perform and observe all of its obligations and agreements contained in the Deposit Trust Agreement. The Issuer and the Trustee shall punctually perform and observe all of their respective obligations and agreements contained in the Master Servicing Agreement. (b) The Issuer shall not take any action and will use its reasonable good faith efforts not to permit any action to be taken by others that would release any Person from any of such Person's covenants or obligations under any of the Mortgage Documents or under any instrument included in the Trust Estate, or that would result in the amendment, hypothecation, subordination, termination or discharge of, or impair the validity or effectiveness of, any of the Mortgage Documents, except as expressly provided or permitted in this Indenture and the Master Servicing Agreement or such Mortgage Document or other instrument or unless such action will not adversely affect the interests of the Holders of the Bonds. III-7 80 (c) The Issuer shall monitor the performance of the Master Servicer under the Master Servicing Agreement, and shall use its reasonable good faith efforts to cause the Master Servicer duly and punctually to perform all of its duties and obligations thereunder. Upon the occurrence of a Servicing Default of which an Authorized Officer of the Issuer has actual knowledge under the Master Servicing Agreement, the Issuer shall promptly notify the Trustee thereof, and shall specify in such notice the action, if any, the Issuer is taking in respect of such Servicing Default. So long as any such Servicing Default shall be continuing, the Trustee may (i) terminate all of the rights and powers of the Master Servicer pursuant to the applicable provisions of the Master Servicing Agreement; (ii) exercise any rights it may have to enforce the Master Servicing Agreement against the Master Servicer; and/or (iii) waive any such Servicing Default under the Master Servicing Agreement or take any other action with respect to such Servicing Default as is permitted thereunder. (d) Upon any termination by the Trustee of the Master Servicer's rights and powers pursuant to the Master Servicing Agreement, the rights and powers of the Master Servicer with respect to the Pledged Mortgages shall vest in the Trustee and the Trustee shall be the successor in all respects to the Master Servicer in its capacity as Master Servicer with respect to such Pledged Mortgages under the Master Servicing Agreement, until the Trustee shall have appointed, with the consent of the Issuer, such consent not to be unreasonably withheld, and the Rating Agencies, and in accordance with the applicable provisions of the Master Servicing Agreement a new FNMA- or FHLMC-approved Person to serve as successor to the Master Servicer. With such consent, the Trustee may elect to continue to serve as successor Master Servicer under the Master Servicing Agreement. Upon appointment of a successor Master Servicer, the Trustee and such successor Master Servicer shall enter into a master servicing agreement in a form substantially similar to the Master Servicing Agreement. In connection with any such appointment, the Trustee may make such arrangements for the compensation of such successor as it and such successor shall agree, but in no event shall such compensation of any successor Master Servicer (including the Trustee) be in excess of that payable to the Master Servicer under the Master Servicing Agreement. III-8 81 (e) Upon any termination of the Master Servicer's rights and powers pursuant to the Master Servicing Agreement, the Trustee shall promptly notify the Issuer and the Rating Agencies, specifying in such notice that the Trustee or any successor Master Servicer, as the case may be, has succeeded the Master Servicer under the Master Servicing Agreement, which notice shall also specify the name and address of any such successor Master Servicer. SECTION 3.08. INVESTMENT COMPANY ACT. The Issuer shall at all times conduct its operations so as not to be subject to the Investment Company Act of 1940, as amended (or any successor statute), and the rules and regulations thereunder. SECTION 3.09. NEGATIVE COVENANTS. The Issuer shall not: (a) sell, transfer, exchange or otherwise dispose of any portion of the Trust Estate except as expressly permitted by this Indenture or the Master Servicing Agreement; (b) claim any credit on, or make any deduction from, the principal of, or interest on, any of the Bonds by reason of the payment of any taxes levied or assessed upon any portion of the Trust Estate; (c) engage in any business or activity other than in connection with, or relating to, the issuance of the Bonds and the Investor Certificate pursuant to this Indenture and the Deposit Trust Agreement, respectively, or amend Section 2.03 or Section 11.01 of the Deposit Trust Agreement as in effect on the Closing Date without, in each case, the consent of the Holders of 66 2/3% of the aggregate Class Principal Amount of the Bonds then Outstanding; (d) incur any indebtedness or assume or guaranty any indebtedness of any Person, except for such indebtedness as may be incurred by the Issuer in connection with the issuance of the Bonds pursuant to this Indenture; III-9 82 (e) dissolve or liquidate in whole or in part; or (f) (i) permit the validity or effectiveness of this Indenture or any Grant to be impaired, or permit the lien of this Indenture to be amended, hypothecated, subordinated, terminated or discharged, or permit any Person to be released from any covenants or obligations under this Indenture, except as may be expressly permitted hereby, (ii) permit any lien, charge, security interest, mortgage or other encumbrance (other than the lien of this Indenture, the lien created by Section 8.04 of the Deposit Trust Agreement, as in effect on the Closing Date, or any Permitted Encumbrance) to be created on or extended to or otherwise arise upon or burden the Trust Estate or any part thereof or any interest therein or the proceeds thereof or (iii) permit the lien of this Indenture not to constitute a valid perfected first priority security interest in the Trust Estate. SECTION 3.10. ANNUAL STATEMENT AS TO COMPLIANCE. On or before 120 days after the end of the first fiscal year of the Issuer which ends more than three months after the Closing Date, and each fiscal year thereafter, the Issuer shall deliver to the Trustee a written statement, signed by an Authorized Officer, stating that: (1) a review of the fulfillment by the Issuer during such year of its obligations under this Indenture has been made under such officer's supervision; and (2) to the best of such officer's knowledge, based on such review, the Issuer has fulfilled all of its obligations under this Indenture throughout such 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. SECTION 3.11. RECORDING OF ASSIGNMENTS. The Issuer shall cause the Assignments of the Pledged Mortgages securing the Bonds to be duly recorded in the manner specified in Section 2(a)(i) of the Master Servicing Agreement. III-10 83 If the Issuer fails to cause the Assignment to be recorded within the time limit provided thereunder, the Issuer shall cause the Master Servicer to purchase such corresponding Pledged Mortgage pursuant to Section 8.04 and the applicable provisions of the Master Servicing Agreement. SECTION 3.12. LIMITATION OF LIABILITY OF . It is expressly understood and agreed by the parties hereto that (a) this Indenture is executed and delivered by _________________________, not individually or personally but solely as owner trustee of Sequoia Mortgage Trust 199_-_ under the Deposit 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 ________________________, 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 ___ _____________________, other than any liability arising out of its gross negligence, bad faith or wilful misconduct, and (d) under no circumstances shall ________________________ 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 undertaken by the Issuer under this Indenture or the other Operative Agreements. III-11 84 ARTICLE IV SATISFACTION AND DISCHARGE SECTION 4.01. SATISFACTION AND DISCHARGE OF INDENTURE. Whenever the following conditions shall have been satisfied: (1) either (A) all Bonds theretofore authenticated and delivered (other than (i) Bonds which have been destroyed, lost or stolen and which have been replaced or paid as provided in Section 2.08, and (ii) Bonds for whose payment money has theretofore been deposited in trust and thereafter repaid to the Issuer, as provided in Section 3.03) have been delivered to the Trustee for cancellation; or (B) all Bonds not theretofore delivered to the Trustee for cancellation (i) have become due and payable, or (ii) will become due and payable at the Stated Maturity of the final installment of the principal thereof within one year, or (iii) are to be called for redemption within one year under irrevocable arrangements satisfactory to the Trustee for the giving of notice of redemption by the Trustee in the name, and at the expense, of the Issuer, and the Issuer, in the case of clauses (B)(i), (B)(ii) or (B)(iii) above, has deposited or caused to be deposited with the Trustee, in trust for such purpose, an amount sufficient to pay and discharge the entire indebtedness on such Bonds not theretofore delivered to the Trustee for cancellation, for principal and interest to the Stated Maturity of their entire unpaid principal amount or to the applicable Redemption Date, as the case may be, and in the case of IV-1 85 Bonds which were not paid at the Stated Maturity of their entire unpaid principal amount, for all overdue principal and all interest payable on such Bonds to the next succeeding Payment Date therefor; (2) the Issuer has paid or caused to be paid all other sums payable hereunder by the Issuer; and (3) the Issuer has delivered to the Trustee an Officers' Certificate and an Opinion of Counsel reasonably satisfactory in form and substance to the Trustee each stating that all conditions precedent herein providing for the satisfaction and discharge of this Indenture have been complied with; then, upon Issuer Request, this Indenture and the lien, rights and interests created hereby shall cease to be of further effect, and the Trustee and each co-trustee and separate trustee, if any, then acting as such hereunder shall, at the expense of the Issuer, execute and deliver all such instruments as may be necessary to acknowledge the satisfaction and discharge of this Indenture and shall pay, or assign or transfer and deliver, to the Issuer or upon Issuer Order all Pledged Mortgages, cash, securities and other property held by it as part of the Trust Estate remaining after satisfaction of the conditions set forth in clauses (1) and (2) above. Notwithstanding the satisfaction and discharge of this Indenture, the obligations of the Issuer to the Trustee under Section 6.07, the obligations of the Trustee to the Issuer and the Holders of Bonds under Section 3.03, the obligations of the Trustee to the Holders of Bonds under Section 4.02 and the provisions of Article II with respect to lost, stolen, destroyed or mutilated Bonds, registration of transfers of Bonds and rights to receive payments of principal of, and interest on, the Bonds shall survive. SECTION 4.02. APPLICATION OF TRUST MONEY. All money deposited with the Trustee pursuant to Sections 3.03 and 4.01 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 Paying Agent, as the Trustee may determine, to the Persons entitled thereto, of the principal and interest for whose payment such money has been deposited with the Trustee. IV-2 86 ARTICLE V DEFAULTS AND REMEDIES SECTION 5.01. EVENT OF DEFAULT. "Event of Default", wherever used herein, means, with respect to Bonds issued hereunder, any one of the following events (whatever the reason for such Event of Default and whether it shall be voluntary or involuntary or be effected by operation of law or pursuant to any judgment, decree or order of any court or any order, rule or regulation of any administrative or governmental body): (1) if the Issuer shall (A) default in the payment when and as due of any installment of principal of or interest on any Bond, or (B) default in the payment of the Redemption Price of any Bond which has been called for optional redemption pursuant to Article X; (2) if the Issuer shall breach, or default in the due observance, of any one or more of the covenants set forth in clauses (a) through (e) of Section 3.09; (3) if the Issuer shall breach, or default in the due observance or performance of, any other of its covenants in this Indenture, and such Default shall continue for a period of 30 days after there shall have been given, by registered or certified mail, to the Issuer by the Trustee, or to the Issuer and the Trustee [by the Bond Insurer, or, during the existence of a Bond Insurer Default] by the Holders of Bonds representing more than 50% of the aggregate Class Principal Amount of the Controlling Class, a written notice specifying such Default and requiring it to be remedied and stating that such notice is a "Notice of Default" hereunder; (4) if any representation or warranty of the Issuer made in this Indenture or any certificate or other writing delivered pursuant hereto or in connection herewith shall prove to be incorrect in any material respect as of the time V-1 87 when the same shall have been made and, within 30 days after there shall have been given, by registered or certified mail, written notice thereof to the Issuer by the Trustee, or to the Issuer and the Trustee by the Holders of Bonds representing more than 50% of the aggregate Class Principal Amount of the Controlling Class, the circumstance or condition in respect of which such representation or warranty was incorrect shall not have been eliminated or otherwise cured; (5) the entry of a decree or order for relief by a court having jurisdiction in respect of the Issuer in an involuntary case under the federal bankruptcy laws, as now or hereafter in effect, or any other present or future federal or state bankruptcy, insolvency or similar law, or appointing a receiver, liquidator, assignee, trustee, custodian, sequestrator or other similar official of the Issuer or of any substantial part of its property, or ordering the winding up or liquidation of the affairs of the Issuer and the continuance of any such decree or order unstayed and in effect for a period of 60 consecutive days; or (6) the commencement by the Issuer of a voluntary case under the federal bankruptcy laws, as now or hereafter in effect, or any other present or future federal or state bankruptcy, insolvency or similar law, or the consent by the Issuer to the appointment of or taking possession by a receiver, liquidator, assignee, trustee, custodian, sequestrator or other similar official of the Issuer or of any substantial part of its property or the making by the Issuer of an assignment for the benefit of creditors or the failure by the Issuer generally to pay its debts as such debts become due or the taking of corporate action by the Issuer in furtherance of any of the foregoing. (a) Notwithstanding the foregoing, prior to the payment in full of the Senior Bonds, the failure of the Issuer to pay when and as due any installment of principal of or interest (regardless of the lapse of any grace period) on any Subordinated Bond shall not constitute an Event of Default hereunder. In addition, notwithstanding any applicable provision of this Indenture, upon payment in full of the Senior Bonds, the prior V-2 88 occurrence of any such shortfalls attributable to the Subordinated Bonds, which shortfalls have previously been paid in full, will not constitute an Event of Default hereunder in respect of the Subordinated Bonds. Subject to the foregoing, Section 5.01 of the Indenture shall otherwise apply in all respects to the Subordinated Bonds. (b) Notwithstanding the foregoing, the failure of the Issuer to pay when and as due any installment of principal of (regardless of the lapse of any grace period) any Senior Bond shall not constitute an Event of Default hereunder unless the Senior Class Principal Amount exceeds the aggregate Stated Principal Balances of the Pledged Mortgages after application of all available amounts on deposit in the Distribution Account on a Payment Date. Subject to the foregoing, Section 5.01 of the Indenture shall otherwise apply in all respects to the Senior Bonds. SECTION 5.02. ACCELERATION OF MATURITY; RESCISSION AND ANNULMENT. If an Event of Default occurs and is continuing with respect to the Bonds, then and in every such case the Trustee or the Holders of Bonds representing more than 50% of the aggregate Class Principal Amount of the Controlling Class may declare all the Bonds to be immediately due and payable, by a notice in writing to the Issuer (and to the Trustee if given by Bondholders), and upon any such declaration such Bonds shall become immediately due and payable in an amount equal to: (i) the aggregate Class Principal Amount of all Classes of Bonds, (ii) accrued and unpaid interest at the respective Bond Interest Rates on the aggregate Class Principal Amount through the date of acceleration, and (iii) in the case of the Senior Bonds, interest (but only to the extent payment thereof shall be legally enforceable) on any overdue installments of interest on the Senior Bonds from the Stated Maturity of any such installments to the date of the acceleration at the Bond Interest Rate at which such interest accrued or such lower rate at which payment of such interest shall be legally enforceable. V-3 89 At any time after such a declaration of acceleration of maturity of the Bonds has been made and before a judgment or decree for payment of the money due has been obtained by the Trustee as hereinafter in this Article provided, the Holders of Bonds representing more than 50% of the aggregate Class Principal Amount of the Controlling Class, by written notice to the Issuer and the Trustee, may rescind and annul such declaration and its consequences if: (1) the Issuer has paid or deposited with the Trustee a sum sufficient to pay: (A) all payments of principal of, and interest on, all Bonds and all other amounts which would then be due hereunder or upon such Bonds if the Event of Default giving rise to such acceleration had not occurred; and (B) all sums paid or advanced by the Trustee hereunder and the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel; and (2) all Events of Default, other than the nonpayment of the principal of Bonds which have become due solely by such acceleration, have been cured or waived as provided in Section 5.15. No such rescission shall affect any subsequent Default or impair any right consequent thereon. SECTION 5.03. COLLECTION OF INDEBTEDNESS AND SUITS FOR ENFORCEMENT BY TRUSTEE. Subject to Section 5.05, the Issuer covenants that if an Event of Default shall occur and be continuing in respect to the Bonds and the Bonds have been declared due and payable and such declaration and its consequences have not been rescinded and annulled, the Issuer will, upon demand of the Trustee, pay to the Trustee, for the benefit of the Holders of the Bonds: V-4 90 (i) the amounts specified in the first paragraph of Section 5.02, and (ii) in addition thereto, such further amount as shall be sufficient to cover the costs and expenses of collection, including the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel. If the Issuer fails to pay such amounts forthwith upon such demand, the Trustee, in its own name and as trustee of an express trust, may institute a Proceeding for the collection of the sums so due and unpaid, and may prosecute such Proceeding to judgment or final decree, and may enforce the same against the Issuer or any other obligor upon the Bonds and collect, out of the Trust Estate (as defined in the Deposit Trust Agreement), wherever situated, of the Issuer, the moneys adjudged or decreed to be payable in the manner provided by law; provided, however, that neither the Bank nor any of its agents, officers, directors, employees, successors or assigns shall be personally liable for any amounts due under the Bonds or this Indenture. If an Event of Default occurs and is continuing, the Trustee may in its discretion proceed to protect and enforce its rights and the rights of the Bondholders by any Proceedings the Trustee deems appropriate to protect and enforce any such rights, whether for the specific enforcement of any covenant or agreement in this Indenture or in aid of the exercise of any power granted herein, or enforce any other proper remedy, including, without limitation, instituting a Proceeding prior to any declaration of acceleration of the Maturity of the Bonds for the collection of all amounts then due and unpaid on such Bonds, prosecuting such Proceeding to final judgment or decree, enforcing the same against the Issuer and collecting out of the property, wherever situated, of the Issuer the moneys adjudged or decreed to be payable in the manner provided by law. SECTION 5.04. REMEDIES. If an Event of Default shall have occurred and be continuing and the Bonds have been declared due and payable and such declaration and its consequences have not been rescinded and V-5 91 annulled, the Trustee (subject to Section 5.18, to the extent applicable) may do one or more of the following: (a) institute Proceedings for the collection of all amounts then payable on the Bonds, or under this Indenture, whether by declaration or otherwise, enforce any judgment obtained, and collect from the Issuer moneys adjudged due; (b) in accordance with Section 5.18, sell the Trust Estate or any portion thereof or rights or interest therein, at one or more public or private Sales called and conducted in any manner permitted by law; (c) institute Proceedings from time to time for the complete or partial foreclosure of this Indenture with respect to the Trust Estate; and (d) exercise any remedies of a secured party under the Uniform Commercial Code and take any other appropriate action to protect and enforce the rights and remedies of the Trustee or the Holders of the Bonds hereunder. SECTION 5.05. [RESERVED]. SECTION 5.06. TRUSTEE MAY FILE PROOFS OF CLAIM. In case of the pendency of any receivership, insolvency, liquidation, bankruptcy, reorganization, arrangement, composition or other judicial Proceeding relative to the Issuer or any other obligor upon any of the Bonds or the property of the Issuer or of such other obligor or their creditors, the Trustee (irrespective of whether the Bonds shall then be due and payable as therein expressed or by declaration or otherwise and irrespective of whether the Trustee shall have made any demand on the Issuer for the payment of any overdue principal or interest) shall be entitled and empowered, by intervention in such Proceeding or otherwise to: (i) file and prove a claim for the whole amount of principal and interest owing and unpaid in respect of the Bonds and file such other papers or documents and take such other actions as it deems necessary or advisable in order to V-6 92 have the claims of the Trustee (including any claim for the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel) and of the Bondholders allowed in such Proceeding; and (ii) collect and receive any moneys or other property payable or deliverable on any such claims and to distribute the same; and any receiver, assignee, trustee, liquidator or sequestrator (or other similar official) in any such Proceeding is hereby authorized by each Bondholder to make such payments to the Trustee and, in the event that the Trustee shall consent to the making of such payments directly to the Bondholders, to pay to the Trustee any amount due it for the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel, and any other amounts due the Trustee under Section 6.07. Nothing herein contained shall be deemed to authorize the Trustee to authorize or consent to or accept or adopt on behalf of any Bondholder any plan of reorganization, arrangement, adjustment or composition affecting any of the Bonds or the rights of any Holder thereof, or to authorize the Trustee to vote in respect of the claim of any Bondholder in any such Proceeding. SECTION 5.07. TRUSTEE MAY ENFORCE CLAIMS WITHOUT POSSESSION OF BONDS. All rights of action and claims under this Indenture or any of the Bonds may be prosecuted and enforced by the Trustee without the possession of any of the Bonds or the production thereof in any Proceeding relating thereto, and any such Proceeding instituted by the Trustee shall be brought in its own name as trustee of an express trust, and any recovery of judgment shall be for the ratable benefit of the Holders of the Bonds in respect of which such judgment has been recovered. Any surplus shall be available, in accordance with Section 5.08, for the payment of the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel. V-7 93 SECTION 5.08. APPLICATION OF MONEY COLLECTED. If the Bonds have been declared due and payable following an Event of Default and such declaration and its consequences have not been rescinded and annulled, any money collected by the Trustee with respect to the Bonds pursuant to this Article or otherwise and any monies that may then be held or thereafter received by the Trustee with respect to the Bonds shall be applied, after payment to the Trustee of such amounts as may be payable to it under Section 6.07, in the order, at the date or dates fixed by the Trustee and, in case of the distribution of the entire amount due on account of principal of, and interest on, such Bonds, upon presentation and surrender thereof: First: To the payment of amounts then due and unpaid to any Servicer or the Master Servicer in respect of Nonrecoverable Advances made by such Servicer or the Master Servicer pursuant to the related Servicing Agreement or the Master Servicing Agreement; Second: To the payment of amounts of interest and principal then due and unpaid upon the Outstanding Bonds in accordance with the priorities set forth in Section 2.03(b); and Third: To the payment of the remainder, if any, to the Issuer or any other Person legally entitled thereto. SECTION 5.09. LIMITATION ON SUITS. No Holder of a Bond shall have any right to institute any Proceedings, judicial or otherwise, with respect to this Indenture, or for the appointment of a receiver or trustee, or for any other remedy hereunder, unless: (1) such Holder has previously given written notice to the Trustee of a continuing Event of Default; (2) the Holders of Bonds representing more than 50% of the aggregate Class Principal Amount of the Controlling Class shall have made written request to the Trustee to institute Proceedings in respect of such Event of Default in its own name as Trustee hereunder; V-8 94 (3) such Holder or Holders have offered to the Trustee indemnity in full against the costs, expenses and liabilities to be incurred in compliance with such request; (4) the Trustee for 60 days after its receipt of such notice, request and offer of indemnity has failed to institute any such Proceeding; and (5) no direction inconsistent with such written request has been given to the Trustee during such 60-day period by the Holders of Bonds representing more than 50% of the aggregate Class Principal Amount of the Controlling Class; it being understood and intended that no one or more Holders of Bonds shall have any right in any manner whatever by virtue of, or by availing themselves 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 and for the equal and ratable benefit of all the Holders of Bonds. SECTION 5.10. UNCONDITIONAL RIGHTS OF BONDHOLDERS TO RECEIVE PRINCIPAL AND INTEREST. Notwithstanding any other provision in this Indenture, other than the provisions hereof limiting the right to recover amounts due on a Bond to recovery from the property of the Issuer, the Holder of any Bond shall have the right, to the extent permitted by applicable law, which right is absolute and unconditional, to receive payment of each installment of interest on such Bond on the respective Stated Maturities of such installments of interest, to receive payment of each installment of principal of such Bond when due (or, in the case of any Bond called for redemption, on the date fixed for such redemption) and to institute suit for the enforcement of any such payment, and such right shall not be impaired without the consent of such Holder. V-9 95 SECTION 5.11. RESTORATION OF RIGHTS AND REMEDIES. If the 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, or has been determined adversely to the Trustee or to such Bondholder, then and in every such case the Issuer, the 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 Trustee and the Bondholders shall continue as though no such Proceeding had been instituted. SECTION 5.12. RIGHTS AND REMEDIES CUMULATIVE. No right or remedy herein conferred upon or reserved to the Trustee or to the 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 5.13. DELAY OR OMISSION NOT WAIVER. No delay or omission of the Trustee or of any Holder of any Bond to exercise any right or remedy accruing upon any Event of Default shall impair any such right or remedy or constitute a waiver of any such Event of Default or an acquiescence therein. Every right and remedy given by this Article or by law to the Trustee or to the Bondholders may be exercised from time to time, and as often as may be deemed expedient, by the Trustee or by the Bondholders, as the case may be. SECTION 5.14. CONTROL BY BONDHOLDERS. The Holders of Bonds representing more than 50% of the aggregate Class Principal Amount of the Controlling Class 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; provided, however, that: V-10 96 (1) such direction shall not be in conflict with any rule of law or with this Indenture; (2) any direction to the Trustee to undertake a Sale of the Trust Estate shall be by the Holders of Bonds representing the percentage of the aggregate Class Principal Amount of the Controlling Class specified in Section 5.18(b)(1), unless Section 5.18(b)(2) is applicable; and (3) [Reserved]; (4) the Trustee may take any other action deemed proper by the Trustee which is not inconsistent with such direction; provided, however, that, subject to Section 6.01, the Trustee need not take any action which it determines might involve it in liability or be unjustly prejudicial to the Bondholders not consenting. SECTION 5.15. WAIVER OF PAST DEFAULTS. The Holders of Bonds representing more than 50% of the aggregate Class Principal Amount of the Controlling Class may on behalf of the Holders of all the Bonds of such Class waive any past Default hereunder and its consequences, except a Default: (1) in the payment of any installment of principal of, or interest on, any Bond; or (2) in respect of a covenant or provision hereof which under Section 9.02 cannot be modified or amended without the consent of the Holder of each Outstanding Bond affected. Upon any such waiver, such Default shall cease to exist, and any Event of Default arising therefrom shall be deemed to have been cured for every purpose of this Indenture; but no such waiver shall extend to any subsequent or other Default or impair any right consequent thereon. SECTION 5.16. UNDERTAKING FOR COSTS. All parties to this Indenture agree, and each Holder of any Bond by his or her acceptance thereof shall be deemed to have agreed, that any court may in its discretion require, in any suit V-11 97 for the enforcement of any right or remedy under this Indenture, or in any suit against the Trustee for any action taken, suffered or omitted by it as 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 reasonable costs, including reasonable attorneys' fees, 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 any suit instituted by the Trustee, to any suit instituted by any Bondholder, or group of Bondholders, holding in the aggregate Bonds representing more than 10% of the aggregate Class Principal Amount of the Controlling Class, or to any suit instituted by any Bondholder for the enforcement of the payment of any installment of interest on any Bond on or after the Stated Maturity thereof expressed in such Bond or for the enforcement of the payment of any installment of principal of any Bond when due (or, in the case of any Bond called for redemption, on or after the applicable redemption date). SECTION 5.17. 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 of law wherever enacted, now or at any time hereafter in force, which may affect the covenants in, 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 Trustee, but will suffer and permit the execution of every such power as though no such law had been enacted. SECTION 5.18. SALE OF TRUST ESTATE. (a) The power to effect any sale (a "Sale") of any portion of the Trust Estate pursuant to Section 5.04 shall not be exhausted by any one or more Sales as to any portion of the Trust Estate remaining unsold, but shall continue unimpaired until the entire Trust Estate shall have been sold or all amounts payable on the Bonds and under this Indenture with respect thereto shall have been paid. The Trustee may from time to time postpone any V-12 98 public Sale by public announcement made at the time and place of such Sale. The Trustee hereby expressly waives its right to any amount fixed by law as compensation for any Sale. (b) To the extent permitted by law, the Trustee shall not in any private Sale sell or otherwise dispose of the Trust Estate, or any portion thereof, unless: (1) the Holders of all Controlling Class consent to, or direct the Trustee to make, such Sale; or (2) the proceeds of such Sale would be not less than the entire amount which would be distributable to the Holders of the Bonds, in full payment thereof in accordance with Section 5.08, on the Payment Date next succeeding the date of such Sale. (3) [Reserved] The purchase by the Trustee of all or any portion of the Trust Estate at a private Sale shall not be deemed a Sale or disposition thereof for purposes of this Section 5.18(b). (c) Unless the Holders of all Controlling Class have otherwise consented or directed the Trustee, at any public Sale of all or any portion of the Trust Estate at which a minimum bid equal to or greater than the amount described in paragraph (2) of subsection (b) of this Section 5.18 has not been established by the Trustee and no Person bids an amount equal to or greater than such amount, the Trustee shall bid an amount at least $1.00 more than the highest other bid. (d) In connection with a Sale of all or any portion of the Trust Estate: (1) any Holder or Holders of Bonds may bid for and purchase the property offered for Sale, and upon compliance with the terms of sale may hold, retain and possess and dispose of such property, without further accountability, and may, in paying the purchase money therefor, deliver any Controlling Class or claims for interest thereon in lieu of cash up to the amount which shall, upon distribution of the net proceeds of such Sale, V-13 99 be payable thereon, and such Bonds, in case the amount so payable thereon shall be less than the amount due thereon, shall be returned to the Holders thereof after being appropriately stamped to show such partial payment; (2) the Trustee may bid for and acquire the property offered for Sale in connection with any public Sale thereof, and, in lieu of paying cash therefor, may make settlement for the purchase price by crediting the gross Sale price against the sum of (A) the amount which would be distributable to the Holders of the Bonds as a result of such Sale in accordance with Section 5.08 on the Payment Date next succeeding the date of such Sale and (B) the expenses of the Sale and of any Proceedings in connection therewith which are reimbursable to it, without being required to produce the Bonds in order to complete any such Sale or in order for the net Sale price to be credited against such Bonds, and any property so acquired by the Trustee shall be held and dealt with by it in accordance with the provisions of this Indenture; (3) the Trustee shall execute and deliver an appropriate instrument of conveyance transferring its interest in any portion of the Trust Estate in connection with a Sale thereof; (4) the Trustee is hereby irrevocably appointed the agent and attorney-in-fact of the Issuer to transfer and convey its interest in any portion of the Trust Estate in connection with a Sale thereof, and to take all action necessary to effect such Sale; and (5) no purchaser or transferee at such a Sale shall be bound to ascertain the Trustee's authority, inquire into the satisfaction of any conditions precedent or see to the application of any moneys. (e) Notwithstanding anything in this Indenture to the contrary, if an Event of Default specified in Section 5.01(1) is the Event of Default, or one of the Events of Default, on the basis of which the Bonds have been declared due and payable, then the Trustee may, in its sole discretion, sell the Trust Estate without compliance with this Section 5.18. V-14 100 SECTION 5.19. ACTION ON BONDS. The Trustee's right to seek and recover judgment 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 Trustee or the Holders of Bonds shall be impaired by the recovery of any judgment by the Trustee against the Issuer or by the levy of any execution under such judgment upon any portion of the Trust Estate. V-15 101 ARTICLE VI THE TRUSTEE SECTION 6.01. DUTIES OF TRUSTEE. (a) If an Event of Default has occurred and is continuing, the Trustee shall exercise such of the rights and powers vested in it by this Indenture, and use the same degree of care and skill in their exercise, as a prudent person would exercise or use under the circumstances in the conduct of his or her own affairs. (b) Except during the continuance of an Event of Default: (1) The Trustee need perform only those duties that are specifically set forth in this Indenture and no others and no implied covenants or obligations shall be read into this Indenture; and (2) In the absence of bad faith on its part, the 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 Trustee and conforming to the requirements of this Indenture. The Trustee shall, however, examine such certificates and opinions to determine whether they conform to the requirements of this Indenture. (c) The 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: (1) This paragraph does not limit the effect of subsection (b) of this Section; (2) The Trustee shall not be liable for any error of judgment made in good faith by a Responsible Officer, unless it is proved that the Trustee was negligent in ascertaining the pertinent facts; and VI-1 102 (3) The 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 5.14 or Section 5.18. (d) Except with respect to duties of the Trustee prescribed by the TIA, as to which this Section 6.01(d) shall not apply, for all purposes under this Indenture, the Trustee shall not be deemed to have notice or knowledge of any Event of Default described in Section 5.01(2), 5.01(5) or 5.01(6) or any Default described in Section 5.01(3) or 5.01(4) or any Servicing Default or default under the Master Servicing Agreement unless a Responsible Officer assigned to and working in the Trustee's corporate trust department has actual knowledge thereof or unless written notice of any event which is in fact such an Event of Default, Servicing Default or default is received by the Trustee at the Corporate Trust Office, and such notice references the Bonds generally, the Issuer, the Trust Estate or this Indenture. (e) No provision of this Indenture shall require the Trustee to expend or risk its own funds or otherwise incur any 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 for believing that repayment of such funds or adequate indemnity against such risk or liability is not reasonably assured to it. In determining that such repayment or indemnity is not reasonably assured to it, the Trustee must consider not only the likelihood of repayment or indemnity by or on behalf of the Issuer but also the likelihood of repayment or indemnity from amounts payable to it from the Trust Estate pursuant to Sections 6.07 and 8.02(d); provided, however, that, except as provided in the first sentence of this Section 6.01(e), the Trustee shall not refuse or fail to perform any of its duties hereunder solely as a result of nonpayment of its reasonable fees and expenses; and provided further, however, that nothing in this Section 6.01(e) shall be construed to limit the exercise by the Trustee of any right or remedy permitted under this Indenture or otherwise in the event of the Issuer's failure to pay the amounts due the Trustee pursuant to Section 6.07. VI-2 103 (f) Every provision of this Indenture that in any way relates to the Trustee is subject to the provisions of this Section. (g) Notwithstanding any extinguishment of all right, title and interest of the Issuer in and to the Trust Estate following an Event of Default and a consequent declaration of acceleration of the Maturity of the Bonds, whether such extinguishment occurs through a Sale of the Trust Estate to another Person, the acquisition of the Trust Estate by the Trustee or otherwise, the rights, powers and duties of the Trustee with respect to the Trust Estate (or the proceeds thereof) and the Bondholders and the rights of Bondholders shall continue to be governed by the terms of this Indenture. SECTION 6.02. NOTICE OF DEFAULT. Within 90 days after the occurrence of any Default known to the Trustee, the Trustee shall transmit by mail to all Holders of Bonds notice of each such Default, unless such Default shall have been cured or waived; provided, however, that except in the case of a Default of the type described in Section 5.01(1), the Trustee shall be protected in withholding such notice if and so long as the board of directors, the executive committee or a trust committee of directors and/or Responsible Officers of the Trustee in good faith determine that the withholding of such notice is in the interests of the Holders of the Bonds; and provided, further, that in the case of any Default of the character specified in Section 5.01(3) or 5.01(4) no such notice to Holders of the Bonds shall be given until at least 30 days after the occurrence thereof. Concurrently with the mailing of any such notice to the Holders of the Bonds, the Trustee shall transmit by mail a copy of such notice to the Rating Agencies. SECTION 6.03. RIGHTS OF TRUSTEE. Except as otherwise provided in Section 6.01 hereof: (a) the Trustee may rely and shall be protected in acting or refraining from acting upon any resolution, certificate, statement, instrument, opinion, report, notice, request, direction, consent, order, bond, note or other paper or VI-3 104 document believed by it to be genuine and to have been signed or presented by the proper party or parties; (b) any request or direction of the Issuer mentioned herein shall be sufficiently evidenced by an Issuer Request or Issuer Order, and any resolution of the board of directors may be sufficiently evidenced by a written resolution; (c) whenever in the administration of this Indenture the Trustee shall deem it desirable that a matter be proved or established prior to taking, suffering or omitting any action hereunder, the Trustee (unless other evidence be herein specifically prescribed) may, in the absence of bad faith on its part, rely upon an Officers' Certificate or the Officer's Certificate of the Master Servicer; (d) the Trustee may consult with counsel, and the written advice of such counsel or any Opinion of Counsel shall be full and complete authorization and protection in respect of any action taken, suffered or omitted by it hereunder in good faith and in reliance thereon; (e) the Trustee shall be under no obligation to exercise any of the rights or powers vested in it by this Indenture at the request or direction of any of the Bondholders pursuant to this Indenture, unless such Bondholders shall have offered to the Trustee reasonable security or indemnity against the costs, expenses and liabilities which might be incurred by it in compliance with such request or direction; (f) the 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, direction, consent, order, bond, note or other paper or document, but the Trustee, in its discretion may make such further inquiry or investigation into such facts or matters as it may see fit, and if the Trustee shall determine to make such further inquiry or investigation, it shall be entitled, on reasonable prior notice to the Issuer, to examine the books, records and premises of the Issuer, personally or by agent or attorney, during the Issuer's normal business hours; provided that the Trustee shall and shall cause its agents to hold in confidence all such information except to the extent disclosure VI-4 105 may be required by law and except to the extent that the Trustee, in its sole judgment, may determine that such disclosure is consistent with its obligations hereunder; (g) the Trustee may execute any of the trusts or powers hereunder or perform any duties hereunder either directly or by or through agents or attorneys and the Trustee shall not be responsible for any misconduct or negligence on the part of any agent or attorney appointed and supervised with due care by it hereunder; (h) the 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; (i) prior to the time that one of its Responsible Officers obtains actual knowledge of a Servicing Default as defined in the Master Servicing Agreement or a failure by the Master Servicer thereunder which with notice and the passage of time will become a Servicing Default, the Trustee shall not be responsible for taking action with respect thereto; (j) the Trustee shall not be responsible for supervising, monitoring or reviewing the Master Servicer's performance of its duties under the Master Servicing Agreement except to the extent of determining (i) that the periodic reports, certificates and opinions required to be delivered by the Master Servicer to it thereunder are delivered in timely fashion and conform to the requirements of the Master Servicing Agreement, (ii) that the amounts received by it from the Master Servicer for deposit in the Distribution Account during any month are as shown in the Master Servicer's report for such month, (iii) and that any Trustee Mortgage File or document therein that has been released by the Trustee to the Master Servicer is returned as provided in the Master Servicing Agreement; and (k) the provisions of this Section, other than clauses (e), (i) and (j), and of Sections 6.01(b) and (c) shall apply to the Trustee as it may be Successor Master Servicer under the Master Servicing Agreement. VI-5 106 SECTION 6.04. NOT RESPONSIBLE FOR RECITALS OR ISSUANCE OF BONDS. The recitals contained herein and in the Bonds, except the certificates of authentication on the Bonds, shall be taken as the statements of the Issuer, and the Trustee assumes no responsibility for their correctness. The Trustee makes no representations with respect to the Trust Estate or as to the validity or sufficiency of this Indenture or of the Bonds. The Trustee shall not be accountable for the use or application by the Issuer of the Bonds or the proceeds thereof or any money paid to the Issuer or upon Issuer Order pursuant to the provisions hereof. SECTION 6.05. MAY HOLD BONDS. The Trustee, any Agent, or any other agent of the Issuer, in its individual or any other capacity, may become the owner or pledgee of Bonds and, subject to Sections 6.08 and 6.13, may otherwise deal with the Issuer or any Affiliate of the Issuer with the same rights it would have if it were not the Trustee, Agent or such other agent. SECTION 6.06. MONEY HELD IN TRUST. Money held by the Trustee in trust hereunder need not be segregated from other funds except to the extent required by this Indenture or by law. The Trustee shall be under no liability for interest on any money received by it hereunder except as otherwise agreed with the Issuer and except to the extent of income or other gain on investments which are obligations of the Trustee, in its commercial capacity, and income or other gain actually received by the Trustee on investments, which are obligations of others. SECTION 6.07. COMPENSATION AND REIMBURSEMENT. The Issuer agrees: (1) subject to any separate written agreement with the Trustee, to pay the Trustee from time to time reasonable compensation for all services rendered by it hereunder (which compensation shall not be limited by any provision of law in regard to the compensation of a trustee of an express trust); VI-6 107 (2) except as otherwise expressly provided herein, to reimburse the Trustee upon its request for all reasonable expenses, disbursements and advances incurred or made by the Trustee in connection with the performance of its duties hereunder (including the reasonable compensation and the expenses and disbursements of its agents and counsel), except any such expense, disbursement or advance as may be attributable to its negligence or bad faith; and (3) to indemnify the Trustee and its agents for, and to hold them harmless against, any loss, liability or expense incurred without negligence or bad faith on their part, arising out of, or in connection with, the acceptance or administration of this trust, including the costs and expenses of defending themselves against any claim in connection with the exercise or performance of any of their powers or duties hereunder, provided that: (i) with respect to any such claim, the Trustee shall have given the Issuer written notice thereof promptly after the Trustee shall have knowledge thereof; (ii) while maintaining absolute control over its own defense, the Trustee shall cooperate and consult fully with the Issuer in preparing such defense; and (iii) notwithstanding anything to the contrary in this Section 6.07(3), the Issuer shall not be liable for settlement of any such claim by the Trustee entered into without the prior consent of the Issuer. As security for the performance of the obligations of the Issuer under this Section, the Trustee shall have a lien ranking junior to the lien of the Bonds with respect to which any claim of the Trustee under this Section arose (but senior to all other liens, if any) upon all property and funds held or collected as part of the Trust Estate by the Trustee in its capacity as such. The Trustee shall not institute any Proceeding seeking the enforcement of such lien against the Trust Estate unless such Proceeding is in connection with a Proceeding in accordance with Article V for enforcement of the lien of this Indenture after the occurrence of an Event of Default (other than VI-7 108 an Event of Default arising solely from the Issuer's failure to pay amounts due the Trustee under this Section 6.07) and a resulting declaration of acceleration of Maturity of the Bonds which has not been rescinded and annulled. SECTION 6.08. ELIGIBILITY; DISQUALIFICATION. Irrespective of whether this Indenture is qualified under the TIA, this Indenture shall always have a Trustee who satisfies the requirements of TIA Sections 310(a)(1) and 310(a)(5). The Trustee shall always have a combined capital and surplus as stated in Section 6.09. The Trustee shall be subject to TIA Section 310(b). SECTION 6.09. TRUSTEE'S CAPITAL AND SURPLUS. The Trustee shall at all times have a combined capital and surplus of at least $50,000,000 or shall be a member of a bank holding company system, the aggregate combined capital and surplus of which is at least $50,000,000; provided, however, that the Trustee's separate capital and surplus shall at all times be at least the amount required by TIA Section 310(a)(2) if this Indenture is qualified under the TIA. If the Trustee publishes annual reports of condition of the type described in TIA Section 310(a)(2), its combined capital and surplus for purposes of this Section 6.09 shall be as set forth in the latest such report. SECTION 6.10. RESIGNATION AND REMOVAL; APPOINTMENT OF SUCCESSOR. (a) No resignation or removal of the Trustee and no appointment of a successor Trustee pursuant to this Article shall become effective until the acceptance of appointment by the successor Trustee under Section 6.11. (b) The Trustee may resign at any time by giving written notice thereof to the Issuer. If an instrument of acceptance by a successor Trustee shall not have been delivered to the Trustee within 30 days after the giving of such notice of resignation, the resigning Trustee may petition any court of competent jurisdiction for the appointment of a successor Trustee. VI-8 109 (c) The Trustee may be removed at any time by Act of the Holders representing more than 50% of the aggregate Class Principal Amount of the Controlling Class, delivered to the Trustee and to the Issuer. (d) If at any time: (1) the Trustee shall have a conflicting interest prohibited by Section 6.08 and shall fail to resign or eliminate such conflicting interest in accordance with Section 6.08 after written request therefor by the Issuer or by any Bondholder; provided, however, that this Section 6.10(d)(1) shall not be operative as part of this Indenture unless and until this Indenture is qualified under the TIA, and until such qualification this Indenture shall be construed as if this Section 6.10(d)(1) were not contained herein; or (2) the Trustee shall cease to be eligible under Section 6.09 or shall become incapable of acting or shall be adjudged a bankrupt or insolvent, or a receiver of the Trustee or of its property shall be appointed, or any public officer shall take charge or control of the Trustee or of its property or affairs for the purpose of rehabilitation, conservation or liquidation; then, in any such case, (i) the Issuer by an Issuer Order may remove the Trustee or (ii) subject to Section 5.16, any Bondholder who has been a bona fide Holder of a Bond for at least six months may, on behalf of itself and all others similarly situated, petition any court of competent jurisdiction for the removal of the Trustee and the appointment of a successor Trustee, unless this Indenture is qualified under the TIA and the Trustee's duty to resign is stayed as provided in Section 310(b) of the TIA. (e) If the Trustee shall resign, be removed or become incapable of acting, or if a vacancy shall occur in the office of the Trustee for any cause, the Issuer, by an Issuer Order shall promptly appoint a successor Trustee. If within one year after such resignation, removal or incapability or the occurrence of such vacancy a successor Trustee shall be appointed by Act of the Holders of Bonds representing more than 50% of the aggregate VI-9 110 Class Principal Amount of the Controlling Class delivered to the Issuer and the retiring Trustee, the successor Trustee so appointed shall, forthwith upon its acceptance of such appointment, become the successor Trustee and supersede the successor Trustee appointed by the Issuer. If no successor Trustee shall have been so appointed by the Issuer or Bondholders and shall have accepted appointment in the manner hereinafter provided, any Bondholder who has been a bona fide Holder of a Bond for at least six months may, on behalf of itself and all others similarly situated, petition any court of competent jurisdiction for the appointment of a successor Trustee. (f) The Issuer shall give notice of each resignation and each removal of the Trustee and each appointment of a successor Trustee to the Holders of Bonds. Each notice shall include the name of the successor Trustee and the address of its Corporate Trust Office. SECTION 6.11. ACCEPTANCE OF APPOINTMENT BY SUCCESSOR. Every successor Trustee appointed hereunder shall execute, acknowledge and deliver to the Issuer and the retiring Trustee an instrument accepting such appointment, and thereupon the resignation or removal of the retiring Trustee shall become effective and such successor Trustee, without any further act, deed or conveyance, shall become vested with all the rights, powers, trusts and duties of the retiring Trustee. Notwithstanding the foregoing, on request of the Issuer or the successor Trustee, such retiring Trustee shall, upon payment of its charges, execute and deliver an instrument transferring to such successor Trustee all the rights, powers and trusts of the retiring Trustee, and shall duly assign, transfer and deliver to such successor Trustee all property and money held by such retiring Trustee hereunder subject nevertheless to its lien, if any, provided for in Section 6.07. Upon request of any such successor Trustee, the Issuer shall execute and deliver any and all instruments for more fully and certainly vesting in and confirming to such successor Trustee all such rights, powers and trusts. No successor Trustee shall accept its appointment unless at the time of such acceptance such successor Trustee shall be qualified and eligible under this Article. VI-10 111 SECTION 6.12. MERGER, CONVERSION, CONSOLIDATION OR SUCCESSION TO BUSINESS OF TRUSTEE. Any corporation into which the Trustee may be merged or converted or with which it may be consolidated, or any corporation resulting from any merger, conversion or consolidation to which the Trustee shall be a party, or any corporation succeeding to all or substantially all of the corporate trust business of the Trustee, shall be the successor of the Trustee hereunder, provided such corporation shall be otherwise qualified and eligible under this Article, without the execution or filing of any paper or any further act on the part of any of the parties hereto. In case any Bonds have been authenticated, but not delivered, by the Trustee then in office, any successor by merger, conversion or consolidation to such authenticating Trustee may adopt such authentication and deliver the Bonds so authenticated with the same effect as if such successor Trustee had authenticated such Bonds. SECTION 6.13. PREFERENTIAL COLLECTION OF CLAIM AGAINST ISSUER. If this Indenture is qualified under the TIA, the Trustee shall be subject to TIA Section 311(a), excluding any creditor relationship listed in TIA Section 311(b), and a Trustee who has resigned or been removed shall be subject to TIA Section 311(a) to the extent indicated. SECTION 6.14. CO-TRUSTEES AND SEPARATE TRUSTEES. At any time or times, for the purpose of meeting the legal requirements of the TIA or of any jurisdiction in which any of the Trust Estate may at the time be located, the Issuer and the Trustee shall have power to appoint, and, upon the written request of the Trustee or of the Holders of Bonds representing more than 50% of the aggregate Class Principal Amount of the Controlling Class with respect to which a co-trustee or separate trustee is being appointed, the Issuer shall for such purpose join with the Trustee in the execution, delivery and performance of all instruments and agreements necessary or proper to appoint, one or more Persons approved by the Trustee either to act as co-trustee, jointly with the Trustee, of all or any part of the Trust Estate, or to act as separate trustee of any such property, in either case with such powers as may be provided in the VI-11 112 instrument of appointment, and to vest in such Person or Persons in the capacity aforesaid, any property, title, right or power deemed necessary or desirable, subject to the other provisions of this Section. If the Issuer does not join in such appointment within 15 days after the receipt by it of a request to do so, or in case an Event of Default has occurred and is continuing, the Trustee alone shall have power to make such appointment. Should any written instrument from the Issuer be required by any co-trustee or separate trustee so appointed for more fully confirming to such co-trustee or separate trustee such property, title, right or power, any and all such instruments shall, on request, be executed, acknowledged and delivered by the Issuer. Each notice shall include the name and address of any such co-trustee or successor trustee. Every co-trustee or separate trustee shall, to the extent permitted by law, but to such extent only, be appointed subject to the following terms: (1) The Bonds shall be authenticated and delivered and all rights, powers, duties and obligations hereunder in respect of the custody of securities, cash and other personal property held by, or required to be deposited or pledged with, the Trustee hereunder, shall be exercised solely by the Trustee. (2) The rights, powers, duties and obligations hereby conferred or imposed upon the Trustee in respect of any property covered by such appointment shall be conferred or imposed upon and exercised or performed by the Trustee or by the Trustee and such co-trustee or separate trustee jointly, as shall be provided in the instrument appointing such co-trustee or separate trustee, except to the extent that under any law of any jurisdiction in which any particular act is to be performed, the Trustee shall be incompetent or unqualified to perform such act, in which event such rights, powers, duties and obligations shall be exercised and performed by such co-trustee or separate trustee. (3) The Trustee at any time, by an instrument in writing executed by it, with the concurrence of the Issuer VI-12 113 evidenced by an Issuer Order, may accept the resignation of or remove any co-trustee or separate trustee appointed under this Section, and, in case of an Event of Default has occurred and is continuing, the Trustee shall have power to accept the resignation of, or remove, any such co-trustee or separate trustee without the concurrence of the Issuer. Upon the written request of the Trustee, the Issuer shall join with the Trustee in the execution, delivery and performance of all instruments and agreements necessary or proper to effectuate such resignation or removal. A successor to any co-trustee or separate trustee which has resigned or has been removed may be appointed in the manner provided in this Section. (4) No co-trustee or separate trustee shall be required to satisfy the eligibility requirements under Sections 6.08 and 6.09. No co-trustee or separate trustee hereunder shall be personally liable by reason of any act or omission of the Trustee, or any other such trustee hereunder. (5) Any Act of Bondholders delivered to the Trustee shall be deemed to have been delivered to each such co-trustee and separate trustee. SECTION 6.15. AUTHENTICATING AGENTS. Upon the request of the Issuer, the Trustee shall appoint an Authenticating Agent with power to act on its behalf and subject to its direction in the authentication and delivery of the Bonds designated for such authentication by the Issuer and containing provisions therein for such authentication (or with respect to which the Issuer has made other arrangements, satisfactory to the Trustee and such Authenticating Agent, for notation on the Bonds of the authority of an Authenticating Agent appointed after the initial authentication and delivery of such Bonds) in connection with transfers and exchanges under Sections 2.06 and 2.07, if any, as fully to all intents and purposes as though the Authenticating Agent had been expressly authorized by those Sections to authenticate and deliver Bonds. For all purposes of this Indenture (other than in connection with the authentication and delivery of Bonds pursuant to Sections 2.05 and 2.12 in connection with their initial issuance and for VI-13 114 purposes of Section 2.08), the authentication and delivery of Bonds by the Authenticating Agent pursuant to this Section shall be deemed to be the authentication and delivery of Bonds "by the Trustee". Such Authenticating Agent shall at all times be a Person that both meets the requirements of Section 6.09 for the Trustee hereunder and has its principal office in the Borough of Manhattan, City and State of New York. Any Authenticating Agent shall also serve as Bond Registrar or co-Bond Registrar, as provided in Section 2.07. Any Authenticating Agent appointed by the Trustee pursuant to the terms of this Section 6.15 or pursuant to the terms of any supplemental indenture shall deliver to the Trustee as a condition precedent to the effectiveness of such appointment an instrument accepting the trusts, duties and responsibilities of Authenticating Agent and of Bond Registrar or co-Bond Registrar and indemnifying the Trustee for and holding the Trustee harmless against, any loss, liability or expense (including reasonable attorneys' fees) incurred without negligence or bad faith on its part, arising out of or in connection with the acceptance, administration of the trust or exercise of authority by such Authenticating Agent, Bond Registrar or co-Bond Registrar. Any corporation into which any Authenticating Agent may be merged or converted or with which it may be consolidated, or any corporation resulting from any merger, consolidation or conversion to which any Authenticating Agent shall be a party, or any corporation succeeding to the corporate trust business of any Authenticating Agent, shall be the successor of the Authenticating Agent hereunder, if such successor corporation is otherwise eligible under this Section, without the execution or filing of any further act on the part of the parties hereto or the Authenticating Agent or such successor corporation. Any Authenticating Agent may at any time resign by giving written notice of resignation to the Trustee and the Issuer. The Trustee may at any time terminate the agency of any Authenticating Agent by giving written notice of termination to such Authenticating Agent and the Issuer. Upon receiving such a notice of resignation or upon such a termination, or in case at any time any Authenticating Agent shall cease to be eligible under this Section, the Trustee shall promptly appoint a successor Authenticating Agent, shall give written notice of such VI-14 115 appointment to the Issuer and shall mail notice of such appointment to all Holders of Bonds. The Trustee agrees, subject to Section 6.01(e), to pay to any Authenticating Agent from time to time reasonable compensation for its services and the Trustee shall be entitled to be reimbursed for such payments, subject to Section 6.07. The provisions of Sections 2.10, 6.04 and 6.05 shall be applicable to any Authenticating Agent. SECTION 6.16. REVIEW OF MORTGAGE DOCUMENTS. The Trustee agrees, for the benefit of the Holders of the Bonds, to review, within 90 days after the Closing Date, the Mortgage Documents delivered to it in connection with the Grant of the Original Pledged Mortgages as security for the Bonds. The Trustee's review shall be limited to a determination that all documents referred to in the definition of the term Mortgage Documents have been delivered with respect to each such Pledged Mortgage (other than the documents related to any Pledged Mortgage so listed which has been subject to a Principal Prepayment in Full and the proceeds of which have been delivered to the Trustee in lieu of the applicable Mortgage Documents), that all such documents have been executed, and that all such documents relate to the Original Pledged Mortgages, provided that the Trustee shall not be responsible for determining whether any assignment is in recordable form or for verifying the information with respect to said loans contained on the Pledged Mortgage Schedule. In performing such review the Trustee may rely upon the purported genuineness and due execution of any such document and on the purported genuineness of any signature thereon. If the Trustee discovers any defect or omission in the Mortgage Documents or that any document required to be delivered to it has not been delivered or that any document so delivered does not relate to any of the Original Pledged Mortgages, it shall promptly notify the Issuer and the Master Servicer of such Pledged Mortgage in accordance with the provisions of the Master Servicing Agreement. SECTION 6.17. PAYMENT OF CERTAIN INSURANCE PREMIUMS. Notwithstanding anything to the contrary contained in this Indenture, the Trustee agrees, for the benefit of the VI-15 116 Holders of the Bonds, that, should it fail to receive notice from the Master Servicer or the applicable Insurer, within the time period required pursuant to the Master Servicing Agreement, to the effect that any premiums due with respect to any Insurance Policies the premiums for which are required to be paid by the Servicer or the Master Servicer from amounts on deposit in the related Escrow Account, or required to be advanced by the Master Servicer or the related Servicer, have been paid in full at the times set forth in the Master Servicing Agreement, the Trustee shall proceed with diligence to make inquiries of the Master Servicer, the Issuer and the applicable Insurers as to whether such premiums have been paid at the times set forth in the Master Servicing Agreement. In the event such premiums have not been paid and the coverage provided under the related Insurance Policy may be interrupted or adversely affected, the Trustee agrees promptly to pay such premiums from amounts on deposit in the Distribution Account, pursuant to Section 8.02(d) and in accordance with its obligations under the applicable provisions of the Master Servicing Agreement. SECTION 6.18. SUBSTITUTION OF INSURANCE POLICIES, ETC.; NOTIFICATION OF RATING AGENCIES. (a) Provided that the conditions set forth in paragraph (b) hereof have been satisfied, the Issuer may substitute a replacement policy or instrument for any Bond Insurance Policy. (b) The Issuer shall notify each Rating Agency rating the Bonds in the event that any replacement policy or instrument is obtained for any Bond Insurance Policy and Insurer or other Person other than the Person who issued such policy or instrument; provided, however, that the Trustee shall not be required to accept any such replacement policy or instrument unless the Trustee has received from each Rating Agency rating the Bonds a written instrument to the effect that such acceptance by the Trustee will not result in the lowering of the then applicable rating of any Bonds issued pursuant to this Indenture by such Rating Agency. VI-16 117 ARTICLE VII BONDHOLDERS' LISTS AND REPORTS SECTION 7.01. ISSUER TO FURNISH TRUSTEE NAMES AND ADDRESSES OF BONDHOLDERS. (a) The Issuer shall furnish or cause to be furnished to the Trustee (i) semi-annually, not less than 45 days nor more than 60 days after the Interest Payment Date occurring closest to six months after the Closing Date and each Interest Payment Date occurring at six-month intervals thereafter, a list, in such form as the Trustee may reasonably require, of the names and addresses of the Holders of Bonds and (ii) at such other times, as the 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 Trustee is the Bond Registrar, no such list shall be required to be furnished. (b) In addition to furnishing to the Trustee the Bondholder lists, if any, required under subsection (a), the Issuer shall also furnish all Bondholder lists, if any, required under Section 3.03 at the times required by Section 3.03. SECTION 7.02. PRESERVATION OF INFORMATION; COMMUNICATIONS TO BONDHOLDERS. (a) The Trustee shall preserve, in as current a form as is reasonably practicable, the names and addresses of the Holders of Bonds contained in the most recent list, if any, furnished to the Trustee as provided in Section 7.01 and the names and addresses of the Holders of Bonds received by the Trustee in its capacity as Bond Registrar. The Trustee may destroy any list furnished to it as provided in Section 7.01 upon receipt of a new list so furnished. (b) If this Indenture is qualified under the TIA, Bondholders may communicate pursuant to TIA Section 312(b) with other Bondholders with respect to their rights under this Indenture or under the Bonds. VII-1 118 (c) If this Indenture is qualified under the TIA, the Issuer, the Trustee and the Bond Registrar shall have the protection of TIA Section 312(c). SECTION 7.03. REPORTS BY TRUSTEE. (a) If this Indenture is qualified under the TIA, then within 30 days after May 15 of each year (the "reporting date"), commencing with the year after the issuance of the Bonds, (i) in the circumstance required by TIA Section 313(a), the Trustee shall mail to all Holders a brief report dated as of such reporting date that complies with TIA Section 313(a), (ii) the Trustee shall also mail to Holders of Bonds with respect to which it has made advances any reports with respect to such advances that are required by TIA Section 313(b)(2) and (iii) the Trustee shall also mail to Holders of Bonds any reports required by TIA Section 313(b)(1). For purposes of the information required to be included in any such reports pursuant to TIA Sections 313(a)(3), 313(b)(1) (if applicable) or 313(b)(2), the principal amount of indenture securities outstanding on the date as of which such information is provided shall be the aggregate Class Principal Amount of the then Controlling Class covered by the report. The Trustee shall comply with TIA Section 313(c) with respect to any reports required by this Section 7.03(a). (b) If this Indenture is qualified under the TIA, a copy of each report required under this Section 7.03 shall, at the time of such transmission to Holders of Bonds be filed by the Trustee with the Commission and with each securities exchange upon which the Bonds are listed. The Issuer will notify the Trustee when the Bonds are listed on any securities exchange. SECTION 7.04. REPORTS BY ISSUER. If this Indenture is qualified under the TIA, the Issuer (a) shall file with the Trustee, within 15 days after it files them with the Commission, copies of the annual reports and of the information, documents and other reports (or copies of such portions of any of the foregoing as the Commission may by rules and regulations prescribe) which the Issuer is required to file with the Commission pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 and (b) shall also comply with the other provisions of TIA Section 314(a). VII-2 119 SECTION 7.05. NOTICE TO THE RATING AGENCIES [AND TO BOND INSURER.] The Issuer shall use its best efforts promptly to provide notice to the Rating Agencies [and the Bond Insurer] of any of the following events of which it has actual knowledge: (a) any material change to or amendment of this Indenture; (b) the occurrence of any Default or Event of Default that has not been cured; (c) the resignation or termination of the Trustee; (d) the substitution of Pledged Mortgages; (e) the proposed issuance of Additional Bonds; (f) the final payment of Bondholders; and [(g) any payment or claim made under the Bond Insurance Policy.] VII-3 120 ARTICLE VIII ACCOUNTS, PAYMENTS OF INTEREST AND PRINCIPAL, AND RELEASES SECTION 8.01. COLLECTION OF MONEYS. Except as otherwise expressly provided herein, the 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 Trustee pursuant to this Indenture. The Trustee shall hold all such money and property received by it as part of the Trust Estate and shall apply it as provided in this Indenture. Except as otherwise expressly provided herein, if any default occurred in the making of any payment or performance under any agreement or instrument that is part of the Trust Estate, the Trustee may take such action as may be appropriate to enforce such payment or performance, including the institution and prosecution of appropriate Proceedings. Any such action shall be without prejudice to any right to claim a Default or Event of Default hereunder and any right to proceed thereafter as provided in Article V. SECTION 8.02. DISTRIBUTION ACCOUNT. (a) On or prior to the Closing Date, the Issuer shall cause the Master Servicer to establish and maintain, in the name of the Trustee, for the benefit of the Bondholders and the Holder of the Investor Certificate, the Pledged Accounts as provided in Section 3(h) of the Master Servicing Agreement. (b) Except as otherwise provided in the Master Servicing Agreement, within one Business Day of receipt thereof by the Master Servicer, the Master Servicer will deposit in the Bond Account all amounts required to be deposited therein pursuant to Section 3(h) of the Master Servicing Agreement. (c) The Trustee shall establish and maintain, on behalf of the Bondholders, the Distribution Account. The Trustee shall, promptly upon receipt, deposit in the Distribution Account and retain therein the following: VIII-1 121 (i) the aggregate amount remitted by the Master Servicer to the Trustee pursuant to Section 3(h)(vii) of the Master Servicing Agreement; and (ii) any other amounts deposited hereunder which are required to be deposited in the Distribution Account. In the event that the Master Servicer shall remit any amount not required to be remitted, it may at any time direct the Trustee to withdraw such amount from the Distribution Account, any provision herein to the contrary notwithstanding. Such direction may be accomplished by delivering an Officer's Certificate to the Trustee which describes the amounts deposited in error in the Distribution Account. All funds deposited in the Distribution Account shall be held by the Trustee in trust for the Bondholders until disbursed in accordance with this Indenture or withdrawn in accordance with Section 2.03(b). In no event shall the Trustee incur liability for withdrawals from the Distribution Account at the direction of the Master Servicer. (d) Subject to Sections 5.02 and 5.08, on each Payment Date and Redemption Date, the Trustee shall distribute all amounts on deposit in the Distribution Account to Bondholders in respect of the Bonds to the extent of amounts due and unpaid on the Bonds for principal and interest in the amounts and in the order of priority set forth in Section 2.03(b). SECTION 8.03. GENERAL PROVISIONS REGARDING PLEDGED ACCOUNTS. (a) Each Pledged Account shall relate solely to the Bonds, the Investor Certificate and to the Pledged Mortgages, Permitted Investments and other property securing the Bonds. Funds and other property in each Pledged Account shall not be commingled with any other moneys or property of the Issuer or any Affiliate thereof. Notwithstanding the foregoing, the Trustee may hold any funds or other property received or held by it as part of a Pledged Account, other than the Distribution Account, in collective accounts maintained by it in the normal course of its business and containing funds or property held by it for other Persons (which may include the Issuer or an Affiliate), provided that such accounts are under the sole control of the Trustee and the Trustee maintains adequate records indicating the ownership of all such funds or property and the portions thereof held for credit to each Pledged Account. VIII-2 122 (b) So long as no Default or Event of Default shall have occurred and be continuing, all or a portion of the funds in the Pledged Accounts shall be invested in Permitted Investments and reinvested by the Trustee upon written direction of the Master Servicer, subject to the provisions of Section 3(h) of the Master Servicing Agreement. Any such Permitted Investment shall mature not later than the applicable date specified in Section 3(h)(ix) of the Master Servicing Agreement. All income and gain (net of any losses) realized from any such investment of funds on deposit in the Pledged Accounts shall be for the benefit of the Master Servicer as servicing compensation and shall be remitted to it monthly as provided in the Master Servicing Agreement. The amount of any realized losses in the Pledged Accounts incurred in respect of any such investments shall promptly be deposited by the Master Servicer in the applicable Pledged Account or Pledged Accounts. The Master Servicer will not direct the Trustee to make any investment of any funds or to sell any investment held in any of the Pledged Accounts unless the security interest Granted and perfected in such account will continue to be perfected in such investment or the proceeds of such sale, in either case without any further action by any Person, and, in connection with any direction to the Trustee to make any such investment or sale, if requested by the Trustee, the Master Servicer shall deliver to the Trustee an Opinion of Counsel, acceptable to the Trustee, to such effect. (c) Subject to Section 6.01(c), the Trustee shall not in any way be held liable by reason of any insufficiency in any of the Pledged Accounts resulting from any loss on any Permitted Investment included therein except for losses attributable to the Trustee's failure to make payments on such Permitted Investments issued by the Trustee, in its commercial capacity as principal obligor and not as trustee, in accordance with their terms. (d) If (i) the Master Servicer shall have failed to give investment directions for any funds on deposit in the Pledged Accounts to the Trustee by 11:00 a.m. Eastern Time (or such other time as may be agreed by the Master Servicer and Trustee) on any Business Day or (ii) a Default or Event of Default shall have occurred and be continuing with respect to the VIII-3 123 Bonds but the Bonds shall not have been declared due and payable pursuant to Section 5.02 or (iii) if such Bonds shall have been declared due and payable following an Event of Default, amounts collected or receivable from the Trust Estate are being applied in accordance with Section 5.05 as if there had not been such a declaration, then the Trustee shall, to the fullest extent practicable, invest and reinvest funds in the Pledged Accounts in one or more Permitted Investments. (e) The Trustee shall, at all times while any Bonds are outstanding, maintain in its possession, or in the possession of an agent whose actions with respect to such items are under the sole control of the Trustee, all certificates or other instruments, if any, evidencing any investment of funds in a Pledged Account. The Trustee shall relinquish possession of such items, or direct its agent to do so, only for purposes of collecting the final payment receivable on such investment or certificate or, in connection with the sale of any investment held in a Pledged Account, against delivery of the amount receivable in connection with any sale. SECTION 8.04. PURCHASES OF DEFECTIVE PLEDGED MORTGAGES. (a) If at any time the Issuer or the Trustee discovers or is notified by the Master Servicer (i) that there has been a breach of any of the Master Servicer's representations and warranties with respect to Pledged Mortgages contained in the Master Servicing Agreement that materially and adversely affects the interests of the Bondholders in any Pledged Mortgage, (ii) that any of the Mortgage Documents for a Pledged Mortgage has not been properly executed by the Mortgagor or contains a material defect or (iii) that any Mortgage Documents for a Pledged Mortgage shall not have been received by the Trustee within the applicable time periods and in the forms set forth in Section 3.11 or Section 6.16, as the case may be, and the Master Servicing Agreement, then the party discovering such defect or omission or receiving notice thereof shall promptly notify the other party and the Master Servicer (other than in cases where the Master Servicer has given notice thereof). (b) If any defect, misrepresentation or omission described in subsection (a) of this Section 8.04 materially and adversely affects the interests of the Bondholders, then the VIII-4 124 Issuer shall, pursuant to the applicable provisions of the Master Servicing Agreement, cause the Master Servicer to either (i) cure any such defect, misrepresentation or omission, (ii) remove such Pledged Mortgage and substitute in its place a Replacement Pledged Mortgage or (iii) purchase the affected Pledged Mortgage, in each case at the times and in the manner set forth in the Master Servicing Agreement. (c) Upon any such purchase or substitution, the Issuer shall be entitled to request a release of the defective Pledged Mortgage from the lien of this Indenture pursuant to Section 8.08(c) and Section 8.12. (d) If the Master Servicer shall either (i) purchase any Pledged Mortgage it is required to purchase pursuant to the Master Servicing Agreement and deposit the Purchase Price therefor in the Bond Account or (ii) (a) remove such Pledged Mortgage from the Trust Estate and substitute in its place a Replacement Pledged Mortgage and (b) deposit in the Bond Account any related Substitution Adjustment Amount, in each case in the manner set forth in the Master Servicing Agreement, then the Master Servicer shall be deemed to have complied with all requirements imposed upon it by this Section 8.04 with respect to such Pledged Mortgage. (e) The Master Servicer shall, in its sole discretion, have the right to purchase for its own account from the Trust Estate any Pledged Mortgage which is 91 days or more delinquent at a price and in the manner specified in Section 3(n) of the Master Servicing Agreement. Upon purchase of such Pledged Mortgage by the Master Servicer, the Master Servicer shall have the right to treat such Pledged Mortgage (a "Defaulted Pledged Mortgage") as having been the subject of a Principal Prepayment in Full and request the release thereof from the lien of this Indenture pursuant to Section 8.12. SECTION 8.05. GRANT OF REPLACEMENT PLEDGED MORTGAGE. The Master Servicer shall be permitted to substitute any Pledged Mortgage for any Original Pledged Mortgage initially Granted to the Trustee on the Closing Date pursuant to this Indenture as set forth in Sections 2(a)(ii) and 2(d)(iv) of the Master Servicing Agreement. VIII-5 125 SECTION 8.06. REPORTS BY TRUSTEE TO BONDHOLDERS. On each Payment Date or Optional Redemption Date the Trustee shall deliver a written report to each Holder of Bonds, setting forth the following: (a) On or before [noon California time] on the Determination Date, the Master Servicer shall provide by modem to the Trustee with respect to the Pledged Mortgages, an electronic data file (accompanied by a hardcopy report) in a format which is mutually agreed upon by the Master Servicer and the Trustee. The Trustee shall be under no duty to recalculate, verify or recompute the information provided to it by the Master Servicer under this Section 8.06(a). Not later than each Payment Date, the Trustee shall prepare and cause to be forwarded by first class mail to each Bondholder, the Master Servicer and the Issuer a statement (each, a "Payment Date Statement") setting forth with respect to the related distribution: (i) the amount thereof allocable to principal, separately identifying the aggregate amount of any Principal Prepayments and Liquidation Proceeds included therein; (ii) the amount thereof allocable to interest, and (x) any of (a) the amount by which the aggregate Senior Interest Shortfalls on prior Payment Dates exceeds the amount paid on the Senior Bonds on prior Payment Dates pursuant to clause (ii) of the definition of Senior Interest Payment Date, (b) the amount by which the aggregate Class B-1 Interest Shortfalls on prior Payment Dates exceeds the amount paid on the Class B-1 Bonds on prior Payment Dates pursuant to clause (iii) of the definition of Class B-1 Interest Payment Amount and (c) the amount by which the aggregate Class B-2 Interest Shortfalls on prior Payment Dates exceeds the amount paid on the Class B-2 Bonds on prior Payment Dates pursuant to clause (iii) of the definition of Class B-2 Interest Payment Amount included in such distribution and (y) any of the amounts in clauses (a), (b) or (c) above remaining after giving effect to such distribution. (iii) if the distribution to the Holders of such Class of Bonds is less than the full amount that would be VIII-6 126 distributable to such Holders pursuant to Section 2.03(b) on such Payment Date if there were sufficient funds available therefor, the amount of the shortfall and the allocation thereof as between principal and interest and specifying, in the case of the Subordinated Bonds, the Class B-2 Principal Carryover Shortfall and/or Class B-1 Principal Carryover Shortfall; (iv) the Class Principal Amount of each Class of Bonds and the Invested Amount after giving effect to the distribution of principal on such Payment Date; (v) the Pool Stated Principal Balance for the following Payment Date; (vi) the Senior Percentage, the Class B-1 Percentage, the Class B-2 Percentage and the Investor Percentage for the following Payment Date; (vii) the amount of the Master Servicing Fees and Servicing Fees paid to or retained by the Master Servicer and the Servicers (with respect to the Servicers, in the aggregate) with respect to such Payment Date; (viii) the Bond Interest Rate for each such Class of Bonds and the Certificate Interest Rate with respect to such Payment Date; (ix) the amount of Advances included in the distribution on such Payment Date and the aggregate amount of Advances outstanding as of the close of business on such Payment Date; (x) the number and aggregate principal amounts of Pledged Mortgages (A) delinquent (exclusive of Pledged Mortgages in foreclosure) (1) 1 to 29 days (2) 30 to 59 days (3) 60 to 89 days and (4) 90 or more days and (B) in foreclosure and delinquent (1) 1 to 29 days (2) 30 to 59 days (3) 60 to 89 days and (4) 90 or more days, as of the close of business on the last day of the calendar month preceding such Payment Date; VIII-7 127 (xi) for each of the preceding 12 calendar months, or all calendar months since the Cut-off Date, whichever is less, the aggregate dollar amount of the Scheduled Payments (A) due on all Outstanding Pledged Mortgages on each of the Due Dates in each such month and (B) delinquent 60 days or more on each of the Due Dates in each such month; (xii) with respect to any Pledged Mortgage that became an REO Property during the preceding calendar month, the loan number and Stated Principal Balance of such Pledged Mortgage as of the close of business on the Determination Date preceding such Payment Date and the date of acquisition thereof; (xiii) the total number and principal balance of any REO Properties (and market value, if available) as of the close of business on the Determination Date preceding such Payment Date; (xiv) the Senior Percentage, the Class B-1 Percentage, the Class B-2 Percentage and the Investor Prepayment Percentage for the following Payment Date; (xv) the aggregate amount of Realized Losses incurred during the preceding calendar month and aggregate Realized Losses through such Payment Date; (xvi) the amount payable to the holder of the Investor Certificate pursuant to Section 5.01 of the Deposit Trust Agreement; and [(xvii) any amount payable under the Bond Insurance Policy.] (b) The Trustee's responsibility for disbursing the above information to the Bondholders is limited to the availability, timeliness and accuracy of the information derived from the Master Servicer. The Trustee will send a copy of each statement provided pursuant to this Section 8.06 to each Rating Agency. (c) Within a reasonable period of time after the end of each calendar year, the Trustee shall cause to be furnished to VIII-8 128 each Person who at any time during the calendar year was a Bondholder, a statement containing the information set forth in clauses (a)(i), (a)(ii) and (a)(vii) of this Section 8.06 aggregated for such calendar year or applicable portion thereof during which such Person was a Bondholder. Such obligation of the Trustee shall be deemed to have been satisfied to the extent that substantially comparable information shall be provided by the Trustee pursuant to any requirements of the Code as from time to time in effect. SECTION 8.07. REPORTS BY TRUSTEE. In addition to any statements required to be delivered or prepared by the Trustee pursuant to Section 2.09, 8.02, 8.06 or 10.01, the Trustee shall deliver to the Issuer, within two Business Days after the request of the Issuer, a written report setting forth the amount of each Pledged Account established hereunder and the identity of the investments included therein. Without limiting the generality of the foregoing, the Trustee shall, upon the request of the Issuer, promptly transmit to the Issuer copies of all accountings of, and information with respect to, collections furnished to it by the Master Servicer and shall promptly notify the Issuer if on the second Business Day after any Distribution Account Deposit Date, the related Bond Distribution Amount or any portion thereof has not been received by the Trustee. SECTION 8.08. TRUST ESTATE; RELEASE AND DELIVERY OF MORTGAGE DOCUMENTS. (a) The Trustee may, and when required by the provisions of this Indenture shall, execute instruments in form supplied to it to release property from the lien of this Indenture, or convey the Trustee's interest in the same, in a manner and under circumstances which are not inconsistent with the provisions of this Indenture and the TIA. No party relying upon an instrument executed by the Trustee as provided in this Article VIII shall be bound to ascertain the Trustee's authority, inquire into the satisfaction of any conditions precedent or see to the application of any moneys. (b) In order to facilitate the servicing of the Pledged Mortgages by the Servicers, the Master Servicer is VIII-9 129 authorized under the Master Servicing Agreement for the benefit of the Trustee, the Bondholders and the Issuer, to supervise, administer, monitor and oversee the servicing of the Pledged Mortgages by the Servicers and the observance and performance by the Servicers of all services, duties, responsibilities and obligations which are to be observed or performed by each Servicer pursuant to the Seller/Servicer Guide. (c) Upon request by the Master Servicer accompanied by a Request for Release in the form of Exhibit D to the Master Servicing Agreement to the effect that a Pledged Mortgage has been the subject of a Prepayment in Full or has otherwise been paid in full, together with any other items required under Section 8.12, the Trustee shall promptly release the related Mortgage Documents and execute such other documents as the Master Servicer may request to evidence satisfaction and discharge of such Pledged Mortgage. (d) In addition, if from time to time and as appropriate for the servicing or foreclosure of any Pledged Mortgage, or the other purposes set forth in the Master Servicing Agreement, the Master Servicer requests the Trustee to release any related Mortgage Documents or other documents contained in the Trustee Mortgage File relating to such Pledged Mortgage and delivers to the Trustee a Request for Release in the form of Exhibit C to the Master Servicing Agreement to the Trustee and signed by a Servicing Officer, the Trustee shall release the related Mortgage Documents to the Master Servicer if the applicable requirements of the Master Servicing Agreement have been satisfied. If such Pledged Mortgage shall be liquidated and the Trustee receives an Issuer Request accompanied by a Request for Release as provided in subsection (c) above, together with any other items required under Section 8.12, then the Trustee shall release any documents with respect to such Pledged Mortgage still in its possession to or upon the order of the Issuer and shall execute such other documents as the Master Servicer may request to evidence satisfaction and discharge of such Pledged Mortgage, as set forth in subsection (c) above. (e) The Trustee shall, at such time as there are no Bonds Outstanding, release all of the Trust Estate to the Issuer (other than any cash held for the payment of the Bonds pursuant VIII-10 130 to Section 3.03 or Section 4.02), subject, however, to Section 4.01 and the rights of the Trustee under Section 6.07. SECTION 8.09. AMENDMENTS TO THE MASTER SERVICING AGREEMENT. The Trustee may enter into or consent to any amendment or supplement to the Master Servicing Agreement or waive any Servicing Default only in accordance with the applicable provisions of the Master Servicing Agreement. The Trustee may, in its discretion, decline to enter into or consent to any such supplement or amendment or make any such waiver (i) unless the Trustee receives an Opinion of Counsel that the interests of the Holders would not be materially adversely affected or (ii) if its own rights, duties or immunities would be adversely affected. SECTION 8.10. SERVICERS AND MASTER SERVICER AS AGENTS AND BAILEES OF TRUSTEE. In order to facilitate the servicing of the Pledged Mortgages by the each Servicer or by the Master Servicer, each Servicer shall deposit in the Servicing Account proceeds of the Pledged Mortgages in accordance with the provisions of the Servicing Agreements, the Master Servicing Agreement and this Indenture, prior to the time they are deposited into the Bond Account. In addition, on each Withdrawal Date, the Master Servicer shall cause each Servicer to remit to the Master Servicer for deposit in the Bond Account all funds held in the Servicing Account that are required to be remitted to the Master Servicer in accordance with the terms of the Servicing Agreement and the Master Servicing Agreement. Solely for purposes of perfection under Section 9-305 of the Uniform Commercial Code or similar provision of law in the state in which such property is held by the Servicers or the Master Servicer, the Trustee hereby designates the Master Servicer and each Servicer as its agents and bailees to hold such funds with respect to the Pledged Mortgages until they are deposited into the Distribution Account as well as its agents and bailees in holding any Mortgage Documents or other documents contained in a Trustee Mortgage File released to it by the Trustee pursuant to Section 8.08(d), and any other items constituting a part of the Trust Estate which from time to time come into possession of any Servicer or the Master Servicer. It is intended that, by the Servicers' and Master Servicer's acceptance of such agency pursuant to the VIII-11 131 Servicing Agreements and the Master Servicing Agreement, the Trustee, as secured party, will be deemed to have possession of such Mortgage Documents, such moneys and such other items for purposes of Section 9-305 of the Uniform Commercial Code or similar provision of law of the states in which such property is held by such Servicer or the Master Servicer. SECTION 8.11. OPINION OF COUNSEL. The Trustee shall be entitled to receive at least five Business Days' notice of any action to be taken pursuant to Section 8.08(a) (other than in connection with releases of Pledged Mortgages which were the subject of a Principal Prepayment in Full) accompanied by copies of any instruments involved, and the Trustee shall be entitled to request an Opinion of Counsel, in form and substance reasonably satisfactory to the Trustee, 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. Counsel rendering any such opinion may rely, without independent investigation, on the accuracy and validity of any certificate or other instrument delivered to the Trustee in connection with any such action. SECTION 8.12. RELEASE OF PLEDGED MORTGAGES. (a) The Issuer shall be entitled to request a release from the lien of this Indenture of any Pledged Mortgage at any time after such Pledged Mortgage has been the subject of a Principal Prepayment in Full or in accordance with the requirements of Section 8.04 if: (i) the Master Servicer has complied with all requirements imposed on it by Section 8.04 in connection with such Pledged Mortgage (or is deemed to have complied with such requirements by reason of the provisions of Section 8.04(e)); (ii) at the time such release is requested, no Default or Event of Default has occurred and is continuing; provided, however, that if a Pledged Mortgage has been the subject of a Principal Prepayment in Full, then the Trustee shall release such Pledged Mortgage from the lien of this VIII-12 132 Indenture upon compliance with all other conditions of this subsection (a), notwithstanding the existence of a Default or Event of Default; (iii) the Master Servicer delivers to the Trustee an Officers' Certificate (A) identifying the Pledged Mortgage to be released, (B) requesting the release thereof, (C) setting forth the amount deposited in the Bond Account with respect thereto, if any, and (D) certifying that the conditions set forth in clauses (i) and (ii) above have been satisfied; and (iv) the Issuer delivers to the Trustee a certificate of fair value if required by Section 314(d)(1) or Section 314(d)(3) of the TIA. (b) Upon satisfaction of the conditions specified in subsection (a) of this Section 8.12, the Trustee shall release from the lien of this Indenture and deliver to or upon the order of the Master Servicer the Pledged Mortgage to be released (including all related Mortgage Documents) described in the Master Servicer's Request for Release. VIII-13 133 ARTICLE IX SUPPLEMENTAL INDENTURES SECTION 9.01. SUPPLEMENTAL INDENTURES WITHOUT CONSENT OF BONDHOLDERS. Without the consent of the Holders of any Bonds, the Issuer and the Trustee, at any time and from time to time, may enter into one or more indentures supplemental hereto, in form satisfactory to the Trustee, for any of the following purposes: (1) 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 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; (2) to add to the conditions, limitations and restrictions on the authorized amount, terms and purposes of the issuance, authentication and delivery of any Bonds, as herein set forth, additional conditions, limitations and restrictions thereafter to be observed; (3) to evidence the succession 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; (4) to add to the covenants of the Issuer, for the benefit of the Holders of all Bonds or to surrender any right or power herein conferred upon the Issuer; (5) to cure any ambiguity, to correct or supplement any provision herein which may be defective or inconsistent with any other provision herein, or to make any other provisions with respect to matters or questions arising under this Indenture, which shall not be inconsistent with the provisions of this Indenture, provided that such action shall not adversely affect the interests of the Holders of the Bonds (any such action shall be deemed not to adversely affect the interests of the Bondholders if the Issuer delivers to the Trustee letters from each Rating Agency to the effect that such action will not result in a downgrading of the Bonds); IX-1 134 (6) to modify, eliminate or add to the provisions of this Indenture to such extent as shall be necessary to effect the qualification of this Indenture under the TIA or under any similar federal statute hereafter enacted, and to add to this Indenture such other provisions as may be expressly required by the TIA; or (7) to set forth the terms of Additional Bonds and to pledge Additional Mortgage Collateral for such Additional Bonds. The 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, but the Trustee shall not be obligated to enter into any such supplemental indenture that affects the Trustee's own rights, duties, liabilities or immunities under this Indenture or otherwise except to the extent required by law. The Trustee may in its discretion determine whether or not the rights of the Holder of Bonds would be adversely affected by any supplemental indenture, and any such determination shall be conclusive upon the Holders of all Bonds, whether theretofore or thereafter authenticated and delivered hereunder. In making such determination, a supplemental indenture shall be conclusively deemed by the Trustee not to adversely affect the Bonds if (i) the Trustee receives a letter or other writing from each Rating Agency rating the Bonds to the effect that execution of the supplemental indenture will not result in any change in the current rating assigned by that Rating Agency to the Bonds and (ii) the supplemental indenture effects no change in principal priority schedules, interest rates, Redemption Prices, substitution of Mortgage Collateral, Payment Dates, Record Dates, Accounting Dates, terms or optional Redemption, the application of surplus to the payment of the Bonds or other payment terms. The Trustee shall not be liable for any such determination made in good faith. [The Trustee shall provide the Bond Insurer, if any, with a copy of any supplemental indenture executed pursuant to IX-2 135 this Section, by first class mail mailed to the Bond Insurer within five Business Days after the execution of such supplemental indenture. Notwithstanding the foregoing, no supplemental indenture that changes in any way any of the payment terms of the Bonds may be entered into without the prior written consent of such Bonder Insurer.] SECTION 9.02. SUPPLEMENTAL INDENTURES WITH CONSENT OF BONDHOLDERS. With the consent of the Holders of Bonds representing not less than two-thirds of the aggregate Class Principal Amount of the Controlling Class by Act of said Holders delivered to the Issuer and the Trustee [and the Bond Insurer], the Issuer and the Trustee may 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 no such supplemental indenture shall, without the consent of the Holder of each Outstanding Bond affected thereby: (1) change the Stated Maturity of the final installment of the principal of, or any installment of interest on, any Bond or reduce the principal amount thereof, the Bond Interest Rate thereon or the Redemption Price with respect thereto, change the earliest date on which any Bond may be redeemed at the option of the Issuer, change any place of payment where, or the coin or currency in which, any Bond or any interest thereon is payable, or impair the right to institute suit for the enforcement of the payment of any installment of interest due on any Bond on or after the Stated Maturity thereof or for the enforcement of the payment of the entire remaining unpaid principal amount of any Bond on or after the Stated Maturity of the final installment of the principal thereof (or, in the case of redemption, on or after the applicable Optional Redemption Date); (2) reduce the percentage of the aggregate Class Principal Amount of the Controlling Class, the consent of the Holders of which is IX-3 136 required for any such supplemental indenture, or the consent of the Holders of which is required for any waiver of compliance with provisions of this Indenture or Defaults hereunder and their consequences provided for in this Indenture; (3) modify any of the provisions of this Section, Section 5.14 or Section 5.18(b) except to increase any percentage specified therein or to provide that certain other provisions of this Indenture cannot be modified or waived without the consent of the Holder of each Outstanding Bond affected thereby; (4) modify or alter the provisions of the proviso to the definition of the term "Outstanding"; (5) 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 Estate (except for Permitted Encumbrances) or terminate the lien of this Indenture on any property at any time subject hereto or deprive the Holder of any Bond of the security afforded by the lien of this Indenture; or (6) modify any of the provisions of this Indenture in such manner as to materially and adversely affect rights of the Holders of the Controlling Class to the benefits of any provisions for the mandatory redemption of Bonds contained herein. The Trustee may in its discretion determine whether or not the rights of the Holder of any Controlling Class would be materially and adversely affected by any supplemental indenture and any such determination shall be conclusive upon the Holders of all Bonds authenticated and delivered hereunder. The Trustee shall not be liable for any such determination made 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 Issuer and the Trustee of any supplemental indenture pursuant to this Section, IX-4 137 the Trustee shall mail to the Holders of the Bonds to which such supplemental indenture relates [and to the Bond Insurer] a notice setting forth in general terms the substance of such supplemental indenture. Any failure of the 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 9.03. EXECUTION OF SUPPLEMENTAL INDENTURES. In executing, or accepting the additional trusts created by, any supplemental indenture permitted by this Article or the modifications thereby of the trusts created by this Indenture, the Trustee shall be entitled to receive, and (subject to Section 6.01) shall be fully protected in relying upon, an Opinion of Counsel stating that the execution of such supplemental indenture is authorized or permitted by this Indenture. The Trustee may, but shall not be obligated to, enter into any such supplemental indenture which affects the Trustee's own rights, duties or immunities under this Indenture or otherwise. SECTION 9.04. EFFECT OF SUPPLEMENTAL INDENTURES. Upon the execution of any supplemental indenture under this Article, this Indenture shall be modified in accordance therewith, and such supplemental indenture shall form a part of this Indenture for all purposes; and every Holder of Bonds to which such supplemental indenture relates which have theretofore been or thereafter are authenticated and delivered hereunder shall be bound thereby. SECTION 9.05. CONFORMITY WITH TRUST INDENTURE ACT. Every supplemental indenture executed pursuant to this Article 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 9.06. REFERENCE IN BONDS TO SUPPLEMENTAL INDENTURES. Bonds authenticated and delivered after the execution of any supplemental indenture pursuant to this Article may, and if required by the Trustee shall, bear a notation in form IX-5 138 approved by the Trustee as to any matter provided for in such supplemental indenture. If the Issuer shall so determine, new Bonds so modified as to conform, in the opinion of the Trustee and the Issuer, to any such supplemental indenture may be prepared and executed by the Issuer and authenticated and delivered by the Trustee in exchange for Controlling Class. SECTION 9.07. AMENDMENTS TO DEPOSIT TRUST AGREEMENT OR MASTER SERVICING AGREEMENT. The Trustee shall, upon Issuer Request, consent to any proposed amendment to the Deposit Trust Agreement or Master Servicing Agreement, or an amendment to or waiver of any provision of any other document relating to the Deposit Trust Agreement or Master Servicing Agreement, such consent to be given without the necessity of obtaining the consent of the Holders of any Bonds upon receipt by the Trustee of: (i) an Opinion of Counsel to the effect that such amendment or waiver will not materially and adversely affect the interests of the Holders of the Bonds and that all conditions precedent to such consent specified in this Section 9.07 have been satisfied; provided, however, that no such Opinion of Counsel shall be required 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; it being understood and agreed that any such letter in and of itself will not represent a determination as to the materiality of any such amendment and will represent a determination only as to the credit issues affecting any such rating; (ii) an Officers' Certificate, to which such proposed amendment or waiver shall be attached, stating that such attached copy is the true copy of the proposed amendment or waiver and that all conditions precedent to such consent specified in this Section 9.07 have been satisfied; (iii) written confirmation from the Rating Agencies that the implementation of the proposed amendment or waiver will not adversely affect their rating of the Bonds; and IX-6 139 (iv) any other document required pursuant to Section 11.01. Notwithstanding the foregoing, the Trustee may decline to consent to a proposed waiver or amendment that adversely affects its own rights, duties or immunities under this Indenture or otherwise. Nothing in this Section 9.07 shall be construed to require that any Person obtain the consent of the Trustee to any amendment or waiver or any provision of any document where the making of such amendment or the giving of such waiver without obtaining the consent of the Trustee is not prohibited by this Indenture or by the terms of the document that is the subject of the proposed amendment or waiver. IX-7 140 ARTICLE X REDEMPTION OF BONDS SECTION 10.01. SPECIAL REDEMPTION; REDEMPTION. (a) The Bonds shall not be subject to special redemption. (b) The Bonds shall be subject to redemption by the Issuer, in whole but not in part, at the option of the Issuer, on any Payment Date on or after the Payment Date on which the sum of (i) the Invested Amount, (ii) the Senior Class Principal Amount, (iii) the Class B-1 Principal Amount and (iv) the Class B-2 Principal Amount, after giving effect to payments expected to be made on such Payment Date, is __% or less than the aggregate of the Stated Principal Balances of the Pledged Mortgages as of the Cut-Off Date [(including the Additional Bonds)], on the terms and conditions specified in this subsection (b) at the Redemption Price. If the Issuer elects to so redeem the Bonds, it shall, no later than 30 days prior to the Optional Redemption Date selected for such redemption, deliver notice of such election to the Trustee, together with the Redemption Price therefor to be deposited in the Distribution Account, an Issuer Order directing the Trustee to effect such redemption, any certification and opinion required pursuant to Section 11.01 and a form of redemption notice. All Bonds so redeemed shall be due and payable on such Optional Redemption Date upon the giving of the notice thereof required by Section 10.02. SECTION 10.02. FORM OF REDEMPTION NOTICE. Notice of redemption shall be given by the Trustee in the name of and at the expense of the Issuer by first class mail, postage prepaid, mailed not less than five days prior to the applicable Optional Redemption Date (but in no event prior to the date on which the Redemption Price with respect to the Bonds to be redeemed pursuant to subsection (b) of Section 10.01 has been deposited in the Distribution Account) to each Holder of Bonds to be redeemed, such Holders being determined as of the last day of the month preceding the month in which such Optional Redemption Date occurs (the "Optional Redemption Record Date"). X-1 141 All notices of redemption shall state: (1) the Optional Redemption Date; and (2) the fact of such payment in full, 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 3.02) and that no interest shall accrue on such Bond for any period after the last day of the month preceding the month in which the date fixed for redemption occurs. Failure to give notice of redemption, or any defect therein, to any Holder of any Bond selected for redemption shall not impair or affect the validity of the redemption of any other Bond. SECTION 10.03. BONDS PAYABLE ON OPTIONAL REDEMPTION DATE. Notice of redemption having been given as provided in Section 10.02, the Bonds or portions thereof so to be redeemed shall, on the applicable Optional 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 such Redemption Price for any period after the last day of the month preceding the month in which such Optional Redemption Date occurs. X-2 142 ARTICLE XI MISCELLANEOUS SECTION 11.01. COMPLIANCE CERTIFICATES AND OPINIONS. Upon any application or request by the Issuer to the Trustee to take any action under any provision of this Indenture, the Issuer shall furnish to the Trustee an Officers' Certificate stating that all conditions precedent, if any, provided for in this Indenture relating to the proposed action have been complied with and an Opinion of Counsel stating that in the opinion of such counsel all such conditions precedent, if any, have been complied with, 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 relating to such particular application or request, no additional certificate or opinion need be furnished. Every certificate, opinion or letter with respect to compliance with a condition or covenant provided for in this Indenture (including one furnished pursuant to specific requirements of this Indenture relating to a particular application or request) shall include: (1) a statement that each individual signing such certificate, opinion or letter has read such covenant or condition and the definitions herein relating thereto; (2) a brief statement as to the nature and scope of the examination or investigation upon which the statements or opinions contained in such certificate, opinion or letter are based; (3) a statement that, in the opinion of each such individual, he or she has made such examination or investigation as is necessary to enable such individual to express an informed opinion as to whether or not such covenant or condition has been complied with; and (4) a statement as to whether, in the opinion of each such individual, such condition or covenant has been complied with. XI-1 143 SECTION 11.02. FORM OF DOCUMENTS DELIVERED TO 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 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 ar opinion or representations with respect to the matters upon which his other certificate or opinion is based are erroneous. Any such Issuer certificate or Opinion of Counsel may be based, insofar as it relates to factual matters, upon a certificate or opinion of, or representations by, an Authorized Officer or Officers of the Owner Trustee or a certificate of the officers of the Depositor or the manager of the Issuer, stating that the information with respect to such factual matters is in the possession of the Owner Trustee, or the Depositor or the manager of the Issuer, unless such officer or 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. Any Opinion of Counsel may be based on the written opinion of other counsel, in which event such Opinion of Counsel shall be accompanied by a copy of such other counsel's opinion and shall include a statement to the effect that such counsel believes that such counsel and the Trustee may reasonably rely upon the opinion of such other counsel. 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. Wherever in this Indenture, in connection with any application or certificate or report to the Trustee, it is XI-2 144 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 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 Trustee's right to rely upon the truth and accuracy of any statement or opinion contained in any such document as provided in Section 6.01(b)(2). Whenever in this Indenture it is provided that the absence of the occurrence and continuation of a Default or Event of Default is a condition precedent to the taking of any action by the Trustee at the request or direction of the Issuer, then, notwithstanding that the satisfaction of such condition is a condition precedent to the Issuer's right to make such request or direction, the Trustee shall be protected in acting in accordance with such request or direction if it does not have knowledge of the occurrence and continuation of such Default or Event of Default as provided in Section 6.01(d). SECTION 11.03. 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 any evidence by one or more instruments of substantially similar tenor signed by such Bondholders in person or by an agent 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 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 6.01) conclusive in favor of the Trustee and the Issuer, if made in the manner provided in this Section. XI-3 145 (b) The fact and date of the execution by any Person of any such instrument or writing may be proved by the affidavit of a witness of such execution or by the certificate of any notary public or other officer authorized by law to take acknowledgements of deeds, certifying that the individual signing such instrument or writing acknowledged to him or her the execution thereof. Whenever such execution is by an officer of a corporation or a member of a partnership on behalf of such corporation or partnership, such certificate or affidavit shall also constitute sufficient proof of his or her authority. (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 of transfer thereof or in exchange therefor or in lieu thereof, in respect of anything done, omitted or suffered to be done by the Trustee or the Issuer in reliance thereon, whether or not any notation of such action is made upon such Bonds. SECTION 11.04. NOTICES, ETC. TO TRUSTEE AND ISSUER. 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: (1) the Trustee by any Bondholder or by the Issuer shall be sufficient for every purpose hereunder if made, given, furnished or filed in writing to or with and received by the Trustee at its Corporate Trust Office; (2) the Issuer by the Trustee or by any Bondholder shall be sufficient for every purpose hereunder (except as provided in Sections 5.01(3) and (4)) if in writing and mailed, first-class, postage prepaid, to the Issuer addressed to it c/o _______________________________________________________________________ ______________ ____________________________, Attention: Corporate Trust Administration, or at any other address previously furnished in writing to the Trustee by the Issuer; XI-4 146 (3) any Rating Agency by the Trustee, the Issuer or the Master Servicer shall be sufficient for every purpose hereunder if made, given, furnished or filed in writing to or with and received by such Rating Agency at the address specified therefor in the definition corresponding to the name of such Rating Agency; or [(4) the Bond Insurer by the Trustee, the Issuer or any Bondholder shall be sufficient for every purpose hereunder if in writing and mailed, first-class, postage prepaid to the Bond Insurer at ________________ _____________________.] SECTION 11.05. NOTICES AND REPORTS TO BONDHOLDERS; WAIVER OF NOTICES. Where this Indenture provides for notice to Bondholders of any event or the mailing of any report to Bondholders, such notice or report shall be sufficiently given (unless otherwise herein expressly provided) if mailed, first-class, postage prepaid, to each Bondholder affected by such event or to whom such report is required to be mailed, at the address of such Bondholder 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 or the mailing of such report. In any case where a notice or report to Bondholders is mailed in the manner provided above, neither the failure to mail such notice or report, nor any defect in any notice or report so mailed, to any particular Bondholder shall affect the sufficiency of such notice or report with respect to other Bondholders, and any notice or report which is mailed in the manner herein provided shall be conclusively presumed to have been duly given or provided. 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. Waiver of notice by any Bondholder shall be filed with the Trustee, but such filing shall not be a condition precedent to the validity of any action taken in reliance upon such 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 XI-5 147 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 Trustee shall be deemed to be a sufficient giving of such notice. Where this Indenture provides for notice to Bondholders of any event, such notice shall also be sent to ______________________________________ _____________________________, so long as [ ] is a Rating Agency. SECTION 11.06. RULES BY TRUSTEE AND AGENTS. The Trustee may make reasonable rules for any meeting of Bondholders. Any Agent may make reasonable rules and set reasonable requirements for its functions. SECTION 11.07. CONFLICT WITH TRUST INDENTURE ACT. If this Indenture is qualified under the TIA and any provision hereof limits, qualifies or conflicts with another provision hereof which is required to be included in this Indenture by any of the provisions of the TIA, such required provision shall control. SECTION 11.08. 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 11.09. SUCCESSORS AND ASSIGNS. All covenants and agreements in this Indenture by the Issuer shall bind its successors and assigns, whether so expressed or not. 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. XI-6 148 SECTION 11.11. BENEFITS OF INDENTURE. Nothing in this Indenture or in the Bonds, expressed or implied, shall give to any Person, other than the parties hereto and their successors hereunder, any separate trustee or co-trustee appointed under Section 6.14 and the Bondholders, any benefit or any legal or equitable right, remedy or claim under this Indenture. SECTION 11.12. LEGAL HOLIDAYS. In any case where the date of any Payment Date, Redemption Date or any other date on which principal of, or interest on, any Bond is proposed to be paid 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 nominal date of any such Payment Date, Optional Redemption Date or other date for the payment of principal of, or interest on, any Bond, as the case may be, and no interest shall accrue for the period from and after any such nominal date, provided such payment is made in full on such next succeeding Business Day. SECTION 11.13. GOVERNING LAW. This Indenture and each Bond shall be construed in accordance with and governed by the substantive laws of the State of New York applicable to agreements made and to be performed in the State of New York and the obligations, rights and remedies of the parties hereto and the Bondholders shall be determined in accordance with such laws. SECTION 11.14. COUNTERPARTS. This instrument may be executed in any number of counterparts, each of which so executed shall be deemed to be an original, and all such counterparts shall together constitute but one and the same instrument. XI-7 149 SECTION 11.15. RECORDING OF INDENTURE. This Indenture is subject to recording in any appropriate public recording office, such recording to be effected by the Issuer and at its expense in compliance with any Opinion of Counsel delivered pursuant to Section 2.12(c) or Section 3.06. SECTION 11.16. ISSUER OBLIGATION. No recourse may be taken, directly or indirectly, against (i) the Bank, (ii) any incorporator, subscriber to the capital stock, stockholder, officer or director of the Bank or of any predecessor or successor of the Bank, (iii) any holder of a beneficial interest in the Issuer (solely in its capacity as such), (iv) any incorporator, subscriber to the capital stock, stockholder, partner, beneficiary, agent, officer, director, employee, or successor or assign of a holder of a beneficial interest in the Issuer, (v) the Depositor or any Affiliate thereof (other than the Issuer) or (vi) any incorporator, subscriber to the capital stock, stockholder, officer, director or employee of the Trustee or any predecessor or successor of the Trustee with respect to the Issuer's obligation with respect to the Bonds or the obligation of the Issuer or the Trustee under this Indenture or any certificate or other writing delivered in connection herewith or therewith. SECTION 11.17. INSPECTION. The Issuer agrees that, on reasonable prior notice, it will permit any representative of the Trustee, during the Issuer's normal business hours, to examine all 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 Accountants selected by the Trustee, and to discuss its affairs, finances and accounts with its officers, employees and Independent Accountants (and by this provision the Issuer hereby authorizes its Accountants to discuss with such representatives such affairs, finances and accounts), all at such reasonable times and as often as may be reasonably requested. Any expense incident to the exercise by the Trustee of any rights under this Section 11.17 shall be borne by the Issuer. XI-8 150 SECTION 11.18. USURY. The amount of interest payable or paid on any Bond under the terms of this Indenture shall be limited to an amount which shall not exceed the maximum nonusurious rate of interest allowed by the applicable laws of the United States or the State of New York (whichever shall permit the higher rate), which could lawfully be contracted for, charged or received (the "Highest Lawful Rate"). In the event any payment of interest on any Bond exceeds the Highest Lawful Rate, the Issuer stipulates that such excess amount will be deemed to have been paid as a result of an error on the part of both the Trustee, acting on behalf of the Holder of such Bond, and the Issuer, and the Holder receiving such excess payment shall promptly, upon discovery of such error or upon notice thereof from the Issuer or the Trustee, refund the amount of such excess or, at the option of the Trustee, apply the excess to the payment of principal of such Bond, if any, remaining unpaid. SECTION 11.19. NO PETITION. The 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 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 Operative Agreements. XI-9 151 ARTICLE XII THE BOND INSURER SECTION 12.01. CERTAIN MATTERS REGARDING THE BOND INSURER AND THE BOND INSURANCE POLICY. [as set forth in the applicable policy] XII-1 152 IN WITNESS WHEREOF, each party has caused this Indenture to be executed by its duly authorized officer or officers as of the day and year first above written. SEQUOIA MORTGAGE TRUST 199_-_, as Issuer By: , ---------------------------------- not in its individual capacity but solely as Owner Trustee By: ---------------------------------- Name: Title: ------------------------------- as Trustee By: ---------------------------------- Authorized Officer By: ---------------------------------- Name: Title: S-1 153 STATE OF DELAWARE ) ) ss.: COUNTY OF NEW CASTLE ) On the ____ day of _____________ in the year one thousand nine hundred and ninety-_____ before me personally came __________________________, to me known, who being by me duly sworn did depose and say that she/he resides in _______________, that she/he is the ______________________ of __________________________, the corporation described in and which executed the above instrument and that she/he signed her/his name thereto by authority of the Board of Directors of said corporation. [NOTARIAL SEAL] --------------------------------- Notary Public S-2 154 STATE OF _________________ ) ) ss.: COUNTY OF ________________ ) On the ____ day of __________, 199__, before me, a notary public in and for said State, personally appeared ___________________________, known to me (or proved to me on the basis of satisfactory evidence) to be a ______ ______________ of ____________________________________, the ___________________ corporation that executed the within instrument, and also known to me (or proved to me on the basis of satisfactory evidence) to be the persons who executed it on behalf of said _____________________ corporation, and acknowledged to me that such ___________________ corporation executed the within instrument. IN WITNESS WHEREOF, I have hereunto set my hand and affixed my official seal the day and year in this certificate first above written. [NOTARIAL SEAL] --------------------------------- Notary Public S-3 155 EXHIBIT I LETTER AGREEMENT WITH THE DEPOSITORY I-1 156 EXHIBIT II FORM OF SENIOR BOND The form of Senior Bond is as follows: PRINCIPAL OF THIS BOND IS PAYABLE IN INSTALLMENTS AS SET FORTH HEREIN. ACCORDINGLY, THE CLASS PRINCIPAL AMOUNT OF THIS BOND AT ANY TIME MAY BE LESS THAN THE AMOUNT SHOWN ON THE FACE HEREOF. THE CLASS PRINCIPAL AMOUNT OF THIS BOND MAY BE ASCERTAINED ONLY BY OBTAINING A CONFIRMATION THEREOF FROM THE TRUSTEE UNDER THE INDENTURE REFERRED TO BELOW. UNLESS THIS 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 BOND SO 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 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. II-1 157 SEQUOIA MORTGAGE TRUST 199_-_, a Delaware Statutory Business Trust Collateralized Mortgage Bonds CLASS A-1 DUE: __________ ___, _____ ACCRUAL DATE: __________ ___, _____ ISSUE DATE: __________ ___, _____ [ ] INTEREST RATE Initial Class Principal Amount of this Bond: $____________________________ CUSIP NO.___ CERTIFICATE NUMBER 1 Sequoia Mortgage Trust 199 _-_ (the "Issuer"), a statutory business trust formed under the Deposit Trust Agreement dated as of _____________ ___, 199__ and having _________________________, a Delaware bank and trust company, as Owner Trustee, for value received, hereby promises to pay to CEDE & CO. or registered assigns, the principal sum of [AMOUNT IN WORDS] ($_______) in monthly installments on the ____________ day of each month, commencing on ________ _ ___, _____ (each, a "Payment Date"), and ending on or before __________ ___, _____, (the "Stated Maturity" of such final installment of principal), and to pay interest (computed on the basis of a 360-day year of twelve 30-day months) on the Class Principal Amount (as defined in the Indenture hereinafter referred to) of this Bond from time to time from _ ________ ___, _____ (the "Accrual Date"), or such later date to which interest has been paid, through the last day of the month preceding the month in which the principal amount of this Bond is paid in full, at a [variable/fixed] rate determined as described below, such interest being payable monthly on each Payment Date. If any Payment Date shall not be a "Business Day" (as defined in the Indenture), payment of the amount due will be made on the next succeeding Business Day. Installments of principal of this Bond are due and payable as described in the Indenture. II-2 158 Interest payable on this Bond on a Payment Date will be equal to the amount of interest that has accrued on the Class Principal Amount of this Bond during the one-month period ending on the last day of the month preceding the month in which each such Payment Date occurs (each, an "Interest Accrual Period"). The principal of, and interest on, this 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 Bond shall be applied as set forth in the Indenture. Any installment of principal or interest which is not paid when and as due shall bear interest as described in the Indenture. Unless the certificate of authentication hereon has been executed by the Trustee by manual signature, this Bond shall not be entitled to any benefit under the Indenture, or be valid or obligatory for any purpose. IN WITNESS WHEREOF, Sequoia Mortgage Trust 199_-_ has caused this instrument to be duly executed by its duly authorized officer. Dated:_______________ SEQUOIA MORTGAGE TRUST 199_-_ By: --------------------------------- not in its individual capacity but solely as Owner Trustee By: --------------------------------- Title: ------------------------------ CERTIFICATE OF AUTHENTICATION This is one of the Bonds referred to in the within-mentioned Indenture. , - --------------------------- as Trustee By: , -------------------------- Authorized Signatory II-3 159 This Bond is one of a duly authorized issue of Bonds of the Issuer, designated as its Collateralized Mortgage Bonds, Series 199_-_ (herein called the "Bonds"). The Bonds are issuable in one or more classes; the Bonds of particular Classes being herein called the Class A-1, Class B-1 and Class B-2 Bonds, all issued and to be issued under the Issuer's Indenture dated as of ____________ ___, 199__ between the Issuer and _______________________________ (the "Trustee", which term includes any successor Trustee under the Indenture), which authorized the Bonds, and reference is hereby made thereto for a statement of the respective rights thereunder of the Issuer, the Trustee and the Holders of the Bonds of each particular Class thereof and the terms upon which the Bonds of each Class are, and are to be, authenticated and delivered. The Class A-1 Bonds constitute "Senior Bonds" and the Class B-1 Bonds and the Class B-2 Bonds constitute "Subordinated Bonds". All terms used in this Bond which are defined in the Indenture shall have the meanings assigned to them in the Indenture. The Bond Interest Rate for the Senior Bonds (the "Senior Bond Interest Rate") and any Interest Accrual Period will equal _______________. As provided in the Indenture, the Bonds are issuable in Classes which may vary as is provided or permitted in the Indenture. Bonds of each Class are equally and ratably secured by the collateral pledged as security therefor to the extent provided by the Indenture. For each Principal Payment Date, the aggregate amount of each installment of principal due and payable on the Senior Bonds will be equal to the Senior Principal Payment Amount for such Payment Date. The Senior Principal Payment Amount for any Payment Date is equal to the Senior Percentage of the sum of (a) the principal portion of the Scheduled Payment due on each Pledged Mortgage [on the related Due Date], (b) the principal portion of the purchase price of each Pledged Mortgage that was purchased by Redwood Trust or another person pursuant to the Mortgage Loan Purchase Agreement [or any optional purchase by the Master Servicer of a defaulted Pledged Mortgage] as of such Payment Date, (c) the II-4 160 Substitution Adjustment Amount in connection with any Deleted Pledged Mortgage received with respect to such Payment Date, (d) any Insurance Proceeds or Liquidation Proceeds allocable to recoveries of principal of Pledged Mortgages that are not yet Liquidated Pledged Mortgages received during the [calendar month] preceding the month of such Payment Date, (e) with respect to each Pledged Mortgage that became a Liquidated Pledged Mortgage during the [calendar month] preceding the month of such Payment Date, the Stated Principal Balance of such Pledged Mortgage, and (f) all partial and full principal prepayments by borrowers received during the related Prepayment Period. Payments of principal or interest, if any, on the Bonds will be made on each Payment Date, commencing on ____________ ___, 199__, in the manner and in accordance with the priorities for the Bonds provided in the Indenture. The entire unpaid principal amount of each Class of Bonds shall be due and payable, if not then previously paid, on the Stated Maturity of the final installment of principal of such Class. All payments of principal of, and interest on, the Bonds shall be made only from the Trust Estate Granted as security for the Bonds and any other assets of the Issuer that have not been Granted as security for any other bonds or obligations of the Issuer, and each Holder hereof, by its acceptance of this Bond, agrees that it will have recourse solely against such Trust Estate and such other assets of the Issuer and that neither _____________________ ___ in its individual capacity, any holder of a beneficial interest in the Issuer nor any of their respective shareholders, partners, beneficiaries, agents, officers, directors, employees, successors or assigns shall be personally liable for any amounts payable, or performance due, under this Bond or the Indenture. Payment of the then remaining unpaid principal amount of this Bond on the Stated Maturity of its final installment of principal or on such earlier date as the Issuer shall be required to pay the then remaining unpaid principal amount of this Bond or payment of the Redemption Price payable on any date as of which this Bond has been called for redemption in full, shall be made upon presentation of this Bond to the office or agency of the Issuer maintained for such purpose. Payments of interest on this II-5 161 Bond due and payable on each Payment Date or on any Optional Redemption Date, to the extent this Bond is not being paid in full, together with any installment of principal of this Bond due and payable on each Payment Date or the Optional Redemption Date, to the extent not in full payment of this Bond, shall be made by check mailed to the Person whose name appears as the registered Holder of this Bond (or one or more Predecessor Bonds) on the Bond Register as of the last day of the month preceding the month in which such Payment Date occurs (each a "Record Date"). Checks for amounts which include installments of principal due on this Bond 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 and checks returned undelivered will be held for payment to the Person entitled thereto, subject to the terms of the Indenture, at the office or agency in the United States of America designated by the Issuer for such purpose pursuant to the Indenture. 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 Holders of this Bond and of any Bond issued upon the registration of transfer hereof or in exchange herefor 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 Bond on a Payment Date or Optional Redemption Date which is prior to the Stated Maturity of the final installment of principal hereof, then the Trustee, on behalf of the Issuer, will notify the Person who was the registered Holder hereof on the last day of the month prior to the month in which such Payment Date or Optional Redemption Date occurs, and the amount then due and payable shall, if sufficient funds therefor are available, be payable only upon presentation of this Bond to the office or agency of the Issuer maintained for such purpose. The failure of the Issuer to pay when and as due any installment of principal of (regardless of the lapse of any grace period) any Senior Bond shall not constitute an Event of Default under the Indenture unless the Senior Class Principal Amount exceeds the aggregate Stated Principal Balances of the Pledged II-6 162 Mortgages after application of all available amounts on deposit in the Distribution Account on a Payment Date. If an Event of Default as defined in the Indenture shall occur and be continuing with respect to the Bonds, the Bonds may become or be declared due and payable in the manner and with the effect provided in the Indenture. If any such acceleration of maturity occurs prior to the Stated Maturity of the final installment of principal of this Bond, the amount payable to the Holder of this Bond will be equal to the Class Principal Amount of this Bond on the date this Bond becomes so due and payable, together with accrued interest. Following the acceleration of the maturity of the Bonds, all amounts collected as proceeds of the collateral securing the Bonds or otherwise shall be applied as described in the Indenture. Following such acceleration, interest on any overdue installments of interest on all Bonds shall be payable at the rate set forth in the Indenture. The Bonds are not prepayable or redeemable at the option or direction of the Issuer except that the Bonds are subject to redemption in whole, but not in part, at the option of the Issuer on any Payment Date on or after the Payment Date on which the sum of (i) the Invested Amount, (ii) the Senior Class Principal Amount, (iii) the Class B- 1 Principal Amount and (iv) the Class B-2 Principal Amount, after giving effect to payments expected to be made on such Payment Date, is __% or less of the aggregate of the Stated Principal Balances of the Pledged Mortgages as of the Cut- Off Date. Any such redemption at the option of the Issuer shall be at a price equal to 100% of the unpaid principal amount of the Bonds (including, in the case of the Subordinated Bonds, any unpaid Class B-1 Principal Carryover Shortfall and/or Class B-2 Principal Carryover Shortfall) so redeemed plus accrued interest through the last day of the month preceding the month in which such optional redemption occurs. As provided in the Indenture and subject to certain limitations therein set forth, the transfer of this Bond may be registered on the Bond Register of the Issuer, upon surrender of this Bond for registration of transfer at the office or agency designated by the Issuer pursuant to the Indenture, duly endorsed by, or accompanied by a written instrument of transfer in form satisfactory to the Trustee duly executed by the Holder hereof or his attorney duly authorized in writing, and thereupon one or more II-7 163 new Bonds of the same Class, of authorized denominations and in the same aggregate initial principal amount, will be issued to the designated transferee or transferees. Prior to the due presentment for registration of transfer of this Bond, the Issuer, the Trustee, and any agent of the Issuer shall treat the Person in whose name this Bond is registered (i) on any Record Date, for purposes of making payments, and (ii) on any other date for any other purposes, as the owner hereof, whether or not this Bond be overdue, and neither the Issuer, the 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 Bonds under the Indenture at any time by the Issuer with the consent of the Holders of Bonds representing two-thirds of the aggregate Class Principal Amount of the Controlling Class. The Indenture also contains provisions permitting the Holders of Bonds representing specified percentages of the aggregate Class Principal Amount of the Controlling Class on behalf of the Holders of all the Bonds of such Class, to waive compliance by the Issuer with certain provisions of the Indenture and certain past defaults under the Indenture and their consequences. Any such consent or waiver by the Holder, at the time of the giving thereof, of this Bond (or any one or 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 herefor or in lieu hereof whether or not notation of such consent or waiver is made upon this Bond. The Indenture also permits the Trustee to amend or waive certain terms and conditions set forth in the Indenture without the consent of the Holders of the Bonds of any Series issued thereunder. The Senior Bonds are "Book Entry Bonds" which will be available to investors only through the book entry facilities of The Depository Trust Company, and bond certificates for all Classes of Bonds will be available only under certain limited circumstances as described in the Indenture. AS PROVIDED IN THE INDENTURE, THIS BOND AND THE INDENTURE SHALL BE CONSTRUED IN ACCORDANCE WITH, AND GOVERNED BY, THE LAWS OF II-8 164 THE STATE OF NEW YORK APPLICABLE TO AGREEMENTS MADE AND TO BE PERFORMED THEREIN. No reference herein to the Indenture and no provision of this Bond or of the Indenture shall alter or impair the obligation of the Issuer, which is absolute and unconditional to the extent permitted by applicable law, to pay the principal of, and interest on, this Bond at the times, place and rate, and in the coin or currency herein prescribed. II-9 165 EXHIBIT III FORM OF A CLASS B-1 BOND The form of a Class B-1 Bond is as follows: PRINCIPAL OF THIS BOND IS PAYABLE IN INSTALLMENTS AS SET FORTH HEREIN. ACCORDINGLY, THE CLASS PRINCIPAL AMOUNT OF THIS BOND AT ANY TIME MAY BE LESS THAN THE AMOUNT SHOWN ON THE FACE HEREOF. THE CLASS PRINCIPAL AMOUNT OF THIS BOND MAY BE ASCERTAINED ONLY BY OBTAINING A CONFIRMATION THEREOF FROM THE TRUSTEE UNDER THE INDENTURE REFERRED TO BELOW. UNLESS THIS 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 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. THIS BOND IS SUBORDINATED IN RIGHT OF PAYMENT TO THE SENIOR BONDS AS DESCRIBED IN THE INDENTURE REFERRED TO HEREIN. THE FOLLOWING INFORMATION IS PROVIDED SOLELY FOR THE PURPOSE OF APPLYING THE U.S. FEDERAL INCOME TAX ORIGINAL ISSUE DISCOUNT ("OID") RULES TO THIS BOND. THE ISSUE DATE OF THIS BOND IS __________ ___, 199__. THE PER ANNUM RATE OF INTEREST ON THIS BOND IS ___% ASSUMING THAT PRINCIPAL PAYMENTS ARE MADE ON THE MORTGAGE COLLATERAL UNDERLYING THE BONDS AT _______% OF THE STANDARD PREPAYMENT ASSUMPTION (AS DEFINED IN THE PROSPECTUS SUPPLEMENT) THIS BOND HAS BEEN ISSUED WITH $ OF OID PER $1,000 OF INITIAL PRINCIPAL AMOUNT, THE YIELD TO MATURITY IS ___% AND THE AMOUNT OF OID ATTRIBUTABLE TO THE INITIAL SHORT ACCRUAL PERIOD IS $_______ OF OID PER $1,000 OF INITIAL PRINCIPAL AMOUNT, CALCULATED ASSUMING THE YIELD IS ACCRUED DAILY DURING INITIAL SHORT PERIOD. NO REPRESENTATION IS MADE AS TO THE RATE AT WHICH PRINCIPAL PAYMENTS WILL BE MADE ON THE MORTGAGE COLLATERAL. III-1 166 SEQUOIA MORTGAGE TRUST 199_-_, a Delaware Statutory Business Trust Collateralized Mortgage Bonds CLASS B-1 DUE: _____________ ___, _____ ACCRUAL DATE: _____________ ___, _____ ISSUE DATE: _____________ ___, _____ ___________ INTEREST RATE Initial Class Principal CUSIP NO. ______ Amount of this Bond: $____________________ CERTIFICATE NUMBER 1 Sequoia Mortgage Trust 199_-_ (the "Issuer"), a statutory business trust formed under the Deposit Trust Agreement dated as of __________ ___, _____, and having ________________________, a Delaware bank and trust company, as Owner Trustee for value received, hereby promises to pay to CEDE & CO. or registered assigns, the principal sum of [AMOUNT IN WORDS] ($___________) in monthly installments on the ______________ day of each month, commencing on _________ ___, _____ (each, a "Payment Date"), and ending on or before __________ ___, _____ (the "Stated Maturity" of such final installment of principal), and to pay interest (computed on the basis of a 360-day year of twelve 30-day months) on the Class Principal Amount (as defined in the Indenture) of this Bond from time to time from __________ ___, _____ (the "Accrual Date"), or such later date to which interest has been paid, through the last day of the month preceding the month in which the principal amount of this Bond is paid in full, at a [variable/fixed] rate determined as described below, such interest being payable monthly on each Payment Date. If any Payment Date shall not be a "Business Day" (as defined in the Indenture), payment of the amount due will be made on the next succeeding Business Day. Installments of principal of this Bond are due and payable as described in the Indenture. Interest payable on this Bond on a Payment Date will be equal to the amount of interest that has accrued on the Class III-2 167 Principal Balance of this Bond during the one-month period ending on the last day of the month preceding the month in which each such Payment Date occurs (each, an "Interest Accrual Period"). The principal of, and interest on, this 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 Bond shall be applied as set forth in the Indenture. Any installment of principal or interest which is not paid when and as due shall bear interest as described in the Indenture. Unless the certificate of authentication hereon has been executed by the Trustee by manual signature, this Bond shall not be entitled to any benefit under the Indenture, or be valid or obligatory for any purpose. IN WITNESS WHEREOF, Sequoia Mortgage Trust 199_-_ has caused this instrument to be duly executed by its duly authorized officer. Dated:_______________ SEQUOIA MORTGAGE TRUST 199_-_ By: -------------------------------- not in its individual capacity but solely as Owner Trustee By: -------------------------------- Title: ----------------------------- CERTIFICATE OF AUTHENTICATION This is one of the Bonds referred to in the within-mentioned Indenture. , - ---------------------------- as Trustee By: ----------------------------------- Authorized Signatory III-3 168 This Bond is one of a duly authorized issue of Bonds of the Issuer, designated as its Collateralized Mortgage Bonds, Series 199_-_ (herein called the "Bonds"). The Bonds are issuable in one or more classes; the Bonds of particular Classes being herein called the Class A-1, Class B-1 and Class B-2 Bonds, all issued and to be issued under the Issuer's Indenture dated as of ____________ ___, 199__ between the Issuer and ________________________________ (the "Trustee", which term includes any successor Trustee under the Indenture), which authorized the Bonds, and reference is hereby made thereto for a statement of the respective rights thereunder of the Issuer, the Trustee and the Holders of the Bonds of each particular Class thereof and the terms upon which the Bonds of each Class are, and are to be, authenticated and delivered. The Class A-1 Bonds constitute "Senior Bonds" and the Class B-1 Bonds and Class B-2 Bonds constitute "Subordinated Bonds". All terms used in this Bond which are defined in the Indenture shall have the meanings assigned to them in the Indenture. The Bond Interest Rate for the Class B-1 Bonds (the "Class B-1 Bond Interest Rate") and any Interest Accrual Period will equal ________________. As provided in the Indenture, the Bonds are issuable in Classes which may vary as provided or permitted in the Indenture. Bonds of each Class are equally and ratably secured by the collateral pledged as security therefor to the extent provided by the Indenture. For each Payment Date, the aggregate amount of each installment of principal due and payable on the Class B-1 Bonds will be equal to the Class B-1 Principal Payment Amount for such Payment Date. The Class B-1 Principal Payment Amount for any Payment Date is equal to the sum of (i) the Class B-1 Percentage of the sum of (a) the principal portion of the Scheduled Payment due on each Pledged Mortgage [on the related Due Date], (b) the principal portion of the purchase price of each Pledged Mortgage that was purchased by Redwood Trust or another person pursuant to the Mortgage Loan Purchase Agreement [or by the Master Servicer in connection with any optional purchase by the Master Servicer of a III-4 169 defaulted Pledged Mortgage] as of such Payment Date, (c) the Substitution Adjustment Amount in connection with any Deleted Pledged Mortgage received with respect to such Payment Date, (d) any Insurance Proceeds or Liquidation Proceeds allocable to recoveries of principal of Pledged Mortgages that are not yet Liquidated Pledged Mortgages received during the [calendar month] preceding the month of such Payment Date, (e) with respect to each Pledged Mortgage that became a Liquidated Pledged Mortgage during the [calendar month] preceding the month of such Payment Date, the Stated Principal Balance of such Pledged Mortgage and (f) all partial and full principal prepayments by borrowers received during the related Prepayment Period and (ii) any Class B-1 Principal Carryover Shortfall. Payments of principal or interest, if any, on the Bonds will be made on each Payment Date, commencing on __________ ___, 199__, in the manner and in accordance with the priorities for the Bonds provided in the Indenture. The entire unpaid principal amount of each Class of Bonds shall be due and payable, if not then previously paid, on the Stated Maturity of the final installment of principal of such Class. All payments of principal of, and interest on, the Bonds shall be made only from the Trust Estate Granted as security for the Bonds and any other assets of the Issuer that have not been Granted as security for any other bonds or obligations of the Issuer, and each Holder hereof, by its acceptance of this Bond, agrees that it will have recourse solely against such Trust Estate and such other assets of the Issuer and that neither Wilmington Trust Company in its individual capacity, any holder of a beneficial interest in the Issuer nor any of their respective shareholders, partners, beneficiaries, agents, officers, directors, employees, successors or assigns shall be personally liable for any amounts payable, or performance due, under this Bond or the Indenture. Payment of the then remaining unpaid principal amount of this Bond on the Stated Maturity of its final installment of principal or on such earlier date as the Issuer shall be required to pay the then remaining unpaid principal amount of this Bond or payment of the Redemption Price payable on any date as of which III-5 170 this Bond has been called for redemption in full, shall be made upon presentation of this Bond to the office or agency of the Issuer maintained for such purpose. Payments of interest on this Bond due and payable on each Payment Date or on any Optional Redemption Date, to the extent this Bond is not being paid in full, together with any installment of principal of this Bond due and payable on each Payment Date or the Optional Redemption Date, to the extent not in full payment of this Bond, shall be made by check mailed to the Person whose name appears as the registered Holder of this Bond (or one or more Predecessor Bonds) on the Bond Register as of the last day of the month preceding the month in which such Payment Date occurs (each a "Record Date"). Checks for amounts which include installments of principal due on this Bond 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 and checks returned undelivered will be held for payment to the Person entitled thereto, subject to the terms of the Indenture, at the office or agency in the United States of America designated by the Issuer for such purpose pursuant to the Indenture. 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 Holders of this Bond and of any Bond issued upon the registration of transfer hereof or in exchange herefor 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 Bond on a Payment Date or Optional Redemption Date which is prior to the Stated Maturity of the final installment of principal hereof, then the Trustee, on behalf of the Issuer, will notify the Person who was the registered Holder hereof on the last day of the month prior to the month in which such Payment Date or optional Redemption Date occurs, and the amount then due and payable shall, if sufficient funds therefor are available, be payable only upon presentation of this Bond to the office or agency of the Issuer maintained for such purpose. Prior to the payment in full of the Senior Bonds, the failure of the Issuer to pay when and as due any installment of principal of or interest (regardless of the lapse of any grace III-6 171 period) on any Subordinated Bond shall not constitute an Event of Default under the Indenture. In addition, notwithstanding any applicable provision of the Indenture, upon payment in full of the Senior Bonds, the prior occurrence of any such shortfalls attributable to the Subordinated Bonds, which shortfalls have previously been paid in full, will not constitute an Event of Default under the Indenture in respect of the Subordinated Bonds. If an Event of Default as defined in the Indenture shall occur and be continuing with respect to the Bonds, the Bonds may become or be declared due and payable in the manner and with the effect provided in the Indenture. If any such acceleration of maturity occurs prior to the Stated Maturity of the final installment of principal of this Bond, the amount payable to the Holder of this Bond will be equal to the Class Principal Amount of this Bond on the date this Bond becomes so due and payable, together with accrued interest. Following the acceleration of the maturity of the Bonds, all amounts collected as proceeds of the collateral securing the Bonds or otherwise shall be applied as described in the Indenture. Following such acceleration, interest on any overdue installments of interest on all Bonds shall be payable at the rate set forth in the Indenture. The Bonds are not prepayable or redeemable at the option or direction of the Issuer except that the Bonds are subject to redemption in whole, but not in part, at the option of the Issuer on any Payment Date on or after the Payment Date on which the sum of (i) the Invested Amount, (ii) the Senior Class Principal Amount, (iii) the Class B- 1 Principal Amount and (iv) the Class B-2 Principal Amount, after giving effect to payments expected to be made on such Payment Date, is __% or less of the aggregate of the Stated Principal Balances of the Pledged Mortgages as of the Cut- Off Date. Any such redemption at the option of the Issuer shall be at a price equal to 100% of the unpaid principal amount of the Bonds (including, in the case of the Subordinated Bonds, any unpaid Class B-1 Principal Carryover Shortfall and/or Class B-2 Principal Carryover Shortfall) so redeemed plus accrued interest through the last day of the month preceding the month in which such optional redemption occurs. As provided in the Indenture and subject to certain limitations therein set forth, the transfer of this Bond may be registered on the Bond Register of the Issuer, upon surrender of III-7 172 this Bond for registration of transfer at the office or agency designated by the Issuer pursuant to the Indenture, duly endorsed by, or accompanied by a written instrument of transfer in form satisfactory to the Trustee duly executed by the Holder hereof or his attorney duly authorized in writing, and thereupon one or more new Bonds of the same Class, of authorized denominations and in the same aggregate initial principal amount, will be issued to the designated transferee or transferees. Prior to the due presentment for registration of transfer of this Bond, the Issuer, the Trustee, and any agent of the Issuer shall treat the Person in whose name this Bond is registered (i) on any Record Date, for purposes of making payments, and (ii) on any other date for any other purposes, as the owner hereof, whether or not this Bond be overdue, and neither the Issuer, the 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 Bonds under the Indenture at any time by the Issuer with the consent of the Holders of Bonds representing two-thirds of the aggregate Class Principal Amount of the Controlling Class. The Indenture also contains provisions permitting the Holders of Bonds representing specified percentages of the aggregate Class Principal Amount of the Controlling Class on behalf of the Holders of all the Bonds of such Class, to waive compliance by the Issuer with certain provisions of the Indenture and certain past defaults under the Indenture and their consequences. Any such consent or waiver by the Holder, at the time of the giving thereof, of this Bond (or any one or 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 herefor or in lieu hereof whether or not notation of such consent or waiver is made upon this Bond. The Indenture also permits the Trustee to amend or waive certain terms and conditions set forth in the Indenture without the consent of the Holders of the Bonds of any Series issued thereunder. The Class B-1 Bonds are "Book Entry Bonds" which will be available to investors only through the book entry facilities of The Depository Trust Company, and bond certificates for all Classes III-8 173 of Bonds will be available only under certain limited circumstances as described in the Indenture. AS PROVIDED IN THE INDENTURE, THIS BOND AND THE INDENTURE SHALL BE CONSTRUED IN ACCORDANCE WITH, AND GOVERNED BY, THE LAWS OF THE STATE OF NEW YORK APPLICABLE TO AGREEMENTS MADE AND TO BE PERFORMED THEREIN. No reference herein to the Indenture and no provision of this Bond or of the Indenture shall alter or impair the obligation of the Issuer, which is absolute and unconditional to the extent permitted by applicable law, to pay the principal of, and interest on, this Bond at the times, place and rate, and in the coin or currency herein prescribed. III-9 174 EXHIBIT IV FORM OF A CLASS B-2 BOND The form of a Class B-2 Bond is as follows: PRINCIPAL OF THIS BOND IS PAYABLE IN INSTALLMENTS AS SET FORTH HEREIN. ACCORDINGLY, THE CLASS PRINCIPAL AMOUNT OF THIS BOND AT ANY TIME MAY BE LESS THAN THE AMOUNT SHOWN ON THE FACE HEREOF. THE CLASS PRINCIPAL AMOUNT OF THIS BOND MAY BE ASCERTAINED ONLY BY OBTAINING A CONFIRMATION THEREOF FROM THE TRUSTEE UNDER THE INDENTURE REFERRED TO BELOW. [UNLESS THIS 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 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.] THIS BOND IS SUBORDINATED IN RIGHT OF PAYMENT TO THE CLASS B-1 BONDS AND THE SENIOR BONDS AS DESCRIBED IN THE INDENTURE REFERRED TO HEREIN. THE FOLLOWING INFORMATION IS PROVIDED SOLELY FOR THE PURPOSE OF APPLYING THE U.S. FEDERAL INCOME TAX ORIGINAL ISSUE DISCOUNT ("OID") RULES TO THIS BOND. THE ISSUE DATE OF THIS BOND IS _____________, 199__. THE PER ANNUM RATE OF INTEREST ON THIS BOND IS ___% ASSUMING THAT PRINCIPAL PAYMENTS ARE MADE ON THE MORTGAGE COLLATERAL UNDERLYING THE BONDS AT _______% OF THE STANDARD PREPAYMENT ASSUMPTION (AS DEFINED IN THE PROSPECTUS SUPPLEMENT) THIS BOND HAS BEEN ISSUED WITH $ OF OID PER $1,000 OF INITIAL PRINCIPAL AMOUNT, THE YIELD TO MATURITY IS ___% AND THE AMOUNT OF OID ATTRIBUTABLE TO THE INITIAL SHORT ACCRUAL PERIOD IS $_______ OF OID PER $1,000 OF INITIAL PRINCIPAL AMOUNT, CALCULATED ASSUMING THE YIELD IS ACCRUED DAILY DURING INITIAL SHORT PERIOD. NO REPRESENTATION IS MADE AS TO THE RATE AT WHICH PRINCIPAL PAYMENTS WILL BE MADE ON THE MORTGAGE COLLATERAL. III-1 175 SEQUOIA MORTGAGE TRUST 199_-_, a Delaware Statutory Business Trust Collateralized Mortgage Bonds CLASS B-2 DUE: __________ ___, _____ ACCRUAL DATE: __________ ___, _____ ISSUE DATE: __________ ___, _____ INTEREST RATE Initial Class Principal CUSIP NO. ______ Amount of this Bond: $____________________ CERTIFICATE NUMBER 1 Sequoia Mortgage Trust 199_-_ (the "Issuer"), a statutory business trust formed under the Deposit Trust Agreement dated as of __________ ___, 199__, and having ________________________, a Delaware bank and trust company, as Owner Trustee for value received, hereby promises to pay to CEDE & CO. or registered assigns, the principal sum of [AMOUNT IN WORDS] ($___________) in monthly installments on the ____________ day of each month, commencing on __________ ___, _____ (each, a "Payment Date"), and ending on or before __________ ___, _____ (the "Stated Maturity" of such final installment of principal), and to pay interest (computed on the basis of a 360-day year of twelve 30-day months) on the Class Principal Amount (as defined in the Indenture) of this Bond from time to time from __________ ___, _____ (the "Accrual Date"), or such later date to which interest has been paid, through the last day of the month preceding the month in which the principal amount of this Bond is paid in full, at a variable rate determined as described below, such interest being payable monthly on each Payment Date. If any Payment Date shall not be a "Business Day" (as defined in the Indenture), payment of the amount due will be made on the next succeeding Business Day. Installments of principal of this Bond are due and payable as described in the Indenture. Interest payable on this Bond on a Payment Date will be equal to the amount of interest that has accrued on the Class III-2 176 Principal Balance of this Bond during the one-month period ending on the last day of the month preceding the month in which each such Payment Date occurs (each, an "Interest Accrual Period"). The principal of, and interest on, this 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 Bond shall be applied as set forth in the Indenture. Any installment of principal or interest which is not paid when and as due shall bear interest as described in the Indenture. Unless the certificate of authentication hereon has been executed by the Trustee by manual signature, this Bond shall not be entitled to any benefit under the Indenture, or be valid or obligatory for any purpose. IN WITNESS WHEREOF, Sequoia Mortgage Trust 199_-_ has caused this instrument to be duly executed by its duly authorized officer. Dated:_______________ SEQUOIA MORTGAGE TRUST 199_-_ By: -------------------------------- not in its individual capacity but solely as Owner Trustee By: -------------------------------- Title: ----------------------------- CERTIFICATE OF AUTHENTICATION This is one of the Bonds referred to in the within-mentioned Indenture. , - ---------------------------- as Trustee By: ----------------------------------- Authorized Signatory III-3 177 This Bond is one of a duly authorized issue of Bonds of the Issuer, designated as its Collateralized Mortgage Bonds, Series 199__-__ (herein called the "Bonds"). The Bonds are issuable in one or more classes; the Bonds of particular Classes being herein called the Class A-1, Class B-1 and Class B-2 Bonds, all issued and to be issued under the Issuer's Indenture dated as of ____________ ___, _____, between the Issuer and ____________ _____________________ (the "Trustee", which term includes any successor Trustee under the Indenture), which authorized the Bonds, and reference is hereby made thereto for a statement of the respective rights thereunder of the Issuer, the Trustee and the Holders of the Bonds of each particular Class thereof and the terms upon which the Bonds of each Class are, and are to be, authenticated and delivered. The Class A-1 Bonds constitute "Senior Bonds" and the Class B-1 and Class B-2 Bonds constitute "Subordinated Bonds". All terms used in this Bond which are defined in the Indenture shall have the meanings assigned to them in the Indenture. The Bond Interest Rate for the Class B-2 Bonds (the "Class B-2 Bond Interest Rate") and any Interest Accrual Period will equal _______________. As provided in the Indenture, the Bonds are issuable in Classes which may vary as provided or permitted in the Indenture. Bonds of each Class are equally and ratably secured by the collateral pledged as security therefor to the extent provided by the Indenture. For each Payment Date, the aggregate amount of each installment of principal due and payable on the Class B-2 Bonds will be equal to the Class B-2 Principal Payment Amount for such Payment Date. The Class B-2 Principal Payment Amount for any Payment Date is equal to the sum of (i) the Class B-2 Percentage of the sum of (a) the principal portion of the Scheduled Payment due on each Pledged Mortgage [on the related Due Date], (b) the principal portion of the purchase price of each Pledged Mortgage that was purchased by Redwood Trust or another person pursuant to the Mortgage Loan Purchase Agreement [or by the Master Servicer in connection with any optional purchase by the Master Servicer of a III-4 178 defaulted Pledged Mortgage] as of such Payment Date, (c) the Substitution Adjustment Amount in connection with any Deleted Pledged Mortgage received with respect to such Payment Date, (d) any Insurance Proceeds or Liquidation Proceeds allocable to recoveries of principal of Pledged Mortgages that are not yet Liquidated Pledged Mortgages received during the [calendar month] preceding the month of such Payment Date, (e) with respect to each Pledged Mortgage that became a Liquidated Pledged Mortgage during the [calendar month] preceding the month of such Payment Date, the Stated Principal Balance of such Pledged Mortgage and (f) all partial and full principal prepayments by borrowers received during the related Prepayment Period and (ii) any Class B-2 Principal Carryover Shortfall. Payments of principal or interest, if any, on the Bonds will be made on each Payment Date, commencing on _____________ __, 199_, in the manner and in accordance with the priorities for the Bonds provided in the Indenture. The entire unpaid principal amount of each Class of Bonds shall be due and payable, if not then previously paid, on the Stated Maturity of the final installment of principal of such Class. All payments of principal of, and interest on, the Bonds shall be made only from the Trust Estate Granted as security for the Bonds and any other assets of the Issuer that have not been Granted as security for any other bonds or obligations of the Issuer, and each Holder hereof, by its acceptance of this Bond, agrees that it will have recourse solely against such Trust Estate and such other assets of the Issuer and that neither Wilmington Trust Company in its individual capacity, any holder of a beneficial interest in the Issuer nor any of their respective shareholders, partners, beneficiaries, agents, officers, directors, employees, successors or assigns shall be personally liable for any amounts payable, or performance due, under this Bond or the Indenture. Payment of the then remaining unpaid principal amount of this Bond on the Stated Maturity of its final installment of principal or on such earlier date as the Issuer shall be required to pay the then remaining unpaid principal amount of this Bond or payment of the Redemption Price payable on any date as of which III-5 179 this Bond has been called for redemption in full, shall be made upon presentation of this Bond to the office or agency of the Issuer maintained for such purpose. Payments of interest on this Bond due and payable on each Payment Date or on any Optional Redemption Date, to the extent this Bond is not being paid in full, together with any installment of principal of this Bond due and payable on each Payment Date or the Optional Redemption Date, to the extent not in full payment of this Bond, shall be made by check mailed to the Person whose name appears as the registered Holder of this Bond (or one or more Predecessor Bonds) on the Bond Register as of the last day of the month preceding the month in which such Payment Date occurs (each a "Record Date"). Checks for amounts which include installments of principal due on this Bond 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 and checks returned undelivered will be held for payment to the Person entitled thereto, subject to the terms of the Indenture, at the office or agency in the United States of America designated by the Issuer for such purpose pursuant to the Indenture. 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 Holders of this Bond and of any Bond issued upon the registration of transfer hereof or in exchange herefor 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 Bond on a Payment Date or Optional Redemption Date which is prior to the Stated Maturity of the final installment of principal hereof, then the Trustee, on behalf of the Issuer, will notify the Person who was the registered Holder hereof on the last day of the month prior to the month in which such Payment Date or optional Redemption Date occurs, and the amount then due and payable shall, if sufficient funds therefor are available, be payable only upon presentation of this Bond to the office or agency of the Issuer maintained for such purpose. Prior to the payment in full of the Senior Bonds, the failure of the Issuer to pay when and as due any installment of principal of or interest (regardless of the lapse of any grace III-6 180 period) on any Subordinated Bond shall not constitute an Event of Default under the Indenture. In addition, notwithstanding any applicable provision of the Indenture, upon payment in full of the Senior Bonds, the prior occurrence of any such shortfalls attributable to the Subordinated Bonds, which shortfalls have previously been paid in full, will not constitute an Event of Default under the Indenture in respect of the Subordinated Bonds. If an Event of Default as defined in the Indenture shall occur and be continuing with respect to the Bonds, the Bonds may become or be declared due and payable in the manner and with the effect provided in the Indenture. If any such acceleration of maturity occurs prior to the Stated Maturity of the final installment of principal of this Bond, the amount payable to the Holder of this Bond will be equal to the Class Principal Amount of this Bond on the date this Bond becomes so due and payable, together with accrued interest. Following the acceleration of the maturity of the Bonds, all amounts collected as proceeds of the collateral securing the Bonds or otherwise shall be applied as described in the Indenture. Following such acceleration, interest on any overdue installments of interest on all Bonds shall be payable at the rate set forth in the Indenture. The Bonds are not prepayable or redeemable at the option or direction of the Issuer except that the Bonds are subject to redemption in whole, but not in part, at the option of the Issuer on any Payment Date on or after the Payment Date on which the sum of (i) the Invested Amount, (ii) the Senior Class Principal Amount and (iii) the Subordinated Class Principal Amount, after giving effect to payments expected to be made on such Payment Date, is __% or less of the aggregate of the Stated Principal Balances of the Pledged Mortgages as of the Cut-Off Date. Any such redemption at the option of the Issuer shall be at a price equal to 100% of the unpaid principal amount of the Bonds (including, in the case of the Subordinated Bonds, any unpaid Class B-1 Principal Carryover Shortfall and/or Class B-2 Principal Carryover Shortfall) so redeemed plus accrued interest through the last day of the month preceding the month in which such optional redemption occurs. As provided in the Indenture and subject to certain limitations therein set forth, the transfer of this Bond may be registered on the Bond Register of the Issuer, upon surrender of this Bond for registration of transfer at the office or agency III-7 181 designated by the Issuer pursuant to the Indenture, duly endorsed by, or accompanied by a written instrument of transfer in form satisfactory to the Trustee duly executed by the Holder hereof or his attorney duly authorized in writing, and thereupon one or more new Bonds of the same Class, of authorized denominations and in the same aggregate initial principal amount, will be issued to the designated transferee or transferees. Prior to the due presentment for registration of transfer of this Bond, the Issuer, the Trustee, and any agent of the Issuer shall treat the Person in whose name this Bond is registered (i) on any Record Date, for purposes of making payments, and (ii) on any other date for any other purposes, as the owner hereof, whether or not this Bond be overdue, and neither the Issuer, the 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 Bonds under the Indenture at any time by the Issuer with the consent of the Holders of Bonds representing two-thirds of the aggregate Class Principal Amount of the Controlling Class. The Indenture also contains provisions permitting the Holders of Bonds representing specified percentages of the aggregate Class Principal Amount of the Controlling Class on behalf of the Holders of all the Bonds such Class, to waive compliance by the Issuer with certain provisions of the Indenture and certain past defaults under the Indenture and their consequences. Any such consent or waiver by the Holder, at the time of the giving thereof, of this Bond (or any one or 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 herefor or in lieu hereof whether or not notation of such consent or waiver is made upon this Bond. The Indenture also permits the Trustee to amend or waive certain terms and conditions set forth in the Indenture without the consent of the Holders of the Bonds of any Series issued thereunder. [The Subordinated Bonds are "Book Entry Bonds" which will be available to investors only through the book entry facilities of The Depository Trust Company, and bond certificates for all Classes of Bonds will be available only under certain limited circumstances as described in the Indenture.] III-8 182 AS PROVIDED IN THE INDENTURE, THIS BOND AND THE INDENTURE SHALL BE CONSTRUED IN ACCORDANCE WITH, AND GOVERNED BY, THE LAWS OF THE STATE OF NEW YORK APPLICABLE TO AGREEMENTS MADE AND TO BE PERFORMED THEREIN. No reference herein to the Indenture and no provision of this Bond or of the Indenture shall alter or impair the obligation of the Issuer, which is absolute and unconditional to the extent permitted by applicable law, to pay the principal of, and interest on, this Bond at the times, place and rate, and in the coin or currency herein prescribed. III-9 183 EXHIBIT V FORM OF BOND INSURANCE POLICY III-10 EX-4.2 4 FORM OF DEPOSIT TRUST AGREEMENT 1 EXHIBIT 4.2 SEQUOIA MORTGAGE TRUST _______ COLLATERALIZED MORTGAGE BONDS AMENDED AND RESTATED DEPOSIT TRUST AGREEMENT Between SEQUOIA MORTGAGE FUNDING CORPORATION, as Depositor and ________________________, as Owner Trustee dated as of ___________ ___, 199__ Sequoia Mortgage Trust 199__-__ 2 TABLE OF CONTENTS ARTICLE I DEFINITIONS 1.01. Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 ARTICLE II ORGANIZATION 2.01. Name . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 2.02. Office . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 2.03. Purpose and Powers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 2.04. Appointment of the Owner Trustee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 2.05. Declaration of Trust . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 2.06. Issuance of Investor Certificate; Prohibition of Transfer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 2.07. Situs of Trust . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 2.08. Title to Trust Property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 ARTICLE III CONCERNING THE OWNER 3.01. Ownership Prior to Closing Date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 3.02. Prohibition of Disposition by Depositor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 3.03. Lost, Stolen Mutilated or Destroyed Investor Certificates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 3.04. Representations and Warranties of the Depositor . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 3.05. Covenants of Owner to Indemnify Bond Trustee. . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 ARTICLE IV PAYMENTS AND DISTRIBUTIONS 4.01. Payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 4.02. Method of Payment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 4.03. Monthly Reports . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 4.04. Reports to Internal Revenue Service and Others . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 ARTICLE V DUTIES OF THE OWNER TRUSTEE 5.01. Authorization; Issuance of the Bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 5.02. Pledge of Collateral . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
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Page ---- 5.03. In General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 5.04. Action upon Instructions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 5.05. No Duties Except as Specified in Agreement or Instructions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 5.06. No Action Except Under Specified Documents or Instructions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 5.07. Further Assurances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 5.08. Restrictions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 5.09. Corporate Existence . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13] ARTICLE VI CONCERNING THE OWNER TRUSTEE 6.01. Acceptance of Trusts and Duties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 6.02. Furnishing of Documents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 6.03. Books and Records . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 6.04. Representations and Warranties of the Bank . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 6.05. No Segregation of Moneys; No Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 6.06. Reliance; Advice of Counsel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 6.07. Not Acting in Individual Capacity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 ARTICLE VII INDEMNIFICATION BY OWNER 7.01. Trust Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 7.02. Indemnification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 7.03. Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 7.04. Lien on Trust Estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 ARTICLE VIII TERMINATION OF TRUST AGREEMENT 8.01. Termination of Trust Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 ARTICLE IX SUCCESSOR OWNER TRUSTEES AND ADDITIONAL TRUSTEES 9.01. Resignation of Owner Trustee; Appointment of Successor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
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Page ---- 9.02. Appointment of Additional Trustees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 ARTICLE X MISCELLANEOUS 10.01. Supplements and Amendments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 10.02. No Legal Title to Trust Estate in Owner . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 10.03. Pledge of Collateral by Owner Trustee Is Binding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 10.04. Limitations on Rights of Others . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 10.05. Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 10.06. Severability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 10.07. Separate Counterparts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 10.08. Successors and Assigns . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 10.09. Headings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 10.10. Governing Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 10.11. No Petition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
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Page ---- ARTICLE XI OFFICERS 11.01. Appointment of Officers. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 11.02. Officers to Provide Information to the Owner Trustee. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 EXHIBIT A FORM OF INVESTOR CERTIFICATE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A-1
iv 6 AMENDED AND RESTATED DEPOSIT TRUST AGREEMENT dated as of __________, 199_, by and between Sequoia Mortgage Funding Corporation, a Delaware corporation, and _________________________________________, a Delaware banking corporation. WHEREAS, the Depositor and the Owner Trustee have entered into a Trust Agreement, dated as of __________, 199_ (the "Trust Agreement"); and WHEREAS, the Depositor and the Owner Trustee desire to amend and restate the Trust Agreement in its entirety. NOW THEREFORE, in consideration of the premises and mutual agreements herein contained, the Trust Agreement is hereby amended and restated in its entirety as follows: ARTICLE I DEFINITIONS 1.01. Definitions. For all purposes of this Agreement, the following terms shall have the meanings set forth below: "AGREEMENT" or "DEPOSIT TRUST AGREEMENT" means this Amended and Restated Deposit Trust Agreement and any amendments or modifications hereof. "AUTHORIZED OFFICER" means any officer of the Owner Trustee who is authorized to act for the Owner Trustee and whose name appears on a list of such authorized officers furnished by the Owner Trustee, as such list may be amended or supplemented from time to time, and any Officer of the Trust who is authorized to act pursuant to Section 11.01 of this Agreement and whose name appears on a list furnished by the Depositor to the Owner Trustee and the Bond Trustee, as such list may be amended or supplemented from time to time. "BANK" means ________________________ in its individual capacity and not as Owner Trustee. 7 "BOND AGREEMENTS" mean the Indenture, the Master Servicing Agreement, the Bonds and the Underwriting Agreement. "BONDHOLDERS" mean the holders from time to time of the Bonds. "BONDS" mean the Sequoia Mortgage Trust _____ Collateralized Mortgage Bonds issued by the Trust under the Indenture. "BUSINESS DAY" means any day that is not (i) a Saturday or a Sunday, or (ii) a day on which banking institutions in the City of New York, the State of California or the city of Wilmington, Delaware, are authorized or obligated by law or executive order to be closed. "BUSINESS TRUST STATUTE" means Chapter 38 of Title 12 of the Delaware Code, 12 Del.C. Section 3801 et seq, as the same may be amended from time to time. "CERTIFICATE DISTRIBUTION AMOUNT" has the meaning specified in Section 3.09(c). "CERTIFICATEHOLDER" or "HOLDER" means the Person in whose name an Investor Certificate is registered in the Certificate Register except that, any Investor Certificate registered in the name of the Issuer, the Owner Trustee or the Indenture Trustee or any Affiliate of any of them shall be deemed not to be outstanding and the registered Holder will not be considered a Certificateholder or a Holder for purposes of giving any request, demand, authorization, direction, notice, consent or waiver under the Indenture or the Trust Agreement provided that, in determining whether the Indenture Trustee or the Owner Trustee shall be protected in relying upon any such request, demand, authorization, direction, notice, consent or waiver, only Certificates that the Indenture Trustee or the Owner Trustee knows to be so owned shall be so disregarded. Owners of Investor Certificates that have been pledged in satisfaction of the Indenture Trustee or the Owner Trustee, as the case may be, the pledgee's right so to act with respect to such Investor Certificates and that the pledgee is not the Issuer, any other 2 8 obligor upon the Investor Certificates or any affiliate of any of the foregoing Persons. "CERTIFICATE OF TRUST" means the Certificate of Trust to be filed by the Owner Trustee for the Trust pursuant to Section 3810(a) of the Business Trust Statute. "CERTIFICATE PAYING AGENT" means __________________. "CERTIFICATE REGISTER" means the register maintained by the Certificate Registrar in which the Certificate Registrar shall provide for the registration of Certificates and of transfers and exchanges of Certificates. "CERTIFICATE REGISTRAR" means, initially, ________________, in its capacity as Certificate Registrar, or any successor to the Trustee in such capacity. "CLOSING DATE" has the meaning specified in the Indenture. "COLLATERAL" means all of the Trust Estate, including the Pledged Mortgages, rights to the Master Servicing Agreement, the Insurance Policies, the Bond Account and the Distribution Account, that is from time to time pledged as security for the Bonds under the Indenture. "DEPOSITOR" means Sequoia Mortgage Funding Corporation, a Delaware corporation. "EXPENSES" has the meaning specified in Section 7.02. "FISCAL YEAR" means the period from each January 1 to and including the following December 31. "INDENTURE" means the indenture between the Trust and the Bond Trustee, providing for the issuance of the Bonds. "INDENTURE TRUSTEE" means _________________________________, a banking corporation organized and existing under 3 9 the laws of _________________________________, as the trustee designated under the Indenture. "INITIAL PRINCIPAL BALANCE" means, with respect to the Investor Certificates, $__________. "INVESTOR CERTIFICATES" means the equity certificates each representing undivided beneficial interests in the Trust in substantially the form attached hereto as Exhibit A. "MANAGEMENT AGREEMENT" means the agreement between the Trust and Redwood Trust, Inc., substantially in the form annexed as Exhibit B hereto, as such agreement may be amended or supplemented. "MANAGER" means the Person acting in such capacity pursuant to the Management Agreement or its successors or assigns. "MASTER SERVICER" means ____________________________________, a ________ corporation, which shall manage and supervise the administration and servicing of the Pledged Mortgages securing the Bonds and the Servicers of such Pledged Mortgages, or its successors or assigns. "MASTER SERVICING AGREEMENT" means the Master Servicing Agreement among the Trust, the Indenture Trustee and the Master Servicer, pursuant to which the Master Servicer will be obligated to manage and supervise the administration and servicing of the Pledged Mortgages by the Servicers, as such agreement may be amended or supplemented from time to time as permitted thereby. "NET PROCEEDS FROM THE BONDS" means the proceeds received by the Trust from the issue and sale of the Bonds, less the costs and expenses incurred in connection with the issue and sale of the Bonds. "OFFICER" means those officers referred to in Article XII. 4 10 "OPERATIVE AGREEMENTS" mean the Indenture, the Underwriting Agreement, the Management Agreement, the Master Servicing Agreement, the Investor Certificate, the Mortgage Loan Purchase Agreement and each other document contemplated by any of the foregoing or this Agreement to which the Owner Trustee or the Trust is a party. "OWNER TRUSTEE" means ________________________, not in its individual capacity but solely as trustee under this Agreement, and any successor trustee hereunder. "PERIODIC FILINGS" mean any filings or submissions that the Trust is required to make with respect to the Bonds, including without limitation filings pursuant to the Securities and Exchange Act of 1934, as amended, and filings with any stock exchange or self-regulatory organization. "PERSON" means any individual, corporation, partnership, joint venture, association, joint stock company, trust, unincorporated organization or government or any agency or political subdivision thereof. "PERCENTAGE INTEREST" means, with respect to any Investor Certificate, the percentage obtained by dividing the denomination specified on such Investor Certificate by the Initial Principal Balance of the Investor Certificates. "PLEDGED MORTGAGES" means those [fixed/floating] rate, [fully-amortizing] conventional mortgage loans secured by first liens on one- to four-family residences as are Granted to the Indenture Trustee pursuant to the Indenture (including any REO Property). "PROPOSER" means the Certificateholder making a written request pursuant to Section 5.07. "QUALIFIED REIT SUBSIDIARY" means any subsidiary of Redwood which satisfies the requirements of Section 856(i)(2) of the Internal Revenue Code of 1986, as amended. 5 11 "REDWOOD" means Redwood Trust, Inc., a Maryland corporation. "SECRETARY OF STATE" means the Secretary of State of the State of Delaware. "SERVICER" means any Person with which the Master Servicer has entered into a Servicing Agreement for the servicing of all or a portion of the Pledged Mortgages pursuant to Section 3(b) of the Master Servicing Agreement. "SERVICING AGREEMENT" means any servicing agreement between the Master Servicer and the related Servicer relating to servicing and/or administration of certain Pledged Mortgages as provided in Section 3(b) of the Master Servicing Agreement. "SINGLE CERTIFICATE" means an Investor Certificate in the denomination of $1,000. "TRUST" means the trust established by this Agreement. "TRUST ESTATE" means all right, title and interest of the Owner Trustee, subject to the lien of the Indenture, in and to the Collateral and any other property contributed by the Depositor, including without limitation all distributions, payments, proceeds, insurance proceeds or requisition and indemnity payments with respect thereto. Notwithstanding the foregoing, "Trust Estate" shall not include any amounts paid or payable as compensation or indemnity to the Bank. "UNDERWRITING AGREEMENT" means the underwriting agreement relating to the sale of the Bonds substantially in the form filed as an exhibit to the registration statement with respect to the Bonds. 6 12 ARTICLE II ORGANIZATION 2.01. Name. The trust established under this Agreement may be referred to as "Sequoia Mortgage Trust 199_-_" in which name the Owner Trustee and the Officers may conduct the activities contemplated hereby. 2.02. Office. The office of the Trust shall be in care of the Owner Trustee, at the address set forth in Section 10.05 or at such other address within the State of Delaware as the Owner Trustee may designate by notice to the Certificateholders. 2.03. Purpose and Powers. The purpose of the Trust is to issue and administer the Bonds and the Certificates, to receive and own the Collateral, to maintain and administer the Collateral, to pledge the Collateral to secure the Bonds pursuant to the Indenture and to distribute the Net Proceeds from the Bonds to the Depositor, all for the benefit of the Certificateholders. The Trust shall not have power to perform any act or engage in any business whatsoever except for the foregoing and any activity that is both necessary to the foregoing and within the contemplation of the Indenture. 2.04. Appointment of the Owner Trustee. The Depositor hereby appoints the Bank as trustee of the Trust effective as of the date hereof, to have all the rights, powers and duties set forth herein and in the Business Trust Statute. The Owner Trustee acknowledges receipt in trust from the Depositor, as of the date hereof, of the sum of Ten Dollars ($10.00) constituting the initial Trust Estate. The Owner Trustee is hereby authorized to execute the Bond Agreements and the Management Agreement on behalf of the Trust. The Owner Trustee is hereby authorized to take all actions required or permitted to be taken by it as Issuer (as defined in the Indenture) under the Indenture and is hereby directed to comply with the terms of the Indenture. Effective as of the date of execution, the Owner Trustee shall have all the rights, powers and duties set forth herein and in the Business 7 13 Trust Statute with respect to accomplishing the purposes of the Trust. 2.05. Initial Capital Contribution; Declaration of Trust. The Depositor hereby sells, assigns, transfers, conveys and sets over to the Trust, as of the date hereof, the sum of $10. The Owner Trustee hereby acknowledges receipt in trust from the Depositor, as of the date hereof, of the foregoing contribution, which shall constitute the initial corpus of the Trust and shall be deposited in the Certificate Distribution Account. The Owner Trustee also acknowledges on behalf of the Trust receipt of the Pledged Mortgage pursuant to Section 3 of the Mortgage Loan Purchase Agreement, which shall constitute the Trust Estate. The Owner Trustee hereby declares that it will hold the Trust Estate upon the trusts set forth herein and for the use and benefit of the Certificateholders. It is the intention of the parties hereto that the Trust constitute a business trust under the Business Trust Statute and that this Agreement constitute the governing instrument of such business trust. No later than the Closing Date, the Owner Trustee shall cause the filing of the Certificate of Trust with the Secretary of State. It is the intention of the parties hereto that, for federal and state income and state and local franchise tax purposes, the Trust shall not be treated as (i) an association subject separately to taxation as a corporation (other than as a "qualified REIT subsidiary" as defined in Section 856(i) of the Code), (ii) a "publicly traded partnership" as defined in Treasury Regulation Section 1.7704-1 or (iii) a "taxable mortgage pool" as defined in Section 7701(i) of the Code, and that the Bonds shall be debt, and the provisions of this Agreement shall be interpreted to further this intention. Except as otherwise provided in this Trust Agreement, the rights of the Certificateholders will be those of equity owners of the Trust. Effective as of the date hereof, the Owner Trustee shall have all rights, powers and duties set forth herein and in the Business Trust Statute with respect to accomplishing the purposes of the Trust. 2.06. Issuance of Initial Investor Certificate. (a) Upon the formation of the Trust by the contribution by the Depositor pursuant to Section 2.04 and until the conveyance of 8 14 the Pledged Mortgages pursuant to Section 3 of the Mortgage Loan Purchase Agreement and the issuance of the Investor Certificates, and thereafter except as otherwise permitted hereunder, the Depositor shall be the sole Certificateholder. 2.07. Liability of the Holders of the Investor Certificates. The Holders of the Investor Certificates shall be jointly and severally liable directly to and shall indemnify any injured party for all losses, claims, damages, liabilities and expenses of the Trust (including Expenses, to the extent not paid out of the Trust Estate); provided however, that the Holders of the Investor Certificates shall not be liable for payments required to be made on the Bonds or the Investor Certificates, or for any losses incurred by a Certificateholder in the capacity of an investor in the Investor Certificates or a Bondholder in the capacity of an investor in the Bonds. In addition, any third party creditors of the Trust, including the Insurer (other than in connection with the obligations described in the following sentence for which the Holders of the Investor Certificates shall not be liable) shall be deemed third party beneficiaries of this paragraph. The Holders of the Investor Certificates shall be liable for any entity level taxes imposed on the Trust. The obligations of the Holders of the Investor Certificates under this paragraph shall be evidenced by the Investor Certificates. 2.08. Situs of Trust. The Trust will be located and administered in the State of Delaware. All bank accounts maintained by the Owner Trustee on behalf of the Trust shall be located in the State of Delaware. The only office of the Trust will be as described in Section 2.02 hereof. 2.09. Title to Trust Property. Title to all of the Trust Estate shall be vested in the Trust until this Agreement terminates pursuant to Article VIII hereof; provided, however, that if the laws of any jurisdiction require that title to any part of the Trust Estate be vested in the trustee of the Trust, then title to that part of the Trust Estate shall be deemed to be vested in the Owner Trustee or any co-trustee or separate trustee, as the case may be, appointed pursuant to Article VI of this Agreement. 9 15 2.10. Representations and Warranties of the Depositor. The Depositor hereby represents and warrants to the Owner Trustee as follows: (a) Upon the receipt of the Trust Estate by the Owner Trustee on behalf of the Trust under this Agreement, the Trust will own the Trust Estate free and clear of any lien (other than the lien of the Indenture) and the Owner Trustee will have the right on behalf of the Trust to grant and deliver the Collateral to the Indenture Trustee in accordance with the Indenture and Section 5.01 of this Agreement. (b) This Agreement has been duly and validly authorized, executed and delivered by, and constitutes a valid and binding agreement of, the Depositor, enforceable in accordance with its terms, subject, as to enforceability of remedies, to applicable bankruptcy, insolvency, reorganization or other laws affecting creditors' rights generally and to general principles of equity and equitable remedies (regardless of whether the enforceability of such remedies is considered in a proceeding at law or in equity). 2.11. Tax Treatment. The Depositor has structured the transactions evidenced by Operative Agreements with the intention that (i) the Bonds qualify under applicable tax laws as indebtedness secured by the Trust Estate and (ii) the Trust formed hereby be disregarded as an entity separate from the Depositor unless and until the date when either (a) there is more than one Investor Certificateholder or (b) any Series of Bonds is recharacterized as an equity interest in the Trust for federal income tax purposes. In such event, the Trust is intended to be classified as a partnership for federal income tax purposes. The Depositor, the Owner Trustee and the Manager agree to report the transactions contemplated hereby in accordance with the above stated intentions unless and until determined to the contrary by an applicable. 2.12. Investment Company. Neither the Company nor any holder of an Investor Certificate shall take any action which 10 16 would cause the Trust to become an "investment company" which would be required to register under the Investment Company Act. ARTICLE III THE INVESTOR CERTIFICATES 3.01. The Investor Certificates. The Investor Certificates shall be issued in the form of one or more Investor Certificates each representing not less than a 10% Percentage Interest. The Investor Certificates shall initially be registered in the name of the Depositor. The Investor Certificates shall be executed on behalf of the Trust by manual or facsimile signature of an authorized officer of the Owner Trustee and authenticated in the manner provided in Section 3.02. Investor Certificates bearing the manual or facsimile signatures of individuals who were, at the time when such signatures shall have been affixed, authorized to sign on behalf of the Trust, shall be validly issued and entitled to the benefit of this Trust Agreement, notwithstanding that such individuals or any of them shall have ceased to be so authorized prior to the authentication and delivery of such Investor Certificates or did not hold such offices at the date of authentication and delivery of such Investor Certificates. A Person shall become a Certificateholder and shall be entitled to the rights and subject to the obligations of a Certificateholder hereunder upon such Person's acceptance of an Investor Certificate duly registered in such Person's name pursuant to Section 3.03. 3.02. Authentication of Investor Certificates. The Owner Trustee shall cause all Investor Certificates issued hereunder to be executed and authenticated on behalf of the Trust, authenticated and delivered to or upon the written order of the Depositor, signed by its chairman of the board, its president or any vice president, without further corporate action by the Depositor, in authorized denominations. No Investor Certificate shall entitle its Holder to any benefit under this Trust Agreement or be valid for any purpose unless there shall appear on such Investor Certificate a certificate of authentication substantially in the form set forth in Exhibit A, executed by the Owner Trustee or the Certificate Registrar by 11 17 manual signature; such authentication shall constitute conclusive evidence that such Investor Certificate shall have been duly authenticated and delivered hereunder. All Investor Certificates shall be dated the date of their authentication. 3.03. Registration of and Limitations on Transfer and Exchange of Investor Certificates. The Certificate Registrar shall keep or cause to be kept, a Certificate Register in which, subject to such reasonable regulations as it may prescribe, the Certificate Registrar shall provide for the registration of Investor Certificates and of transfers and exchanges of Investor Certificates as herein provided. _____________________ shall be the initial Certificate Registrar. If the Certificate Registrar resigns or is removed, the Owner Trustee shall appoint a successor Certificate Registrar. Subject to satisfaction of the conditions set forth below with respect to the Investor Certificate, upon surrender for registration of transfer of any Investor Certificate at the office or agency maintained pursuant to Section 3.09, the Owner Trustee or the Certificate Registrar shall execute, authenticate and deliver in the name of the designated transferee or transferees, one or more new Investor Certificates in authorized denominations of a like aggregate amount dated the date of authentication by the Owner Trustee or the Certificate Registrar. At the option of a Holder, Investor Certificates may be exchanged for other Investor Certificates of authorized denominations of a like aggregate amount upon surrender of the Investor Certificates to be exchanged at the office or agency maintained pursuant to Section 3.09. Every Investor Certificate presented or surrendered for registration of transfer or exchange shall be accompanied by a written instrument of transfer in form satisfactory to the Certificate Registrar duly executed by the Holder or such Holder's attorney duly authorized in writing. Each Investor Certificate surrendered for registration of transfer or exchange shall be cancelled and subsequently disposed of by the Certificate Registrar in accordance with its customary practice. 12 18 No service charge shall be made for any registration of transfer or exchange of Investor Certificates, but the Owner Trustee or the Certificate Registrar may require payment of a sum sufficient to cover any tax or governmental charge that may be imposed in connection with any transfer or exchange of Investor Certificates. No Person shall become a Certificateholder until it shall establish its non-foreign status by submitting to the Certificate Paying Agent an IRS Form W-9 and the Certificate of Non-Foreign Status set forth in Exhibit D hereto. No transfer of an Investor Certificate shall be made unless such transfer is exempt from the registration requirements of the Securities Act and any applicable state securities laws or is made in accordance with said Act and laws. In the event of any such transfer, the Certificate Registrar or the Depositor shall prior to such transfer require the transferee to execute (i) (a) an investment letter (in substantially the form attached hereto as Exhibit C) in form and substance reasonably satisfactory to the Certificate Registrar and the Depositor certifying to the Trust, the Owner Trustee, the Certificate Registrar and the Depositor that such transferee is a "qualified institutional buyer" under Rule 144A under the Securities Act, or (b) an investment letter (in substantially the form attached hereto as Exhibit E), acceptable to and in form and substance reasonably satisfactory to the Certificate Registrar and the Depositor, which investment letters shall not be an expense of the Trust, the Owner Trustee, the Certificate Registrar, the Master Servicer or the Depositor, or (c) a certificate (in substantially the form attached hereto as Exhibit F) in form and substance reasonably satisfactory to the Certificate Registrar and the Depositor certifying that such transferee is a Person involved in the organization or operation of the Trust or an affiliate of such a Person within the meaning of Rule 3a-7 of the Investment Company Act of 1940, as amended (including but not limited to the Company) and (ii) the Certificate of Non-Foreign Status (in substantially the form attached hereto as Exhibit F) acceptable to and in form and substance reasonably satisfactory to the Certificate Registrar and the Depositor, which certificate shall not be an expense of the Trust, the Owner Trustee, the 13 19 Certificate Registrar or the Depositor. The Holder of an Investor Certificate desiring to effect such transfer shall, and does hereby agree to, indemnify the Trust, the Owner Trustee, the Certificate Registrar, the Master Servicer and the Depositor against any liability that may result if the transfer is not so exempt or is not made in accordance with such federal and state laws. No transfer of an Investor Certificate shall be made unless the Certificate Registrar shall have received either (i) a representation letter from the proposed transferee of such Investor Certificate to the effect that such proposed transferee is not an employee benefit plan subject to the fiduciary responsibility provisions of ERISA, or Section 4975 of the Code, or a Person acting on behalf of any such plan or using the assets of any such plan, which representation letter shall not be an expense of the Trust, Owner Trustee, the Certificate Registrar, the Master Servicer or the Depositor or (ii) in the case of any such certificate presented for registration in the name of an employee benefit plan subject to the fiduciary responsibility provisions of ERISA, or Section 4975 of the Code (or comparable provisions of any subsequent enactments), or a trustee of any such plan, or any other Person who is using the assets of any such plan to effect such acquisition, an Opinion of Counsel, in form and substance reasonably satisfactory to, and addressed and delivered to, the Trust, the Certificate Registrar and the Depositor, to the effect that the purchase or holding of such Investor Certificate will not result in the assets of the Trust Estate being deemed to be "plan assets" and subject to the fiduciary responsibility provisions of ERISA or the prohibited transaction provisions of the Code, will not constitute or result in a prohibited transaction within the meaning of Section 406 or Section 407 of ERISA or Section 4975 of the Code, and will not subject the Trust, the Owner Trustee, the Certificate Registrar or the Depositor to any obligation or liability including obligations or liabilities under ERISA or Section 4975 of the Code) in addition to those explicitly undertaken in this Trust Agreement which Opinion of Counsel shall not be an expense of the Trust, the Owner Trustee, the Certificate Registrar or Depositor. 14 20 As long as two or more Persons are holders of Investor Certificates, the Investor Certificates may only be transferred in accordance with the following provisions: before any Investor Certificates may be transferred to any Person, the Owner Trustee shall have received the consent to such transfer by holder of Investor Certificates representing ownership of more than 50% of the beneficial interest in the Trust, excluding for this purpose the beneficial interest represented by the Investor Certificates owned by the transferor or (unless the transferor and its Affiliates are the only holders of Investor Certificates) any Affiliate thereof; provided, however, that no consent shall be required to a transfer of Investor Certificates to the Depositor upon the Closing Date. No offer, sale, transfer or other disposition (including pledge) of any Investor Certificate shall be made to any transferee unless such transferee certifies to the Owner Trustee that the net worth of such transferee equals or exceeds $500,000 other than its interest in the Investor Certificates. The foregoing requirement shall not apply to the Depositor so long as it is the Holder of 100% of the Investor Certificates, but shall apply to the Depositor upon any sale of a portion of the Investor Certificates. No offer, sale, transfer or other disposition (including any pledge or sale under a repurchase transaction) of any Investor Certificate shall be made to any transferee unless, prior to such disposition, the proposed transferor delivers to the Owner Trustee an Opinion of Counsel, rendered by a law firm generally recognized to be qualified to opine concerning the tax aspects of asset securitization, to the effect that such transfer (including any disposition permitted following any default under any pledge or repurchase transaction) will not cause the Trust to be (i) treated as an association taxable as a corporation for federal income tax purposes (other than a Qualified REIT Subsidiary), (ii) taxable as a taxable mortgage pool as defined in Section 7701(i) of the Code or (iii) taxable as a "publicly traded partnership" as defined in Treasury Regulation section 1.7704-1. Notwithstanding the foregoing, the provisions of this paragraph shall not apply to the initial transfer of the Investor Certificates to the Depositor. 15 21 No offer, sale, transfer or other disposition (including pledge) of any Investor Certificate shall be made to any affiliate of the Depositor or the Issuer, other than the initial transfer of the Investor Certificate to the Depositor. 3.04. Lost, Stolen, Mutilated or Destroyed Investor Certificates. If (a) a mutilated Investor Certificate is surrendered to the Certificate Registrar, or (b) the Certificate Registrar receives evidence to its satisfaction that the Investor Certificate has been destroyed, lost or stolen, and there is delivered to the Certificate Registrar proof of ownership satisfactory to the Certificate Registrar, together with such security or indemnity as required by the Certificate Registrar and the Owner Trustee to save each of them harmless, then in the absence of notice to the Certificate Registrar or the Owner Trustee that such Investor Certificate has been acquired by a bona fide purchaser, the Owner Trustee shall execute on behalf of the Trust, and the Owner Trustee or the Certificate Registrar shall authenticate and deliver, in exchange for or in lieu of any such mutilated, destroyed, lost or stolen Investor Certificates, a new Investor Certificate of like tenor and denomination. In connection with the issuance of any new Investor Certificate under this Section 3.04, the Owner Trustee or the Certificate Registrar may require the payment of a sum sufficient to cover any expenses of the Owner Trustee or the Certificate Registrar (including fees and expenses of counsel) and any tax or other governmental charge that may be imposed in connection therewith. Any duplicate Investor Certificate issued pursuant to this Section 3.04 shall constitute conclusive evidence of ownership in the Trust, as if originally issued, whether or not the lost, stolen or destroyed Investor Certificate shall be found at any time. 3.05. Persons Deemed Certificateholders. Prior to due presentation of a Certificate for registration of transfer, the Owner Trustee, the Certificate Registrar or any Certificate Paying Agent may treat the Person in whose name any Investor Certificate is registered in the Certificate Register as the owner of such Investor Certificate for the purpose of receiving distributions pursuant to Section 5.02 and for all other purposes whatsoever, and none of the Trust, the Owner 16 22 Trustee, the Certificate Registrar or any Certificate Paying Agent shall be bound by any notice to the contrary. 3.06. Access to List of Certificateholders' Names and Addresses. The Certificate Registrar shall furnish or cause to be furnished to the Depositor or the Owner Trustee, within 15 days after receipt by the Certificate Registrar of a written request therefor from the Depositor or the Owner Trustee, a list, in such form as the Depositor or the Owner Trustee, as the case may be, may reasonably require, of the names and addresses of the Certificateholders as of the most recent Record Date. Each Holder, by receiving and holding an Investor Certificate, shall be deemed to have agreed not to hold any of the Trust, the Depositor, the Certificate Registrar or the Owner Trustee accountable by reason of the disclosure of its name and address, regardless of the source from which such information was derived. 3.07. Covenants of Certificateholders to Indemnify Indenture Trustee. The Certificateholders shall be liable to the Indenture Trustee for the payment of the Indenture Trustee's fees, indemnity and expenses pursuant to Section 6.07 of the Indenture in the event that the Trust fails to pay such fees, indemnity and expenses but only to the extent payable out of amounts actually received by the Certificateholders from distributions of the Trust pursuant to Section 4.01 hereof made on or before the date of demand for such payment by the Indenture Trustee. 3.08. Maintenance of Office or Agency. The Owner Trustee on behalf of the Trust, shall maintain in ___________, Delaware, an office or offices or agency or agencies where Investor Certificates may be surrendered for registration of transfer or exchange and where notices and demands to or upon the Owner Trustee in respect of the Investor Certificates and the Operative Documents may be served. The Owner Trustee initially designates the Corporate Trust Office as its office for such purposes. The Owner Trustee shall give prompt written notice to the Depositor and the Certificateholders of any change in the location of the Certificate Register or any such office or agency. 17 23 3.09. Certificate Paying Agent. (a) The Certificate Paying Agent shall make distributions to Certificateholders from the Certificate Distribution Account on behalf of the Trust in accordance with the provisions of the Investor Certificates and Section 4.01 hereof from payments remitted to the Certificate Paying Agent by the Trustee pursuant to Section 3.01 of the Indenture. The Trust hereby appoints _________________________ as Certificate Paying Agent and _______________________________ hereby accepts such appointment and further agrees that it will be bound by the provisions of this Trust Agreement relating to the Certificate Paying Agent and shall: (i) hold all sums held by it for the payment of amounts due with respect to the Investor Certificates 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; (ii) give the Owner Trustee notice of any default by the Trust of which it has actual knowledge in the making of any payment required to be made with respect to the Investor Certificates; (iii) at any time during the continuance of any such default, upon the written request of the Owner Trustee forthwith pay to the Owner Trustee on behalf of the Trust all sums so held in Trust by such Certificate Paying Agent; (iv) immediately resign as Certificate Paying Agent and forthwith pay to the Owner Trustee on behalf of the Trust all sums held by it in trust for the payment of Investor Certificates if at any time it ceases to meet the standards under this Section 3.09 required to be met by the Certificate Paying Agent at the time of its appointment; (v) comply with all requirements of the Code with respect to the withholding from any payments made by it on any Investor Certificates of any applicable withholding taxes imposed thereon and with respect to any applicable reporting requirements in connection therewith; 18 24 (vi) deliver to the Owner Trustee a copy of the report to Bondholders prepared with respect to each Payment Date by the Master Servicer pursuant to Section 8.06 of the Indenture; and (vii) not institute bankruptcy proceedings against the Issuer in connection with this Trust Agreement. (b) The Trust may revoke such power and remove the Certificate Paying Agent if it determines in its sole discretion that the Certificate Paying Agent shall have failed to perform its obligations under this Trust Agreement in any material respect. _________________________________ shall be permitted to resign as Certificate Paying Agent upon 30 days written notice to the Owner Trustee; provided _________________________________________ is also resigning as Paying Agent under the Indenture at such time. In the event that ___________________________________________ shall no longer be the Certificate Paying Agent under this Trust Agreement and Paying Agent under the Indenture, the Owner Trustee shall appoint a successor to act as Certificate Paying Agent (which shall be a bank or trust company) and which shall also be the successor Paying Agent under the Indenture. The Owner Trustee shall cause such successor Certificate Paying Agent or any additional Certificate Paying Agent appointed by the Owner Trustee to execute and deliver to the Owner Trustee an instrument to the effect set forth in this Section 3.09 as it relates to the Certificate Paying Agent. The Certificate Paying Agent shall return all unclaimed funds to the Trust and upon removal of a Certificate Paying Agent such Certificate Paying Agent shall also return all funds in its possession to the Trust. The provisions of Sections 6.01, 6.04, 6.06 and 7.01 shall apply to the Certificate Paying Agent to the extent applicable. Any reference in this Agreement to the Certificate Paying Agent shall include any co-paying agent unless the context requires otherwise. (c) The Certificate Paying Agent shall establish and maintain with itself a trust account (the "Certificate Distribution Account") in which the Certificate Paying Agent shall, deposit, on the same day as it is received from the Trustee, each remittance received by the Certificate Paying Agent 19 25 with respect to payments made pursuant to the Indenture. The Certificate Paying Agent shall make all distributions to Investor Certificates, from moneys on deposit in the Certificate Distribution Account. (d) The Certificate Paying Agent shall be paid by the Indenture Trustee. ARTICLE IV PAYMENTS AND DISTRIBUTIONS 4.01. Payments. (a) Any amounts paid to the Owner Trustee by the Indenture Trustee free and clear of the lien of the Indenture shall be applied in the following order: (i) to pay any amounts owing to the Owner Trustee or the Bank, as the case may be, as then due under this Agreement; (ii) to pay fees then due under the Management Agreement; and (iii) to pay any operating expenses of the Trust. Any sums remaining after such application shall be distributed monthly to the Certificateholders pursuant to Section 3(h)(viii) of the Master Servicing Agreement no later than the ____________ day of each [month] or, if such day is not a Business Day, on the next succeeding Business Day. All Net Proceeds from the Bonds shall be distributed to, or at the direction of, the Depositor in immediately available funds. All payments to be made under this Agreement by the Owner Trustee shall be made only from the income and proceeds, including Net Proceeds From the Bonds, of the Trust Estate and only to the extent that the Owner Trustee has received such income or proceeds. The Bank shall not be liable to the Owner, the Indenture Trustee or the Manager for any amounts payable pursuant to this Section 4.01 except to the extent that non- 20 26 payment is due to the Owner Trustee's acts or omissions amounting to willful misconduct or gross negligence. (b) In the event that any withholding tax is imposed on the distributions (or allocations of income) to the Certificateholders, such tax shall reduce the amount otherwise distributable to the Certificateholders in accordance with this Section 4.01. The Certificate Paying Agent is hereby authorized and directed to retain or cause to be retained from amounts otherwise distributable to the Certificateholders sufficient funds for the payment of any tax that is legally owed by the Trust (but such authorization shall not prevent the Owner Trustee from contesting any such tax in appropriate proceedings, and withholding payment of such tax, if permitted by law, pending the outcome of such proceedings). The amount of any withholding tax imposed with respect to a Certificateholder shall be treated as cash distributed to such Certificateholder at the time it is withheld by the Certificate Paying Agent and remitted to the appropriate taxing authority. If there is a possibility that withholding tax is payable with respect to a distribution (such as a distribution to a non-U.S. Certificateholder), the Certificate Paying Agent may in its own discretion withhold such amounts in accordance with this paragraph (b). (c) Distributions to Certificateholders shall be subordinated to the creditors of the Trust, including the Bondholders. 4.02. Method of Payment. Subject to Section 8.01(c), distributions required to be made to the Certificateholders on any Payment Date as provided in Section 4.01 shall be made to the Certificateholders of record on the preceding Record Date either by, in the case of any Certificateholder owning Certificates having a Percentage Interest of 100%, wire transfer, in immediately available funds, to the account of such Holder at a bank or other entity having appropriate facilities therefor, if such Certificateholder shall have provided to the Certificate Registrar appropriate written instructions at least five Business Days prior to such Payment Date or, if not, by check mailed to such Certificateholder at the address of such Holder appearing in the Certificate Register. 21 27 4.03. Tax Returns. The Master Servicer shall (a) maintain (or cause to be maintained) the books of the Trust on a calendar year basis using the accrual method of accounting, (b) deliver (or cause to be delivered) to each Certificateholder as may be required by the Code and applicable Treasury Regulations, such information as may be required to enable each Certificateholder to prepare its federal and state income tax returns, (c) prepare and file or cause to be prepared and filed such tax returns relating to the Trust as may be required by the Code and applicable Treasury Regulations (making such elections as may from time to time be required or appropriate under any applicable state or federal statutes, rules or regulations) and (d) collect or cause to be collected any withholding tax as described in and in accordance with Section 4.01 of this Trust Agreement with respect to income or distributions to Certificateholders and prepare or cause to be prepared the appropriate forms relating thereto. The Owner Trustee shall sign all tax and information returns prepared or caused to be prepared by the Master Servicer pursuant to this Section 4.03 at the request of the Master Servicer, and in doing so shall rely entirely upon, and shall have no liability for information or calculations provided by, the Master Servicer. 4.04. Statements to Certificateholders. On each Payment Date, the Certificate Paying Agent shall send to each Certificateholder the statement or statements provided to the Owner Trustee and the Certificate Paying Agent by the Master Servicer pursuant to Section 8.06 of the Indenture with respect to such Payment Date. 4.05. Reports to Internal Revenue Service and Others. The Trust will (i) cause to be prepared all Periodic Filings, (ii) make such elections and file such tax returns relating to the Trust as the Depositor may direct in a notice delivered to the Owner Trustee in accordance with Section 10.05, and (iii) cause to be mailed to the Depositor any or all of such reports and tax returns within 90 days of the end of the Fiscal Year; provided, however, that the Trust shall be deemed to be in compliance with this provision by its execution of the Management Agreement. 22 28 ARTICLE V AUTHORITY AND DUTIES OF THE OWNER TRUSTEE; ACTION BY CERTIFICATEHOLDERS 5.01. General Authority. The Owner Trustee is authorized and directed to execute and deliver the Operative Documents to which the Trust is to be a party and each certificate or other document attached as an exhibit to or contemplated by the Operative Documents to which the Trust is to be a party and any amendment or other agreement or instrument described herein, as evidenced conclusively by the Owner Trustee's execution thereof. In addition to the foregoing, the Owner Trustee is authorized, but shall not be obligated, to take all actions required of the Trust pursuant to the Operative Documents. 5.02. General Duties. It shall be the duty of the Owner Trustee to discharge (or cause to be discharged) all of its responsibilities pursuant to the terms of this Trust Agreement and the Operative Documents to which the Trust is a party and to administer the Trust in the interest of the Certificateholders, subject to the Operative Documents and in accordance with the provisions of this Trust Agreement. 5.03. Action Upon Instruction. (a) Subject to Article V and in accordance with the terms of the Operative Documents, the Certificateholders may by written instruction direct the Owner Trustee in the management of the Trust. Such direction may be exercised at any time by written instruction of the Certificateholders pursuant to Article V. (b) Notwithstanding the foregoing, the Owner Trustee shall not be required to take any action hereunder or under any Operative Document if the Owner Trustee shall have reasonably determined, or shall have been advised by counsel, that such action is likely to result in liability on the part of the Owner Trustee or is contrary to the terms hereof or of any Operative Document or is otherwise contrary to law. (c) Whenever the Owner Trustee is unable to decide between alternative courses of action permitted or required by 23 29 the terms of this Trust Agreement or under any Operative Document, or in the event that the Owner Trustee is unsure as to the application of any provision of this Trust Agreement or any Operative Document or any such provision is ambiguous as to its application, or is, or appears to be, in conflict with any other applicable provision, or in the event that this Trust Agreement permits any determination by the Owner Trustee or is silent or is incomplete as to the course of action that the Owner Trustee is required to take with respect to a particular set of facts, the Owner Trustee shall promptly give notice (in such form as shall be appropriate under the circumstances) to the Certificateholders (with a copy to the Insurer) requesting instruction as to the course of action to be adopted, and to the extent the Owner Trustee acts in good faith in accordance with any written instruction of the Certificateholders received, the Owner Trustee shall not be liable on account of such action to any Person. If the Owners Trustee shall not have received appropriate instruction within 10 days of such notice (or within such shorter period of time as reasonably may be specified in such notice or may be necessary under the circumstances) it may, but shall be under no duty to, take or refrain from taking such action not inconsistent with this Trust Agreement or the Operative Documents, as it shall deem to be in the best interests of the Certificateholders, and the Owner Trustee shall have no liability to any Person for such action or inaction. 5.04. No Duties Except as Specified under Specified Documents or in Instructions. The Owner Trustee shall not have any duty or obligation to manage, make any payment with respect to, register, record, sell, dispose of, or otherwise deal with the Trust Estate, or to otherwise take or refrain from taking any action under, or in connection with, any document contemplated hereby to which the Owner Trustee is a party, except as expressly provided (i) in accordance with the powers granted to and the authority conferred upon the Owner Trustee pursuant to this Trust Agreement, (ii) in accordance with the Operative Documents and (iii) in accordance with any document or instruction delivered to the Owner Trustee pursuant to Section 5.03; and no implied duties or obligations shall be read into this Trust Agreement or any Operative Document against the Owner Trustee. The Owner Trustee shall have no responsibility for filing any financing or 24 30 continuation statement in any public office at any time or to otherwise perfect or maintain the perfection of any security interest or lien granted to it hereunder or to prepare or file any Securities and Exchange Commission filing for the Trust or to record this Trust Agreement or any Operative Document. The Owner Trustee nevertheless agrees that it will, at its own cost and expense, promptly take all action as may be necessary to discharge any liens on any part of the Trust Estate that result form actions by, or claims against the Owner Trustee that are not related to the ownership or the administration of the Trust Estate. 5.05. Restrictions. (a) The Owner Trustee shall not take any action (x) that is inconsistent with the purposes of the Trust set forth in Section 2.03 or (y) that, to the actual knowledge of the Owner Trustee, would result in the Trust becoming taxable as a corporation (other than as a Qualified REIT Subsidiary) for federal income tax purposes or (z) would result in the amendment or modification of the Operative Documents or this Trust Agreement without the prior written consent of the Insurer. The Certificateholders shall not direct the Owner Trustee to take action that would violate the provisions of this Section 5.05. (b) The Owner Trustee shall not convey or transfer any of the Trust's properties or assets, including those included in the Trust Estate, to any person unless (a) it shall have received an Opinion of Counsel to the effect that such transaction will not have any material adverse tax consequence to the Trust or any Certificateholder and (b) such conveyance or transfer shall not violate the provisions of Section [3.09(a)] of the Indenture. 5.06. Prior Notice to Certificateholders with Respect to Certain Matters. With respect to the following matters, the Owner Trustee shall not take action unless at least 30 days before the taking of such action, the Owner Trustee shall have notified the Certificateholders in writing of the proposed action and the Certificateholders shall not have notified the Owner Trustee in writing prior to the 30th day after such notice is given that such Certificateholders have withheld consent or provided alternative direction: 25 31 (a) the initiation of any claim or lawsuit by the Trust (except claims or lawsuits brought in connection with the collection of cash distributions due and owning under the Pledged Mortgages) and the compromise of any action, claim or lawsuit brought by or against the Trust (except with respect to the aforementioned claims or lawsuits for collection of cash distributions due and owning under the Pledged Mortgages); (b) the election by the Trust to file an amendment to the Certificate of Trust (unless such amendment is required to be filed under the Business Trust Statute); (c) the amendment of the Indenture by a supplemental indenture in circumstances where the consent of any Bondholder is required; (d) the amendment of the Indenture by a supplemental indenture in circumstances where the consent of any Bondholder is not required and such amendment materially adversely affects the interests of the Certificateholders; or (e) the appointment pursuant to the Indenture of a successor Bond Registrar, Paying Agent or Indenture Trustee or pursuant to this Trust Agreement of a successor Certificate Registrar or Certificate Paying Agent or the consent to the assignment by the Bond Registrar, Paying Agent, Indenture Trustee, Certificate Registrar or Certificate Paying Agent of its obligations under the Indenture or this Trust Agreement, as applicable. 5.07. Action by Certificateholders with Respect to Certain Matters. (a) The Owner Trustee shall not have the power, except upon the direction of the Certificateholders, and with the consent of the Insurer, to (i) remove the Master Servicer under the Master Servicing Agreement pursuant to Sections 7(a) thereof or (ii) except as expressly provided in the Operative Documents, sell the Pledged Mortgages after the termination of the Indenture. The Owner Trustee shall take the actions referred to in the preceding sentence only upon written instructions signed by the Certificateholders and with the consent of the Insurer. 26 32 (b) Upon the written request of any Certificateholder (a "Proposer"), the Owner Trustee shall distribute promptly to all Certificateholders any request for action or consent of Certificateholders submitted by such Proposer, with a copy to the Manager and the Insurer. The Owner Trustee shall provide a reasonable method for collecting responses to such request and shall tabulate and report the results thereof to the Certificateholders, the Manager and the Insurer. The Owner Trustee shall have no responsibility or duty to determine if any such proposed action or consent is permitted under the terms of this Trust Agreement or applicable law. 5.08. Action by Certificateholders with Respect to Bankruptcy. The Owner Trustee shall not have the power to commence a voluntary proceeding in bankruptcy relating to the Trust without the unanimous prior approval of all Certificateholders and with the consent of the Insurer, the Bondholders and the Owner Trustee and the delivery to the Owner Trustee by each such Certificateholder of a certificate certifying that such Certificateholder reasonably believes that the Trust is insolvent. This paragraph shall survive for one year and one day following termination of this Trust Agreement. 5.09. Restrictions on Certificateholders' Power. The Certificateholders shall not direct the Owner Trustee to take or to refrain from taking any action if such action or inaction would be contrary to any obligation of the Trust or the Owner Trustee under this Trust Agreement or any of the Operative Documents or would be contrary to Section 2.03 nor shall the Owner Trustee be obligated to follow any such direction, if given. 5.10. Majority Control. Except as expressly provided herein, any action that may be taken by the Certificateholders under this Trust Agreement may be taken by the Holders of Investor Certificates evidencing not less than a majority of the outstanding Percentage Interests of the Investor Certificates. Except as expressly provided herein, any written notice of the Certificateholders delivered pursuant to this Trust Agreement shall be effective if signed by Holders of Investor Certificates evidencing not less than a majority of the outstanding Percentage 27 33 Interests of the Investor Certificates at the time of the delivery of such notice. 5.11. Optional Redemption. Upon receipt of written instructions provided to the Owner Trustee by the Holder or Holders of 100% of the Investor Certificates, the Owner Trustee shall cause the Issuer to redeem the Bonds in accordance with Section 10.01 of the Indenture and shall provide all necessary notices on behalf of the Issuer to effect the foregoing, provided that such Holder or Holders shall deposit with the Indenture Trustee an amount equal to the aggregate redemption price specified under Section 10.01 of the Indenture, which shall be applied by the Indenture Trustee solely to make such redemption payments. The Owner Trustee shall not have the power to exercise the right of the Issuer to redeem the Bonds pursuant to Section 10.01 of the Indenture, except as provided above. ARTICLE VI CONCERNING THE OWNER TRUSTEE 6.01. Acceptance of Trusts and Duties. The Owner Trustee accepts the trusts hereby created and agrees to perform the same but only upon the terms of this Agreement. The Owner Trustee also agrees to disburse all moneys actually received by it constituting part of the Trust Estate upon the terms of this Agreement. The Bank shall not be answerable or accountable under any circumstances, except (i) for its own wilful misconduct or gross negligence, (ii) in the case of the inaccuracy of any representation or warranty contained in Section 6.04, (iii) for liabilities arising from the failure by the Bank to perform obligations expressly undertaken by it in the last sentence of Section 5.04(a), or (iv) for taxes, fees or other charges on based on or measured by any fees, commissions or compensation received by the Bank in connection with any of the transactions contemplated by this Agreement, the Operative Agreements or the Bonds. In particular, but not by way of limitation: (a) The Bank shall not be liable for any error of judgment, not constituting gross negligence, made in good faith by a responsible officer of the Owner Trustee; 28 34 (b) The Bank shall not be liable with respect to any action taken or omitted to be taken by the Owner Trustee in good faith in accordance with the instructions of the Certificateholders; (c) No provision of this Agreement shall require the Bank to expend or risk funds or otherwise incur any financial liability in the performance of any of the Owner Trustee's rights or powers hereunder if the Bank shall have reasonable grounds for believing that repayment of such funds or adequate indemnity against such risk or liability is not reasonably assured or provided to it; (d) Under no circumstance shall the Bank be liable for indebtedness evidenced by any Bond; (e) The Bank shall not be liable with respect to any action taken or omitted to be taken by the Manager under the Management Agreement and the Bank shall not be obligated to perform any obligations or duties under this Agreement or the Bond Agreements which are to be performed by the Manager under the Management Agreement; (f) The Bank shall not be responsible for or in respect of the recitals herein, the validity or sufficiency of this Agreement or for the due execution hereof by the Depositor or for the form, character, genuineness, sufficiency, value or validity of any Collateral or for or in respect of the validity or sufficiency of the Indenture, and the Bank shall in no event assume or incur any liability, duty or obligation to any Bondholder, the Depositor or to the Certificateholders, other than as expressly provided for herein; and (g) Under no circumstances shall the Bank be responsible for the action or inaction of the Officers, the Manager or the Master Servicer, nor shall the Bank be responsible for monitoring the performance of the Officers' duties hereunder, the Manager's duties under the Management Agreement or the Master Servicer's duties under the Master Servicing Agreement. 29 35 6.02. Furnishing of Documents. The Owner Trustee will furnish to the Certificateholders and the Manager, promptly upon receipt thereof, duplicates or copies of all reports, notices, requests, demands, certificates, financial statements and any other instruments furnished to the Owner Trustee hereunder or under the Bond Agreements unless the Certificateholders and the Manager shall have already received the same. 6.03. Books and Records. The Owner Trustee shall keep or cause to be kept proper books of record and account of all the transactions under this Agreement, including a record of the name and address of the Holders of the Investor Certificates. 6.04. Representations and Warranties of the Bank. The Bank represents and warrants as follows: (a) the Bank is a banking corporation duly created, validly existing and in good standing under the laws of the State of Delaware and has the full corporate power, authority and legal right to execute, deliver and perform this Agreement, the Indenture and each of the other Operative Agreements to which it or the Owner Trustee, as the case may be, is a party; the execution and delivery by the Bank of this Agreement, and by the Owner Trustee of the Indenture and each of the other Operative Agreements to which it is a party and the performance by the Bank or the Owner Trustee, as the case may be, of its obligations under this Agreement, the Indenture and each of the other Operative Documents to which it is a party have been duly authorized by all necessary corporate action on the part of the Bank and, assuming the due authorization, execution and delivery thereof by the other parties thereto, constitutes a legal, valid and binding obligation of the Bank or the Owner Trustee, as the case may be, enforceable against the Bank or the Owner Trustee, as the case may be, in accordance with its terms, except that (a) the enforceability thereof may be limited by bankruptcy, insolvency, moratorium, receivership and other similar laws relating to creditors' rights generally and (b) the remedy of specific performance and injunctive and other forms of equitable relief may be 30 36 subject to equitable defenses and to the discretion of the court before which any proceeding therefor may be brought; (b) neither the Bank nor anyone authorized to act on its behalf has offered any interest in and to the Trust for sale to, or solicited any offer to acquire any of the same from, anyone; (c) the execution and delivery by the Bank of, and the performance by it and the Owner Trustee, as the case may be, of their obligations under this Agreement, the Indenture and the other Operative Documents to which they are a party are not in violation of any indenture, agreement or other instrument, license, judgment or order applicable to the Bank; (d) the execution and delivery by the Bank of, and its and the Owner Trustee's performance of their obligations under, this Agreement, the Indenture and the other Operative Documents to which they are a party do not require the consent or approval of, the giving of notice to, or the registration with, or the taking of any other action with respect to, any governmental authority or agency of the State of Delaware (except as may be required by the Delaware securities law or the Business Trust Statute or as may be required to enforce the lien of the Indenture); and (e) no litigation is pending or, to the best of the Bank's knowledge, threatened against the Bank or the Owner Trustee, as the case may be, that would materially and adversely affect the execution, delivery or enforceability of this Agreement, the Investor Certificates, the Bonds, the Indenture or any of the other Operative Documents to which it is a party, or the ability of the Bank or the Owner Trustee, as the case may be, to perform any of its obligations thereunder in accordance with the terms thereof. 6.05. No Segregation of Moneys; No Interest. Except as otherwise provided herein or in the Indenture, moneys received by the Owner Trustee hereunder need not be segregated in any manner except to the extent required by law and may be deposited 31 37 under such general conditions as may be prescribed by law, and neither the Owner Trustee nor the Bank shall be liable for any interest thereon. 6.06. Reliance; Advice of Counsel. (a) The Owner Trustee shall incur no liability to anyone in acting upon any signature, instrument, notice, resolution, request, consent, order, certificate, report, opinion, bond or other document or paper believed by it to be genuine and believed by it to be signed by the proper party or parties. The Owner Trustee may accept a certified copy of a resolution of the board of directors or other governing body of any corporate party as conclusive evidence that such resolution has been duly adopted by such body and that the same is in full force and effect. As to any fact or matter the manner of ascertainment of which is not specifically prescribed herein, the Owner Trustee may for all purposes hereof rely on a certificate, signed by the president or any vice president and by the treasurer or any assistant treasurer or the secretary or any assistant secretary of the relevant party, as to such fact or matter, and such certificate shall constitute full protection to the Owner Trustee for any action taken or omitted to be taken by it in good faith in reliance thereon. (b) In its exercise or administration of the trusts and powers hereunder, including its obligations under Section 5.02(b) and any duties or obligations under the Indenture and under the other Operative Documents, the Owner Trustee may employ agents and attorneys and enter into agreements (including the Management Agreement and the Master Servicing Agreement) with any of them, and the Owner Trustee shall not be answerable for the default or misconduct of any such agents or attorneys if such agents or attorneys shall have been selected by the Owner Trustee with reasonable care. If, and to the extent, the Depositor shall have failed to reimburse the Trustee for all reasonable expenses incurred pursuant to this Section 6.06(b), as provided in Section 7.01, the Owner Trustee may seek reimbursement therefor from the Trust Estate. (c) In the administration of the trusts hereunder or in the performance of its duties and obligations under any of the Bond Agreements, the Owner Trustee may consult with counsel, 32 38 accountants and other skilled Persons to be selected and employed by it, and the Owner Trustee shall not be liable for anything done, suffered or omitted in good faith by it in accordance with the reasonable advice or opinion of any such counsel, accountants or other skilled Persons and not contrary to this Agreement. If, and to the extent, the Depositor shall have failed to reimburse the Trustee for all reasonable expenses incurred pursuant to this Section 6.06(c), as provided in Section 7.01, the Owner Trustee may seek reimbursement therefor from the Trust Estate. 6.07. Not Acting in Individual Capacity. Except as provided in this Article VI, in accepting the trusts hereby created the Owner Trustee acts solely as trustee hereunder and not in its individual capacity, and all persons having any claim against the Owner Trustee by reason of the transactions contemplated by the Bond Agreements shall look only to the Trust Estate for payment or satisfaction thereof. 6.08. Corporate Existence. Subject to Section 9.01, the Bank will keep in full effect its existence, rights and franchises as a bank and trust company under the laws of the State of Delaware. ARTICLE VII INDEMNIFICATION BY DEPOSITOR 7.01. Trust Expenses. The Depositor shall pay (or reimburse the Bank for) all reasonable expenses of the Owner Trustee hereunder, including, without limitation, the reasonable compensation, expenses and disbursements of such agents, representatives, experts and counsel as the Owner Trustee may employ in connection with the exercise and performance of its rights and duties under the Bond Agreements. 7.02. Indemnification. The Depositor hereby agrees to assume liability for, and indemnify the Bank and its successors, assigns, agents and servants, against and from, any and all liabilities, obligations, losses, damages, taxes, claims, actions, suits, costs, expenses and disbursements (including reasonable legal fees and expenses) of any kind and nature 33 39 whatsoever (collectively, "Expenses") which may be imposed on, incurred by or asserted at any time against the Bank (whether or not indemnified against by other parties) in any way relating to or arising out of this Agreement, any Bond Agreement, the Collateral, the administration of the Trust Estate or the action or inaction of the Owner Trustee hereunder, except only that the Depositor shall not be required to indemnify the Bank for Expenses arising or resulting from any of the matters described in the third sentence of Section 6.01. The indemnities contained in this Section 7.02 shall survive the termination of this Agreement. 7.03. Compensation. The Bank shall receive as compensation for the Owner Trustee's services hereunder such ordinary fees as are fair, reasonable and customary for the performance of such services and as may heretofore and from time to time hereafter be separately agreed upon between the Depositor and the Owner Trustee. The Bank shall be compensated reasonably for any extraordinary services rendered by the Owner Trustee hereunder. 7.04. Lien on Trust Estate. The Bank shall have a lien on the Trust Estate for any compensation or indemnity due hereunder, such lien to be subject only to prior liens of the Indenture. The Bank shall not bring any proceedings to foreclose on such lien if and to the extent the Trust Estate is subject to the lien of the Indenture. ARTICLE VIII TERMINATION OF TRUST AGREEMENT 8.01. Termination of Trust Agreement. (a) This Agreement and the trusts created hereby shall terminate and the Trust Estate shall, subject to the Indenture and Section 4.01, be distributed to the Certificateholders, and this Agreement shall be of no further force or effect, upon the earlier of (i) the sale or other final disposition by the Indenture Trustee or the Owner Trustee, as the case may be, of all the Trust Estate and the final distribution by the Indenture Trustee or the Owner Trustee, as the case may be, of all moneys or other property or 34 40 proceeds of the Trust Estate in accordance with the terms of the Indenture and Section 4.01, and (ii) the expiration of 21 years from the death of the survivor of the descendants of Joseph P. Kennedy, the late ambassador of the United States to the Court of St. James's, living on the date of this Agreement. The bankruptcy of any Certificateholder shall not operate to terminate this Agreement, nor entitle such Certificateholder's legal representatives to claim an accounting or to take any action or proceeding in any court for a partition or winding up of the Trust Estate, nor otherwise affect the rights, obligations and liabilities of the parties hereto. (b) Except as provided in Section 8.01(a), neither the Depositor nor the Certificateholders shall be entitled to revoke the Trust established hereunder. (c) Notice of any termination of the Trust, specifying the Payment Date upon which Certificateholders shall surrender their Investor Certificates to the Certificate Paying Agent for payment of the final distribution and cancellation, shall be given by the Certificate Paying Agent by letter to Certificateholders and the Insurer mailed within five Business Days of receipt of notice of the final payment on the Bonds from the Indenture Trustee, stating (i) the Payment Date upon or with respect to which final payment of the Investor Certificates shall be made upon presentation and surrender of the Investor Certificates at the office of the Certificate Paying Agent therein designated, (ii) the amount of any such final payment and (iii) that the Record Date otherwise applicable to such Payment Date is not applicable, payments being made only upon presentation and surrender of the Investor Certificates at the office of the Certificate Payment Agent therein specified. The Certificate Paying Agent shall give such notice to the Owner Trustee and the Certificate Registrar at the time such notice is given to Certificateholders. Upon presentation and surrender of the Investor Certificates, the Certificate Paying Agent shall cause to be distributed to Certificateholders amounts distributable on such Payment Date pursuant to Section 4.01. In the event that all of the Certificateholders shall not surrender their Investor Certificates for cancellation within 35 41 six months after the date specified in the above mentioned written notice, the Certificate Paying Agent shall give a second written notice to the remaining Certificateholders to surrender their Investor Certificates for cancellation and receive the final distribution with respect thereto. Subject to applicable laws with respect to escheat of funds, if within one year following the Payment Date on which final payment of the Investor Certificates was to have been made pursuant to Section 3.03 of the Indenture, all the Investor Certificates shall not have been surrendered for cancellation, the Certificate Paying Agent may take appropriate steps, or may appoint an agent to take appropriate steps, to contact the remaining Certificateholders concerning surrender of their Investor Certificates, and the cost thereof shall be paid out of the funds and other assets that shall remain subject to this Trust Agreement. Any funds remaining in the Certificate Distribution Account after exhaustion of such remedies shall be distributed by the Certificate Paying Agent to the Holders of the Investor Certificates. (d) Upon the winding up of the Trust and its termination, the Owner Trustee shall cause the Certificate of Trust to be cancelled by filing a certificate of cancellation with the Secretary of State in accordance with the provisions of Section 3810 of the Business Trust Statute. ARTICLE IX SUCCESSOR OWNER TRUSTEES AND ADDITIONAL TRUSTEES 9.01. Resignation of Owner Trustee; Appointment of Successor. (a) The Owner Trustee may resign at any time without cause by giving at least 60 days' prior written notice to the Owner, such resignation to be effective on the acceptance of appointment by a successor Owner Trustee under (b) below. In addition, the Owner Trustee may be removed (i) at any time by the Depositor, without cause, by an instrument in writing delivered to the Owner Trustee, such removal to be effective upon the acceptance of appointment by a successor Owner Trustee under Section 9.01(b) or (ii) by action of the Certificateholders holding Percentage Interests aggregating at least 66 2/3%. In 36 42 case of the resignation or removal of the Owner Trustee, the Depositor may appoint a successor Owner Trustee by an instrument signed by the Depositor. If a successor Owner Trustee shall not have been appointed within 30 days after the giving of written notice of such resignation or the delivery of the written instrument with respect to such removal, the Owner Trustee or the Depositor may apply to any court of competent jurisdiction to appoint a successor Owner Trustee to act until such time, if any, as a successor shall have been appointed as above provided. Any successor Owner Trustee so appointed by such court shall immediately and without further act be superseded by any successor Owner Trustee appointed as above provided within one year from the date of the appointment by such court. (b) Any successor Owner Trustee, however appointed, shall execute and deliver to the predecessor Owner Trustee an instrument accepting such appointment, and thereupon such successor Owner Trustee, without further act, shall become vested with all the estates, properties, rights, powers, duties and trusts of the predecessor Owner Trustee in the trusts hereunder with like effect as if originally named the Owner Trustee herein; but nevertheless, upon the written request of such successor Owner Trustee, such predecessor Owner Trustee shall execute and deliver an instrument (presented to it in execution form) transferring to such successor Owner Trustee, upon the trusts herein expressed, all the estates, properties, rights, powers, duties and trusts of such predecessor Owner Trustee, and such predecessor Owner Trustee shall duly assign, transfer, deliver and pay over to such successor Owner Trustee all moneys or other property then held or subsequently received by such predecessor Owner Trustee upon the trusts herein expressed. (c) Any successor Owner Trustee, however appointed, shall be a bank or trust company satisfying the provisions of Section 3807(a) of the Business Trust Statute and having a combined capital and surplus of at least $50,000,000, if there be such an institution willing, able and legally qualified to perform the duties of the Owner Trustee hereunder upon reasonable or customary terms. 37 43 (d) Any corporation into which the Owner Trustee may be merged or converted or with which it may be consolidated, or any corporation resulting from any merger, conversion or consolidation to which the Owner Trustee shall be a party, or any corporation to which substantially all the corporate trust business of the Owner Trustee may be transferred, shall, subject to the terms of (c) above, be the Owner Trustee under this Agreement without further act. (e) Upon the happening of any of the events described in this Section 9.01, the successor Owner Trustee shall cause an amendment to the Certificate of Trust to be filed with the Secretary of State, in accordance with the provisions of Section 3810 of the Business Trust Statute, indicating the change with respect to the Owner Trustee's identity. 9.02. Appointment of Additional Trustees. At any time or times for the purpose of meeting any legal requirements of any jurisdiction in which any part of the Trust Estate may at the time be located, the Owner Trustee, by an instrument in writing, may appoint one or more individuals or corporations to act as separate trustee or separate trustees of all or any part of the Trust Estate to the full extent that a local law makes it necessary for such separate trustee or separate trustees to act alone. No trustee shall be liable for the acts or omissions of any other trustee appointed hereunder. ARTICLE X MISCELLANEOUS 10.01. Supplements and Amendments. At the written request of the Depositor, this Agreement (other than Sections 8.01 and 10.02 and this Section 10.01) shall be amended by a written instrument signed by the Owner Trustee and the Depositor, but if in the opinion of the Owner Trustee any instrument required to be so executed adversely affects any right, duty or liability of, or immunity or indemnity in favor of, the Owner Trustee under this Agreement or any of the documents contemplated hereby to which the Owner Trustee is a party, or would cause or result in any conflict with or breach of any terms, conditions or 38 44 provisions of, or default under, the charter documents or bylaws of the Bank or any Operative Agreement, the Owner Trustee may in its sole discretion decline to execute such instrument. 10.02. No Legal Title to Trust Estate in Certificateholders. The Certificateholders shall not have legal title to any part of the Trust Estate and shall only be entitled to receive distributions with respect to its undivided beneficial interest therein pursuant to Section 4.01 once all amounts then owing with respect to the Bonds have been paid in accordance with the Indenture. No transfer, by operation of law of any right, title and interest of the Certificateholders in and to its undivided beneficial interest in the Trust Estate or hereunder shall operate to terminate this Agreement or the trusts hereunder or entitle any successor transferee to an accounting or to the transfer to it of legal title to any part of the Trust Estate. 10.03. Pledge of Collateral by Owner Trustee Is Binding. The pledge of the Collateral to the Indenture Trustee by the Trust made under the Indenture and pursuant to the terms of this Agreement shall bind the Certificateholders and shall be effective to transfer or convey the rights of the Trust and the Certificateholders in and to such Collateral to the extent set forth in the Indenture. No purchaser or other grantee shall be required to inquire as to the authorization, necessity, expediency or regularity of such pledge or as to the application of any proceeds with respect thereto by the Owner Trustee. 10.04. Limitations on Rights of Others. Nothing in this Agreement, whether express or implied (except for Section 7.04), shall be construed to give to any Person other than the Trust and the Certificateholders any legal or equitable right in the Trust Estate or under or in respect of this Agreement or any covenants, conditions or provisions contained herein; provided, however, that the parties hereto acknowledge and agree that the Indenture Trustee is a third-party beneficiary under Section 3.05 hereof. 10.05. Notices. Unless otherwise expressly specified or permitted by the terms hereof, all notices shall be in writing and delivered by hand or mailed by certified mail, postage 39 45 prepaid, if to the Owner Trustee or the Trust, addressed to it at _______________________________________________________________________________ __________________________________, Attention: Corporate Trust Administration or to such other address as the Owner Trustee may have set forth in a written notice to the Certificateholders and the Depositor addressed to it at the address set forth for such Certificateholders in the register maintained by the Owner Trustee. Whenever any notice in writing is required to be given by the Owner Trustee or the Manager, such notice shall be deemed given and such requirement satisfied if such notice is mailed by certified mail, postage prepaid, addressed as provided above. 10.06. Severability. Any provision of this Agreement which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. 10.07. Separate Counterparts. This Agreement may be executed by the parties hereto in separate counterparts, each of which when so executed and delivered shall be an original, but all such counterparts shall together constitute but one and the same instrument. 10.08. Successors and Assigns. All representations, warranties, covenants and agreements contained herein shall be binding upon, and inure to the benefit of, the Owner Trustee and its successors and assigns and the Depositor and each Certificateholder and its respective successors, all as herein provided. Any request, notice, direction, consent, waiver or other instrument or action by any Certificateholder shall bind the successors of such Certificateholder. 10.09. Headings. The headings of the various Articles and Sections herein are for convenience of reference only and shall not define or limit any of the terms or provisions hereof. 40 46 10.10. Governing Law. This Agreement shall in all respects be governed by, and construed in accordance with, the laws of the State of Delaware without reference to the conflict of laws provisions thereof, including all matters of construction, validity and performance. 10.11. No Petition. The Owner Trustee, by entering into this Agreement, the Certificateholders, by accepting the Investor Certificates, and the Indenture Trustee and each Bondholder, by accepting the benefits of this Agreement, 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 proceedings under any United States federal or state bankruptcy or similar law in connection with any obligations relating to the Investor Certificate, the Bonds, this Agreement or any of the Operative Agreements. ARTICLE XI OFFICERS 11.01. Appointment of Officers. The Trust may have one or more Officers who are hereby empowered to take and are responsible for performing all ministerial duties on behalf of the Trust pursuant to this Agreement and Operative Agreements, including, without limitation, the execution of the Officers' Certificate (as defined in the Indenture), the Issuer Order (as defined in the Indenture), the Issuer Request (as defined in the Indenture), the annual compliance report required under Section 3.10 of the Indenture, and annual reports, documents and other reports which the Trust is required to file with the Securities and Exchange Commission pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended. Each of the Chairman of the Board, the Chief Executive Officer, the President, each Senior Vice President and each Vice President of the Depositor is hereby appointed as an Officer of the Trust. The Depositor shall promptly deliver to the Owner Trustee and the Indenture Trustee a list of its officers who shall become the Officers of the Trust pursuant to this Section 11.01. 41 47 11.02. Officers to Provide Information to the Owner Trustee. It shall be the duty of each Officer to keep the Owner Trustee reasonably informed as to material events relating to the Trust, including, without limitation, all claims pending or threatened against the Trust, the purchase and sale of any material portion of the Trust Estate and the execution by such Officer on behalf of the Trust of any material agreements or instruments. 42 48 IN WITNESS WHEREOF, the parties hereto have caused this Deposit Trust Agreement to be duly executed by their respective officers hereunto duly authorized, as of the day and year first above written. , --------------------------------------- not in its individual capacity but solely as Owner Trustee By: ------------------------------------ Its: ----------------------------------- SEQUOIA MORTGAGE FUNDING CORPORATION By: ------------------------------------ Its: ----------------------------------- 43 49 EXHIBIT A [Form of Investor Certificate] [Face] THIS INVESTOR CERTIFICATE HAS NOT BEEN AND WILL NOT BE REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR THE SECURITIES LAWS OF ANY STATE AND MAY NOT BE RESOLD OR TRANSFERRED UNLESS IT IS REGISTERED PURSUANT TO SUCH ACT AND LAWS OR IS SOLD OR TRANSFERRED IN TRANSACTIONS WHICH ARE EXEMPT FROM REGISTRATION UNDER SUCH ACT AND UNDER APPLICABLE STATE LAW AND IS TRANSFERRED IN ACCORDANCE WITH THE PROVISIONS OF SECTION 3.03 OF THE TRUST AGREEMENT REFERRED TO HEREIN. NO TRANSFER OF THIS INVESTOR CERTIFICATE SHALL BE MADE UNLESS THE CERTIFICATE REGISTRAR SHALL HAVE RECEIVED EITHER (I) A REPRESENTATION LETTER FROM THE TRANSFEREE OF THIS INVESTOR CERTIFICATE TO THE EFFECT THAT SUCH TRANSFEREE IS NOT AN EMPLOYEE BENEFIT PLAN SUBJECT TO THE FIDUCIARY RESPONSIBILITY PROVISIONS 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"), OR A PERSON ACTING ON BEHALF OF ANY SUCH PLAN OR USING THE ASSETS OF ANY SUCH PLAN, OR (II) IF THIS INVESTOR CERTIFICATE IS PRESENTED FOR REGISTRATION IN THE NAME OF A PLAN SUBJECT TO THE FIDUCIARY RESPONSIBILITY PROVISIONS OF ERISA, OR SECTION 4975 OF THE CODE (OR COMPARABLE PROVISIONS OF ANY SUBSEQUENT ENACTMENTS), OR A TRUSTEE OF ANY SUCH PLAN, OR ANY OTHER PERSON WHO IS USING THE ASSETS OF ANY SUCH PLAN TO EFFECT SUCH ACQUISITION, AN OPINION OF COUNSEL TO THE EFFECT THAT THE PURCHASE OR HOLDING OF THIS INVESTOR CERTIFICATE WILL NOT RESULT IN THE ASSETS OF THE TRUST ESTATE BEING DEEMED TO BE "PLAN ASSETS" AND SUBJECT TO THE FIDUCIARY RESPONSIBILITY PROVISIONS OF ERISA OR THE PROHIBITED TRANSACTION PROVISIONS OF THE CODE, WILL NOT CONSTITUTE OR RESULT IN A PROHIBITED TRANSACTION WITHIN THE MEANING OF SECTION 406 OR SECTION 407 OF ERISA OR SECTION 4975 OF THE CODE, AND WILL NOT SUBJECT THE OWNER TRUSTEE OR THE DEPOSITOR TO ANY OBLIGATION OR LIABILITY. NO TRANSFER OF THIS INVESTOR CERTIFICATE SHALL BE MADE UNLESS THE CERTIFICATE REGISTRAR SHALL HAVE RECEIVED A CERTIFICATE OF A-1 50 NON-FOREIGN STATUS CERTIFYING AS TO THE TRANSFEREE'S STATUS AS A U.S. PERSON OR CORPORATION UNDER U.S. LAW. THIS CERTIFICATE DOES NOT REPRESENT AN INTEREST IN OR OBLIGATION OF THE DEPOSITOR, THE MASTER SERVICER, THE INDENTURE TRUSTEE, OR THE OWNER TRUSTEE OR ANY OF THEIR RESPECTIVE AFFILIATES, EXCEPT AS EXPRESSLY PROVIDED IN THE TRUST AGREEMENT OR THE OPERATIVE DOCUMENTS. A-2 51 Certificate No. Original principal amount ("Denomination") of this Investor Certificate: $___________ Aggregate Denominations of all Investor Certificates: $ Pass-Through Rate: Cut-Off Date: First Payment Date ____________, _______ CUSIP NO. ___________ SEQUOIA MORTGAGE TRUST 199_-_ Evidencing a fractional undivided equity interest in the Trust Estate, the property of which consists primarily of the Mortgage Collateral in Sequoia Mortgage Trust 199_-_ (the "Trust"), a Delaware business trust formed by SEQUOIA MORTGAGE FUNDING CORP., AS DEPOSITOR, pursuant to the Trust Agreement referred to below. This certifies that [name of Holder] is the registered owner of the Percentage Interest represented hereby. The Trust was created pursuant to a Trust Agreement dated as of ___________ (as amended and supplemented from time to time, the "Trust Agreement") between the Depositor and ___________________, as owner trustee (as amended and supplemented from time to time, the "Owner Trustee", which term includes any successor entity under the Trust Agreement), a summary of certain of the pertinent provisions of which is set forth hereinafter. This Investor Certificate is issued under and is subject to the terms, provisions and conditions of the Trust Agreement, to which Trust Agreement the Holder of this Investor Certificate by virtue of the acceptance hereof assents and by which such Holder is bound. A-3 52 This Investor Certificate is one of a duly authorized issue of Trust Certificates, Series 199_-_ (herein called the "Investor Certificates") issued under the Trust Agreement to which reference is hereby made for a statement of the respective rights thereunder of the Depositor, the Owner Trustee and the Holders of the Investor Certificates and the terms upon which the Investor Certificates are executed and delivered. All terms used in this Investor Certificate which are defined in the Trust Agreement shall have the meanings assigned to them in the Trust Agreement. The Trust Estate consists of the Mortgage Collateral in the Sequoia Mortgage Trust 199_-_ [and a Bond Insurance Policy]. The rights of the Holders of the Investor Certificates are subordinated to the rights of the Holders of the Bonds, as set forth in the Indenture. There will be distributed on the ___________ day of each month or, if such ___________ day is not a Business Day, the next Business Day (each, a "Payment Date"), commencing in ___________, to the Person in whose name this Investor Certificate is registered at the close of business on the last Business Day of the month preceding the month of such Payment Date (the "Record Date"), such Certificateholder's Percentage Interest (obtained by dividing the Denomination of this Investor Certificate by the aggregate Denominations of all Investor Certificates) in the amount to be distributed to Certificateholders on such Payment Date. The Certificateholder, by its acceptance of this Investor Certificate, agrees that it will look solely to the funds on deposit in the [Certificate Distribution Account] that have been released from the Lien of the Indenture for payment hereunder and that neither the Owner Trustee in its individual capacity nor the Depositor is personally liable to the Certificateholders for any amount payable under this Investor Certificate or the Trust Agreement or, except as expressly provided in the Trust Agreement. Subject to any liability under the Trust Agreement. The Holder of this Investor Certificate acknowledges and agrees that its rights to receive distributions in respect of this Investor Certificate are subordinated to the rights of the Bondholders as described in the Indenture, dated as of A-4 53 __________, between the Trust and _____________, as Indenture Trustee (the "Indenture"). The Depositor and each Certificateholder, by acceptance of an Investor Certificate, agree to treat, and to take no action inconsistent with the treatment of, the Investor Certificates for federal, state and local income tax purposes as an equity interest in the Trust. Each Certificateholder, by its acceptance of an Investor Certificate, covenants and agrees that such Certificateholder will not at any time institute against the Depositor, or join in any institution against the Depositor or the Trust 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 Investor Certificates, the Bonds, the Trust Agreement or any of the Operative Documents. Distributions on this Investor Certificate will be made as provided in the Trust Agreement by the Certificate Paying Agent by wire transfer or check mailed to the Certificateholder of record in the Certificate Register without the presentation or surrender of this Investor Certificate or the making of any notation hereon. Except as otherwise provided in the Trust Agreement and notwithstanding the above, the final distribution on this Investor Certificate will be made after due notice by the Certificate Paying Agent of the pendency of such distribution and only upon presentation and surrender of this Investor Certificate at the office or agency maintained by the Certificate Registrar for that purpose by the Trust in the Borough of Manhattan, The City of New York. Reference is hereby made to the further provisions of this Investor Certificate set forth on the reverse hereof, which further provisions shall for all purposes have the same effect as if set forth at this place. Unless the certificate of authentication hereon shall have been executed by an authorized officer of the Owner Trustee, or an authenticating agent by manual signature, this Investor A-5 54 Certificate shall not entitle the Holder hereof to any benefit under the Trust Agreement or be valid for any purpose. THIS INVESTOR CERTIFICATE SHALL BE CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF DELAWARE, WITHOUT REFERENCE TO ITS CONFLICT OF LAW PROVISIONS, AND THE OBLIGATIONS, RIGHTS AND REMEDIES OF THE PARTIES HEREUNDER SHALL BE DETERMINED IN ACCORDANCE WITH SUCH LAWS. A-6 55 IN WITNESS WHEREOF, the Owner Trustee, on behalf of the Trust and not in its individual capacity, has caused this Investor Certificate to be duly executed. __________________________, not in its individual capacity but solely as Owner Trustee Dated: By: ----------------------------------- Authorized Signatory A-7 56 [REVERSE OF INVESTOR CERTIFICATE] The Investor Certificates do not represent an obligation of, or an interest in, the Depositor, the Master Servicer, the Indenture Trustee, the Owner Trustee or any Affiliates of any of them and no recourse may be had against such parties or their assets, except as expressly set forth or contemplated herein or in the Trust Agreement or the Operative Documents. In addition, this Investor Certificate is not guaranteed by any governmental agency or instrumentality and is limited in right of payment to certain collections and recoveries with respect to the Mortgage Collateral, all as more specifically set forth herein. A copy of the Trust Agreement may be examined by any Certificateholder upon written request during normal business hours at the principal office of the Depositor and at such other places, if any, designated by the Depositor. The Trust Agreement permits the amendment thereof as specified below, provided that any amendment be accompanied by the consent of the Insurer and an Opinion of Counsel to the Owner Trustee to the effect that such amendment complies with the provisions of the Trust Agreement and, if the Depositor was not the holder of 100% of the Investor Certificates, would not cause the Trust to be subject to an entity level tax. If the purpose of the amendment is to correct any mistake, eliminate any inconsistency, cure any ambiguity or deal with any matter not covered, it shall not be necessary to obtain the consent of any Holder, but the Owner Trustee shall be furnished with a letter from the Rating Agencies that the amendment will not result in the downgrading or withdrawal of the rating then assigned to any Bond. If the purpose of the amendment is to prevent the imposition of any federal or state taxes at any time that any Bond or Investor Certificate is outstanding, it shall not be necessary to obtain the consent of the any Holder, but the Owner Trustee shall be furnished with an Opinion of Counsel that such amendment is necessary or helpful to prevent the imposition of such taxes and is not materially adverse to any Holder. If the purpose of the amendment is to add or eliminate or change any provision of the Trust Agreement, other than as specified in the preceding two sentences, the amendment shall require either (a) a A-8 57 letter from the Rating Agencies that the amendment will not result in the downgrading or withdrawal of the rating then assigned to any Bond or (b) the consent of Holders of the Investor Certificates evidencing a majority of the Percentage Interests of the Investor Certificates and the Indenture Trustee; PROVIDED, HOWEVER, that no such amendment shall (i) reduce in any manner the amount of, or delay the time of, payments received that are required to be distributed on any Investor Certificate without the consent of the related Certificateholder, or (ii) reduce the aforesaid percentage of Investor Certificates the Holders of which are required to consent to any such amendment without the consent of the Holders of all such Investor Certificates then outstanding. As provided in the Trust Agreement and subject to certain limitations therein set forth, the transfer of this Investor Certificate is registerable in the Certificate Register upon surrender of this Investor Certificate for registration of transfer at the offices or agencies of the Certificate Registrar maintained by the Trust in the Borough of Manhattan, The City of New York, accompanied by a written instrument of transfer in form satisfactory to the Certificate Registrar duly executed by the Holder hereof or such Holder's attorney duly authorized in writing, and thereupon one or more new Investor Certificates of authorized denominations evidencing the same aggregate interest in the Trust will be issued to the designated transferee. The initial Certificate Registrar appointed under the Trust Agreement is _____________________. Except as provided in the Trust Agreement, the Investor Certificates are issuable only in a minimum Percentage Interest of 10%. As provided in the Trust Agreement and subject to certain limitations therein set forth, Investor Certificates are exchangeable for new Investor Certificates of authorized denominations evidencing the same aggregate denomination, as requested by the Holder surrendering the same. No service charge will be made for any such registration of transfer or exchange, but the Owner Trustee or the Certificate Registrar may require payment of a sum sufficient to cover any tax or governmental charge payable in connection therewith. A-9 58 The Owner Trustee, the Certificate Paying Agent, the Certificate Registrar and any agent of the Owner Trustee, the Certificate Paying Agent, or the Certificate Registrar may treat the Person in whose name this Investor Certificate is registered as the owner hereof for all purposes, and none of the Owner Trustee, the Certificate Paying Agent, the Certificate Registrar or any such agent shall be affected by any notice to the contrary. The obligations and responsibilities created by the Trust Agreement and the Trust created thereby shall terminate as and when provided in accordance with the terms of the Trust Agreement. A-10 59 ASSIGNMENT FOR VALUE RECEIVED the undersigned hereby sells, assigns and transfers unto PLEASE INSERT SOCIAL SECURITY OR OTHER IDENTIFYING NUMBER OF ASSIGNEE - -------------------------------------------------------------------------------- (Please print or type name and address, including postal zip code, of assignee) - -------------------------------------------------------------------------------- the within Investor Certificate, and all rights thereunder, hereby irrevocably constituting and appointing - -------------------------------------------------------------------------------- to transfer said Investor Certificate on the books of the Certificate Registrar, with full power of substitution in the premises. Dated: */ ----------------------------------- Signature Guaranteed: */ ----------------------------------- - --------- */ NOTICE: The signature to this assignment must correspond with the name as it appears upon the face of the within Investor Certificate in every particular, without alteration, enlargement or any change whatever. Such signature must be guaranteed by a member firm of the New York Stock Exchange or a commercial bank or trust company. A-11 60 DISTRIBUTION INSTRUCTIONS The assignee should include the following for the information of the Certificate Paying Agent: Distribution shall be made by wire transfer in immediately available funds __________________ to for the account of ______________________________, account number _______________, or, if mailed by check, to __________________. Applicable statements should be mailed to _______________. --------------------------------------------- Signature of assignee or agent (for authorization of wire transfer only) A-12 61 EXHIBIT B CERTIFICATE OF TRUST OF SEQUOIA MORTGAGE TRUST 199_-_ THIS Certificate of Trust of Sequoia Mortgage Trust 199_-_ (the "Trust"), dated ________, __, is being duly executed and filed by _________________________, a Delaware banking corporation, as trustee, to form a business trust under the Delaware Business Trust Act (12 DEL. CODE, Sections 3801 ET SEQ.) 1. NAME. The name of the business trust formed hereby is Sequoia Mortgage Trust 199_-_. 2. DELAWARE TRUSTEE. The name and business address of the trustee of the Trust in the State of Delaware is ___________, __________________________, _________, __________, Attention: _________________________________. IN WITNESS WHEREOF, the undersigned, being the sole trustee of the Trust, has executed this Certificate of Trust as of the date first above written. , -------------------------------------- not in its individual capacity but solely as owner trustee under a Trust Agreement dated as of ____, __, By: ------------------------------------ Name: Title: B-1 62 EXHIBIT C [FORM OF RULE 144A INVESTMENT REPRESENTATION] Description of Rule 144A Securities, including numbers: _______________________________________________________ _______________________________________________________ _______________________________________________________ _______________________________________________________ The undersigned seller, as registered holder (the "Seller"), intends to transfer the Rule 144A Securities described above to the undersigned buyer (the "Buyer"). 1. In connection with such transfer and in accordance with the agreements pursuant to which the Rule 144A Securities were issued, the Seller hereby certifies the following facts: Neither the Seller nor anyone acting on its behalf has offered, transferred, pledged, sold or otherwise disposed of the Rule 144A Securities, any interest in the Rule 144A Securities or any other similar security to, or solicited any offer to buy or accept a transfer, pledge or other disposition of the Rule 144A Securities, any interest in the Rule 144A Securities or any other similar security from, or otherwise approached or negotiated with respect to the Rule 144A Securities, any interest in the Rule 144A Securities or any other similar security with, any person in any manner, or made any general solicitation by means of general advertising or in any other manner, or taken any other action that would constitute a distribution of the Rule 144A Securities under the Securities Act of 1933, as amended (the "1933 Act"), or that would render the disposition of the Rule 144A Securities a violation of Section 5 of the 1933 Act to require registration pursuant thereto, and that the Seller has not offered the Rule 144A Securities to any person other than the Buyer or another "qualified institutional buyer" as defined in Rule 144A under the 1933 Act. 2. The Buyer warrants and represents to, and covenants with, the Owner Trustee and the Depositor (as defined in the C-1 63 Trust Agreement (the "Agreement"), dated as of ______, ___ between Sequoia Mortgage Funding Corporation, as Depositor and ____________, as Owner Trustee pursuant to Section 3.03 of the Agreement and _________________ as indenture trustee, as follows: a. The Buyer understands that Rule 144A Securities have not been registered under the 1933 Act or the securities laws of any state. b. The Buyer considers itself a substantial, sophisticated institutional investor having such knowledge and experience in financial and business matters that it is capable of evaluating the merits and risks of investment in the Rule 144A Securities. c. The Buyer has been furnished with all information regarding the Rule 144A Securities that it has requested from the Seller, the Trustee, the Owner Trustee or the Master Servicer. d. Neither the Buyer nor anyone acting on its behalf has offered, transferred, pledged, sold or otherwise disposed of the Rule 144A Securities, any interest in the Rule 144A Securities or any other similar security to, or solicited any offer to buy or accept a transfer, pledge or other disposition of the Rule 144A Securities, any interest in the Rule 144A Securities or any other similar security from, or otherwise approached or negotiated with respect to the Rule 144A Securities, any interest in the Rule 144A Securities or any other similar security with, any person in any manner, or made any general solicitation by means of general advertising or in any other manner, or taken any other action, that would constitute a distribution of the Rule 144A Securities under the 1933 Act or that would render the disposition of the Rule 144A Securities a violation of Section 5 of the 1933 Act or require registration pursuant thereto, nor will it act, nor has it authorized or will it authorize any person to act, in such manner with respect to the Rule 144A Securities. C-2 64 e. The Buyer is a "qualified institutional buyer" as that term is defined in Rule 144A under the 1933 Act and has completed either of the forms of certification to that effect attached hereto as Annex 1 or Annex 2. The Buyer is aware that the sale to it is being made in reliance on Rule 144A. The Buyer is acquiring the Rule 144A Securities for its own account or the accounts of other qualified institutional buyers, understands that such Rule 144A Securities may be resold, pledged or transferred only (i) to a person reasonably believed to be a qualified institutional buyer that purchases for its own account or for the account of a qualified institutional buyer to whom notice is given that the resale, pledge or transfer is being made in reliance on Rule 144A, or (ii) pursuant to another exemption from registration under the 1933 Act. [3. The Buyer warrants and represents to, and covenants with, the Seller, the Trustee, Owner Trustee, Master Servicer and the Depositor that either (1) the Buyer is (A) not an employee benefit plan (within the meaning of Section 3(3) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA")), or a plan (within the meaning of Section 4975(e)(1) of the Internal Revenue Code of 1986 ("Code"), which (in either case) is subject to ERISA or Section 4975 of the Code (both a "Plan"), and (B) is not directly or indirectly purchasing the Rule 144A Securities on behalf of, as investment manager of, as named fiduciary of, a trustee of, or with "plan assets" of a Plan, or (2) the Buyer understands that registration of transfer of any Rule 144A Securities to any Plan, or to any Person acting on behalf of any Plan, will not be made unless such Plan delivers an opinion of its counsel, addressed and satisfactory to the Certificate Registrar and the Depositor, to the effect that the purchase and holding of the Rule 144A Securities by, on behalf of or with "plan assets" of any Plan would not constitute or result in a prohibited transaction under Section 406 of ERISA or Section 4975 of the Code, and would not subject the Depositor, the Master Servicer, the Trustee or the Trust to any obligation or liability (including liabilities under ERISA or Section 4975 of the Code) in addition to those undertaken in the Agreement or any other liability.] C-3 65 4. This document may be executed in one or more counterparts and by the different parties hereto on separate counterparts, each of which, when so executed, shall be deemed to be an original; such counterparts, together, shall constitute one and the same document. IN WITNESS WHEREOF, each of the parties has executed this document as of the date set forth below. - ------------------------------------ ------------------------------------ Print Name of Seller Print Name of Buyer By: By: --------------------------------- --------------------------------- Name: Name: Title: Title: Taxpayer Identification Taxpayer Identification No. No. --------------------------------- --------------------------------- Date: Date: ------------------------------- ------------------------------- C-4 66 ANNEX 1 TO EXHIBIT C QUALIFIED INSTITUTIONAL BUYER STATUS UNDER SEC RULE 144A [For Buyers Other Than Registered Investment Companies] The undersigned hereby certifies as follows in connection with the Rule 144A Investment Representation to which this Certification is attached: 1. As indicated below, the undersigned is the President, Chief Financial Officer, Senior Vice President or other executive officer of the Buyer. 2. In connection with purchases by the Buyer, the Buyer is a "qualified institutional buyer" as that term is defined in Rule 144A under the Securities Act of 1933 ("Rule 144A") because (i) the Buyer owned and/or invested on a discretionary basis $_____________(1) in securities (except for the excluded securities referred to below) as of the end of the Buyer's most recent fiscal year (such amount being calculated in accordance with Rule 144A) and (ii) the Buyer satisfies the criteria in the category marked below. ___ CORPORATION, ETC. The Buyer is a corporation (other than a bank, savings and loan association or similar institution), Massachusetts or similar business trust, partnership, or charitable organization described in Section 501(c)(3) of the Internal Revenue Code. ___ BANK. The Buyer (a) is a national bank or banking institution organized under the laws of any State, territory or the District of Columbia, the business of - ---------- (1) Buyer must own and/or invest on a discretionary basis at least $100,000,000 in securities unless Buyer is a dealer, and, in that case, Buyer must own and/or invest on a discretionary basis at least $10,000,000 in securities. C-5 67 which is substantially confined to banking and is supervised by the State or territorial banking commission or similar official or is a foreign bank or equivalent institution, and (b) has an audited net worth of at least $25,000,000 as demonstrated in its latest annual financial statements, A COPY OF WHICH IS ATTACHED HERETO. ___ SAVINGS AND LOAN. The Buyer (a) is a savings and loan association, building and loan association, cooperative bank, homestead association or similar institution, which is supervised and examined by a State or Federal authority having supervision over any such institutions or is a foreign savings and loan association or equivalent institution and (b) has an audited net worth of at least $25,000,000 as demonstrated units latest annual financial statements. ___ BROKER-DEALER. The Buyer is a dealer registered pursuant to Section 15 of the Securities Exchange Act of 1934. ___ INSURANCE COMPANY. The Buyer is an insurance company whose primary and predominant business activity is the writing of insurance or the reinsuring of risks underwritten by insurance companies and which is subject to supervision by the insurance commissioner or a similar official or agency of a State or territory or the District of Columbia. ___ STATE OR LOCAL PLAN. The Buyer is a plan established and maintained by a State, its political subdivisions, or any agency or instrumentality of the State or its political subdivisions, for the benefit of its employees. ___ ERISA PLAN. The Buyer is an employee benefit plan within the meaning of Title I of the Employee Retirement Income Security Act of 1974. C-6 68 ___ INVESTMENT ADVISOR. The Buyer is an investment adviser registered under the Investment Advisers Act of 1940. ___ SBIC. The Buyer is a Small Business Investment Company licensed by the U.S. Small Business Administration under Section 301(c) or (d) of the Small Business Investment Act of 1958. ___ BUSINESS DEVELOPMENT COMPANY. The Buyer is a business development company as defined in Section 202(a)(22) of the Investment Advisers Act of 1940. ___ TRUST FUND. The Buyer is a trust fund whose trustee is a bank or trust company and whose participants are exclusively (a) plans established and maintained by a State, its political subdivisions, or any agency or instrumentality of the State or its political subdivisions, for the benefit of its employees, or (b) employee benefit plans within the meaning of Title I of the Employee Retirement Income Security Act of 1974, but is not a trust fund that includes as participants individual retirement accounts of H.R. 10 plans. 3. The term "Securities" as used herein DOES NOT INCLUDE (i) securities of issuers that are affiliated with the Buyer, (ii) securities that are part of an unsold allotment to or subscription by the Buyer, if the Buyer is a dealer, (iii) bank deposit notes and certificates of deposit, (iv) loan participations, (v) repurchase agreements, (vi) securities owned but subject to a repurchase agreement and (vii) currency, interest rate and commodity swaps. 4. For purposes of determining the aggregate amount of securities owned and/or invested on a discretionary basis by the Buyer, the Buyer used the cost of such securities to the Buyer and did not include any of the securities referred to in the preceding paragraph. Further, in determining such aggregate amount, the Buyer may have included securities owned by subsidiaries of the Buyer, but only if such subsidiaries are consolidated with the Buyer in its financial statements prepared in accordance with generally accepted accounting principles and C-7 69 if the investments of such subsidiaries are managed under the Buyer's direction. However, such securities were not included if the Buyer is a majority-owned, consolidated subsidiary of another enterprise and the Buyer is not itself a reporting company under the Securities and Exchange Act of 1934. 5. The Buyer acknowledges that it is familiar with Rule 144A and understands that the seller to it and other parties related to the Certificates are relying and will continue to rely on the statements made herein because one or more sales to the Buyer may be in reliance on Rule 144A. ____ ____ Will the Buyer be purchasing the Rule 144A Yes No Securities only for the Buyer's own account? 6. If the answer to the foregoing question is "no", the Buyer agrees that, in connection with any purchase of securities sold to the Buyer for the account of a third party (including any separate account) in reliance on Rule 144A, the Buyer will not only purchase for the account of a third party that at the time is a "qualified institutional buyer" within the meaning of Rule 144A. In addition, the Buyer agrees that the Buyer will not purchase securities for a third party unless the Buyer has obtained a current representation letter from such third party or taken other appropriate steps contemplated by Rule 144A to conclude that such third party independently meets the definition of "qualified institutional buyer" set forth in Rule 144A. 7. The Buyer will notify each of the parties to which this certification is made of any changes in the information and conclusions herein. Until such notice is given, the Buyer's purchase of Rule 144A Securities will constitute a reaffirmation of this certification as of the date of such purchase. ---------------------------------------- Print Name of Buyer By: ------------------------------------- Name: Title: Date: ----------------------------------- C-8 70 ANNEX 2 TO EXHIBIT C QUALIFIED INSTITUTIONAL BUYER STATUS UNDER SEC RULE 144A [FOR BUYERS THAT ARE REGISTERED INVESTMENT COMPANIES] The undersigned hereby certifies as follows in connection with the Rule 144A investment representation to which this certification is attached: 1. As indicated below, the undersigned is the President, Chief Financial Officer or Senior Vice President of the Buyer or, if the Buyer is a "qualified institutional buyer" as that term is defined in Rule 144A under the Securities Act of 1933 ("Rule 144A") because Buyer is part of a family of investment companies (as defined below), is such an officer of the adviser. 2. In connection with purchases by Buyer, the Buyer is a "qualified institutional buyer" as defined in SEC Rule 144A because (i) the Buyer is an investment company registered under the Investment Company Act of 1940, and (ii) as marked below, the Buyer alone, or the Buyer's family of Investment Companies, owned at least $100,000,000 in securities (other than the excluded securities referred to below) as of the end of the Buyer's most recent fiscal year. For purposes of determining the amount of securities owned by the Buyer of the Buyer's family of Investment Companies, the cost of such securities was used. ____ The Buyer owned $__________ in securities (other that the excluded securities referred to below) as of the end of the Buyer's most recent fiscal year (such amount being calculated in accordance with Rule 144A). ____ The Buyer is part of a Family of Investment Companies which owned in the aggregate $__________ in securities (other than the excluded securities referred to below) as of the end of the Buyer's most recent fiscal year (such amount being calculated in accordance with Rule 144A). C-9 71 3. The term "Family of Investment Companies" as used herein means two or more registered investment companies (or series thereof) that have the same investment advisor or investment advisers that are affiliated (by virtue of being majority owned subsidiaries of the same parent or because one investment adviser is a majority owned subsidiary of the other). 4. The term "Securities" as used herein does not include (i) securities of issuers that are affiliated with the Buyer or are part of the Buyer's Family of Investment Companies, (ii) bank deposit notes and certificates of deposit, (iii) loan participations, (iv) repurchase agreements, (v) securities owned but subject to a repurchase agreement and (vi) currency, interest rate and commodity swaps. 5. The Buyer is familiar with Rule 144A and understands that each of the parties to which this certification is made are relying and will continue to rely on the statements made herein because one or more sales to the Buyer will be in reliance on Rule 144A. In addition, the Buyer will only purchase for the Buyer's own account. 6. The undersigned will notify each of the parties to which this certification is made of any changes in the information and conclusions herein. Until such notice, the Buyer's purchase of Rule 144A securities will constitute a reaffirmation of this certification by the undersigned as of the date of such purchase. ---------------------------------------- PRINT NAME OF BUYER BY: ------------------------------------- NAME: -------------------------------- TITLE: ------------------------------- IF AN ADVISER: ---------------------------------------- PRINT NAME OF BUYER DATE: ----------------------------------- C-10 72 EXHIBIT D CERTIFICATE OF NON-FOREIGN STATUS This certificate of Non-Foreign status ("certificate") is delivered pursuant to Section 3.03 of the Trust Agreement, dated as of _________ __, 19____ (the "Trust Agreement") between Sequoia Mortgage Funding Corporation, as depositor and ___________________, as owner trustee, in connection with the acquisition of, transfer to or possession by the undersigned, whether as beneficial owner (the "Beneficial Owner"), or nominee on behalf of the Beneficial Owner of the Investor Certificates, (the "Investor Certificate"). Capitalized terms used but not defined in this certificate have the respective meanings given them in the Trust Agreement. Each holder must complete Part I, Part II (if the holder is a nominee), and in all cases sign and otherwise complete Part III. In addition, each holder shall submit with the certificate an IRS Form W-9 relating to such holder. To confirm to the Trust that the provisions of Sections 871, 881 or 1446 of the Internal Revenue Code (relating to withholding tax on foreign partners) do not apply in respect of the Investor Certificate held by the undersigned, the undersigned hereby certifies: PART I - COMPLETE EITHER A OR B A. Individual as Beneficial Owner 1. I am (The Beneficial Owner is) not an Non-resident alien for purposes of U.S. Income Taxation; 2. My (The Beneficial Owner's) name and home address are: ________________________________________ ________________________________________ ________________________________________; and D-1 73 3. My (The Beneficial Owner's) U.S. Taxpayer Identification Number (Social Security Number) is ____________________________. B. Corporate, Partnership or other entity as Beneficial Owner 1. _____________________ (Name of the Beneficial Owner) is not a foreign corporation, foreign partnership, foreign trust or foreign estate (as those terms are defined in the Code and Treasury Regulations) 2. The Beneficial Owner's office address and place of incorporation (if applicable) is _____________________________; and 3. The Beneficial Owner's U.S. employer identification number is ___________________. PART II - NOMINEES If the undersigned is the nominee for the Beneficial Owner, the undersigned certifies that this certificate has been made in reliance upon information contained in: _____ an IRS Form W-9 _____ a form such as this or substantially similar provided to the undersigned by an appropriate person and (i) the undersigned agrees to notify the Trust at least thirty (30) days prior to the date that the form relied upon becomes obsolete, and (ii) in connection with change in Beneficial Owners, the undersigned agrees to submit a new Certificate of Non-Foreign Status to the Trust promptly after such change. PART III - DECLARATION The undersigned, as the Beneficial Owner or a nominee thereof, agrees to notify the Trust within sixty (60) days of the date that the Beneficial Owner becomes a foreign person. The undersigned understands that this certificate may be disclosed to the Internal Revenue Service by the Trust and any false statement contained therein could be punishable by fines, imprisonment or both. D-2 74 Under penalties of perjury, I declare that I have examined this certificate and to the best of my knowledge and belief it is true, correct and complete and will further declare that I will inform the Trust of any change in the information provided above, and, if applicable, I further declare that I have the authority* to sign this document. - ------------------------------------ Name - ------------------------------------ Title (if applicable) - ------------------------------------ Signature and Date *NOTE: If signed pursuant to a power of attorney, the power of attorney must accompany this certificate. D-3 75 EXHIBIT E FORM OF INVESTMENT LETTER [NON-RULE 144A] [DATE] [CERTIFICATE REGISTRAR] RE: SEQUOIA MORTGAGE TRUST 199_-_ INVESTOR CERTIFICATES, 199_-_, (THE "INVESTOR CERTIFICATES") Ladies and Gentlemen: In connection with our acquisition of the above-captioned certificates, we certify that (a) we understand that the Investor Certificates are not being registered under the Securities Act of 1933, as amended (the "Act"), or any state securities laws and are being transferred to us in a transaction that is exempt from the registration requirements of the Act and any such laws, (b) we are an "accredited investor," as defined in Regulation D under the Act, and have such knowledge and experience in financial and business matters that we are capable of evaluating the merits and risks of investments in the Investor Certificates, (c) we have had the opportunity to ask questions of and receive answers from the depositor concerning the purchase of the Investor Certificates and all matters relating thereto or any additional information deemed necessary to our decision to purchase the Investor Certificates, (d) we are not an employee benefit plan that is subject to the Employee Retirement Income Security Act of 1974, as amended, or a plan that is subject to Section 4975 of the Internal Revenue Code of 1986, as amended, nor are we acting on behalf of any such plan, (e) we are acquiring the Investor Certificates for investment for our own account and not with a view to any distribution of such Investor Certificates (but without prejudice to our right at all times to sell or otherwise dispose of the Investor Certificates in accordance with clause (g) below), (f) we have not offered or sold any Investor Certificates to, or solicited offers to buy any Investor Certificates from, any person, or otherwise approached or E-1 76 negotiated with any person with respect thereto, or taken any other action which would result in a violation of Section 5 of the Act, and (g) we will not sell, transfer or otherwise dispose of any Investor Certificates unless (1) such sale, transfer or other disposition is made pursuant to an effective registration statement under the Act or is exempt from such registration requirements, and if requested, we will at our expense provide an opinion of counsel satisfactory to the addressees of this Investment Letter that such sale, transfer or other disposition may be made pursuant to an exemption from the Act, (2) the purchaser or transferee of such Investor Certificate has executed and delivered to you an Investment Letter to substantially the same effect as this Investment Letter, and (3) the purchaser or transferee has otherwise complied with any conditions for transfer set forth in the Trust Agreement. Very truly yours, [TRANSFEREE] By: ----------------------------------- Authorized Officer E-2 77 EXHIBIT F TRANSFER CERTIFICATE [Owner Trustee] [Certificate Paying Agent] Re: PROPOSED TRANSFER OF INVESTOR CERTIFICATES Ladies and Gentlemen: This certification is being made by __________________ (the "Proposed Transferee") in connection with the proposed transfer to the Proposed Transferee of a trust certificate (the "Investor Certificate") representing __% fractional undivided interest in Sequoia Mortgage Trust 199_-_ (the "Trust") created pursuant to a Deposit Trust Agreement, dated as of ___________ __, 199_ (such agreement, as amended, being referred to herein as the "Deposit Trust Agreement") between Sequoia Mortgage Funding Corporation and ____________________, as Owner Trustee. Initially capitalized terms used but not defined herein have the meanings assigned to them in the Deposit Trust Agreement. The Proposed Transferee hereby certifies as follows: 1. The undersigned is a Person involved in the organization or operation of the Trust or an affiliate of such a Person within the meaning of Rule 3a-7 of the Investment Company Act. 2. The Proposed Transferee understands that (a) the Investor Certificates have not been and will not be registered or qualified under the Securities Act, or the securities laws of any state, (b) neither the Trust nor the Owner Trustee is required, and neither intends, to so register or qualify the Investor Certificates, and (c) the Investor Certificates cannot be resold unless (i) they are registered and qualified under the Securities Act and the applicable state securities laws or (ii) an exemption from registration and qualification is available. F-1 78 3. The Proposed Transferee is acquiring the Investor Certificate for its own account for investment only and not with a view to or for sale or other transfer in connection with any distribution of the Investor Certificate in any manner that would violate the Securities Act or any applicable state securities laws. 4. The Proposed Transferee (a) is an accredited investor having such knowledge and experience in financial and business matters,and in particular in such matters related to securities similar to the Investor Certificate, such that it is capable of evaluating the merits and risks of investment in the Investor Certificate and (b) is able to bear the economic risks of such an investment. 5. The Proposed Transferee will not authorize nor has it authorized any person (a) to offer, pledge, sell, dispose of or otherwise transfer any Investor Certificate, any interest in any Investor Certificate or any other similar security to any person in any manner, (b) to solicit any offer to buy or to accept a pledge, disposition or other transfer of any Investor Certificate, any interest in any Investor Certificate or any other similar security from any person in any manner, (c) otherwise to approach or negotiate with respect to any Investor Certificate, any interest in any Investor Certificate or any other similar security with any person in any manner, (d) to make any general solicitation by means of general advertising or in any other manner, or (e) to take any other action that would constitute a distribution of any Investor Certificate under the Securities Act, that would render the disposition of any Investor Certificate a violation of Section 5 of the Securities Act or any state securities law, or that could require registration or qualification pursuant thereto. Neither the Proposed Transferee nor anyone acting on its behalf has offered any Investor Certificate for sale or made any general solicitation by means of general advertising or in any other manner with respect to the Investor Certificate. The Proposed Transferee will not sell or otherwise transfer any Investor Certificates, except in compliance with the provisions of the Deposit Trust Agreement. F-2 79 Date: ---------------------- --------------------------------------- Name of Proposed Transferee --------------------------------------- Signature --------------------------------------- Name --------------------------------------- Title F-3 EX-4.3 5 FORM OF MASTERING SERVICE AGREEMENT 1 EXHIBIT 4.3 MASTER SERVICING AGREEMENT Dated as of __________ __, 1997 among SEQUOIA MORTGAGE TRUST 199_-_, Issuer and ___________________________, Master Servicer and _____________________________, Trustee Relating to the Pledged Mortgages Pledged as Collateral for the Issuer's Collateralized Mortgage Bonds, in the Aggregate Initial Principal Amount of $___________ 2 TABLE OF CONTENTS
Page ---- PRELIMINARY STATEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 1. Defined Terms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 2. Mortgage Documents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 (a) Trustee to Retain Possession of Documents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 (b) Trustee to Cooperate; Release of Trustee Mortgage Files. . . . . . . . . . . . . . . . . . . . . . . 32 (c) Documents, Records and Funds in Possession of Master Servicer to be Held for Trustee . . . . . . . . 33 (d) Representations, Warranties and Covenants of the Issuer and the Master Servicer. . . . . . . . . . . 34 (e) Covenants of the Master Servicer. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37 3. General Duties of the Master Servicer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38 (a) Master Servicer to Service Pledged Mortgages. . . . . . . . . . . . . . . . . . . . . . . . . . . . 38 (b) Subservicing; Enforcement of the Obligations of Servicers . . . . . . . . . . . . . . . . . . . . . 39 (c) Successor Servicers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40 (d) Liability of the Master Servicer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41 (e) No Contractual Relationship Between Servicers and the Trustee . . . . . . . . . . . . . . . . . . . 41 (f) Rights of the Issuer and the Trustee in Respect of the Master Servicer. . . . . . . . . . . . . . . 41 (g) Trustee to Act as Master Servicer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42 (h) Collection of Pledged Mortgage Payments; Eligible Accounts; Servicing Accounts; Bond Account . . . . 43 (i) Collection of Taxes, Assessments and Similar Items; Escrow Accounts . . . . . . . . . . . . . . . . 47 (j) Access to Certain Documentation and Information Regarding the Pledged Mortgages . . . . . . . . . . 48 (k) Permitted Withdrawals from the Bond Account . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48 (l) Maintenance of Hazard Insurance; Maintenance of Primary Insurance Policies . . . . . . . . . . . . . 50 (m) Enforcement of Due-On-Sale Clauses; Assumption Agreements . . . . . . . . . . . . . . . . . . . . . 52 (n) Realization Upon Defaulted Pledged Mortgages; Purchase of Certain Pledged Mortgages . . . . . . . . 54 (o) Access to Certain Documentation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56 (p) Annual Statement as to Compliance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57
3 TABLE OF CONTENTS (CONT'D)
Page ---- (q) Annual Independent Public Accountants' Servicing Statement; Financial Statements. . . . . . . . . . 57 (r) Errors and Omissions Insurance; Fidelity Bonds. . . . . . . . . . . . . . . . . . . . . . . . . . . 58 4. Advances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58 5. Servicing Compensation and Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59 6. The Master Servicer. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60 (a) Liabilities of the Master Servicer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60 (b) Merger or Consolidation of the Master Servicer. . . . . . . . . . . . . . . . . . . . . . . . . . . 60 (c) Limitation on Liability of the Master Servicer and Others. . . . . . . . . . . . . . . . . . . . . . 60 (d) Limitation on Resignation of the Master Servicer. . . . . . . . . . . . . . . . . . . . . . . . . . 61 7. Servicing Default; Termination and Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61 (a) Servicing Default . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61 (b) Trustee to Act; Appointment of Successor. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64 (c) Notification to Bondholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65 8. Miscellaneous . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65 (a) Term of Master Servicing Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65 (b) Assignment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66 (c) Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66 (d) Inspection and Audit Rights. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67 (e) Governing Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67 (f) Amendments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67 (g) Severability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67 (h) No Joint Venture . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67 (i) Execution in Counterparts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68 (j) Limitation of Liability of Wilmington Trust Company . . . . . . . . . . . . . . . . . . . . . . . . 68 (k) Nonpetition Covenants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68 SCHEDULE I: Schedule of Pledged Mortgages . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-I-1 SCHEDULE II: Representations and Warranties of the Master Servicer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-II-1 SCHEDULE III: Representations and Warranties as to the Pledged Mortgages . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-III-1
ii 4 TABLE OF CONTENTS (CONT'D)
Page ---- SCHEDULE IV: Representations and Warranties of the Issuer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-IV-1 EXHIBITS EXHIBIT A FORM OF INITIAL CERTIFICATION OF TRUSTEE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A-1 EXHIBIT B FORM OF FINAL CERTIFICATION OF TRUSTEE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . B-1 EXHIBIT C REQUEST FOR RELEASE (for Trustee) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . C-1 EXHIBIT D REQUEST FOR RELEASE (Pledged Mortgage Paid in Full, Repurchased and Released) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . D-1
iii 5 MASTER SERVICING AGREEMENT THIS MASTER SERVICING AGREEMENT is made and entered into as of ________ __, 19__, by and among Sequoia Mortgage Trust 199_-_, a statutory business trust formed under the laws of the State of Delaware (the "Issuer"), ________ _________________, a _______ corporation (the "Master Servicer") and _______________________________, a _________________ _______ corporation (in its capacity as trustee under the Indenture referred to below, the "Trustee"). PRELIMINARY STATEMENT The Issuer was formed for the purpose of issuing bonds secured by mortgage collateral. The Issuer has entered into a trust indenture, dated as of ________ __, 19__ (the "Indenture"), between the Issuer and the Trustee, pursuant to which the Issuer intends to issue its Collateralized Mortgage Bonds, in the aggregate initial principal amount of $___________ (the "Bonds"). Pursuant to the Indenture, as security for the indebtedness represented by such Bonds, the Issuer is and will be pledging to the Trustee, or granting the Trustee a security interest in, among other things, certain Pledged Mortgages, its rights under this Agreement, the Bond Account, the Distribution Account and certain Insurance Policies (as each such term is defined herein). The parties desire to enter into this Agreement to provide, among other things, for the servicing of the Pledged Mortgages by the Master Servicer. The Master Servicer acknowledges that, in order further to secure the Bonds, the Issuer is and will be granting to the Trustee a security interest in, among other things, its rights under this Agreement, and the Master Servicer agrees that all covenants and agreements made by the Master Servicer herein with respect to the Pledged Mortgages shall also be for the benefit and security of the Trustee and Holders of the Bonds. For its services hereunder, the Master Servicer will receive a Master Servicing Fee (as defined herein) with respect to each Pledged Mortgage serviced hereunder. The Master Servicer has entered into Servicing Agreements (as defined herein) with Servicers (as defined herein) to perform, as independent contractors, servicing functions for the Master Servicer with respect to the Pledged Mortgages. For its services under a Servicing Agreement, each Servicer will 6 receive a Servicing Fee (as defined herein) with respect to each Pledged Mortgage serviced by it thereunder. In addition, the Issuer will enter into a Management Agreement, dated as of the date hereof, with Redwood Trust, Inc. (in such capacity, the "Manager"), pursuant to which the Manager will conduct certain operations of the Issuer. Actions by or required of the Issuer hereunder may be performed on its behalf by the Manager or any sub-manager appointed to act for the Issuer. 1. Defined Terms. Except as otherwise specified or as the context may otherwise require, the following terms have the respective meanings set forth below for all purposes of this Agreement, and the definitions of such terms are applicable to the singular as well as the plural forms of such terms and to the masculine as well as to the feminine and neuter genders of such terms: "ADJUSTED NET MORTGAGE RATE" means, as to each Pledged Mortgage and at any time, the per annum rate equal to the Mortgage Rate less the sum of the Master Servicing Fee Rate and the related Servicing Fee Rate. ["ADJUSTMENT DATE" means, as to any Pledged Mortgage, the date on which the related Mortgage Rate adjusts annually after a period of ten years following origination, in accordance with the terms of the related Mortgage Note.] "ADVANCE" means the payment required to be made by the Master Servicer with respect to any Payment Date pursuant to Section 4, the amount of any such payment being equal to the aggregate of payments of principal and interest (net of the Master Servicing Fee and the applicable Servicing Fee and net of any net income in the case of any REO Property) on the Pledged Mortgages that were due on the related Due Date and not received as of the close of business on the related Determination Date, less the aggregate amount of any such delinquent payments that the Master Servicer has determined would constitute a Nonrecoverable Advance if advanced. 2 7 "AGREEMENT" means this Master Servicing Agreement, as the same may be amended or supplemented from time to time. "AMOUNT HELD FOR FUTURE DISTRIBUTION" means, as to any Payment Date, the aggregate amount held in the Bond Account at the close of business on the related Determination Date on account of (i) Principal Prepayments and Liquidation Proceeds received in the month of such Payment Date and (ii) all Scheduled Payments due after the related Due Date. "APPRAISED VALUE" means (i) with respect to a Pledged Mortgage other than a Refinancing Pledged Mortgage, the lesser of (a) the value of the Mortgaged Property based upon the appraisal made at the time of the origination of such Pledged Mortgage and (b) the sales price of the Mortgaged Property at the time of the origination of such Pledged Mortgage; or (ii) with respect to a Refinancing Pledged Mortgage, the value of the Mortgaged Property based upon the appraisal made at the time of the origination of such Refinancing Pledged Mortgage. "AVAILABLE FUNDS" means, as to any Payment Date, 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 Insurance Proceeds and all Liquidation Proceeds for the [month] preceding the month of such Payment Date, net of unreimbursed expenses incurred in connection with a liquidation or foreclosure and unreimbursed Advances; (iii) all partial or full prepayments received during the related Prepayment Period; and (iv) amounts received with respect to such Payment Date as the Substitution Adjustment Amount or purchase price in respect to such Payment Date as the Substitution Adjustment Amount or purchase price in respect of a Deleted Pledged Mortgage or a Pledged Mortgage purchased by Redwood Trust [or by the Master Servicer] 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. "BANKRUPTCY CODE" means the United States Bankruptcy Reform Act of 1978, as amended. 3 8 "BLANKET MORTGAGE" means the mortgage or mortgages encumbering the Cooperative Property. "BOND ACCOUNT" means, with respect to the Bonds, the separate Eligible Account created and maintained by the Master Servicer pursuant to Section 3(h)(v) with a depository institution in the name of the Master Servicer for the benefit of the Trustee on behalf of the Bondholders and designated "_________________________________________ in trust for the registered holders of Sequoia Mortgage Trust 199_-_ Collateralized Mortgage Bonds." "BOND DISTRIBUTION AMOUNT" means, as to any Payment Date, the sum of (i) the Senior Interest Payment Amount, (ii) the Senior Principal Payment Amount, (iii) the Class B-1 Interest Payment Amount, (iv) the Class B-1 Principal Payment Amount, (v) the Class B-2 Interest Payment Amount and (vi) the Class B-2 Principal Payment Amount. "BONDHOLDER" or "HOLDER" means the Person in whose name a Bond is registered in the Bond Register (as defined in the Indenture). "BONDS" mean the Issuer's Collateralized Mortgage Bonds. "BUSINESS DAY" means any day other than (i) a Saturday or a Sunday, or (ii) a day on which banking institutions in the City of New York, New York, the State of California or the city in which the Corporate Trust Office (as defined in the Indenture) of the Trustee is located are authorized or obligated by law or executive order to be closed. "CERTIFICATE INTEREST PAYMENT AMOUNT" means, as to any Payment Date, one month's interest accrued during the related Interest Accrual Period at the Certificate Interest Rate on the Invested Amount, subject to reduction pursuant to Section 3(h)(viii). The Certificate Interest Payment Amount shall be calculated on the basis of a 360-day year of twelve 30-day months. 4 9 "CERTIFICATE INTEREST RATE" means, for any Interest Accrual Period beginning prior to the Interest Conversion Date _____________________. "CERTIFICATE PAYING AGENT" has the meaning assigned thereto in the Deposit Trust Agreement. "CLASS B-1 BOND INTEREST RATE" means, with respect to any Interest Accrual Period, the annual rate at which interest accrues on the Subordinated Bonds as specified in such Bonds and in Section 2.03(c) of the Indenture. "CLASS B-1 INTEREST CARRYOVER SHORTFALL" means, the amount by which sum of (i) the interest at the Class B-1 Bond Interest Rate on the Class B-1 Principal Amount and (ii) the interest at the Class B-1 Bond Interest Rate on any Class B-1 Principal Carryover Shortfall, on each prior Payment Date, exceeded the amount actually distributed as interest on such prior Payment Dates and not subsequently distributed. "CLASS B-1 INTEREST PAYMENT AMOUNT" means, as of any Payment Date, the sum of (i) interest at the Class B-1 Bond Interest Rate on the Class B-1 Principal Amount, (ii) interest at the Class B-1 Bond Interest Rate on any Class B-1 Principal Carryover Shortfall, (iii) the Class B-1 Interest Carryover Shortfall and (iv) interest at the Class B-1 Bond Interest Rate on any Class B-1 Interest Carryover Shortfall. "CLASS B-1 PERCENTAGE" means, as to any Payment Date, the percentage equivalent of a fraction the numerator of which is the Class B-1 Principal Amount immediately prior to such date and the denominator of which is the sum of (i) the Senior Class Principal Amount, (ii) the Class B-1 Principal Amount, (iii) the Class B-2 Principal Amount and (iv) the Invested Amount, in each case immediately prior to such date. "CLASS B-1 PRINCIPAL AMOUNT" means, as of any Payment Date, the lesser of (i)_the aggregate of the Stated Principal Balances of the Pledged Mortgages, less the Senior Class Principal Amount immediately prior to such date, and (ii) the Original Class B-1 Principal Amount reduced by all amounts previously distributed to holders of the Class B-1 bonds as payments of principal. 5 10 "CLASS B-1 PRINCIPAL CARRYOVER SHORTFALL" means, as to any Payment Date, the excess of (i) the Original Class B-1 Principal Amount reduced by all amounts previously distributed to holders of the Class B-1 Bonds as payments of principal or Class B-1 Principal Carryover Shortfall, over (ii) the Class B-1 Principal Amount immediately prior to such date. "CLASS B-1 PRINCIPAL PAYMENT AMOUNT" means, as to any Payment Date, the sum of (i) the Class B-1 Percentage of the sum of (a) the principal portion of the Schedules Payment due on each Pledged Mortgage [on the related Due Date], (b) the principal portion of the purchase price of each Pledged Mortgage that was purchased by Redwood Trust or another person pursuant to the Mortgage Loan Purchase Agreement [or by the Master Servicer in connection with any optional purchase by the Master Servicer of a defaulted Pledged Mortgage] as of such Payment Date, (c) the Substitution Adjustment Amount in connection with any Deleted Pledged Mortgage received with respect to such Payment Date, (d) any Insurance Proceeds or Liquidation Proceeds allocable to recoveries of principal of Pledged Mortgages that are not yet Liquidated Pledged Mortgages received during the related Prepayment Period, (e) with respect to each Pledged Mortgage that became a Liquidated Pledged Mortgage during the [calendar month] preceding the month of such Payment Date, the Stated Principal Balance of such Pledged Mortgage and (f) all partial and full principal prepayments by borrowers received during the related Prepayment Period and (ii) any Class B-1 Principal Carryover Shortfall. "CLASS B-2 BOND INTEREST RATE" means, with respect to any Interest Accrual Period, the annual rate at which interest accrues on the Subordinated Bonds as specified in such Bonds and in Section 2.03(c) of the Indenture. "CLASS B-2 INTEREST CARRYOVER SHORTFALL" means, the amount by which sum of (i) the interest at the Class B-2 Bond Interest Rate on the Class B-2 Principal Amount and (ii) the interest at the Class B-2 Bond Interest Rate on any Class B-2 Principal Carryover Shortfall, on each prior Payment Date, exceeded the amount actually distributed as interest on such prior Payment Dates and not subsequently distributed. 6 11 "CLASS B-2 INTEREST PAYMENT AMOUNT" means, as to any Payment Date, the sum of (i) interest at the Class B-2 Bond Interest Rate on the Class B-2 Principal Amount, (ii) interest at the Class B-2 Bond Interest Rate on any Class B-2 Principal Carryover Shortfall, (iii) the Class B-2 Interest Carryover Shortfall and (iv) interest at the Class B-2 Bond Interest Rate on any Class B-2 Interest Carryover Shortfall. "CLASS B-2 PERCENTAGE" means, as to any Payment Date, the percentage equivalent of a fraction the numerator of which is the Class B-2 Principal Amount immediately prior to such date and the denominator of which is the sum of (i) the Senior Class Principal Amount, (ii) the Class B-1 Principal Amount, (iii) the Class B-2 Principal Amount and (iv) the Invested Amount, in each case immediately prior to such date. "CLASS B-2 PRINCIPAL AMOUNT" means, as of any Payment Date, the lesser of (i) the aggregate of the Stated Principal Balances of the Pledged Mortgages, less the sum of the Senior Class Principal Amount and the Class B-2 Principal Amount, in each case immediately prior to such date, and (i) the Original Class B-2 Principal Amount reduced by all amounts previously distributed to holders of the Class B-2 Bonds as payments of principal. "CLASS B-2 PRINCIPAL CARRYOVER SHORTFALL" means, as to any Payment Date, the excess of (i) the Original Class B-2 Principal Amount reduced by all amounts previously distributed to holders of the Class B-2 Bonds as payments of principal or Class B-2 Principal Carryover Shortfall, over (ii) the Class B-2 Principal Amount immediately prior to such date. "CLASS B-2 PRINCIPAL PAYMENT AMOUNT" means, as to any Payment Date, the sum of (i) the Class B-2 Percentage of the sum of (a) the principal portion of the Schedules Payment due on each Pledged Mortgage [on the related Due Date], (b) the principal portion of the purchase price of each Pledged Mortgage that was purchased by Redwood Trust or another person pursuant to the Mortgage Loan Purchase Agreement [or by the Master Servicer in connection with any optional purchase by the Master Servicer of a defaulted Pledged Mortgage] as of such Payment Date, (c) the Substitution Adjustment Amount in connection with any Deleted Pledged Mortgage received with respect to such Payment Date, (d) 7 12 any Insurance Proceeds or Liquidation Proceeds allocable to recoveries of principal of Pledged Mortgages that are not yet Liquidated Pledged Mortgages received during the [calendar month] preceding the month of such Payment Date, (e) with respect to each Pledged Mortgage that became a Liquidated Pledged Mortgage during the [calendar month] preceding the month of such Payment Date, the Stated Principal Balance of such Pledged Mortgage and (f) all partial and full principal prepayments by borrowers received during the related Prepayment Period and (ii) any Class B-2 Principal Carryover Shortfall. "CLASS PRINCIPAL AMOUNT" shall have the meaning ascribed thereto in the Indenture. "CLOSING DATE" means _______ __, 199__. "CODE" means the Internal Revenue Code of 1986, including any successor or amendatory provisions. "COLLECTION ACCOUNT" means the Eligible Account or Accounts established and maintained by the Master Servicer in accordance with Section 3(h)(iii). "COMPANY" means Sequoia Mortgage Funding Corporation, a Delaware corporation, which, as of the Closing Date, owns all of the outstanding beneficial interests in the Issuer. "CONTROLLING CLASS" means the Class A-1 Bonds or, if the Class A-1 Bonds are no longer Outstanding, the most senior Class of Subordinated Bonds then Outstanding. "COOPERATIVE CORPORATION" means the entity that holds title (fee or an acceptable leasehold estate) to the real property and improvements constituting the Cooperative Property and which governs the Cooperative Property, which Cooperative Corporation must qualify as a Cooperative Housing Corporation under Section 216 of the Code. "COOPERATIVE LOAN" means any Pledged Mortgage secured by Cooperative Shares and a Proprietary Lease. "COOPERATIVE PROPERTY" means the real property and improvements owned by the Cooperative Corporation, including the 8 13 allocation of individual dwelling units to the holders of the Cooperative Shares of the Cooperative Corporation. "COOPERATIVE SHARES" means shares issued by a Cooperative Corporation. "COOPERATIVE UNIT" means a single family dwelling located in a Cooperative Property. "CUT-OFF DATE" means, with respect to the Pledged Mortgages, ________ __, 199__. "CUT-OFF DATE POOL PRINCIPAL BALANCE" means $________________. "CUT-OFF DATE PRINCIPAL BALANCE" means, as to any Pledged Mortgage, the Stated Principal Balance thereof as of the close of business on the Cut-off Date. "DEBT SERVICE REDUCTION" means, with respect to any Pledged Mortgage, a reduction by a court of competent jurisdiction in a proceeding under the Bankruptcy Code in the Scheduled Payment for such Pledged Mortgage which became final and non-appealable, except such a reduction resulting from a Deficient Valuation or any reduction that results in a permanent forgiveness of principal. "DEBT SERVICE REDUCTION PLEDGED MORTGAGE" means any Pledged Mortgage that became the subject of a Debt Service Reduction. "DEFECTIVE PLEDGED MORTGAGE" means any Pledged Mortgage required to be purchased by the Master Servicer pursuant to Section 2(a) hereof. "DEFICIENT VALUATION" means, with respect to any Pledged Mortgage, a valuation by a court of competent jurisdiction of the Mortgaged Property in an amount less than the then outstanding indebtedness under the Pledged Mortgage, or any reduction in the amount of principal to be paid in connection with any Scheduled Payment that results in a permanent forgiveness of principal, which valuation or reduction results 9 14 from an order of such court which is final and non-appealable in a proceeding under the Bankruptcy Code. "DELETED PLEDGED MORTGAGE" has the meaning ascribed thereto in Section 5. "DEPOSIT TRUST AGREEMENT" means the Amended and Restated Deposit Trust Agreement, dated as of _______ __, 199__, between the Company and the Owner Trustee, as such Deposit Trust Agreement may be amended or supplemented from time to time. "DETERMINATION DATE" means, as to any Payment Date, the __th day of the [month] in which such Payment Date occurs or, if such __th day is not a Business Day, the next succeeding Business Day; provided, however, that if such next succeeding Business Day is less than two Business Days prior to the related Payment Date, then the Determination Date shall be the next Business Day preceding the __th day of such [month]. "DISTRIBUTION ACCOUNT" means the Eligible Account or Accounts created and maintained with the Trustee pursuant to Section 8.02 of the Indenture, to which shall be remitted from time to time certain of the funds the Master Servicer has collected and deposited in the Bond Account with respect to the Pledged Mortgages, as required hereunder and under the Indenture. "DISTRIBUTION ACCOUNT DEPOSIT DATE" means, as to any Payment Date, [12:30 p.m. Pacific time] on the Business Day immediately preceding such Payment Date. "DUE DATE" means the first day of the month. "DUFF & PHELPS" means Duff & Phelps Credit Rating Company, or any successor thereto. If Duff & Phelps is designated as a Rating Agency in the Indenture, for purposes of Section 8(c) the address for notices to Duff & Phelps shall be Duff & Phelps Credit Rating Company, 55 E. Monroe Street, 35th Floor, Chicago, Illinois 60603, Attention: MBS Monitoring, or such other address as Duff & Phelps may hereafter furnish to the Issuer and the Master Servicer. "ELIGIBLE ACCOUNT" means any of (i) an account or accounts maintained with a federal or state chartered depository 10 15 institution or trust company the short-term unsecured debt obligations of which (or, in the case of a depository institution or trust company that is the principal subsidiary of a holding company, the debt obligations of such holding company, but only if Moody's is not a Rating Agency) have the highest short-term ratings of each Rating Agency at the time any amounts are held on deposit therein, or (ii) an account or accounts in a depository institution or trust company in which such accounts are insured by the FDIC or the SAIF (to the limits established by the FDIC or the SAIF) and the uninsured deposits in which accounts are otherwise secured such that, as evidenced by an Opinion of Counsel delivered to the Trustee and to each Rating Agency, the Bondholders have a claim with respect to the funds in such account or a perfected first priority security interest against any collateral (which shall be limited to Permitted Investments) securing such funds that is superior to claims of any other depositors or creditors of the depository institution or trust company in which such account is maintained, or (iii) a trust account or accounts maintained with the trust department of a federal or state chartered depository institution or trust company, acting in its fiduciary capacity or (iv) any other account acceptable to each Rating Agency. Eligible Accounts may bear interest, and may include, if otherwise qualified under this definition, accounts maintained with the Trustee. "ESCROW ACCOUNT" means the Eligible Account or Accounts established and maintained pursuant to Section 3(i) hereof. "EXCESS PROCEEDS" means, with respect to any Liquidated Pledged Mortgage, the amount, if any, by which the sum of any Liquidation Proceeds of such Pledged Mortgage received in the calendar month in which such Pledged Mortgage became a Liquidated Pledged Mortgage, net of any amounts previously reimbursed to the Master Servicer as Nonrecoverable Advance(s) with respect to such Pledged Mortgage pursuant to Section 3(k)(iii), exceeds (a) the unpaid principal balance of such Liquidated Pledged Mortgage as of the Due Date in the month in which such Pledged Mortgage became a Liquidated Pledged Mortgage plus (b) accrued interest at the Mortgage Rate from the Due Date as to which interest was last paid or advanced (and not reimbursed) to Bondholders up to the Due Date applicable to the Payment Date immediately following the calendar month during which such liquidation occurred. 11 16 "EXPENSE RATE" means, as to each Pledged Mortgage, the sum of the related Servicing Fee Rate, the related Master Servicing Fee Rate and Trustee Fee Rate. "FDIC" means the Federal Deposit Insurance Corporation, or any successor thereto. "FHLMC" means the Federal Home Loan Mortgage Corporation, a corporate instrumentality of the United States created and existing under Title III of the Emergency Home Finance Act of 1970, as amended, or any successor thereto. "FIRREA" means the Financial Institutions Reform, Recovery and Enforcement Act of 1989. "FITCH" means Fitch Investors Service, L.P., or any successor thereto. If Fitch is designated as a Rating Agency in the Indenture, for purposes of Section 8(c) the address for notices to Fitch shall be Fitch Investors Service, L.P., One State Street Plaza, New York, New York 10004, Attention: Residential Mortgage Surveillance Group, or such other address as Fitch may hereafter furnish to the Issuer and the Master Servicer. "FNMA" means the Federal National Mortgage Association, a federally chartered and privately owned corporation organized and existing under the Federal National Mortgage Association Charter Act, or any successor thereto. "INDENTURE" means the trust indenture, dated as of the date hereof, between the Issuer and the Trustee, as such Indenture may be amended or supplemented from time to time in accordance with its terms. "INDEPENDENT ACCOUNTANTS" shall have the meaning ascribed to such term under the Indenture. "INDEX" means, as to each Pledged Mortgage, the index from time to time in effect for the adjustment of the Mortgage Rate set forth as such on the related Mortgage Note. "INSURANCE POLICY" means, with respect to any Pledged Mortgage, any insurance policy, including all riders and 12 17 endorsements thereto in effect, including any replacement policy or policies for any Insurance Policies. "INSURANCE PROCEEDS" means proceeds paid by an insurer pursuant to any Insurance Policy, in each case other than any amount included in such Insurance Proceeds in respect of Insured Expenses. "INSURED EXPENSES" means expenses covered by an Insurance Policy or any other insurance policy with respect to the Pledged Mortgages. "INTEREST ACCRUAL PERIOD" means, with respect to each Class of Bonds, the Investor Certificate and any Payment Date _______________. ["INTEREST CONVERSION DATE" means, as to the Pledged Mortgages, the date on which the first Adjustment Date occurs.] "INVESTED AMOUNT" means, as of any Payment Date, the lesser of (i) the aggregate of the Stated Principal Balances of the Pledged Mortgages, less the sum of (x) the Senior Class Principal Amount (y) the Class B-1 Principal Amount and (z) the Class B-2 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. "INVESTED AMOUNT PAYMENT" means, as to any Payment Date, the sum of (i) the Investor Percentage of the sum of (a) the principal portion of the Scheduled Payment due on each Pledged Mortgage [on the related Due Date], (b) the principal portion of the purchase price of each Pledged Mortgage that was purchased by the Redwood Trust or another Person pursuant to the Mortgage Loan Purchase Agreement as of such Payment Date, (c) the Substitution Adjustment Amount in connection with any Deleted Pledged Mortgage received with respect to such Payment Date and (d) any Insurance Proceeds or Liquidation Proceeds allocable to recoveries of principal of Pledged Mortgages that are not yet Liquidated Pledged Mortgages 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 related Prepayment Period, and (ii) with respect to each Pledged 13 18 Mortgage that became a Liquidated Pledged Mortgage during the [calendar month] preceding the month of such Payment Date, the Liquidation Proceeds allocable to principal received with respect to such Pledged Mortgage, after application of such amounts pursuant to clause (e) of the definition of Senior Principal Payment Amount clause (e) of the definition of Class B-1 Principal Payment Amount and clause (e) of the definition of Class B-2 Principal Payment Amount. "INVESTOR CERTIFICATE" shall have the meaning ascribed thereto in the Deposit Trust Agreement. "INVESTOR PERCENTAGE" means, as of any Payment Date, the difference between 100% and the sum of the Senior Percentage, the Class B-1 Percentage and the Class B-2 Percentage. "LIQUIDATED PLEDGED MORTGAGE" means with respect to any Payment Date, a defaulted Pledged Mortgage (including any REO Property) which was liquidated in the [calendar month] preceding the month of such Payment Date and as to which the Master Servicer has certified (in accordance with this Agreement) that it has received all amounts it expects to receive in connection with the liquidation of such Pledged Mortgage including the final disposition of an REO Property. "LIQUIDATION PROCEEDS" means amounts, including Insurance Proceeds, received in connection with the partial or complete liquidation of defaulted Pledged Mortgages, whether through trustee's sale, foreclosure sale or otherwise or amounts received in connection with any condemnation or partial release of a Mortgaged Property and any other proceeds received in connection with an REO Property, less the sum of related unreimbursed Master Servicing Fees, Servicing Advances and Advances. "LOAN-TO-VALUE RATIO" means, with respect to any Pledged Mortgage and as to any date of determination, the fraction (expressed as a percentage) the numerator of which is the principal balance of the related Pledged Mortgage at such date of determination and the denominator of which is the Appraised Value of the related Mortgaged Property. 14 19 "MAINTENANCE" means with respect to any Cooperative Unit, the rent paid by the Mortgagor to the Cooperative Corporation pursuant to the Proprietary Lease. "MARGIN" means as to each Pledged Mortgage, the percentage amount set forth on the related Mortgage Note added to the Index in calculating the Mortgage Rate thereon. "MASTER SERVICER" means _____________________, a _______ corporation, and its successors and assigns, in its capacity as master servicer hereunder. "MASTER SERVICER ADVANCE DATE" means as to any Payment Date, [12:30 p.m. Pacific time] on the Business Day immediately preceding such Payment Date. "MASTER SERVICING FEE" means as to each Pledged Mortgage and any Payment Date, an amount equal to [one month's] interest at the related Master Servicing Fee Rate on the Stated Principal Balance of such Pledged Mortgage or, in the event of any payment of interest which accompanies a Principal Prepayment in Full made by the Mortgagor, interest at the Master Servicing Fee Rate on the Stated Principal Balance of such Pledged Mortgage for the period covered by such payment of interest, subject to reduction as provided in Section 5(a). "MASTER SERVICING FEE RATE" means with respect to each Pledged Mortgage, ______% per annum. "MAXIMUM RATE" means as to any Pledged Mortgage, the maximum rate set forth on the related Mortgage Note at which interest can accrue on such Pledged Mortgage. "MINIMUM RATE" means as to any Pledged Mortgage, the minimum rate set forth on the related Mortgage Note at which interest can accrue on such Pledged Mortgage. "MOODY'S" means Moody's Investors Service, Inc., or any successor thereto. If Moody's is designated as a Rating Agency in the Indenture, for purposes of Section 8(c) the address for notices to Moody's shall be Moody's Investors Service, Inc., 99 Church Street, New York, New York 10007, Attention: [Residential 15 20 Pass-Through Monitoring], or such other address as Moody's may hereafter furnish to the Issuer and the Master Servicer. "MORTGAGE" means the mortgage, deed of trust or other instrument creating a first lien on an estate in fee simple or leasehold interest in real property securing a Mortgage Note. "MORTGAGE DOCUMENTS" mean the mortgage documents listed in Section 2(a)(i) pertaining to a particular Pledged Mortgage and any additional documents delivered to the Trustee to be added to the Mortgage Documents pursuant to this Agreement. "MORTGAGE NOTE" means the original executed note or other evidence of indebtedness evidencing the indebtedness of a Mortgagor under a Pledged Mortgage. "MORTGAGE RATE" means the annual rate of interest borne by a Mortgage Note from time to time. "MORTGAGED PROPERTY" means the underlying property securing a Pledged Mortgage, which, with respect to a Cooperative Loan, is the related Cooperative Shares and Proprietary Lease. "MORTGAGOR" means the obligor(s) on a Mortgage Note. "NET INTEREST SHORTFALL" means, as to any Payment Date, the amount by which the sum of (i) the amount of interest which would otherwise have been received with respect to any Pledged Mortgage 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 Certificate Interest Payment Amount, the Invested Amount Payment and the amounts otherwise payable on such Payment Date to the holder of the Investor Certificate. "NET MORTGAGE RATE" means, as to any Pledged Mortgage and Payment Date, the related Mortgage Rate as of the Due Date in the month preceding the month of such Payment Date reduced by the related Expense Rate. "NONRECOVERABLE ADVANCE" means any portion of an Advance or Servicer Advance previously made or proposed to be 16 21 made by the Master Servicer or the related Servicer, as the case may be, that, in the good faith judgment of the Master Servicer or such Servicer, will not be ultimately recoverable by the Master Servicer from the related Mortgagor, related Liquidation Proceeds or otherwise. "OFFICER'S CERTIFICATE" means a certificate (i) signed by the Chairman of the Board, the Vice Chairman of the Board, the President, a Managing Director, a Vice President (however denominated), an Assistant Vice President, the Treasurer, the Secretary, or one of the Assistant Treasurers or Assistant Secretaries of the Master Servicer, or (ii) if provided for in this Agreement, signed by a Servicing Officer, as the case may be, and delivered to the Trustee as required by this Agreement. "OPINION OF COUNSEL" means a written opinion of counsel, who may be counsel for the Master Servicer, including, in-house counsel, reasonably acceptable to the Trustee. "ORIGINAL CLASS B-1 PRINCIPAL AMOUNT" means $____________. "ORIGINAL CLASS B-2 PRINCIPAL AMOUNT" means $_________. "ORIGINAL INVESTED AMOUNT" means $____________. "ORIGINAL PLEDGED MORTGAGE" means the Pledged Mortgage refinanced in connection with the origination of a Refinancing Pledged Mortgage. "ORIGINAL SENIOR CLASS PRINCIPAL AMOUNT" means $______________. "ORIGINAL SUBORDINATION AMOUNT" means the sum of the Original Class B-1 Principal Amount the Original Class B-2 Principal Amount and the Original Invested Amount. "OTS" means the Office of Thrift Supervision. "OUTSTANDING" shall have the meaning ascribed thereto in the Indenture. 17 22 "OUTSTANDING PLEDGED MORTGAGE" means, as of any Due Date, a Pledged Mortgage with a Stated Principal Balance greater than zero which was not the subject of a Principal Prepayment in Full prior to such Due Date and which did not become a Liquidated Pledged Mortgage prior to such Due Date. "OWNER TRUSTEE" means ________________________, a Delaware banking corporation, not in its individual capacity but solely as Owner Trustee under the Deposit Trust Agreement, until a successor Person shall have become the Owner Trustee pursuant to the applicable provisions of the Deposit Trust Agreement, and thereafter "Owner Trustee" shall mean such successor Person. "PAYMENT DATE" means, with respect to the Bonds and the Investor Certificate, the __th day of each [calendar month] after the initial issuance of the Bonds and the Investor Certificate or, if such __th day is not a Business Day, the next succeeding Business Day, commencing in ________ 199__. ["PERIODIC RATE CAP" means, as to any Pledged Mortgage and any Adjustment Date, the maximum percentage increase or decrease to the related Mortgage Rate on any such Adjustment Date, as specified in the related Mortgage Note.] "PERMITTED INVESTMENTS" means, at the time, any one or more of the following obligations and securities. (i) obligations of the United States or any agency thereof, provided such obligations are backed by the full faith and credit of the United States; (ii) general obligations of or obligations guaranteed by any state of the United States or the District of Columbia receiving the highest long-term debt rating of each Rating Agency, or such lower rating which will not result in a change in the rating assigned to the Bonds by each Rating Agency; (iii) commercial paper or finance company paper which is then receiving the highest commercial or finance company paper rating of each Rating Agency, or such lower rating as will not result in a change in the rating assigned to the Bonds by each Rating Agency; 18 23 (iv) certificates of deposit, demand or time deposits, or bankers' acceptances issued by any depository institution or trust company incorporated under the laws of the United States or of any state thereof and subject to supervision and examination by federal and/or state banking authorities, provided that the commercial paper and/or long-term unsecured debt obligations of such depository institution or trust company (or in the case of the principal depository institution in a holding company system, the commercial paper or long-term unsecured debt obligations of such holding company, but only if Moody's Investors Service, Inc. ("Moody's") is a Rating Agency) are then rated one of the two highest long-term and the highest short-term ratings of each Rating Agency for such securities, or such lower ratings as will not result in a change in the rating assigned to the Bonds by each Rating Agency; (v) demand or time deposits or certificates of deposit issued by any bank or trust company or savings institution by any bank, insurance company or other corporation containing, at the time of issuance of such agreements, such terms and conditions as will not result in a change in the rating then assigned to the Bonds by each Rating Agency; (vi) guaranteed reinvestment agreements issued by any bank, insurance company or other corporation containing, at the time of the issuance of such agreements, such terms and conditions as will not result in a change in the rating then assigned to the Bonds by each Rating Agency; (vii) repurchase obligations with respect to any security described in clauses (i) and (ii) above, in either case entered into with a depository institution or trust company (acting as principal) described in clause (iv) above; (viii) securities (other than stripped bonds, stripped coupons or instruments sold at a purchase price in excess of 115% of the face amount thereof) bearing interest or sold at a discount issued by any corporation incorporated under the laws of the United States or any state thereof which, at the time of such investment, have one of the two highest ratings of each Rating Agency (except if the Rating Agency is Moody's, such rating shall be the highest commercial paper rating of Moody's for any such securities), or such lower rating as will not result in a change 19 24 in the rating then assigned to the Bonds by each Rating Agency, as evidenced by a signed writing delivered by each such Rating Agency; (ix) 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 the highest applicable rating by each applicable Rating Agency or such lower rating as will not result in a change in the rating then assigned to the Bonds by each Rating Agency; (x) short term investment funds 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 each applicable Rating Agency in their respective highest applicable rating category or such lower rating as will not result in a change assigned to the Bonds by each Rating Agency; and (xi) such other investments having a specified stated maturity and bearing interest or sold at a discount acceptable to each applicable Rating Agency as will not result in a change in the rating then assigned to the Bonds by each Rating Agency, as evidenced by a signed writing delivered by each Rating Agency; provided, that no such instrument shall be a Permitted Investment if (i) such instrument evidences the right to receive interest only payments with respect to the obligations underlying such instrument or (ii) such instrument would require the Issuer to register as an investment company under the Investment Company Act of 1940, as amended. "PERSON" means any individual, corporation, partnership, joint venture, association, joint-stock company, trust, unincorporated organization or government, or any agency or political subdivision thereof. "PLEDGED MORTGAGE" means such of the mortgage loans granted by the Issuer to the Trustee under the Indenture as security for the Bonds, as from time to time are held as part of the Trust Estate (including any REO Property), the mortgage loans so held being identified in the Schedule of Pledged Mortgages, 20 25 notwithstanding foreclosure or other acquisition of title of the related Mortgaged Property. "POOL STATED PRINCIPAL BALANCE" means, as to any Payment Date, the aggregate of the Stated Principal Balances of the Pledged Mortgages which were Outstanding Pledged Mortgages on the Due Date in the month preceding the month of such Payment Date. "PREPAYMENT INTEREST SHORTFALL" means, as to any Payment Date, Pledged Mortgage and Principal Prepayment, the amount, if any, by which one month's interest at the related Mortgage Rate on such Principal Prepayment exceeds the amount of interest paid in connection with such Principal Prepayment. "PREPAYMENT PERIOD" means, as to any Payment Date, the calendar month preceding the month of such Payment Date. "PRIMARY INSURANCE POLICY" means each policy of primary mortgage guaranty insurance or any replacement policy therefor with respect to any Pledged Mortgage. "PRINCIPAL PREPAYMENT" means any payment of principal by a Mortgagor on a Pledged Mortgage that is received in advance of its scheduled Due Date and is not accompanied by an amount representing scheduled interest due on any date or dates in any month or months subsequent to the month of prepayment. Partial Principal Prepayments shall be applied by the Master Servicer in accordance with the terms of the related Mortgage Note. "PRINCIPAL PREPAYMENT IN FULL" means any Principal Prepayment made by a Mortgagor of the entire principal balance of a Pledged Mortgage. "PROPRIETARY LEASE" means, with respect to any Cooperative Unit, a lease or occupancy agreement between a Cooperative Corporation and a holder of related Cooperative Shares. "PROSPECTUS SUPPLEMENT" means the Prospectus Supplement dated ____________, 199__ relating to the Bonds. "PUD" means Planned Unit Development. 21 26 "PURCHASE PRICE" means, with respect to any Pledged Mortgage required to be purchased by the Master Servicer pursuant to Section 2(a)(ii) or 2(d)(iv) or purchased at the option of the Master Servicer pursuant to Section 3(n), an amount equal to the sum of (i) 100% of the unpaid principal balance of the Pledged Mortgage on the date of such purchase, and (ii) accrued interest thereon at the applicable Mortgage Rate (or at the applicable Adjusted Net Mortgage Rate if the purchaser is the Master Servicer) from the date through which interest was last paid by the Mortgagor to the Due Date in the month in which the Purchase Price is to be distributed to Bondholders and the holder of the Investor Certificate. "QUALIFIED INSURER" means a mortgage guaranty insurance company duly qualified as such under the laws of the state of its principal place of business and each state having jurisdiction over such insurer in connection with the insurance policy issued by such insurer, duly authorized and licensed in such states to transact a mortgage guaranty insurance business in such states and to write the insurance provided by the insurance policy issued by it, approved as a FNMA- or FHLMC-approved mortgage insurer or having a claims paying ability rating of at least "AA" or equivalent rating by a nationally recognized statistical rating organization. Any replacement insurer with respect to a Pledged Mortgage must have at least as high a claims paying ability rating as the insurer it replaces had on the Closing Date. "RATING AGENCY" shall mean each of the Rating Agencies specified in the Indenture. If either such organization or a successor is no longer in existence, "Rating Agency" shall be such nationally recognized statistical rating organization, or other comparable Person, as is designated by the Issuer, notice of which designation shall be given to the Trustee. References herein to a given rating or rating category of a Rating Agency shall mean such rating category without giving effect to any modifiers. "REALIZED LOSS" means, with respect to each Liquidated Pledged Mortgage, an amount (not less than zero or more than the Stated Principal Balance of the Pledged Mortgage) as of the date of such liquidation, equal to (i) the Stated Principal Balance of the Liquidated Pledged Mortgage as of the date of such 22 27 liquidation, plus (ii) interest at the Net Mortgage Rate from the Due Date as to which interest was last paid or advanced (and not reimbursed) to Bondholders up to the Due Date in the month in which Liquidation Proceeds are required to be distributed on the Stated Principal Balance of such Liquidated Pledged Mortgage from time to time, minus (iii) the Liquidation Proceeds, if any, received during the month in which such liquidation occurred, to the extent applied as recoveries of interest at the Adjusted Net Mortgage Rate and to principal of the Liquidated Pledged Mortgage. With respect to each Pledged Mortgage which has become the subject of a Deficient Valuation, if the principal amount due under the related Mortgage Note has been reduced, the difference between the principal balance of the Pledged Mortgage outstanding immediately prior to such Deficient Valuation and the principal balance of the Pledged Mortgage as reduced by the Deficient Valuation. With respect to each Pledged Mortgage which has become the subject of a Debt Service Reduction and any Payment Date, the amount, if any, by which the principal portion of the related Scheduled Payment has been reduced. "RECOGNITION AGREEMENT" means, with respect to any Cooperative Loan, an agreement between the Cooperative Corporation and the originator of such Pledged Mortgage which establishes the rights of such originator in the Cooperative Property. "REFINANCING PLEDGED MORTGAGE" means any Pledged Mortgage originated in connection with the refinancing of an existing mortgage loan. "RELIEF ACT" means the Soldiers' and Sailors' Civil Relief Act of 1940, as amended. "RELIEF ACT REDUCTIONS" means, with respect to any Payment Date and any Pledged Mortgage as to which there has been a reduction in the amount of interest collectible thereon for the most recently ended calendar month as a result of the application of the Relief Act, the amount, if any, by which (i) interest collectible on such Pledged Mortgage for the most recently ended calendar month is less than (ii) interest accrued thereon for such month pursuant to the Mortgage Note. 23 28 "REO PROPERTY" means a Mortgaged Property acquired by the Trust Estate through foreclosure or deed-in-lieu of foreclosure in connection with a defaulted Pledged Mortgage. "REPLACEMENT PLEDGED MORTGAGE" means a Pledged Mortgage substituted by the Master Servicer for a Deleted Pledged Mortgage which must, on the date of such substitution, as confirmed in a Request for Release, substantially in the form of Exhibit C, (i) have a principal balance, after deduction of the principal portion of the Scheduled Payment due in the month of substitution, not in excess of, and not more than __% less than, the Stated Principal Balance of the Deleted Pledged Mortgage; (ii) be accruing interest at a rate no lower than and not more than __% per annum higher than, that of the Deleted Pledged Mortgage; (iii) have a Loan-to-Value Ratio no higher than that of the Deleted Pledged Mortgage; (iv) have a Mortgage Rate not lower than, and not more than ___% per annum higher than that of the Deleted Pledged Mortgage; (v) have a remaining term to maturity no greater than (and not more than _______ less than that of the Deleted Pledged Mortgage; and (vi) comply with each representation and warranty set forth in Section 2(d)(ii). "REQUEST FOR RELEASE" means the Request for Release submitted by the Master Servicer to the Trustee, substantially in the form of Exhibits C and D, as appropriate. "REQUIRED INSURANCE POLICY" means with respect to any Pledged Mortgage, any insurance policy that is required to be maintained from time to time under this Agreement. "SAIF" means the Savings Association Insurance Fund, or any successor thereto. "S&P" means Standard & Poor's Ratings Group, a division of McGraw-Hill Inc. If S&P is designated as a Rating Agency in the Indenture, for purposes of Section 8(c) the address for notices to S&P shall be Standard & Poor's Ratings Group, 26 Broadway, 15th Floor, New York, New York 10004, Attention: Mortgage Surveillance Monitoring, or such other address as S&P may hereafter furnish to the Issuer and the Master Servicer. "SCHEDULE OF PLEDGED MORTGAGES" means the schedule attached hereto as Schedule A listing the Pledged Mortgages to be 24 29 serviced by the Master Servicer pursuant to this Agreement (as from time to time amended by the Master Servicer to reflect the addition of Replacement Pledged Mortgages and the deletion of Deleted Pledged Mortgages pursuant to the provisions of this Agreement and Section 8.04 of the Indenture) pledged to the Trustee as part of the Trust Estate and from time to time subject to this Agreement and the Indenture, setting forth the following information with respect to each Pledged Mortgage: (i) the loan number; (ii) the Mortgagor's name and the street address of the Mortgaged Property, including the zip code; (iii) the maturity date; (iv) the original principal balance; (v) the Cut-off Date Principal Balance; (vi) the first payment date of the Pledged Mortgage; (vii) the Scheduled Payment in effect as of the Cut-off Date; (viii) the Loan-to-Value Ratio at origination; (ix) a code indicating whether the residential dwelling at the time of origination was represented to be owner-occupied; (x) a code indicating whether the residential dwelling is either (a) a detached single family dwelling, (b) a dwelling in a PUD, (c) a condominium unit, (d) a two- to four-unit residential property or (e) a Cooperative Unit; (xi) the Mortgage Rate in effect as of the Cut-off Date; (xii) the Master Servicing Fee Rate; (xiii) the Maximum Rate and the Minimum Rate; 25 30 (xiv) the Periodic Rate Cap; (xv) the Adjustment Date; (xvi) the Margin; (xvii) the purpose for the Pledged Mortgage; and (xviii) the type of documentation program pursuant to which the Pledged Mortgage was originated. Such schedule shall also set forth (a) the total of the amounts described under (v) and (vii) above and (b) the weighted average, weighted on the basis of the Cut-off Date Principal Balance, of the amounts described under (xi) and (xii) above, in each case for all of the Pledged Mortgages. "SCHEDULED PAYMENT" means the scheduled [monthly payment] on a Pledged Mortgage due on any Due Date allocable to principal and/or interest on such Pledged Mortgage which, unless otherwise specified herein, shall give effect to any related Debt Service Reduction and any Deficient Valuation that affects the amount of the monthly payment due on such Pledged Mortgage. "SECURITY AGREEMENT" means with respect to any Cooperative Loan, the agreement between the owner of the related Cooperative Shares and the originator of the related Mortgage Note, which defines the terms of the security interest in such Cooperative Shares and the related Proprietary Lease. "SENIOR BOND INTEREST RATE" means, with respect to any Interest Accrual Period, the annual rate at which interest accrues on the Senior Bonds as specified in such Bonds in Section 2.03(c) of the Indenture. "SENIOR BONDS" means the Class A-1 Bonds. "SENIOR CLASS PRINCIPAL AMOUNT" means, as of any Payment Date, the Original Senior Class Principal Amount reduced by all amounts previously distributed to Holders of the Senior Bonds as payments of principal. 26 31 "SENIOR INTEREST PAYMENT AMOUNT" means, as to any Payment Date, the sum of (i) [one month's] interest accrued during the related Interest Accrual Period at the Senior Bond Interest Rate on the Senior Class Principal Amount, subject to reduction pursuant to Section 5 and (ii) the sum of the amounts, if any, by which the amounts 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. "SENIOR PERCENTAGE" means, as to any Payment Date, 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 Class B-1 Principal Amount (iii) the Class B-2 Principal Amount and (iv) the Invested Amount, in each case immediately prior to such date. "SENIOR PRINCIPAL PAYMENT AMOUNT" means, as to any Payment Date, the Senior Percentage of the sum of (a) the principal portion of each Scheduled Payment due on each Pledged Mortgage [on the related Due Date], (b) the principal portion of the purchase price of each Pledged Mortgage that was purchased by Redwood Trust or another Person pursuant to the Mortgage Loan Purchase Agreement [or any optional purchase by the Master Servicer of a defaulted Pledged Mortgage] as of such Payment Date, (c) the Substitution Adjustment Amount in connection with any Deleted Pledged Mortgages received with respect to such Payment Date (d) any Insurance Proceeds or Liquidation Proceeds allocable to recoveries of principal of Pledged Mortgages that are not yet Liquidated Pledged Mortgages received during the [calendar month] preceding the month of such Payment Date, (e) with respect to any Pledged Mortgages that became a Liquidated Pledged Mortgages during the [calendar month] preceding the month of such Payment Date, the Stated Principal Balance of such Pledged Mortgage and (f) all partial and full principal prepayments by borrowers received during the related Prepayment Period. "SEQUOIA" means Sequoia Mortgage Funding Corporation, a Delaware corporation, and its successors and assigns. 27 32 "SERVICER" means any person with which the Master Servicer has entered into a Servicing Agreement for the servicing of all or a portion of the Pledged Mortgages pursuant to Section 3(b). "SERVICER ADVANCE" means the meaning ascribed to such term in Section 3(h)(iv). "SERVICING ACCOUNT" means the separate Eligible Account or Accounts created and maintained pursuant to Section 3(h)(ii). "SERVICING ADVANCES" means all customary, reasonable and necessary "out of pocket" costs and expenses incurred in the performance by the Master Servicer of its servicing obligations, including, but not limited to, the cost of (i) the preservation, restoration and protection of a Mortgaged Property, (ii) any expenses reimbursable to the Master Servicer pursuant to Section 3(n) and any enforcement or judicial proceedings, including foreclosures, (iii) the management and liquidation of any REO Property and (iv) compliance with the obligations under Section 3(l). "SERVICING AGREEMENT" means any agreement between the Master Servicer and the related Servicer relating to servicing and/or administration of certain Pledged Mortgages as provided in Section 3(b). "SERVICING DEFAULT" means a servicing default as described under Section 7(a) of this Agreement. "SERVICING FEE" means, as to each Pledged Mortgage and any Payment Date, an amount equal to one month's interest at the applicable Servicing Fee Rate on the Stated Principal Balance of such Pledged Mortgage. "SERVICING FEE RATE" means, with respect to any Pledged Mortgage, the per annum rate set forth in the Schedule of Pledged Mortgages for such Pledged Mortgage. "SERVICING OFFICER" means any officer of the Master Servicer involved in, or responsible for, the administration and servicing of the Pledged Mortgage whose name and facsimile signature appear on a list of servicing officers furnished to the 28 33 Trustee by the Master Servicer on the Closing Date pursuant to this Agreement, as such list may from time to time be amended. "STATED PRINCIPAL BALANCE" means, as to any Pledged Mortgage and Due Date, the unpaid principal balance of such Pledged Mortgage 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 allocable to principal (other than with respect to any Liquidated Pledged Mortgage) and to the payment of principal due on such Due Date and irrespective of any delinquency in payment by the related Mortgagor. "SUBORDINATED BONDS" means the Class B-1 Bonds and the Class B-2 Bonds. "SUBSTITUTION ADJUSTMENT AMOUNT" has the meaning ascribed to such term pursuant to Section 2(d)(iv). "TRUST ESTATE" shall have the meaning ascribed to such term in the Indenture. "TRUSTEE FEE" means, as to any Payment Date, the fee payable to the Trustee pursuant to Section 6.07(1) of the Indenture, in an amount equal to one-twelfth of the Trustee Fee Rate multiplied by the Pool Stated Principal Balance with respect to such Payment Date. "TRUSTEE FEE RATE" means, with respect to each Pledged Mortgage, the per annum rate agreed upon in writing on or prior to the Closing Date by the Trustee and the Issuer. "TRUSTEE MORTGAGE FILE" means, with respect to each Pledged Mortgage, the original documents and instruments relating thereto to be retained in the custody and possession of the Trustee, as set forth and enumerated in Section 2(a) of this Agreement. "WITHDRAWAL DATE" means the __th day of each month, or if such day is not a Business Day, the next preceding Business Day. 29 34 2. Mortgage Documents. (a) Trustee to Retain Possession of Documents. (i) Concurrently with the execution and delivery hereof, the Issuer has pledged, transferred and assigned to the Trustee for the benefit of the Bondholders, as collateral for the payment of principal and interest on the Bonds, all right, title and interest of the Issuer in and to the Trust Estate for the Bonds, including the Pledged Mortgages. Prior to or contemporaneous with the execution of this Agreement, or within the applicable time periods specified below, the Issuer shall have delivered or caused to be delivered to the Trustee, or its custodian, with respect to each Pledged Mortgage all originals of the Mortgage Documents and any other instruments relating thereto specified below, which shall be referred to in this Agreement as the "Trustee Mortgage File" relating to such Pledged Mortgage: (A) the original Mortgage Note, endorsed by manual or facsimile signature in blank in the following form: "Pay to the order of ________________________________ without recourse", with all intervening endorsements showing a complete chain of endorsement from the originator to the Person endorsing it to the Trustee (each such endorsement being sufficient to transfer all right, title and interest of the party so endorsing, as noteholder or assignee thereof, in and to that Mortgage Note); (B) except as provided below, the original recorded Mortgage or a copy of such Mortgage certified by the Master Servicer as being a true and complete copy of the Mortgage; (C) a duly executed assignment of the Mortgage (which may be included in a blanket assignment or assignments), together with, except as provided below, all interim recorded assignments of such mortgage (each such assignment, when duly and validly completed, to be in recordable form and sufficient to effect the assignment of and transfer to the assignee thereof, under the Mortgage to which the assignment relates); provided that, if the related Mortgage has not been returned from the applicable public recording office, such assignment of the Mortgage may exclude the information to be provided by the recording office; 30 35 (D) the original or copies of each assumption, modification, written assurance or substitution agreement, if any; (E) except as provided below, the original or duplicate original lender's title policy and all riders thereto; and (F) In the case of a Cooperative Loan, the originals of the following documents or instruments: (a) The Cooperative Shares, together with a stock power in blank; (b) The executed Security Agreement; (c) The executed Proprietary Lease; (d) The executed Recognition Agreement; (e) The executed assignment of Recognition Agreement; (f) The executed UCC-1 financing statement with evidence of recording thereon which have been filed in all places required to perfect the Trustee's and the Bondholder's interest in the Cooperative Shares and the Proprietary Lease; and (g) Executed UCC-3 financing statements or other appropriate UCC financing statements required by state law, evidencing a complete and unbroken line from the mortgagee to the Trustee with evidence of recording thereon (or in a form suitable for recordation). In the event that in connection with any Pledged Mortgage the Issuer cannot deliver (i) the original recorded Mortgage, (ii) all interim recorded assignments or (iii) the lender's title policy (together with all riders thereto) satisfying the requirements of clause (B), (C) or (E) above, respectively, concurrently with the execution and delivery hereof because such document or documents have not been returned from the applicable public recording office in the case of clause (B) 31 36 or (C) above, or because the title policy has not been delivered to either the Master Servicer or the Issuer by the applicable title insurer in the case of clause (E) above, the Issuer shall promptly deliver to the Trustee, in the case of clause (B) or (C) above, such original Mortgage or such interim assignment, as the case may be, with evidence of recording indicated thereon upon receipt thereof from the public recording office, or a copy thereof, certified, if appropriate, by the relevant recording office, but in no event shall any such delivery of the original Pledged Mortgage and each such interim assignment or a copy thereof, certified, if appropriate, by the relevant recording office, be made later than one year following the Closing Date, or, in the case of clause (E) above, later than 120 days following the Closing Date; provided, however, that in the event the Issuer is unable to deliver by such date each Mortgage and each such interim assignment by reason of the fact that any such documents have not been returned by the appropriate recording office, or, in the case of each such interim assignment, because the related Mortgage has not been returned by the appropriate recording office, the Issuer shall deliver such documents to the Trustee as promptly as possible upon receipt thereof and, in any event, within ___ days following the Closing Date. The Issuer shall forward or cause to be forwarded to the Trustee (a) from time to time additional original documents evidencing an assumption or modification of a Pledged Mortgage and (b) any other documents required to be delivered by the Issuer or the Master Servicer to the Trustee. In the event that the original Mortgage is not delivered and in connection with the payment in full of the related Pledged Mortgage the public recording office requires the presentation of a "lost instruments affidavit and indemnity" or any equivalent document, because only a copy of the Mortgage can be delivered with the instrument of satisfaction or reconveyance, the Master Servicer shall execute and deliver or cause to be executed and delivered such a document to the public recording office. In the case where a public recording office retains the original recorded Mortgage or in the case where a Mortgage is lost after recordation in a public recording office, the Issuer shall deliver to the Trustee a copy of such Mortgage certified by such public recording office to be a true and complete copy of the original recorded Mortgage. As promptly as practicable subsequent to such pledge, transfer and assignment, and in any event within thirty (30) days 32 37 thereafter, the Master Servicer shall (i) affix the Trustee's name to each assignment of Mortgage, as the assignee thereof, (ii) cause such assignment to be in proper form for recording in the appropriate public office for real property records within thirty (30) days after receipt thereof and (iii) cause to be delivered for recording in the appropriate public office for real property records the assignments of the Mortgages to the Trustee, except that, with respect to any assignment of a Mortgage as to which the Master Servicer has not received the information required to prepare such assignment in recordable form, the Master Servicer's obligation to do so and to deliver the same for such recording shall be as soon as practicable after receipt of such information and in any event within thirty (30) days after the receipt thereof, and the Master Servicer need not cause to be recorded any assignment which relates to a Pledged Mortgage (a) the Mortgaged Property and Trustee Mortgage File relating to which are located in California or (b) in any other jurisdiction under the laws of which, as evidenced by an Opinion of Counsel delivered by the Issuer (at the Issuer's expense) to the Trustee in accordance with Section 3.11 of the Indenture, the recordation of such assignment is not necessary to protect the Trustee's and the Bondholders' interest in the related Pledged Mortgage. In the case of Pledged Mortgages that have been prepaid in full as of the Closing Date, the Issuer, in lieu of delivering the above documents to the Trustee, will deposit in the Bond Account the portion of such payment that is required to be deposited in the Bond Account pursuant to Section 3(h). Until the Bonds have been paid in full and the Issuer has otherwise fulfilled its obligations under the Indenture, the Trustee shall retain possession and custody of each Trustee Mortgage File in accordance with and subject to the terms and conditions set forth in the Indenture and this Agreement. (ii) The Trustee acknowledges receipt of the documents identified in the Initial Certification in the form annexed hereto as Exhibit A and declares that it holds and will hold such documents and the other documents delivered to it constituting the Trustee Mortgage Files, and that it holds or will hold such other assets as are included in the Trust Estate, in trust for the exclusive use and benefit of all present and future Bondholders. The Trustee acknowledges that it will maintain 33 38 possession of the Mortgage Notes in the State of _______________, unless otherwise permitted by the Rating Agencies. The Trustee agrees to execute and deliver on the Closing Date to the Issuer and the Master Servicer an Initial Certification in the form annexed hereto as Exhibit A. Based on its review and examination required by and in accordance with Sections 6.16 and 8.04 of the Indenture, and only as to the documents identified in such Initial Certification, the Trustee acknowledges that such documents appear regular on their face and relate to such Pledged Mortgage; provided that the Trustee shall be under no obligation to ascertain that, except the information set forth in items (i) through (iv) and (vi) of the Schedule of Pledged Mortgages, any information set forth in said schedule is accurate. The Trustee shall be under no duty or obligation to inspect, review or examine said documents, instruments, certificates or other papers to determine that the same are genuine, enforceable or appropriate for the represented purpose or that they have actually been recorded in the real estate records or that they are other than what they purport to be on their face. Not later than 90 days after the Closing Date, the Trustee shall deliver to the Issuer and the Master Servicer a Final Certification in the form annexed hereto as Exhibit B, with any applicable exceptions noted thereon. If, in the course of such review, the Trustee finds any document constituting a part of a Trustee Mortgage File which does not meet the requirements of Section 2(a)(i), the Trustee shall list such as an exception in the Final Certification; provided, however, that the Trustee shall not make any determination as to whether (i) any endorsement is sufficient to transfer all right, title and interest of the party so endorsing, as noteholder or assignee thereof, in and to that Mortgage Note or (ii) that any assignment is in recordable form or is sufficient to effect the assignment of and transfer to the assignee thereof under the mortgage to which the assignment relates. The Master Servicer shall promptly correct or cure such defect within 90 days from the date it was so notified of such defect and, if the Master Servicer does not correct or cure such defect within such period, the Master Servicer shall either (a) substitute for the related Pledged Mortgage a Replacement Pledged 34 39 Mortgage, which substitution shall be accomplished in the manner and subject to the conditions set forth in Section 2(d)(iv), or (b) purchase such Pledged Mortgage from the Trustee within 90 days from the date the Master Servicer was notified of such defect in writing at the Purchase Price of such Pledged Mortgage. Any such substitution pursuant to (a) above shall not be effected prior to the delivery to the Trustee of a Request for Release substantially in the form of Exhibit D. No substitution is permitted to be made in any calendar month after the Determination Date for such month. The Purchase Price for any such Pledged Mortgage shall be deposited by the Master Servicer in the Bond Account on or prior to the Distribution Account Report Date in the month following the month of purchase and, upon receipt of such deposit and certification with respect thereto in the form of Exhibit D hereto, the Trustee shall release the related Trustee Mortgage File to the Master Servicer and shall execute and deliver at the Master Servicer's request such instruments of transfer or assignment prepared by the Master Servicer, in each case without recourse, as shall be necessary to vest in the Master Servicer, or a designee, the Trustee's interest in any Pledged Mortgage released pursuant hereto. The Trustee shall retain possession and custody of each Trustee Mortgage File in accordance with and subject to the terms and conditions set forth herein. The Master Servicer shall promptly deliver to the Trustee, upon the execution or receipt thereof, the originals of such other documents or instruments constituting the Trustee Mortgage File as come into the possession of the Master Servicer from time to time. It is understood and agreed that the obligation of the Master Servicer to substitute for or to purchase any Pledged Mortgage which does not meet the requirements of Section 2(a)(i) shall constitute the sole remedy respecting such defect available to the Trustee and any Bondholder against the Master Servicer. (b) Trustee to Cooperate; Release of Trustee Mortgage Files. Upon the payment in full of any Pledged Mortgage, or the receipt by the Master Servicer of a notification that payment in full will be escrowed in a manner customary for such purposes, the Master Servicer will immediately notify the Trustee by 35 40 delivering, or causing to be delivered, a "Request for Release" substantially in the form of Exhibit D, all in accordance with Section 8.08(c) of the Indenture. Upon receipt of such request, the Trustee shall promptly release the related Trustee Mortgage File to the Master Servicer, and the Trustee shall at the Master Servicer's direction execute and deliver to the Master Servicer the request for reconveyance, deed of reconveyance or release or satisfaction of mortgage or such instrument releasing the lien of the Mortgage in each case provided by the Master Servicer, together with the Mortgage Note with written evidence of cancellation thereon, all in accordance with Section 8.08(c) of the Indenture. Expenses incurred in connection with any instrument of satisfaction or deed of reconveyance shall be chargeable to the related Mortgagor. From time to time and as shall be appropriate for the servicing or foreclosure of any Pledged Mortgage, including for such purpose collection under any policy of flood insurance, any fidelity bond or errors or omissions policy, or for the purposes of effecting a partial release of any Mortgaged Property from the lien of the Mortgage or the making of any corrections to the Mortgage Note or the Mortgage or any of the other documents included in the Trustee Mortgage File, the Trustee shall, upon delivery to the Trustee in accordance with Section 8.08(c) of the Indenture of a Request for Release in the form of Exhibit C signed by a Servicing Officer, release the Trustee Mortgage File to the Master Servicer or, at the Master Servicer's direction, to the related Servicer. Subject to the further limitations set forth below, the Master Servicer shall cause the Trustee Mortgage File or documents so released to be returned to the Trustee when the need therefor by the Master Servicer no longer exists, unless the Pledged Mortgage is liquidated and the proceeds thereof are deposited in the Bond Account, in which case the Master Servicer shall deliver to the Trustee a Request for Release in the form of Exhibit D, signed by a Servicing Officer. If the Master Servicer at any time seeks to initiate a foreclosure proceeding in respect of any Mortgaged Property as authorized by this Agreement, the Master Servicer shall deliver or cause to be delivered to the Trustee, for signature, as appropriate, any court pleadings, requests for trustee's sale or other documents necessary to effectuate such foreclosure or any legal action brought to obtain judgment against the Mortgagor on the Mortgage Note or the Mortgage or to obtain a deficiency 36 41 judgment or to enforce any other remedies or rights provided by the Mortgage Note or the Mortgage or otherwise available at law or in equity. (c) Documents, Records and Funds in Possession of Master Servicer to be Held for Trustee. (i) Notwithstanding any other provisions of this Agreement, the Master Servicer shall deliver to the Trustee as required by this Agreement and the Indenture all documents and instruments relating to the Pledged Mortgages coming into the possession of the Master Servicer from time to time and shall account fully to the Trustee for any funds received by the Master Servicer or which otherwise are collected by the Master Servicer as Liquidation Proceeds or Insurance Proceeds in respect of any Pledged Mortgage. All Trustee Mortgage Files, including without limitation the Mortgage Documents contained therein, funds collected or held by, or under the control of, the Master Servicer from time to time in respect of any Pledged Mortgages, whether from the collection of principal and interest payments or from Liquidation Proceeds or Insurance Proceeds, including but not limited to any funds on deposit in any Eligible Account and any other items constituting a part of the Trust Estate which from time to time come into the possession of the Master Servicer, shall be held by the Master Servicer for and on behalf of the Trustee and the Bondholders as specified in Section 8.10 of the Indenture, and shall be and remain the sole and exclusive property of the Trustee, subject to the applicable provisions of this Agreement and the Indenture. The Master Servicer also agrees that it shall not create, incur or subject any Trustee Mortgage File, Mortgage Documents or other documents relating to a Pledged Mortgage which are in the possession of the Master Servicer with respect to each Pledged Mortgage (each a "Master Servicer Mortgage File") or any funds that are deposited in the Distribution Account, the Bond Account, any Eligible Account, Servicing Account or Escrow Account, or any funds that otherwise are or may become due or payable to the Trustee for the benefit of the Bondholders, to any claim, lien, security interest, judgment, levy, writ of attachment or other encumbrance, or assert by legal action or otherwise any claim or right of set-off against any Master Servicer Mortgage File or Trustee Mortgage File or any funds collected or held by, or under the control of, the Master Servicer from time to time in respect of a Pledged 37 42 Mortgage; provided, however, that the Master Servicer shall be entitled to set-off against and deduct from any such funds any amounts that are properly due and payable to the Master Servicer under this Agreement. (ii) The Master Servicer hereby acknowledges that concurrently with the execution of this Agreement, the Trustee has acquired and holds a security interest in the Trustee Mortgage Files and in all Pledged Mortgages represented by such Master Servicer Mortgage Files and Trustee Mortgage Files and in all funds now or hereafter held by, or under the control of, the Master Servicer that are collected by the Master Servicer in connection with the Pledged Mortgages, whether as Scheduled Payments, as Principal Prepayments, or as Liquidation Proceeds or Insurance Proceeds, and in all proceeds of the foregoing and proceeds of proceeds (but excluding any Master Servicing Fees, [Servicing Fees], Trustee Fees and any other amounts or reimbursements to which the Master Servicer is entitled under this Agreement). The Master Servicer agrees that so long as the Pledged Mortgages are assigned to the Trustee, all Master Servicer Mortgage Files and Trustee Mortgage Files (and any documents or instruments constituting a part of such files), and such funds which come into the possession or custody of, or which are subject to the control of, the Master Servicer shall be held by the Master Servicer for and on behalf of the Trustee as the Trustee's agent and bailee for purposes of perfecting the Trustee's security interest therein, as provided by Section 9-305 of the Uniform Commercial Code of the state in which such property is located, or by other laws, as specified in Section 8.10 of the Indenture. The Master Servicer hereby accepts such agency and acknowledges that the Trustee, as secured party, will be deemed to have possession at all times of all Master Servicer Mortgage Files, Trustee Mortgage Files and any other documents or instruments constituting a part of such files, such funds and other items for purposes of Section 9-305 of the Uniform Commercial Code of the state in which such property is held by the Master Servicer. (d) Representations, Warranties and Covenants of the Issuer and the Master Servicer. (i) ________________________, in its capacity as Master Servicer, hereby makes the representations and warranties 38 43 set forth in Schedule II hereto, and by this reference incorporated herein, to the Issuer and the Trustee, as of the Closing Date, or if so specified therein, as of the Cut-off Date. (ii) _______________________, in its capacity as Master Servicer, hereby makes the representations and warranties set forth in Schedule III hereto, and by this reference incorporated herein, to the Issuer and the Trustee, as of the Closing Date, or if so specified therein, as of the Cut-off Date. (iii) The Issuer hereby makes the representations and warranties set forth in Schedule IV hereto, and by this reference incorporated herein, to the Trustee and the Master Servicer, as of the Closing Date. (iv) Upon discovery by any of the parties hereto of a breach of a representation or warranty made pursuant to Section 2(d)(ii) that materially and adversely affects the interests of the Bondholders in any Pledged Mortgage, the party discovering such breach shall give prompt notice thereof to the other parties. The Master Servicer hereby covenants that within 90 days of the earlier of its discovery or its receipt of written notice from any party of a breach of any representation or warranty made pursuant to Section 2(d)(ii) which materially and adversely affects the interests of the Bondholders, in any Pledged Mortgage, it shall cure such breach in all material respects, and if such breach is not so cured, shall, (i) remove such Pledged Mortgage (a "Deleted Pledged Mortgage") from the Trust Estate and substitute in its place a Replacement Pledged Mortgage, in the manner and subject to the conditions set forth in this Section 2(d); or (ii) purchase the affected Pledged Mortgage or Pledged Mortgages from the Trustee at the Purchase Price in the manner set forth below; provided, however, that any such substitution pursuant to (i) above shall not be effected prior to the delivery to the Trustee of a Request for Release substantially in the form of Exhibit D, and the Trustee Mortgage File for any such Replacement Pledged Mortgage. The Issuer shall promptly reimburse the Master Servicer and the Trustee for any expenses reasonably incurred by the Master Servicer or the Trustee in respect of enforcing the remedies for such breach. With respect to the representations and warranties described in this Section 2(d) which are made to the best of the Issuer's knowledge, if it is discovered by either the Issuer or the 39 44 Trustee that the substance of such representation and warranty is inaccurate and such inaccuracy materially and adversely affects the interests of the Bondholders therein, notwithstanding the Issuer's lack of knowledge with respect to the substance of such representation or warranty, such inaccuracy shall be deemed a breach of the applicable representation or warranty. With respect to any Replacement Pledged Mortgage or Mortgages, the Issuer shall deliver to the Trustee for the benefit of the Bondholders the Mortgage Note, the Mortgage, the related assignment of the Mortgage, and such other documents and agreements as are required by Section 2(a), with the Mortgage Note endorsed and the Mortgage assigned as required by Section 2(a). No substitution is permitted to be made in any calendar month after the Determination Date for such month. Scheduled Payments due with respect to Replacement Pledged Mortgages in the month of substitution shall not be part of the Trust Estate and will be retained by the Master Servicer on the next succeeding Payment Date. For the month of substitution, Available Funds will include the monthly payment due on any Deleted Pledged Mortgage for such month and thereafter the Master Servicer shall be entitled to retain all amounts received in respect of such Deleted Pledged Mortgage. The Master Servicer shall amend the Schedule of Pledged Mortgages for the benefit of the Bondholders to reflect the removal of such Deleted Pledged Mortgage or Mortgages and the substitution of the Replacement Pledged Mortgage or Mortgages and the Master Servicer shall deliver the amended Schedule of Pledged Mortgages to the Trustee. Upon such substitution, the Replacement Pledged Mortgage or Mortgages shall be subject to the terms of this Agreement in all respects, and the Master Servicer shall be deemed to have made with respect to such Replacement Pledged Mortgage or Mortgages, as of the date of substitution, the representations and warranties made pursuant to Section 2(d)(ii) with respect to such Pledged Mortgage or Mortgages. Upon any such substitution and the deposit to the Bond Account of the amount required to be deposited therein in connection with such substitution as described in the following paragraph, the Trustee shall release the Trustee Mortgage File held for the benefit of the Bondholders relating to such Deleted Pledged Mortgage or Mortgages to the Master Servicer and shall execute and deliver at the Master Servicer's direction such instruments 40 45 of transfer or assignment prepared by the Master Servicer, in each case without recourse, as shall be necessary to vest title in the Master Servicer, or its designee, the Trustee's interest in any Deleted Pledged Mortgage or Mortgages substituted for pursuant to this Section 2(d). For any month in which the Master Servicer substitutes one or more Replacement Pledged Mortgages for one or more Deleted Pledged Mortgages, the Master Servicer will determine the amount (if any) by which the aggregate principal balance of all such Replacement Pledged Mortgages as of the date of substitution is less than the aggregate Stated Principal Balance of all such Deleted Pledged Mortgages (after application of the scheduled principal portion of the monthly payments due in the month of substitution). The amount of such shortage (the "Substitution Adjustment Amount") shall be deposited into the Bond Account by the Master Servicer on or before the Distribution Account Deposit Date for the Payment Date in the month succeeding the calendar month during which the related Pledged Mortgage became required to be purchased or replaced hereunder. In the event that the Master Servicer shall have purchased a Pledged Mortgage, the Purchase Price therefor shall be deposited in the Bond Account pursuant to Section 3(h) and in compliance with the provisions of Section 8.04 of the Indenture on or before the Distribution Account Deposit Date for the Payment Date in the month following the month during which the Master Servicer became obligated hereunder to purchase or replace such Pledged Mortgage and upon such deposit of the Purchase Price and receipt of a Request for Release in the form of Exhibit D hereto, the Trustee shall release the related Trustee Mortgage File held for the benefit of the Bondholders to such Person, and the Trustee shall execute and deliver at such Person's direction such instruments of transfer or assignment prepared by such Person, in each case without recourse, as shall be necessary to transfer title from the Trustee pursuant to Sections 8.08(c) and 8.12 of the Indenture. It is understood and agreed that the obligation under this Agreement of any Person to cure, purchase or replace any Pledged Mortgage as to which a breach has occurred and is continuing shall constitute the sole remedy against such Persons respecting such breach available to Bondholders or the Trustee on their behalf. 41 46 The representations and warranties made pursuant to this Section 2(d) shall survive delivery of the respective Trustee Mortgage Files to the Trustee for the benefit of the Bondholders. (e) Covenants of the Master Servicer. The Master Servicer hereby covenants to the Issuer and the Trustee as follows: (i) the Master Servicer shall comply in the performance of its obligations under this Agreement with all reasonable rules and requirements of the insurer under each Required Insurance Policy; and (ii) no written information, certificate of an officer, statement furnished in writing or written report delivered to the Issuer, any affiliate of the Issuer or the Trustee and prepared by the Master Servicer pursuant to this Agreement will contain any untrue statement of a material fact or omit to state a material fact necessary to make such information, certificate, statement or report not misleading. 3. General Duties of the Master Servicer. The parties agree that, subject to the provisions of Section 7 hereof, the Master Servicer shall service the Pledged Mortgages in the manner and on the terms and conditions set forth below: (a) Master Servicer to Service Pledged Mortgages. For and on behalf of the Issuer, the Trustee and the Bondholders, the Master Servicer shall service and administer the Pledged Mortgages in accordance with the terms of this Agreement and customary and usual standards of practice of prudent mortgage loan servicers. In connection with such servicing and administration, the Master Servicer shall have full power and authority, acting alone and/or through Servicers as provided in Section 3(b), to do or cause to be done any and all things that it may deem necessary or desirable in connection with 42 47 such servicing and administration, including but not limited to, the power and authority, subject to the terms hereof, (i) to execute and deliver, on behalf of the Bondholders and the Trustee, customary consents or waivers and other instruments and documents, (ii) to consent to transfers of any Mortgaged Property and assumptions of the Mortgage Notes and related Mortgages (but only in the manner provided in this Agreement), (iii) to collect any Insurance Proceeds and other Liquidation Proceeds, and (iv) to effectuate foreclosure or other conversion of the ownership of the Mortgaged Property securing any Pledged Mortgage; provided that the Master Servicer shall not take, or permit any Servicer to take, any action that is inconsistent with or prejudices the interests of the Trustee or the Bondholders in any Pledged Mortgage or the rights and interests of the Issuer, the Trustee and the Bondholders under this Agreement. The Master Servicer shall represent and protect the interests of the Trustee in the same manner as it protects its own interests in mortgage loans in its own portfolio in any claim, proceeding or litigation regarding a Pledged Mortgage. Without limiting the generality of the foregoing, the Master Servicer, in its own name or in the name of any Servicer or the Issuer and the Trustee, is hereby authorized and empowered by the Issuer and the Trustee, when the Master Servicer or the Servicer, as the case may be, believes it appropriate in its reasonable judgment, to execute and deliver, on behalf of the Trustee, the Issuer, the Bondholders or any of them, 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 Pledged Mortgages and with respect to the Mortgaged Properties held for the benefit of the Trustee and the Bondholders. The Master Servicer shall prepare and deliver to the Issuer and/or the Trustee such documents requiring execution and delivery by either or both of them as are necessary or appropriate to enable the Master Servicer to service and administer the Pledged Mortgages to the extent that the Master Servicer is not permitted to execute and deliver such documents pursuant to the preceding sentence. Upon receipt of such documents, the Issuer and/or the Trustee shall execute such documents and deliver them to the Master Servicer. In accordance with the standards of the preceding paragraph, the Master Servicer shall advance or cause to be advanced funds as necessary for the purpose of effecting the payment of taxes and assessments on the Mortgaged Properties, which advances 43 48 shall be reimbursable in the first instance from related collections from the Mortgagors pursuant to Section 3(i), and further as provided in Section 3(k). The costs incurred by the Master Servicer, if any, in effecting the timely payments of taxes and assessments on the Mortgaged Properties and related insurance premiums shall not, for the purpose of calculating payments to the Bondholders, be added to the Stated Principal Balances of the related Pledged Mortgages, notwithstanding that the terms of such Pledged Mortgages so permit. [(b) Subservicing; Enforcement of the Obligations of Servicers. (i) The Master Servicer may arrange for the servicing of any Pledged Mortgage by a Servicer pursuant to a Servicing Agreement; provided, however, that such servicing arrangement and the terms of the related Servicing Agreement must provide for the servicing of such Pledged Mortgages in a manner consistent with the servicing arrangements contemplated hereunder. Each Servicer of a Pledged Mortgage shall be entitled to receive and retain, as provided in the related Servicing Agreement and in Section 5(a), the related Servicing Fee from payments of interest received on such Pledged Mortgage after payment of all amounts required to be remitted to the Master Servicer in respect of such Pledged Mortgage. Unless the context otherwise requires, references in this Agreement to actions taken or to be taken by the Master Servicer in servicing the Pledged Mortgages include actions taken or to be taken by a Servicer on behalf of the Master Servicer. With the approval of the Master Servicer, a Servicer may delegate its servicing obligations to third-party servicers, but such Servicer will remain obligated under the related Servicing Agreement. The Master Servicer and Servicer may enter into amendments to the related Servicing Agreement or a different form of Servicing Agreement; provided, however, that any such amendments or different forms shall be consistent with and not violate the provisions of this Agreement in a manner which would materially and adversely affect the interests of the Trustee and the Bondholders. (ii) For purposes of this Agreement, the Master Servicer shall be deemed to have received any collections, recoveries or payments with respect to the Pledged Mortgages that 44 49 are received by a Servicer regardless of whether such payments are remitted by the Servicer to the Master Servicer. (iii) As part of its servicing activities hereunder, the Master Servicer, for the benefit of the Trustee and the Bondholders, shall use its best reasonable efforts to enforce the obligations of each Servicer under the related Servicing Agreement, to the extent that the non-performance of any such obligation would have material and adverse effect on a Pledged Mortgage. Such enforcement, including, without limitation, the legal prosecution of claims, termination of Servicing Agreements and the pursuit of other appropriate remedies, shall be in such form and carried out to such an extent and at such time as the Master Servicer, in its good faith business judgment, would require were it the owner of the related Pledged Mortgages. The Master Servicer shall pay the costs of such enforcement at its own expense, and shall be reimbursed therefor only (i) from a general recovery resulting from such enforcement to the extent, if any, that such recovery exceeds all amounts due in respect of the related Pledged Mortgage or (ii) from a specific recovery of costs, expenses or attorneys fees against the party against whom such enforcement is directed. (c) Successor Servicers. The Master Servicer shall be entitled to terminate any Servicing Agreement that may exist in accordance with the terms and conditions of such Servicing Agreement and without any limitation by virtue of this Agreement; provided, however, that in the event of termination of any Servicing Agreement by the Master Servicer or the Servicer, the Master Servicer shall either act as servicer of the related Pledged Mortgage or enter into a Servicing Agreement with a successor Servicer which will be bound by the terms of the related Servicing Agreement. If the Master Servicer or any affiliate of the Master Servicer acts as servicer, it will not assume liability for the representations and warranties of the Servicer which it replaces. If the Master Servicer enters into a Servicing Agreement with a successor Servicer, the Master Servicer shall use reasonable efforts to have the successor Servicer assume liability for the representations and warranties made by the terminated Servicer in respect of the related Pledged Mortgages and, in the event of any such assumption by the successor Servicer, the Master Servicer may, in 45 50 the exercise of its business judgment, release the terminated Servicer from liability for such representations and warranties. (d) Liability of the Master Servicer. Notwithstanding any Servicing Agreement, any of the provisions of this Agreement relating to agreements or arrangements between the Master Servicer or a Servicer or references to actions taken through a Servicer or otherwise, the Master Servicer shall remain obligated and liable to the Trustee and Bondholders for the servicing and administering of the Pledged Mortgages in accordance with the provisions of Section 3(a) without diminution of such obligation or liability by virtue of such Servicing Agreements or arrangements or by virtue of indemnification from the Servicer and to the same extent and under the same terms and conditions as if the Master Servicer alone were servicing and administering the Pledged Mortgages. The Master Servicer shall be entitled to enter into any agreement with a Servicer for indemnification of the Master Servicer and nothing contained in this Agreement shall be deemed to limit or modify such indemnification. (e) No Contractual Relationship Between Servicers and the Trustee. Any Servicing Agreement that may be entered into and any other transactions or services relating to the Pledged Mortgages involving a Servicer in its capacity as such and not as an originator shall be deemed to be between the Servicer and the Master Servicer alone and the Trustee and Bondholders shall not be deemed parties thereto and shall have no claims, rights, obligations, duties or liabilities with respect to the Servicer in its capacity as such except as set forth in Section 3(g). (f) Rights of the Issuer and the Trustee in Respect of the Master Servicer. The Issuer may, but is not obligated to, enforce the obligations of the Master Servicer hereunder and may, but is not obligated to, perform, or cause a designee to perform, any defaulted obligation of the Master Servicer hereunder and in connection with any such defaulted obligation to exercise the related rights of the Master Servicer hereunder; provided that 46 51 the Master Servicer shall not be relieved of any of its obligations hereunder by virtue of such performance by the Issuer or its designee. Neither the Trustee nor the Issuer shall have any responsibility or liability for any action or failure to act by the Master Servicer nor shall the Trustee or the Issuer be obligated to supervise the performance of the Master Servicer hereunder or otherwise. (g) Trustee to Act as Master Servicer. In the event that the Master Servicer shall for any reason no longer be the Master Servicer hereunder (including by reason of a Servicing Default), the Trustee or its successor shall thereupon assume all of the rights and obligations of the Master Servicer hereunder arising thereafter, except that the Trustee shall not be (i) liable for losses of the Master Servicer pursuant to Section 3(l) or any acts or omissions of the predecessor Master Servicer hereunder, (ii) obligated to make Advances if it is prohibited from doing so by applicable law, (iii) obligated to effectuate purchases or substitutions of Pledged Mortgages hereunder, including but not limited to purchases or substitutions pursuant to Section 2(a)(ii) or 2(d)(iv), (iv) responsible for expenses of the Master Servicer pursuant to Section 2(d)(iv) or (v) deemed to have made any representations and warranties of the Master Servicer hereunder. Any such assumption shall be subject to Section 7(b). If the Master Servicer shall for any reason no longer be the Master Servicer (including by reason of any Servicing Default), the Trustee or its successor shall succeed to any rights of the Master Servicer under each Servicing Agreement and any obligations of the Master Servicer under each Servicing Agreement arising thereafter. The Trustee or the successor Master Servicer shall be deemed to have assumed all of the Master Servicer's interest therein and to have replaced the Master Servicer as a party to any Servicing Agreement entered into by the Master Servicer as contemplated by Section 3(b) to the same extent as if such Servicing Agreement had been assigned to the assuming party except that the Master Servicer shall not be relieved of any liability or obligations under any such Servicing Agreement. The Master Servicer shall, upon request of the Trustee, but at the expense of the Master Servicer, deliver to the assuming party all documents and records relating to each Servicing 47 52 Agreement or substitute servicing agreement and the Pledged Mortgages then being serviced thereunder and an accounting of amounts collected or held by it and otherwise use its best efforts to effect the orderly and efficient transfer of the substitute Servicing Agreement to the assuming party. (h) Collection of Pledged Mortgage Payments; Eligible Accounts; Servicing Accounts; Bond Account. (i) The Master Servicer shall make reasonable efforts in accordance with the customary and usual standards of practice of prudent mortgage servicers to collect all payments called for under the terms and provisions of the Pledged Mortgages to the extent such procedures shall be consistent with this Agreement and the terms and provisions of any related Required Insurance Policy. Consistent with the foregoing, the Master Servicer may in its discretion (i) waive any late payment charge or any prepayment charge or penalty interest in connection with the prepayment of a Pledged Mortgage and (ii) extend the due dates for payments due on a Mortgage Note for a period not greater than 120 days; provided, however, that the Master Servicer cannot extend the maturity of any such Pledged Mortgage past the date on which the final payment is due on the latest maturing Pledged Mortgage as of the Cut-off Date. In the event of any such arrangement, the Master Servicer shall make Advances on the related Pledged Mortgage in accordance with the provisions of Section 4 during the scheduled period in accordance with the amortization schedule of such Pledged Mortgage without modification thereof by reason of such arrangements. The Master Servicer shall not be required to institute or join in litigation with respect to collection of any payment (whether under a Mortgage, Mortgage Note or otherwise or against any public or governmental authority with respect to a taking or condemnation) if it reasonably believes that enforcing the provision of the Mortgage or other instrument pursuant to which such payment is required is prohibited by applicable law. (ii) In those cases where a Servicer is servicing Pledged Mortgages pursuant to a Servicing Agreement, the Master Servicer shall cause each Servicer, pursuant to the respective Servicing Agreement, to establish and maintain one or more Servicing Accounts, each of which shall be an Eligible Account. The Servicer will be required under its Servicing Agreement to 48 53 deposit into the Servicing Account on a daily basis no later than the Business Day following receipt all proceeds of Pledged Mortgages received by the Servicer, less its Servicing Fees and unreimbursed Servicer Advances and expenses, to the extent permitted by the Servicing Agreement. The Servicer shall not be required to deposit in the Servicing Account payments or collections in the nature of prepayment charges or late charges. (iii) The Master Servicer shall establish and maintain a Collection Account, which shall be an Eligible Account, into which the Master Servicer shall deposit or cause to be deposited on or before each Withdrawal Date payments, collections and Servicer Advances remitted by Servicers in respect of the Pledged Mortgages. (iv) On or before the Withdrawal Date in each calendar month, the Master Servicer shall cause each Servicer, pursuant to its Servicing Agreement, to remit to the Master Servicer for deposit in the Collection Account all funds held in the Servicing Account with respect to each Pledged Mortgage serviced by such Servicer that are required to be remitted to the Master Servicer. The Servicer will also be required, pursuant to the Servicing Agreement, to advance on or before each such Withdrawal Date amounts equal to any Scheduled Payments (net of its Servicing Fees with respect thereto) not received on any Pledged Mortgages by the Servicer (such amount, a "Servicer Advance"). The Servicer's obligation to advance with respect to each Pledged Mortgage will continue up to and including the first day of the month following the date on which the related Mortgaged Property is sold at a foreclosure sale or is acquired by the Issuer by deed in lieu of foreclosure or otherwise. All such Servicer Advances received by the Master Servicer shall be deposited promptly by it in the Collection Account or the Bond Account, as appropriate. Within five Business Days after the receipt by a Servicer of a Principal Prepayment in Full or any Liquidation Proceeds or Insurance Proceeds (not required to be applied to the restoration or repair of the related Mortgaged Property), the Master Servicer shall cause such Servicer, pursuant to the related Servicing Agreement, to remit such amounts to the Master Servicer for deposit in the Collection Account. 49 54 (v) The Master Servicer shall establish and maintain a Bond Account, which shall be an Eligible Account, into which the Master Servicer shall deposit or cause to be deposited on a daily basis within one Business Day of receipt, except as otherwise specifically provided herein, the following payments and collections remitted by Servicers or received by it in respect of Pledged Mortgages subsequent to the Cut-off Date (other than in respect of principal and interest due on the Pledged Mortgages on or before the Cut-off Date) and the following amounts required to be deposited hereunder: (A) all payments on account of principal on the Pledged Mortgages, including Principal Prepayments and the principal component of any Servicer Advance; (B) all payments on account of interest on the Pledged Mortgages, net of the sum of the related Master Servicing Fee and related Servicing Fee, and the interest component of any Servicer Advance; (C) all Insurance Proceeds and Liquidation Proceeds (net of any related expenses of the related Servicer), other than proceeds to be applied to the restoration or repair of the Mortgaged Property or released to the Mortgagor in accordance with the Master Servicer's normal servicing procedures; (D) any amount required to be deposited by the Master Servicer pursuant to Section 3(h)(vii) in connection with any losses on Permitted Investments; (E) any amounts required to be deposited by the Master Servicer pursuant to Sections 3(l) and 3(n); (F) all Purchase Prices from the Master Servicer and all Substitution Adjustment Amounts; (G) all Advances made by the Master Servicer pursuant to Section 4; and (H) any other amounts required to be deposited hereunder. 50 55 [In addition, on or prior to the last day of the month in which the Closing Date occurs, the Issuer shall cause an amount equal to $__________ to be deposited in the Bond Account, such amount to be treated as a Principal Prepayment in Full of a Pledged Mortgage.] (vi) In addition, with respect to any Pledged Mortgage that is subject to a buydown agreement, on each Due Date for such Pledged Mortgage, in addition to the monthly payment remitted by the Mortgagor, the Master Servicer shall cause funds to be deposited into the Bond Account in an amount required to cause an amount of interest to be paid with respect to such Pledged Mortgage equal to the amount of interest that has accrued on such Pledged Mortgage from the preceding Due Date at the Mortgage Rate net of the Master Servicing Fee on such date. The foregoing requirements for remittance by the Master Servicer shall be exclusive, it being understood and agreed that, without limiting the generality of the foregoing, payments in the nature of prepayment penalties, late payment charges or assumption fees, if collected, need not be remitted by the Master Servicer. In the event that the Master Servicer shall remit any amount not required to be remitted, it may at any time withdraw or direct the institution maintaining the Bond Account to withdraw such amount from the Bond Account, any provision herein to the contrary notwithstanding. Such withdrawal or direction may be accomplished by delivering written notice thereof to the Trustee or such other institution maintaining the Bond Account which describes the amounts deposited in error in the Bond Account. The Master Servicer shall maintain adequate records with respect to all withdrawals made pursuant to this Section 3(h)(vi). All funds deposited in the Bond Account shall be held in trust for the Bondholders until withdrawn in accordance with Section 3(k). (vii) On or prior to each Distribution Account Deposit Date, after payment of any amount described in Section 6.17 of the Indenture, as well as any amounts owed to the Trustee pursuant to Section 6.07 of the Indenture, the Master Servicer will withdraw from the Bond Account the Bond Distribution Amount, to the extent of Available Funds, and will deposit such amount in the Distribution Account. 51 56 (viii) On each Payment Date, after payment of any amount described in Section 6.17 of the Indenture, as well as any amounts owed to the Trustee pursuant to Section 6.07 of the Indenture, the Master Servicer shall withdraw the Available Funds remaining on deposit in the Bond Account, after giving effect to the withdrawal therefrom pursuant to Section 3(h)(vii) above, and pay such funds to the Certificate Paying Agent for application in the following order of priority and, in each case, to the extent of funds remaining: (1) to the Investor Certificates, an amount allocable to interest equal to the Certificate Interest Payment Amount for such Payment Date; (2) to the Investor Certificates, an amount allocable to principal equal to the Invested Amount Payment for such Payment Date; and (3) to the holders of the Investor Certificates, the balance of any Available Funds remaining in the Bond Account. With respect to each Payment Date, the amounts described in clause (1) of this Section 3(h)(viii) for such Payment Date shall be reduced by the Investor Certificates' pro rata share (based on the Interest Payment Amount of the Investor Certificates before reduction pursuant to this Section 3(h)(viii)) of each (A) Relief Act Reduction incurred during the calendar month preceding the month of such Payment Date and (B) Prepayment Interest Shortfalls. In addition, with respect to each Payment Date, the amounts described in clauses (2) and (3) of this Section 3(h)(viii) for such Payment Date shall be reduced by an amount equal to the excess, if any, of Prepayment Interest Shortfalls, after giving effect to the reduction described in the immediately preceding sentence, over the Master Servicing Fee for such payment date. (ix) Each institution at which the Bond Account, the Distribution Account or the Collection Account is maintained shall invest the funds therein as directed in writing by the Master Servicer in Permitted Investments, which shall mature not later than (i) in the case of the Bond Account, the second Business Day next preceding the related Distribution Account 52 57 Deposit Date (except that if such Permitted Investment is an obligation of the institution that maintains such account, then such Permitted Investment shall mature not later than the Business Day next preceding such Distribution Account Deposit Date), (ii) in the case of the Collection Account, the next Business Day and (iii) in the case of the Distribution Account, the Business Day next preceding the related Payment Date (except that if such Permitted Investment is an obligation of the institution that maintains such account, then such Permitted Investment shall mature not later than such Payment Date) and, in each case, shall not be sold or disposed of prior to its maturity. All such Permitted Investments shall be made in the name of the Trustee, for the benefit of the Bondholders. All income and gain (net of any losses) realized from any such investment of funds on deposit in the Bond Account, the Distribution Account or the Collection Account shall be for the benefit of the Master Servicer as servicing compensation and shall be remitted to it monthly as provided herein. The amount of any realized losses in the Bond Account, the Distribution Account or the Collection Account incurred in any such account in respect of any such investments shall promptly be deposited by the Master Servicer in the Bond Account, the Distribution Account or the Collection Account, as applicable. The Trustee in its fiduciary capacity shall not be liable for the amount of any loss incurred in respect of any investment or lack of investment of funds held in the Bond Account, the Distribution Account or the Collection Account and made in accordance with this Section 3(h)(ix). (x) The Master Servicer shall give notice to the Trustee, the Issuer and each Rating Agency of any proposed change of the location of the Bond Account not later than 30 days and not more than 45 days prior to any change thereof. (i) Collection of Taxes, Assessments and Similar Items; Escrow Accounts. (i) To the extent required by the related Mortgage Note and not violative of current law, the Master Servicer shall cause each Servicer to establish and maintain one or more accounts (each, an "Escrow Account") and deposit and retain therein all collections from the Mortgagors (or advances by the Servicer) for the payment of taxes, assessments, hazard insurance 53 58 premiums or comparable items for the account of the Mortgagors. Nothing herein shall require the Master Servicer or any Servicer to compel a Mortgagor to establish an Escrow Account in violation of applicable law. (ii) Withdrawals of amounts so collected from the Escrow Accounts may be made only to effect timely payment of taxes, assessments, hazard insurance premiums, condominium or PUD association dues, or comparable items, to reimburse the Master Servicer or the related Servicer out of related collections for any payments made pursuant to Sections 3(l) (with respect to taxes and assessments and insurance premiums) and 3(m) (with respect to hazard insurance), to refund to any Mortgagors any sums determined to be overages, to pay interest, if required by law or the terms of the related Mortgage or Mortgage Note, to Mortgagors on balances in the Escrow Account or to clear and terminate the Escrow Account at the termination of this Agreement in accordance with Section 8(a). The Escrow Accounts shall not be a part of the Trust Estate. (iii) The Master Servicer shall advance any payments referred to in Section 3(i)(i) that are not timely paid by the Mortgagors or advanced by the Servicers on the date when the tax, premium or other cost for which such payment is intended is due, but the Master Servicer shall be required so to advance only to the extent that such advances, in the good faith judgment of the Master Servicer, will be recoverable by the Master Servicer out of Insurance Proceeds, Liquidation Proceeds or otherwise. (j) Access to Certain Documentation and Information Regarding the Pledged Mortgages. The Master Servicer shall afford, or shall cause the Servicers to afford, the Issuer and the Trustee reasonable access to all records and documentation regarding the Pledged Mortgages and all accounts, insurance information and other matters relating to this Agreement, such access being afforded without charge, but only upon reasonable request and during normal business hours at the office designated by the Master Servicer. Upon reasonable advance notice in writing, the Master Servicer will provide, or will cause the Servicers to provide, to each Bondholder which is a savings and loan association, bank or 54 59 insurance company certain reports and reasonable access to information and documentation regarding the Pledged Mortgages sufficient to permit such Bondholder to comply with applicable regulations of the OTS or other regulatory authorities with respect to investment in the Bonds; provided that the Master Servicer and any Servicer shall be entitled to be reimbursed by each such Bondholder for actual expenses incurred by the Master Servicer or such Servicer in providing such reports and access. (k) Permitted Withdrawals from the Bond Account. The Master Servicer may from time to time make withdrawals from the Bond Account for the following purposes: (i) to pay to the Master Servicer or the related Servicer (to the extent not previously retained), the servicing compensation to which it is entitled pursuant to Section 5(a), and to pay to the Master Servicer, as additional master servicing compensation, earnings on or investment income with respect to funds in or credited to the Bond Account; (ii) to reimburse the Master Servicer or the related Servicer for unreimbursed Advances or Servicer Advances made by it, such right of reimbursement pursuant to this subclause (ii) being limited to amounts received on the Pledged Mortgage(s) in respect of which any such Advance or Servicer Advance was made; (iii) to reimburse the Master Servicer for any Nonrecoverable Advance previously made; (iv) to reimburse the Master Servicer for Insured Expenses from the related Insurance Proceeds; (v) to reimburse the Master Servicer for (A) unreimbursed Servicing Advances, the Master Servicer's right to reimbursement pursuant to this clause (A) with respect to any Pledged Mortgage being limited to amounts received on such Pledged Mortgage(s) which represent late recoveries of the payments for which such advances were made pursuant to Section 3(a) or Section 3(i) and (B) for unpaid Master Servicing Fees as provided in Section 3(n); 55 60 (vi) to pay to the purchaser, with respect to each Pledged Mortgage or property acquired in respect thereof that has been purchased pursuant to Section 2(a)(ii), 2(d)(iv) or 3(n), all amounts received thereon after the date of such purchase; (vii) to reimburse the Master Servicer for expenses incurred by it and reimbursable pursuant to Section 6(c) and to pay the Trustee amounts due to it pursuant to Section 6.07(2) and (3) of the Indenture; (viii) to withdraw any amount deposited in the Bond Account and not required to be deposited therein; (ix) on or prior to the Distribution Account Deposit Date, to withdraw an amount equal to the related Bond Distribution Amount and the Trustee Fee for such Payment Date, to the extent on deposit, and remit such amount to the Trustee for deposit in the Distribution Account; and (x) to clear and terminate the Bond Account upon termination of this Agreement pursuant to Section 8(a). The Master Servicer shall keep and maintain separate accounting, on a Pledged Mortgage by Pledged Mortgage basis, for the purpose of justifying any withdrawal from the Bond Account pursuant to such subclauses (i), (ii), (iv), (v) and (vi). Prior to making any withdrawal from the Bond Account pursuant to subclause (iii), the Master Servicer shall deliver to the Trustee an Officer's Certificate of a Servicing Officer indicating the amount of any previous Advance determined by the Master Servicer to be a Nonrecoverable Advance and identifying the related Pledged Mortgage(s) and their respective portions of such Nonrecoverable Advance. (l) Maintenance of Hazard Insurance; Maintenance of Primary Insurance Policies. (i) The Master Servicer shall cause to be maintained, for each Pledged Mortgage, hazard insurance with extended coverage in an amount that is at least equal to the lesser of (A) the maximum insurable value of the improvements securing such Pledged Mortgage or (B) the greater of (y) the outstanding 56 61 principal balance of the Pledged Mortgage and (z) an amount such that the proceeds of such policy shall be sufficient to prevent the Mortgagor and/or the mortgagee from becoming a co-insurer. Each such policy of standard hazard insurance shall contain, or have an accompanying endorsement that contains, a standard mortgagee clause. To the extent it may do so without breaching the related Servicing Agreement, the Master Servicer shall replace any Servicer that does not cause such insurance, to the extent it is available, to be maintained. Any amounts collected by the Master Servicer under any such policies (other than the amounts to be applied to the restoration or repair of the related Mortgaged Property or amounts released to the Mortgagor in accordance with the Master Servicer's normal servicing procedures) shall be deposited in the Bond Account or the related Servicing Account, as applicable. Any cost incurred by the Master Servicer or any Servicer in maintaining any such insurance shall not, for the purpose of calculating payments to the Bondholders or remittances to the Trustee for their benefit, be added to the principal balance of the Pledged Mortgage, notwithstanding that the terms of the Pledged Mortgage so permit. Such costs shall be recoverable by the Master Servicer out of late payments by the related Mortgagor or out of Liquidation Proceeds to the extent permitted by Section 3(k). It is understood and agreed that no earthquake or other additional insurance is to be required of any Mortgagor or maintained on property acquired in respect of a Mortgage 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 Mortgaged Property is located at the time of origination of the Pledged Mortgage in a federally designated special flood hazard area and such area is participating in the national flood insurance program, the Master Servicer shall cause flood insurance to be maintained with respect to such Pledged Mortgage. Such flood insurance shall be in an amount equal to the least of (A) the original principal balance of the related Pledged Mortgage, (B) the replacement value of the improvements which are part of such Mortgaged Property, and (C) the maximum amount of such insurance available for the related Mortgaged Property under the national flood insurance program. In the event that the Master Servicer shall obtain and maintain a blanket policy insuring against hazard losses on all of the Pledged Mortgages, it shall conclusively be deemed to have 57 62 satisfied its obligations as set forth in the first sentence of this Section 3(l)(i), it being understood and agreed that such policy may contain a deductible clause on terms substantially equivalent to those commercially available and maintained by comparable servicers. If such policy contains a deductible clause, the Master Servicer shall, in the event that there shall not have been maintained on the related Mortgaged Property a policy complying with the first sentence of this Section 3(l)(i), and there shall have been a loss that would have been covered by such policy, deposit in the Bond Account the amount not otherwise payable under the blanket policy because of such deductible clause. In connection with its activities as Master Servicer of the Pledged Mortgages, the Master Servicer agrees to present, on behalf of itself, the Issuer and the Trustee for the benefit of the Bondholders, claims under any such blanket policy. (ii) The Master Servicer shall not take, or permit any Servicer to take, any action which would result in non-coverage under any applicable Primary Insurance Policy of any loss which, but for the actions of the Master Servicer or any Servicer, would have been covered thereunder. The Master Servicer shall not cancel or refuse to renew any such Primary Insurance Policy that is in effect at the date of the initial issuance of the Bonds and is required to be kept in force hereunder unless the replacement Primary Insurance Policy for such canceled or non-renewed policy is maintained with a Qualified Insurer. The Master Servicer shall not be required to maintain any Primary Insurance Policy with respect to any Pledged Mortgage with a Loan-to-Value Ratio less than or equal to 80% as of any date of determination or, based on a new appraisal, the principal balance of such Pledged Mortgage represents 80% or less of the new Appraised Value. The Master Servicer agrees to effect the timely payment of the premiums on each Primary Insurance Policy, and such costs not otherwise recoverable shall be recoverable by the Master Servicer from the related liquidation proceeds. In connection with its activities as Master Servicer of the Pledged Mortgages, the Master Servicer agrees to present, or cause the related Servicer to present, on behalf of itself, the Trustee and the Bondholders, claims to the insurer under any Primary Insurance Policies and, in this regard, to take such reasonable action as shall be necessary to permit recovery under any Primary Insurance Policies respecting defaulted Pledged 58 63 Mortgages. Any amounts collected by a Servicer or the Master Servicer under any Primary Insurance Policies shall be deposited in the Servicing Account, the Collection Account or the Bond Account, as applicable. (m) Enforcement of Due-On-Sale Clauses; Assumption Agreements. (i) Except as otherwise provided in this Section 3(m), when any property subject to a Mortgage has been conveyed by the Mortgagor, the Master Servicer or the related Servicer shall, to the extent that it has knowledge of such conveyance, enforce any due-on-sale clause contained in any Mortgage Note or Mortgage, to the extent permitted under applicable law and governmental regulations, but only to the extent that such enforcement will not adversely affect or jeopardize coverage under any Required Insurance Policy. Notwithstanding the foregoing, neither the Master Servicer nor the related Servicer is required to exercise such rights with respect to a Pledged Mortgage if the Person to whom the related Mortgaged Property has been conveyed or is proposed to be conveyed satisfies the terms and conditions contained in the Mortgage Note and Mortgage related thereto and the consent of the mortgagee under such Mortgage Note or Mortgage is not otherwise so required under such Mortgage Note or Mortgage as a condition to such transfer. In the event that (A) the Master Servicer or the related Servicer is prohibited by law from enforcing any such due-on-sale clause, (B) coverage under any Required Insurance Policy would be adversely affected, (C) the Mortgage Note does not include a due-on-sale clause or (D) nonenforcement is otherwise permitted hereunder, the Master Servicer is authorized, subject to Section 3(m)(ii), to take or enter into an assumption and modification agreement from or with the person to whom such property has been or is about to be conveyed, pursuant to which such person becomes liable under the Mortgage Note and, unless prohibited by applicable state law, the Mortgagor remains liable thereon, provided that the Pledged Mortgage shall continue to be covered (if so covered before the Master Servicer enters such agreement) by the applicable Required Insurance Policies. The Master Servicer, subject to Section 3(m)(ii), is also authorized with the prior approval of the insurers under any Required Insurance Policies to enter into a substitution of liability agreement with such Person, pursuant to which the original Mortgagor is released from liability and such 59 64 Person is substituted as Mortgagor and becomes liable under the Mortgage Note. Notwithstanding the foregoing, the Master Servicer shall not be deemed to be in default under this Section 3(m) by reason of any transfer or assumption which the Master Servicer reasonably believes it is restricted by law from preventing, for any reason whatsoever. (ii) Subject to the Master Servicer's duty to enforce any due-on-sale clause to the extent set forth in Section 3(m)(i), in any case in which a Mortgaged Property has been conveyed to a Person by a Mortgagor, and such Person is to enter into an assumption agreement or modification agreement or supplement to the Mortgage Note or Mortgage that requires the signature of the Trustee, or if an instrument of release signed by the Trustee is required releasing the Mortgagor from liability on the Pledged Mortgage, the Master Servicer shall prepare and deliver or cause to be prepared and delivered to the Trustee for signature and shall direct, in writing, the Trustee to execute the assumption agreement with the Person to whom the Mortgaged Property is to be conveyed and such modification agreement or supplement to the Mortgage Note or Mortgage or other instruments as are reasonable or necessary to carry out the terms of the Mortgage Note or Mortgage or otherwise to comply with any applicable laws regarding assumptions or the transfer of the Mortgaged Property to such Person. In connection with any such assumption, no material term of the Mortgage Note may be changed. In addition, the substitute Mortgagor and the Mortgaged Property must be acceptable to the Master Servicer in accordance with its underwriting standards as then in effect. Together with each such substitution, assumption or other agreement or instrument delivered to the Trustee for execution by it, the Master Servicer shall deliver an Officer's Certificate signed by a Servicing Officer stating that the requirements of this subsection have been met in connection therewith. The Master Servicer shall notify, or cause the related Servicer to notify, the Trustee that any such substitution or assumption agreement has been completed by forwarding to the Trustee the original of such substitution or assumption agreement, which in the case of the original shall be added to the related Trustee Mortgage File and shall, for all purposes, be considered a part of such Trustee Mortgage File to the same extent as all other documents and instruments constituting a part thereof. Any fee collected by the Master Servicer or any Servicer for entering into an assumption or substitution 60 65 of liability agreement will be retained by the Master Servicer as additional master servicing compensation. (n) Realization Upon Defaulted Pledged Mortgages; Purchase of Certain Pledged Mortgages. The Master Servicer shall use reasonable efforts to foreclose upon or otherwise comparably convert the ownership of properties securing such of the Pledged Mortgages as come into and continue in default and as to which no satisfactory arrangements can be made for collection of delinquent payments. In connection with such foreclosure or other conversion, the Master Servicer shall follow such practices and procedures as it shall deem necessary or advisable, as shall be normal and usual in its general mortgage servicing activities and as shall meet the requirements of the insurer under any Required Insurance Policy. Notwithstanding the foregoing, the Master Servicer shall not be required to expend its own funds in connection with any foreclosure or towards the restoration of any property unless it shall determine (A) that such restoration and/or foreclosure will increase the proceeds of liquidation of the Pledged Mortgage after reimbursement to itself of such expenses and (B) that such expenses will be recoverable to it through Liquidation Proceeds (respecting which it shall have priority for purposes of withdrawals from the Bond Account). The Master Servicer shall be responsible for all other costs and expenses incurred by it in any such proceedings; provided, however, that it shall be entitled to reimbursement thereof from the liquidation proceeds with respect to the related Mortgaged Property, as provided in the definition of Liquidation Proceeds. If the Master Servicer has knowledge that a Mortgaged Property which the Master Servicer is contemplating acquiring in foreclosure or by deed in lieu of foreclosure is located within a 1 mile radius of any site listed in the Expenditure Plan for the Hazardous Substance Clean Up Bond Act of 1984 or other site with environmental or hazardous waste risks known to the Master Servicer, the Master Servicer will, prior to acquiring the Mortgaged Property, consider such risks and only take action in accordance with its established environmental review procedures. With respect to any REO Property, the deed or certificate of sale shall be taken in the name of the Trustee for the benefit of the Bondholders, or its nominee, on behalf of the 61 66 Bondholders. The Trustee's name shall be placed on the title to such REO Property solely as the Trustee under the Indenture and not in its individual capacity. The Master Servicer shall ensure that the title to such REO Property references the Indenture and the Trustee's capacity thereunder. Pursuant to its efforts to sell such REO Property, the Master Servicer shall either itself or through an agent selected by the Master Servicer protect and conserve such REO Property in the same manner and to such extent as is customary in the locality where such REO Property is located and may, incident to its conservation and protection of the interests of the Bondholders, rent the same, or any part thereof, as the Master Servicer deems to be in the best interest of the Bondholders for the period prior to the sale of such REO Property. The net monthly rental income, if any, from such REO Property shall be deposited in the Bond Account no later than the close of business on each Determination Date. The Master Servicer shall perform the tax reporting and withholding required by Sections 1445 and 6050J of the Code with respect to foreclosures and abandonments, the tax reporting required by Section 6050H of the Code with respect to the receipt of mortgage interest from individuals and, if required by Section 6050P of the Code with respect to the cancellation of indebtedness by certain financial entities, by preparing such tax and information returns as may be required, in the form required, and delivering the same to the Trustee for filing. The decision of the Master Servicer to foreclose on a defaulted Pledged Mortgage shall be subject to a determination by the Master Servicer that the proceeds of such foreclosure would exceed the costs and expenses of bringing such a proceeding. The income earned from the management of any REO Properties, net of reimbursement to the Master Servicer for expenses incurred (including any property or other taxes) in connection with such management and net of unreimbursed Master Servicing Fees, Servicing Fees, Advances, Servicer Advances and Servicing Advances, shall be applied to the payment of principal of and interest on the related defaulted Pledged Mortgages (with interest accruing as though such Pledged Mortgages were still current and adjustments, if applicable, to the Mortgage Rate were being made in accordance with the terms of the Mortgage Note) and all such income shall be deemed, for all purposes in this Agreement, to be payments on account of principal and interest on the related Mortgage Notes and shall be deposited into the Bond 62 67 Account. To the extent the net income received during any calendar month is in excess of the amount attributable to amortizing principal and accrued interest at the related Mortgage Rate on the related Pledged Mortgage for such calendar month, such excess shall be considered to be a partial prepayment of principal of the related Pledged Mortgage. The proceeds from any liquidation of a Pledged Mortgage, as well as any income from an REO Property, will be applied in the following order of priority: first, to reimburse the Master Servicer or the related Servicer for any related unreimbursed Advances or Servicing Advances, Master Servicing Fees and Servicing Fees, as applicable; second, to reimburse the Master Servicer or the related Servicer for any unreimbursed Advances or Servicer Advances, as applicable, and to reimburse the Bond Account for any Nonrecoverable Advances (or portions thereof) that were previously withdrawn by the Master Servicer pursuant to Section 3(k)(iii) that related to such Pledged Mortgage; third, to accrued and unpaid interest (to the extent no Advance or Servicer Advance has been made for such amount or any such Advance or Servicer Advance has been reimbursed) on the Pledged Mortgage or related REO Property at the Net Mortgage Rate to the Due Date occurring in the month in which such amounts are required to be distributed; and fourth, as a recovery of principal of the Pledged Mortgage. Excess Proceeds, if any, from the liquidation of a Liquidated Pledged Mortgage will be retained by the Master Servicer as additional servicing compensation pursuant to Section 5(a). The Master Servicer, in its sole discretion, shall have the right to purchase for its own account from the Issuer any Pledged Mortgage which is 91 days or more delinquent at a price equal to the Purchase Price. The Purchase Price for any Pledged Mortgage purchased hereunder shall be deposited in the Bond Account and the Trustee, upon receipt of a certificate from the Master Servicer in the form of Exhibit D hereto, shall release or cause to be released to the purchaser of such Pledged Mortgage the related Trustee Mortgage File and shall execute and deliver such instruments of transfer or assignment prepared by the purchaser of such Pledged Mortgage, in each case without recourse, as shall be necessary to vest in the purchaser of such Pledged Mortgage any Pledged Mortgage released pursuant hereto and the purchaser of such Pledged Mortgage shall succeed to all 63 68 the Issuer's and the Trustee's right, title and interest in and to such Pledged Mortgage and all security and documents related thereto. Such assignment shall be an assignment outright and not for security. The purchaser of such Pledged Mortgage shall thereupon own such Pledged Mortgage, and all security and documents, free of any further obligation to the Issuer, the Trustee or the Bondholders with respect thereto. (o) Access to Certain Documentation. The Master Servicer shall provide to the OTS and the FDIC and to comparable regulatory authorities supervising Holders of Subordinated Bonds and the examiners and supervisory agents of the OTS, the FDIC and such other authorities, access to the documentation regarding the Pledged Mortgages required by applicable regulations of the OTS and the FDIC. Such access shall be afforded without charge, but only upon reasonable and prior written request and during normal business hours at the offices designated by the Master Servicer. Nothing in this Section 3(o) shall limit the obligation of the Master Servicer to observe any applicable law prohibiting disclosure of information regarding the Mortgagors and the failure of the Master Servicer or any Servicer to provide access as provided in this Section 3(o) as a result of such obligation shall not constitute a breach of this Section 3(o). (p) Annual Statement as to Compliance. The Master Servicer shall deliver to the Issuer and the Trustee on or before 120 days after the end of the Master Servicer's fiscal year, commencing with its [1997] fiscal year, an Officer's Certificate stating, as to the signer thereof, that (i) a review of the activities of the Master Servicer during the preceding calendar year and of the performance of the Master Servicer under this Agreement has been made under such officer's supervision, (ii) to the best of such officer's knowledge, based on such review, the Master Servicer has fulfilled all its obligations under this Agreement throughout such 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 and (iii) to the best of such officer's knowledge, each Servicer has fulfilled all its obligations under its Servicing Agreement throughout such year, or, if there has been a 64 69 default in the fulfillment of any such obligation, specifying each such default known to such officer and the nature and status thereof. The Trustee shall forward a copy of each such statement to each Rating Agency. (q) Annual Independent Public Accountants' Servicing Statement; Financial Statements. On or before 120 days after the end of the Master Servicer's fiscal year, commencing with its [1997] fiscal year, the Master Servicer at its expense shall cause a nationally recognized firm of independent public accountants (who may also render other services to the Master Servicer or any affiliate thereof) which is a member of the American Institute of Certified Public Accountants to furnish a statement to the Trustee and the Issuer to the effect that such firm has examined certain documents and records relating to the servicing of the Pledged Mortgages under this Agreement or of mortgage loans under servicing agreements substantially similar to this Agreement (such statement to have attached thereto a schedule setting forth the servicing agreements covered thereby) and that, on the basis of such examination, conducted substantially in compliance with the Uniform Single Attestation Program for Mortgage Bankers or the Audit Program for Mortgages serviced for FNMA and FHLMC, such servicing has been conducted in compliance with such servicing agreements except for such significant exceptions or errors in records that, in the opinion of such firm, the Uniform Single Attestation Program for Mortgage Bankers or the Audit Program for Mortgages serviced for FNMA and FHLMC requires it to report. In rendering such statement, such firm may rely, as to matters relating to direct servicing of mortgage loans by Servicers, upon comparable statements for examinations conducted substantially in compliance with the Uniform Single Attestation Program for Mortgage Bankers or the Audit Program for Mortgages serviced for FNMA and FHLMC (rendered within one year of such statement) of independent public accountants with respect to the related Servicer. Copies of such statement shall be provided by the Trustee to any Bondholder upon request at the Master Servicer's expense, provided that such statement is delivered by the Master Servicer to the Trustee. (r) Errors and Omissions Insurance; Fidelity Bonds. 65 70 The Master Servicer shall obtain and maintain in force, and shall cause each Servicer to obtain and maintain in force, (a) a policy or policies of insurance covering errors and omissions in the performance of its obligations as Master Servicer hereunder or as Servicer under its Servicing Agreement, as the case may be, and (b) a fidelity bond in respect of its officers, employees and agents. Each such policy or policies and bond shall, together, comply with the requirements from time to time of FNMA or FHLMC for persons performing servicing for mortgage loans purchased by FNMA or FHLMC. In the event that any such policy or bond ceases to be in effect, the Master Servicer shall obtain a comparable replacement policy or bond from an insurer or issuer meeting the requirements set forth above as of the date of such replacement. (s) Master Servicer Monthly Data. On or before [noon California time] on the Determination Date, the Master Servicer shall provide by modem to the Trustee with respect to the Pledged Mortgages, an electronic data file (accompanied by a hardcopy report) in a format which is mutually agreed upon by the Master Servicer and the Trustee. The Trustee shall be under no duty to recalculate, verify or recompute the information provided to it by the Master Servicer hereunder. 4. Advances. The Master Servicer shall determine on or before each Master Servicer Advance Date whether it is required to make an Advance pursuant to the definition thereof. If the Master Servicer determines it is required to make an Advance, it shall, on or before the Master Servicer Advance Date, either (i) deposit into the Bond Account an amount equal to the Advance or (ii) make an appropriate entry in its records relating to the Bond Account that any Amount Held for Future Distribution has been used by the Master Servicer in discharge of its obligation to make any such Advance. Any funds so applied shall be replaced by the Master Servicer by deposit in the Bond Account no later than the close of business on the next Master Servicer Advance Date. The Master Servicer shall be entitled to be reimbursed from the Bond Account for all Advances of its own funds made pursuant to this Section 4 as provided in Section 3(k). The obligation to make Advances 66 71 with respect to any Pledged Mortgage shall continue if such Pledged Mortgage has been foreclosed or otherwise terminated and the related Mortgaged Property has not been liquidated. The Master Servicer shall inform the Trustee of the amount of the Advance to be made on each Master Servicer Advance Date no later than the Second Business Day before the related Payment Date. The Master Servicer shall deliver to the Trustee on the related Master Servicer Advance Date an Officer's Certificate of a Servicing Officer indicating the amount of any proposed Advance determined by the Master Servicer to be a Nonrecoverable Advance. 5. Servicing Compensation and Expenses. As compensation for its activities hereunder, the Master Servicer shall be entitled out of each payment of interest on a Pledged Mortgage (or portion thereof) to retain or withdraw from the Bond Account an amount equal to the Master Servicing Fee for such Payment Date. Additional master servicing compensation in the form of Excess Proceeds, prepayment penalties, assumption fees, late payment charges and all income and gain net of any losses realized from Permitted Investments shall be retained by the Master Servicer to the extent not required to be deposited in the Bond Account pursuant to Section 3(h). The Master Servicer shall be required to pay all expenses incurred by it in connection with its servicing activities hereunder (including payment of any premiums for hazard insurance and any Primary Insurance Policy and maintenance of the other forms of insurance coverage required by this Agreement) and shall not be entitled to reimbursement therefor except as specifically provided in this Agreement. As compensation for its activities under its Servicing Agreement, each Servicer shall be entitled to retain out of each payment of interest on a Pledged Mortgage (or portion thereof) an amount equal to interest at the applicable Servicing Fee Rate on the Stated Principal Balance of the related Pledged Mortgage for the period covered by such interest payment. Additional servicing compensation in the form of prepayment penalties, assumption fees and late payment charges shall be retained by the Servicers to the extent not required to be 67 72 deposited in the Servicing Accounts pursuant to the related Servicing Agreement. Each Servicer shall be required to pay all expenses incurred by it in connection with its servicing activities under its Servicing Agreement (including payment of any premium for hazard insurance and any Primary Insurance Policy and maintenance of the other forms of insurance coverage required by this Agreement and its Servicing Agreement) and shall not be entitled to reimbursement therefor except as specifically provided in its Servicing Agreement and not inconsistent with this Agreement. In the event of any Prepayment Interest Shortfalls, the aggregate Master Servicing Fee for such Payment Date shall be reduced (but not below zero) by an amount equal to such Prepayment Interest Shortfalls. 6. The Master Servicer. (a) Liabilities of the Master Servicer. The Master Servicer shall be liable in accordance herewith only to the extent of the obligations specifically imposed upon and undertaken by it herein. (b) Merger or Consolidation of the Master Servicer. The Master Servicer will keep in full effect its existence, rights and franchises as a corporation under the laws of the United States or under the laws of one of the states thereof and will obtain and preserve its qualification to do business as a foreign corporation in each jurisdiction in which such qualification is or shall be necessary to protect the validity and enforceability of this Agreement, or any of the Pledged Mortgages and to perform its duties under this Agreement. Any Person into which the Master Servicer may be merged or consolidated, or any Person resulting from any merger or consolidation to which the Master Servicer shall be a party, or any person succeeding to the business of the Master Servicer, shall be the successor of the Master Servicer 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; provided, however, that the successor 68 73 or surviving Person to the Master Servicer shall be qualified to sell mortgage loans to, and to service mortgage loans on behalf of, FNMA or FHLMC. (c) Limitation on Liability of the Master Servicer and Others. Neither the Master Servicer nor any of the directors, officers, employees or agents of the Master Servicer shall be under any liability to the Issuer or the Bondholders for any action taken or for refraining from the taking of any action in good faith pursuant to this Agreement, or for errors in judgment; provided, however, that this provision shall not protect the Master Servicer or any such Person against any breach of representations or warranties made by it herein or protect the Master Servicer or any such Person from any liability which would otherwise be imposed by reasons of willful misfeasance, bad faith or gross negligence in the performance of duties or by reason of reckless disregard of obligations and duties hereunder. The Master Servicer and any director, officer, employee or agent of the Master 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 Master Servicer and any director, officer, employee or agent of the Master Servicer shall be indemnified by the Issuer and held harmless against any loss, liability or expense incurred in connection with any audit, controversy or judicial proceeding relating to a governmental taxing authority or any legal action relating to this Agreement or the Bonds, other than any loss, liability or expense related to any specific Pledged Mortgage or Pledged Mortgages (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 willful misfeasance, bad faith or gross negligence in the performance of duties hereunder or by reason of reckless disregard of obligations and duties hereunder. The Master Servicer shall not be under any obligation to appear in, prosecute or defend any legal action that is not incidental to its respective duties hereunder and which in its opinion may involve it in any expense or liability; provided, however, that the Master Servicer may in its discretion undertake any such action that it may deem necessary or desirable in respect of this Agreement and the rights and duties of the parties hereto and interests of the Issuer, the Trustee and the 69 74 Bondholders hereunder. In such event, the legal expenses and costs of such action and any liability resulting therefrom shall be expenses, costs and liabilities of the Issuer, and the Master Servicer shall be entitled to be reimbursed therefor out of the Bond Account. (d) Limitation on Resignation of the Master Servicer. The Master Servicer shall not resign from the obligations and duties hereby imposed on it except (a) upon appointment of a successor servicer and receipt by the Trustee of a letter from each Rating Agency that such a resignation and appointment will not result in a downgrading of the rating of any of the Bonds or (b) upon determination that its duties hereunder are no longer permissible under applicable law. Any such determination under clause (b) permitting the resignation of the Master Servicer shall be evidenced by an Opinion of Counsel to such effect delivered to the Trustee. No such resignation shall become effective until the Trustee or a successor master servicer shall have assumed the Master Servicer's responsibilities, duties, liabilities and obligations hereunder. 7. Servicing Default; Termination and Liabilities. (a) Servicing Default. Any of the following acts or occurrences shall constitute a Servicing Default by the Master Servicer under this Agreement: (i) any failure by the Master Servicer to deposit in the Bond Account or remit to the Trustee any payment (other than a payment required to be made under Section 4) required to be made under the terms of this Agreement, which failure shall continue unremedied for five days after the date upon which written notice of such failure shall have been given to the Master Servicer by the Trustee or the Issuer or to the Master Servicer, the Trustee and the Issuer by the Holders of Bonds representing more than 50% of the aggregate Class Principal Amount of the Controlling Class; or (ii) any failure by the Master Servicer to observe or perform in any material respect any other of the covenants 70 75 or agreements on the part of the Master Servicer contained in this Agreement, which failure shall continue unremedied for a period of 60 days after the date on which written notice of such failure shall have been given to the Master Servicer by the Trustee or the Issuer or to the Master Servicer, the Trustee and the Issuer by the Holders of Bonds representing more than 50% of the aggregate Class Principal Amount of the Controlling Class; or (iii) a decree or order of a court or agency or supervisory authority having jurisdiction in the premises for the appointment of a receiver or liquidator 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 Master Servicer and such decree or order shall have remained in force undischarged or unstayed for a period of 60 consecutive days; or (iv) the Master Servicer shall consent to the appointment of a receiver or liquidator in any insolvency, readjustment of debt, marshalling of assets and liabilities or similar proceedings of or relating to the Master Servicer or all or substantially all of the property of the Master Servicer; or (v) the Master Servicer shall admit in writing its inability to pay its debts generally as they become due, file a petition to take advantage of, or commence a voluntary case under, any applicable insolvency or reorganization statute, make an assignment for the benefit of its creditors, or voluntarily suspend payment of its obligations; or (vi) any failure of the Master Servicer to make any Advance in the manner and at the time required to be made pursuant to Section 4 which continues unremedied for a period of one Business Day after the date of such failure. If a Servicing Default described in clauses (i) to (v) of this Section 7(a) shall occur, then, and in each and every such case, so long as such Servicing Default shall not have been remedied the Trustee may (subject to Section 3.07 and Section 71 76 8.11 of the Indenture), by notice in writing to the Master Servicer (with a copy to each Rating Agency), and in addition to any other rights the Trustee may have on behalf of the Bondholders as a result of such Servicing Default, terminate all of the rights and obligations of the Master Servicer thereafter arising under this Agreement and in and to the Pledged Mortgages and the proceeds thereof, other than its rights as a Bondholder under the Indenture and its obligations which are not assumed by the Trustee pursuant to clauses (i), (iii) and (v) of Section 3(g). If a Servicing Default described in clause (vi) shall occur, the Trustee shall, by notice in writing to the Master Servicer and the Issuer, terminate all of the rights and obligations of the Master Servicer under this Agreement and in and to the Pledged Mortgages and the proceeds thereof, other than its rights as a Bondholder under the Indenture and its obligations which are not assumed by the Trustee pursuant to clauses (i), (iii) and (v) of Section 3(g). On and after the receipt by the Master Servicer of such written notice, all authority and power of the Master Servicer hereunder, whether with respect to the Pledged Mortgages or otherwise, shall pass to and be vested in the Trustee. The Trustee shall thereupon make any Advance described in clause (vi) subject to clause (ii) of the first sentence of Section 3(g). The Trustee is hereby authorized and empowered to execute and deliver, on behalf of the Master 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 or assignment of the Pledged Mortgages and related documents, or otherwise. The Master Servicer agrees to cooperate with the Trustee in effecting the termination of the Master Servicer's responsibilities and rights hereunder, including, without limitation, the transfer to the Trustee of all cash amounts which shall at the time be credited to the Bond Account or thereafter be received with respect to the Pledged Mortgages. Notwithstanding any termination of the activities of the Master Servicer hereunder, the Master Servicer shall be entitled to receive, out of any late collection of a Scheduled Payment on a Pledged Mortgage which was due prior to the notice terminating such Master Servicer's rights and obligations as Master Servicer hereunder and received after such notice, that portion thereof to which such Master Servicer would have been 72 77 entitled pursuant to Sections 3(k)(i) through (viii), and any other amounts payable to such Master Servicer hereunder the entitlement to which arose prior to the termination of its activities hereunder. (b) Trustee to Act; Appointment of Successor. On and after the time the Master Servicer receives a notice of termination pursuant to Section 7(a), the Trustee shall, subject to and to the extent provided in Section 3(g), be the successor to the Master Servicer in its capacity as master 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 Master Servicer by the terms and provisions hereof and applicable law including the obligation to make Advances pursuant to Section 4. As compensation therefor, the Trustee shall be entitled to all funds relating to the Pledged Mortgages that the Master Servicer would have been entitled to charge to the Bond Account or Distribution Account if the Master Servicer had continued to act hereunder. Notwithstanding the foregoing, if the Trustee has become the successor to the Master Servicer in accordance with Section 7(a), the Trustee may, if it shall be unwilling to so act, or shall, if it is prohibited by applicable law from making Advances pursuant to Section 4 or if it is otherwise unable to so act, appoint, or petition a court of competent jurisdiction to appoint, any established mortgage loan servicing institution the appointment of which does not adversely affect the then current rating of the Bonds by each Rating Agency as the successor to the Master Servicer hereunder in the assumption of all or any part of the responsibilities, duties or liabilities of the Master Servicer hereunder. Any successor to the Master Servicer shall be an institution which is a FNMA and FHLMC approved seller/servicer in good standing, which has a net worth of at least $15,000,000, which is willing to service the Pledged Mortgages and which executes and delivers to the Issuer and the Trustee an agreement accepting such delegation and assignment, containing an assumption by such Person of the rights, powers, duties, responsibilities, obligations and liabilities of the Master Servicer (other than liabilities of the Master Servicer under Section 6(c) incurred prior to termination of the Master Servicer under Section 7(a)), with like effect as if originally named as a party to this Agreement; provided that each Rating 73 78 Agency acknowledges that its rating of the Bonds in effect immediately prior to such assignment and delegation will not be qualified or reduced as a result of such assignment and delegation. Pending appointment of a successor to the Master Servicer hereunder, the Trustee, unless the Trustee is prohibited by law from so acting, shall, subject to Section 3(g), act in such capacity as hereinabove provided. In connection with such appointment and assumption, the Trustee may make such arrangements for the compensation of such successor out of payments on Pledged Mortgages as it and such successor shall agree; provided, however, that no such compensation shall be in excess of the Master Servicing Fee permitted the Master Servicer hereunder. The Trustee and such successor shall take such action, consistent with this Agreement, as shall be necessary to effectuate any such succession. Neither the Trustee nor any other successor master servicer shall be deemed to be in default hereunder by reason of any failure to make, or any delay in making, any distribution hereunder or any portion thereof or any failure to perform, or any delay in performing, any duties or responsibilities hereunder, in either case caused by the failure of the Master Servicer to deliver or provide, or any delay in delivering or providing, any cash, information, documents or records to it. Any successor to the Master Servicer as master servicer shall give notice to the Mortgagors of such change of servicer and shall, during the term of its service as master servicer, maintain in force the policy or policies that the Master Servicer is required to maintain pursuant to Section 3(r). (c) Notification to Bondholders. (i) Upon any termination of or appointment of a successor to the Master Servicer, the Trustee shall give prompt written notice thereof to Bondholders and to each Rating Agency. (ii) Within 60 days after the occurrence of any Servicing Default, the Trustee shall transmit by mail to all Bondholders notice of each such Servicing Default hereunder known to the Trustee, unless such Servicing Default shall have been cured or waived. 8. Miscellaneous. 74 79 (a) Term of Master Servicing Agreement. The obligations to be performed by the Master Servicer under this Agreement shall commence on and as of the date on which the Issuer issues the Bonds and shall terminate as to each Pledged Mortgage upon (i) the payment in full of all principal and interest due under such Pledged Mortgage or other liquidation of such Pledged Mortgage as contemplated by this Agreement, (ii) the termination of the Master Servicer's rights and powers under this Agreement by the Trustee as provided in Section 7(a) of this Agreement, or (iii) the release by the Trustee of its security interest in any Pledged Mortgage. (b) Assignment. Notwithstanding anything to the contrary contained herein, except as provided in Section 6(a), this Agreement may not be assigned by the Master Servicer without the prior written consent of the Trustee. (c) Notices. All directions, demands and notices hereunder shall be in writing and shall be deemed to have been duly given when delivered at the following addresses of the parties: The Master Servicer: The Issuer: Sequoia Mortgage Trust 199_ -__ c/o Trust Company Attention: Corporate Trust Administration 75 80 With a copy to Sequoia Mortgage Funding Corporation 391 Redwood Highway, Suite 3100 Mill Valley, California 94941 Attention: Michael W. Perry The Trustee: Attention: Corporate Trust Department Any Rating Agency: The address specified therefor in the definition corresponding to the name of such Rating Agency. Any of the parties may at any time give notice in writing to the others of a change of its address for the purpose of this Section 8(c). (d) Inspection and Audit Rights. The Master Servicer agrees that, on reasonable prior notice, it will permit and will cause each Servicer to permit any representative of the Issuer or the Trustee during the Master Servicer's normal business hours, to examine all the books of account, records, reports and other papers of the Master Servicer relating to the Pledged Mortgages, to make copies and extracts therefrom, to cause such books to be audited by independent certified public accountants selected by the Trustee and to discuss its affairs, finances and accounts relating to the Pledged Mortgages with its officers, employees and independent public accountants (and by this provision the Master Servicer hereby authorizes said accountants to discuss with such representative such affairs, finances and accounts), all at such reasonable times and as often as may be reasonably requested. Any out-of-pocket expense incident to the exercise by the Issuer or the Trustee of any right under this Section 8(d) shall be borne by the party requesting such inspection; all other such expenses shall be borne by the Master Servicer or the related Servicer. 76 81 (e) Governing Law. This Agreement shall be construed in accordance with and governed by the substantive laws of the State of New York applicable to agreements made and to be performed in the State of New York and the obligations, rights and remedies of the parties hereto and the Bondholders shall be determined in accordance with such laws. (f) Amendments. This Agreement shall not be amended, changed, modified, terminated or discharged in whole or in part except (i) by an instrument in writing signed by all parties hereto, or their respective successors or assigns and (ii) in compliance with Section 8.10 of the Indenture. (g) Severability. 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. (h) No Joint Venture. The Servicer and the Issuer are not partners or joint venturers with each other and nothing herein shall be construed to make them such partners or joint venturers or impose any liability as such of either of them. (i) Execution in Counterparts. This Agreement may be executed in one or more counterparts, any of which shall constitute an original as against any party whose signature appears on it, and all of which shall together constitute a single instrument. This Agreement shall become binding when one or more counterparts, individually or taken together, bear the signatures of all parties. 77 82 (j) Limitation of Liability of _______________________ ________________________. It is expressly understood and agreed by the parties hereto that (a) this Agreement is executed and delivered by _________________________ _____________________________, not individually or personally but solely as owner trustee of Sequoia Trust 199_-_ under the Deposit 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 Trust is made and intended not as personal representations, undertakings and agreements by _____________________ but is made and intended for the purpose for binding only the Trust, (c) nothing herein contained shall be construed as creating any liability on __________________________________, other than any liability arising out of its gross negligence, bad faith or willful misconduct, and (d) under no circumstances shall _____________________________ be personally liable for the payment of any indebtedness or expenses of the Trust or be liable for the breach or failure of any obligation, representation, warranty or covenant made or undertaken by the Trust under this Agreement or the other Operative Documents. (k) Nonpetition Covenants. Notwithstanding any prior termination of this Agreement, the Master Servicer shall not, prior to the date which is one year and one day after the termination of this Agreement with respect to the Issuer or the Depositor, acquiesce, petition or otherwise invoke or cause the Issuer or the Depositor (or any assignee) to invoke the process of any court or government authority for the purpose of commencing or sustaining a case against the Issuer or the Depositor under any federal or state bankruptcy, insolvency or similar law, or appointing a receiver, liquidator, assignee, trustee, custodian, sequestrator or other similar official of the Issuer or the Depositor or any substantial part of its property, or ordering the winding up or liquidation of the affairs of the Issuer or the Depositor. 78 83 IN WITNESS WHEREOF, each party has caused this Master Servicing Agreement to be executed by its duly authorized officer or officers as of the day and year first above written. SEQUOIA MORTGAGE TRUST 1997-1, as Issuer By:_________________ TRUST COMPANY, not in its individual capacity but solely as Owner Trustee By: -------------------------------- Its: ------------------------------- , ----------------------------------- as Master Servicer By: -------------------------------- Its: ------------------------------- , ----------------------------------- as Trustee By: -------------------------------- Its: ------------------------------- 79 84 SCHEDULE I Schedule of Pledged Mortgages S-I-1 85 SCHEDULE II SEQUOIA MORTGAGE TRUST 199__-__ Collateralized Mortgage Bonds Representations and Warranties of the Master Servicer _______________________ ("___") hereby makes the representations and warranties set forth in this Schedule II to the Issuer and the Trustee, as of the Closing Date, or if so specified herein, as of the Cut-off Date. Capitalized terms used but not otherwise defined in this Schedule II shall have the meanings ascribed thereto in the Master Servicing Agreement (the "Master Servicing Agreement") relating to the above-referenced Series, among ____________ ____, as Master Servicer, Sequoia Mortgage Trust 199__-__, as Issuer, and __________________________________________, as Trustee. (1) _________________ is duly organized as a Delaware corporation and is validly existing and in good standing under the laws of the State of ________ and is duly authorized and qualified to transact any and all business contemplated by the Master Servicing Agreement to be conducted by ________________ in any state in which a Mortgaged Property is located or is otherwise not required under applicable law to effect such qualification and, in any event, is in compliance with the doing business laws of any such state, to the extent necessary to ensure its ability to enforce each Pledged Mortgage, to service the Pledged Mortgages in accordance with the terms of the Master Servicing Agreement and to perform any of its other obligations under the Master Servicing Agreement in accordance with the terms thereof. (2) _________________ has the full corporate power and authority to sell and service each Pledged Mortgage, and to execute, deliver and perform, and to enter into and consummate the transactions contemplated by the Master Servicing Agreement and has duly authorized by all necessary corporate action on the part of _________________ the execution, delivery and performance of the Master Servicing Agreement; and the Master Servicing Agreement, S-II-1 86 assuming the due authorization, execution and delivery thereof by the other parties thereto, constitutes a legal, valid and binding obligation of _________________, enforceable against _________________ in accordance with its terms, except that (a) the enforceability thereof may be limited by bankruptcy, insolvency, moratorium, receivership and other similar laws relating to creditors' rights generally and (b) the remedy of specific performance and injunctive and other forms of equitable relief may be subject to equitable defenses and to the discretion of the court before which any proceeding therefor may be brought. (3) The execution and delivery of the Master Servicing Agreement by _________________, the servicing of the Pledged Mortgages by _________________ under the Master Servicing Agreement, the consummation of any other of the transactions contemplated by the Master Servicing Agreement, and the fulfillment of or compliance with the terms thereof are in the ordinary course of business of _________________ and will not (A) result in a material breach of any term or provision of the charter or by-laws of ________________ or (B) materially conflict with, result in a material breach, violation or acceleration of, or result in a material default under, the terms of any other material agreement or instrument to which ________________ is a party or by which it may be bound, or (C) constitute a material violation of any statute, order or regulation applicable to _________________ of any court, regulatory body, administrative agency or governmental body having jurisdiction over ________________; and _________________ is not in breach or violation of any material indenture or other material agreement or instrument, or in violation of any statute, order or regulation of any court, regulatory body, administrative agency or governmental body having jurisdiction over it which breach or violation may materially impair ________________'s ability to perform or meet any of its obligations under the Master Servicing Agreement. (4) Each Servicer is an approved servicer of conventional mortgage loans for FNMA or FHLMC or is a mortgagee approved by the Secretary of Housing and Urban Development pursuant to Sections 203 and 211 of the National Housing Act. S-II-2 87 (5) No litigation is pending or, to the best of ______'s knowledge, threatened against ____ _______that would materially and adversely affect the execution, delivery or enforceability of the Master Servicing Agreement or the ability of __________ to service the Pledged Mortgages or to perform any of its other obligations under the Master Servicing Agreement in accordance with the terms thereof. (6) No consent, approval, authorization or order of any court or governmental agency or body is required for the execution, delivery and performance by _________________ of, or compliance by _________ _______with, the Master Servicing Agreement or the consummation of the transactions contemplated thereby, or if any such consent, approval, authorization or order is required, _________________ has obtained the same. S-II-3 88 SCHEDULE III SEQUOIA MORTGAGE TRUST 199__-__ Collateralized Mortgage Bonds Representations and Warranties as to the Pledged Mortgages _______________________ ("___") hereby makes the representations and warranties set forth in this Schedule III to the Trustee, as of the Closing Date, or if so specified herein, as of the Cut-off Date. Capitalized terms used but not otherwise defined in this Schedule III shall have the meanings ascribed thereto in the Master Servicing Agreement (the "Master Servicing Agreement") relating to the above-referenced Series, among _____________ as Master Servicer, Sequoia Mortgage Trust 199__-__, as Issuer, and ____________________________________________________, as Trustee. (1) The information set forth on Schedule I to the Master Servicing Agreement with respect to each Pledged Mortgage is true and correct in all material respects as of the Closing Date. (2) As of the Closing Date, all payments due with respect to each Pledged Mortgage prior to the Cut-off Date have been made; and as of the Cut-off Date, [no Pledged Mortgage has been contractually delinquent for 30 or more days during the twelve months prior to the Cut-off Date]. (3) No Pledged Mortgage had a Loan-to-Value Ratio at origination in excess of ____%. (4) With respect to any Pledged Mortgage that is not a Cooperative Loan, each Mortgage is a valid and enforceable first lien on the Mortgaged Property subject only to (a) the lien of non-delinquent current real property taxes and assessments, (b) covenants, conditions and restrictions, rights of way, easements and other matters of public record as of the date of recording of such Mortgage, such exceptions appearing of record being acceptable to mortgage lending institutions generally or specifically reflected in the appraisal made in connection with the S-III-1 89 origination of the related Pledged Mortgage, and (c) 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. (5) Immediately prior to the pledge of the Pledged Mortgages to the Trustee for the benefit of the Bondholders, the Issuer had good title to, and was the sole owner of, each Pledged Mortgage free and clear of any pledge, lien, encumbrance or security interest and had full right and authority, subject to no interest or participation of, or agreement with, any other party, to pledge and assign the same pursuant to the Indenture. (6) There is no delinquent tax or assessment lien against any Mortgaged Property. (7) There is no valid offset, defense or counterclaim to any Mortgage Note or Mortgage, including the obligation of the Mortgagor to pay the unpaid principal of or interest on such Mortgage Note. (8) There are no mechanics' liens or claims for work, labor or material affecting any Mortgaged Property which are or may be a lien prior to, or equal with, the lien of such Mortgage, except those which are insured against by the title insurance policy referred to in item (12) below. (9) To the best of the _______'s knowledge, each Mortgaged Property is free of material damage, and is in good repair. (10) Each Pledged Mortgage at origination complied in all material respects with applicable state and federal laws, including, without limitation, usury, equal credit opportunity, real estate settlement procedures, truth-in-lending and disclosure laws, and consummation of the transactions contemplated hereby will not involve the violation of any such laws. (11) As of the Closing Date, no prior holder of any Mortgage has modified the Mortgage in any material respect (except that a Pledged Mortgage may have been modified S-III-2 90 by a written instrument which has been recorded or submitted for recordation, if necessary, to protect the interests of the Bondholders and which has been delivered to the Trustee); satisfied, cancelled or subordinated such Mortgage in whole or in part; released the related Mortgaged Property in whole or in part from the lien of such Mortgage; or executed any instrument of release, cancellation, modification or satisfaction with respect thereto. (12) A lender's policy of title insurance together with a condominium endorsement and an extended coverage endorsement, if applicable, and a variable rate endorsement in an amount at least equal to the Cut-off Date Stated Principal Balance of each such Pledged Mortgage or a commitment (binder) to issue the same was effective on the date of the origination of each Pledged Mortgage, each such policy is valid and remains in full force and effect, and each such policy was issued by a title insurer qualified to do business in the jurisdiction where the Mortgaged Property is located and acceptable to FNMA or FHLMC and is in a form acceptable to FNMA or FHLMC, which policy insures the Master Servicer and successor owners of indebtedness secured by the insured Mortgage, (a) as to the first priority lien of the Mortgage subject to the exceptions set forth in paragraph (4) above and (b) against loss by reason of the invalidity or unenforceability of the lien resulting from the provisions of the Mortgage Note and Mortgage with respect to adjustment in the Mortgage Rate and Scheduled Payment; to the best of the Issuer's knowledge, no claims have been made under such mortgage title insurance policy and no prior holder of the related Mortgage, including the Master Servicer or the Issuer, has done, by act or omission, anything which would impair the coverage of such mortgage title insurance policy. (13) Each Pledged Mortgage was originated by an entity that satisfied at the time of origination the requirements of Section 3(a)(41) of the Securities Exchange Act of 1934, as amended. (14) To the best of _______'s knowledge, all of the improvements which were included for the purpose of determining the Appraised Value of the Mortgaged Property S-III-3 91 lie wholly within the boundaries and building restriction lines of such property, and no improvements on adjoining properties encroach upon the Mortgaged Property. (15) To the best of _______'s knowledge, no improvement located on or being part of the Mortgaged Property is in violation of any applicable zoning law or regulation. To the best of _______'s knowledge, all inspections, licenses and certificates required to be made or issued with respect to all occupied portions of the 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, unless the lack thereof would not have a material adverse effect on the value of such Mortgaged Property, and the Mortgaged Property is lawfully occupied under applicable law. (16) The Mortgage Note and the related Mortgage are genuine, and each is the legal, valid and binding obligation of the maker thereof, enforceable in accordance with its terms and under applicable law. To the best of _______'s knowledge, 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. (17) The proceeds of the Pledged Mortgage have been fully disbursed, there is no requirement for future advances thereunder and 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 the Pledged Mortgages were paid. (18) The related Mortgage contains customary and enforceable provisions which render the rights and remedies of the holder thereof adequate for the realization against the Mortgaged Property of the benefits of the security, including, (i) in the case of a Mortgage designated as a deed of trust, by trustee's sale, and (ii) otherwise by judicial foreclosure. S-III-4 92 (19) With respect to each Mortgage constituting a deed of trust, a trustee, duly qualified under applicable 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 Trust Estate to the trustee under the deed of trust, except in connection with a trustee's sale after default by the Mortgagor. (20) Each Mortgage Note and each Mortgage is in substantially one of the forms acceptable to FNMA or FHLMC, with such riders as have been acceptable to FNMA or FHLMC, as the case may be. (21) There exist no deficiencies with respect to escrow deposits and payments, if such are required, for which customary arrangements for repayment thereof have not been made, and no escrow deposits or payments of other charges or payments due _______ have been capitalized under the Mortgage or the related Mortgage Note. (22) The origination, underwriting and collection practices used by the Master Servicer with respect to each Pledged Mortgage have been in all respects legal, prudent and customary in the mortgage lending and servicing business. (23) There is no pledged account or other security other than real estate securing the Mortgagor's obligations. (24) No Pledged Mortgage has a shared appreciation feature, or other contingent interest feature. (25) Each Pledged Mortgage is assumable if the proposed transferee submits certain information required to evaluate the transferee's ability to repay the Pledged Mortgage and the holder of the Mortgage Note reasonably determines that the security for the Pledged Mortgage would not be impaired by the assumption. (26) None of the Pledged Mortgages provides for a prepayment penalty. S-III-5 93 (27) Except with respect to ____ Pledged Mortgages representing approximately _____% of the Cut-off Date Pool Principal Balance, each Pledged Mortgage which had a Loan-to-Value Ratio at origination in excess of 80% is the subject of a Primary Insurance Policy that insures that portion of the original principal balance of the related Pledged Mortgage 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 Pledged Mortgage over 75% of the lesser of the appraised value and selling price of the related Mortgaged Property and the denominator of which is the original principal balance of the related Pledged Mortgage, plus accrued interest thereon and related foreclosure expenses. Each such Primary Insurance Policy is issued by a Qualified Insurer acceptable to each of the Rating Agencies. All provisions of any such Primary Insurance Policy have been and are being complied with, any such policy is in full force and effect, and all premiums due thereunder have been paid. Any Mortgage subject to any such Primary Insurance Policy obligates the Mortgagor thereunder to maintain such insurance and to pay all premiums and charges in connection therewith. The Mortgage Rate for each Pledged Mortgage is net of any such insurance premium. (28) At the Cut-off Date, the improvements upon each Mortgaged Property are covered by a valid and existing hazard insurance policy with a generally acceptable carrier that provides for fire and extended coverage and coverage for such other hazards as are customary in the area where the Mortgaged Property is located in an amount which is at least equal to the lesser of (i) the maximum insurable value of the improvements securing such Pledged Mortgage or (ii) the greater of (a) the outstanding principal balance of the Pledged Mortgage and (b) an amount such that the proceeds of such policy shall be sufficient to prevent the Mortgagor and/or the mortgagee from becoming a co-insurer. If the Mortgaged Property is a condominium unit, it is included under the coverage afforded by a blanket policy for the condominium unit. All such individual insurance policies and all flood policies referred to in item (29) below contain a standard mortgagee clause naming ___________ or the original mortgagee, and its successors in interest, as S-III-6 94 mortgagee, and _________ has received no notice that any premiums due and payable thereon have not been paid; the Mortgage obligates the Mortgagor thereunder to maintain all such insurance including flood 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. (29) If the Mortgaged Property is in an area identified in the Federal Register by the Federal Emergency Management Agency as having special flood hazards, a flood insurance policy in a form meeting the requirements of the current guidelines of the Flood Insurance Administration is in effect with respect to such Mortgaged Property with a generally acceptable carrier in an amount representing coverage not less than the least of (A) the original outstanding principal balance of the Pledged Mortgage, (B) the minimum amount required to compensate for damage or loss on a replacement cost basis, or (C) the maximum amount of insurance that is available under the Flood Disaster Protection Act of 1973, as amended. (30) To the best of _______'s knowledge, there is no proceeding pending or threatened for the total or partial condemnation of any Mortgaged Property, nor is such a proceeding currently occurring. (31) There is no material monetary default existing under any Mortgage or the related Mortgage Note and, to the best of the Issuer's knowledge, there is no material 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 under the Mortgage or the related Mortgage Note; and _______ has not waived any default, breach, violation or event of acceleration. (32) Other than with respect to Mortgaged Property underlying a Cooperative Loan, each Mortgaged Property is improved by a one- to four-family residential dwelling including condominium units and dwelling units in PUDs, which, to the best of _______'s knowledge, does not S-III-7 95 include mobile homes and does not constitute other than real property under state law. (33) Each Pledged Mortgage is being serviced by the Master Servicer or a Servicer as provided in Section 3(b) of the Master Servicing Agreement. (34) There is no obligation on the part of the Issuer or any other party under the terms of the Mortgage or related Mortgage Note to make payments in addition to those made by the Mortgagor. (35) Any future advances made prior to the Cut-off Date have been consolidated with the outstanding principal amount secured by the Mortgage, and the secured principal amount, as consolidated, bears a single interest rate and single repayment term reflected on the Schedule of Pledged Mortgages. The consolidated principal amount does not exceed the original principal amount of the Pledged Mortgage. The Mortgage Note does not permit or obligate the Master Servicer to make future advances to the Mortgagor at the option of the Mortgagor. (36) There are no defaults in complying with the terms of the Mortgage, and all taxes, governmental assessments, insurance premiums, water, sewer and municipal charges, leasehold payments or ground rents which previously became due and owing have been paid, or 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 payable. Except for (A) payments in the nature of escrow payments, and (B) interest accruing from the date of the Mortgage Note or date of disbursement of the Mortgage proceeds, whichever is later, to the day which precedes by one month the Due Date of the first installment of principal and interest, including without limitation taxes and insurance payments, _______ 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. S-III-8 96 [ (37) Each Pledged Mortgage was underwritten in all material respects in accordance with the underwriting guidelines set forth in the Prospectus Supplement. ] (38) Prior to the approval of the Pledged Mortgage application, an appraisal of the related Mortgaged Property was obtained from a qualified appraiser, duly appointed by the originator, who had no interest, direct or indirect in the Mortgaged Property or in any loan made on the security thereof, and whose compensation is not affected by the approval or disapproval of the Pledged Mortgage; such appraisal is in a form acceptable to FNMA or FHLMC. (39) None of the Pledged Mortgages is a graduated payment mortgage loan or a growing equity mortgage loan or subject to a buy down or similar arrangement. (40) Any leasehold estate securing a Pledged Mortgage has a term of not less than five years in excess of the term of the related Pledged Mortgage. (41) All of the Pledged Mortgages have a payment date on or before the Due Date in the month of the first Payment Date. (42) [None] of the Pledged Mortgages are Convertible Pledged Mortgages. [(43) As of the Closing Date, the Index for the adjustment of the Mortgage Rate of each Pledged Mortgage is __________________________________.] (44) The Pledged Mortgages, individually and in the aggregate, conform in all material respects to the descriptions thereof in the Prospectus Supplement. (45) [None] of the Pledged Mortgages are Cooperative Loans. S-III-9 97 SCHEDULE IV SEQUOIA Mortgage Trust 199__-__ Collateralized Mortgage Bonds Representations and Warranties of the Issuer. Sequoia Mortgage Trust 199__-__ (the "Issuer") hereby makes the representations and warranties set forth in this Schedule IV to the Master Servicer and the Trustee, as of the Closing Date. Capitalized terms used but not otherwise defined in this Schedule IV shall have the meanings ascribed thereto in the Master Servicing Agreement (the "Master Servicing Agreement") relating to the above-referenced Series, among _________________________, as Master Servicer, Sequoia Mortgage Trust 199__-__, as Issuer, and _________________________________, as Trustee. (1) The Issuer is a statutory business trust duly organized, validly existing and in good standing under the laws of the State of Delaware, and possesses all requisite authority, power, licenses, permits and franchises to conduct any and all business contemplated by the Master Servicing Agreement and to comply with its obligations under the terms of this Agreement, the performance of which have been duly authorized by all necessary action. (2) Neither the execution and delivery of the Master Servicing Agreement by the Issuer, nor the performance and compliance with the terms thereof by the Issuer will (A) result in a material breach of any term or provision of the instruments creating the Issuer or governing its operations, or (B) materially conflict with, result in a material breach, violation or acceleration of, or result in a material default under, the terms of any other material agreement or instrument to which the Issuer is a party or by which it may be bound, or (C) constitute a material violation of any statute, order or regulation applicable to the Issuer of any court, regulatory body, administrative agency or governmental body having jurisdiction over the Issuer; and the Issuer is not in breach or violation of any material indenture or other material agreement or instrument, or in violation of any statute, order or regulation of S-IV-1 98 any court, regulatory body, administrative agency or governmental body having jurisdiction over it which breach or violation may materially impair the Issuer's ability to perform or meet any of its obligations under the Master Servicing Agreement. (3) This Agreement, and all documents and instruments contemplated hereby, which are executed and delivered by the Issuer, will, assuming due authorization, execution by and delivery to the other parties hereto and thereto, constitute valid, legal and binding obligations of the Issuer, enforceable in accordance with their respective terms, except that (a) the enforceability thereof may be limited by bankruptcy, insolvency, moratorium, receivership and other similar laws relating to creditors' rights generally and (b) the remedy of specific performance and injunctive and other forms of equitable relief may be subject to equitable defenses and to the discretion of the court before which any proceeding therefor may be brought. (4) No litigation is pending or, to the best of the Issuer's knowledge, threatened against the Issuer that would materially and adversely affect the execution, delivery or enforceability of the Master Servicing Agreement or the ability of the Issuer to perform its obligations thereunder. (5) Immediately prior to the transfer and assignment of the Pledged Mortgages to the Trustee, the Issuer had good title to, and was the sole owner of, each Pledged Mortgage free and clear of any liens, charges or encumbrances or any ownership or participation interests in favor of any other Person. S-IV-2 99 EXHIBIT A FORM OF INITIAL CERTIFICATION OF TRUSTEE [date] [Master Servicer] [Issuer] - ------------------------------- - ------------------------------- Re: Master Servicing Agreement among Sequoia Mortgage Trust 199__-__, as Issuer, ______________, as Master Servicer, and ____________________, as Trustee, Collateralized Mortgage Bonds Gentlemen: In accordance with Section 2(b) of the above-captioned Master Servicing Agreement (the "Master Servicing Agreement"), the undersigned, as Trustee, hereby certifies that, as to each Pledged Mortgage listed in the Schedule of Pledged Mortgages (other than any Pledged Mortgage listed in the attached schedule), it has received: (i) the original Mortgage Note, endorsed as provided in the following form: "Pay to the order of ________, without recourse"; and (ii) a duly executed assignment of the Mortgage (which may be included in a blanket assignment or assignments). Based on its review and examination and only as to the foregoing documents, such documents appear regular on their face and related to such Pledged Mortgage. The Trustee has made no independent examination of any documents contained in each Trustee Mortgage File beyond the review specifically required in the Master Servicing Agreement. A-1 100 The Trustee makes no representations as to: (i) the validity, legality, sufficiency, enforceability or genuineness of any of the documents contained in each Trustee Mortgage File of any of the Pledged Mortgages identified on the Schedule of Pledged Mortgages, (ii) the collectability, insurability, effectiveness or suitability of any such Pledged Mortgage or (iii) the correctness of any information set forth in the Schedule of Pledged Mortgages, other than the information specified in items (i) through (iv) and (vi) thereof. Capitalized words and phrases used herein shall have the respective meanings assigned to them in the Master Servicing Agreement. -------------------------------------- as Trustee By: ----------------------------------- Name: --------------------------------- Title: -------------------------------- A-2 101 EXHIBIT B FORM OF FINAL CERTIFICATION OF TRUSTEE [date] [Master Servicer] [Issuer] - ------------------------------- - ------------------------------- Re: Master Servicing Agreement among Sequoia Mortgage Trust 199__-__, as Issuer, ___________________ _, as Master Servicer, and ________________________, as Trustee, Collateralized Mortgage Bonds, Gentlemen: In accordance with Section 2(b) of the above-captioned Master Servicing Agreement (the "Master Servicing Agreement"), the undersigned, as Trustee, hereby certifies that as to each Pledged Mortgage listed in the Schedule of Pledged Mortgages (other than any Pledged Mortgage paid in full or listed on the attached Document Exception Report) it has received: (i) The original Mortgage Note, endorsed in the form provided in Section 2(a) of the Master Servicing Agreement, with all intervening endorsements showing a complete chain of endorsement from the originator to the Issuer. (ii) The original recorded Mortgage. (iii) A duly executed assignment of the Mortgage in the form provided in Section 2(a) of the Master Servicing Agreement, or, if the Master Servicer has certified or the Trustee otherwise knows that the related Mortgage has not been returned from the applicable recording office, a copy of the assignment of the Mortgage (excluding information to be provided by the recording office). B-1 102 (iv) The original or duplicate original recorded assignment or assignments of the Mortgage showing a complete chain of assignment from the originator to the Issuer. (v) The original or duplicate original lender's title policy and all riders thereto or, any one of an original title binder, an original preliminary title report or an original title commitment, or a copy thereof certified by the title company. Based on its review and examination and only as to the foregoing documents, (a) such documents appear regular on their face and related to such Pledged Mortgage, and (b) the information set forth in items (i), (ii), (iii), (iv), (vi) and (xi) of the definition of the "Schedule of Pledged Mortgages" in Section 1.01 of the Master Servicing Agreement accurately reflects information set forth in the Trustee Mortgage File. The Trustee has made no independent examination of any documents contained in each Trustee Mortgage File beyond the review specifically required in the Master Servicing Agreement. The Trustee makes no representations as to: (i) the validity, legality, sufficiency, enforceability or genuineness of any of the documents contained in each Trustee Mortgage File of any of the Pledged Mortgages identified on the Schedule of Pledged Mortgages, or (ii) the collectability, insurability, effectiveness or suitability of any such Pledged Mortgage. Notwithstanding anything herein to the contrary, the Trustee has made no determination and makes no representations as to whether (i) any endorsement is sufficient to transfer all right, title and interest of the party so endorsing, as noteholder or assignee thereof, in and to that Mortgage Note or (ii) any assignment is in recordable form or sufficient to effect the assignment of and transfer to the assignee thereof, under the Mortgage to which the assignment relates. Capitalized words and phrases used herein shall have the respective meanings assigned to them in the Master Servicing Agreement. ------------------------------------- as Trustee By: ---------------------------------- Name: -------------------------------- Title: ------------------------------- B-2 103 EXHIBIT C REQUEST FOR RELEASE (for Trustee) Sequoia Mortgage Trust 199__-__ Collateralized Mortgage Bonds Loan Information Name of Mortgagor: ---------------------------------------- Servicer Loan No.: ---------------------------------------- Trustee Name: ---------------------------------------- Address: ---------------------------------------- ---------------------------------------- Trustee Mortgage File No.: ---------------------------------------- The undersigned Master Servicer hereby acknowledges that it has received from ___________________________, as Trustee for the Holders of Bonds of the above-referenced Series, the documents referred to below (the "Documents"). All capitalized terms not otherwise defined in this Request for Release shall have the meanings given them in the Master Servicing Agreement (the "Master Servicing Agreement") relating to the above-referenced Series among the Trustee, _______ ________________________________________, as Master Servicer, and Sequoia Mortgage Trust 1997-1, as Issuer. ( ) Mortgage Note dated ____________, 19__, in the original principal sum of $__________, made by _________________ . payable to, or endorsed to the order of, the Trustee. ( ) Mortgage recorded on _________________ as instrument no. _____________________ in the County Recorder's Office of the C-1 104 County of ___________________, State of _______________ in book/reel/docket ________________ of official records at page/image ________________. ( ) Deed of Trust recorded on __________________ as instrument no. _________________ in the County Recorder's Office of the County of _______________, State of _______________ in book/reel/docket _______________ of official records at page/image _______________. ( ) Assignment of Mortgage or Deed of Trust to the Trustee, recorded on _________________ as instrument no. ________ ___ in the County Recorder's Office of the County of __________, State of ________________ in book/reel/docket _ _____________ of official records at page/image _______________. ( ) Other documents, including any amendments, assignments or other assumptions of the Mortgage Note or Mortgage. ( ) ______________________________________________ ( ) ______________________________________________ ( ) ______________________________________________ ( ) ______________________________________________ The undersigned Master Servicer hereby acknowledges and agrees as follows: (1) The Master Servicer shall hold and retain possession of the Documents in trust for the benefit of the Trustee, solely for the purposes provided in the Agreement. (2) The Master Servicer shall not cause or knowingly permit the Documents to become subject to, or encumbered by, any claim, liens, security interest, charges, writs of attachment or other impositions nor shall the Master Servicer assert or seek to assert any claims or rights of setoff to or against the Documents or any proceeds thereof. (3) The Master Servicer shall return each and every Document previously requested from the Trustee Mortgage File to the Trustee when the need therefor no longer exists, unless the Pledged Mortgage relating to the Documents has been liquidated and the proceeds thereof have been remitted to the Bond Account and except as expressly provided in the Master Servicing Agreement. C-2 105 (4) The Documents and any proceeds thereof, including any proceeds of proceeds, coming into the possession or control of the Master Servicer shall at all times be earmarked for the account of the Trustee, and the Master Servicer shall keep the Documents and any proceeds separate and distinct from all other property in the Master Servicer's possession, custody or control. ---------------------------------------- By -------------------------------------- Its ------------------------------------- Date: , 19 ------------------ -- C-3 106 EXHIBIT D REQUEST FOR RELEASE OF DOCUMENTS To: Re: The Master Servicing Agreement dated ________ __, 19__ among ____________________ ("_____"), as Master Servicer, Sequoia Mortgage Trust 199__-__, as Issuer, and ____________________, as Trustee Ladies and Gentlemen: In connection with the administration of the Pledged Mortgages held by you as Trustee for Sequoia Mortgage Trust 199__-_ , as Issuer, we request the release of the Trustee Mortgage File for the Pledged Mortgage(s) described below, for the reason indicated. FT Account#: Pool #: Mortgagor's Name, Address and Zip Code: Pledged Mortgage Number: Reason for Requesting Documents (check one) _______1. Pledged Mortgage paid in full (__________ hereby certifies that all amounts have been received.) _______2. Pledged Mortgage Liquidated (_____ hereby certifies that all proceeds of foreclosure, insurance, or other liquidation have been finally received.) _______3. Pledged Mortgage in Foreclosure. _______4. Other (explain): ____________________________________ If item 1 or 2 above is checked, and if all or part of the Trustee Mortgage File was previously released to us, please release to us our previous receipt on file with you, as well as an additional documents in your possession relating to the above-specified Pledged Mortgage. If item 3 or 4 is checked, upon return of all of the above documents to you as Trustee, please acknowledge your receipt by signing in the space indicated below, and returning this form. D-1 107 - --------------------------------- ------------------------- ------------------------- ------------------------- By: ------------------------------ Name: ---------------------------- Title: --------------------------- Date: ---------------------------- TRUSTEE CONSENT TO RELEASE AND ACKNOWLEDGEMENT OF RECEIPT By: ------------------------------ Name: ---------------------------- Title: --------------------------- Date: ---------------------------- D-2 EX-5.1 6 OPINION OF TOBIN & TOBIN 1 EXHIBIT 5.1 [Letterhead of Tobin & Tobin] April 24, 1997 Sequoia Mortgage Funding Corporation 591 Redwood Highway Suite 3120 Mill Valley, CA 94941 Re: Sequoia Mortgage Funding Corporation Registration Statement on Form S-3 Ladies and Gentlemen: We have acted as special counsel to Sequoia Mortgage Funding Corporation, a Delaware corporation (the "Registrant"), in connection with the registration under the Securities Act of 1933, as amended (the "Act"), of Collateralized Mortgage Bonds (the "Bonds"), and the related preparation and filing of a Registration Statement on Form S-3 (the "Registration Statement"). The Bonds are issuable in series under separate indentures (each such agreement, an "Indenture"), between an issuer and an indenture trustee, each to be identified in the prospectus supplement for such series of Bonds. Each Indenture will be substantially in the form filed as an exhibit to the Registration Statement. We have examined and relied upon copies of the Company's Bylaws, the Registration Statement, 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. 2 Sequoia Mortgage Funding Corporation April 24, 1997 Page 2 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 Company and others. In rendering this opinion letter, we express no opinion as to the laws of any jurisdiction other than the laws of the State of New York, the corporation laws of the State of Delaware and the federal laws of the United States of America. Based upon the foregoing, we are of the opinion that: 1. 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. 2. 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 and prospectus supplement 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. 3 Sequoia Mortgage Funding Corporation April 24, 1997 Page 3 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 and prospectus supplement 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, /s/ Tobin & Tobin EX-8.1 7 OPINION OF GIANCARLO & GNAZZO 1 Exhibit 8.1 [Letterhead of Giancarlo & Gnazzo] April 28, 1997 Sequoia Mortgage Funding Corporation 591 Redwood Highway Suite 3100 Mill Valley, CA 94941 Re: Sequoia Mortgage Funding Corporation Shelf Registration Ladies and Gentlemen: We have acted as your special tax counsel and have assisted in the preparation of the tax summary for the Shelf Registration Statement on Form S-3, dated April --, 1997 (the "Registration Statement") which has been filed by Sequoia Mortgage Funding Corporation (the "Company") with the Securities and Exchange Commission the (the "SEC") in connection with the registration of certain Collateralized Mortgage Bonds (issuable in series) (the "Bonds"). Each series of Bonds will be issued by a trust (the "Issuer") formed by the Company pursuant to a deposit trust agreement (the"Deposit Trust Agreement") and pursuant to an indenture (the "Indenture") entered into by the Issuer. You have requested our opinion regarding certain descriptions of federal income tax consequences contained in the prospectus and prospectus supplement to be used in connection with offers and sales of the Bonds (the "Prospectus" and "Prospectus Supplement", respectively). In formulating our opinions, we have reviewed (i) the Registration Statement and the related forms of Prospectus and Prospectus Supplement filed with the SEC on the date hereof , (ii) the forms of the Deposit Trust Agreement, the Indenture and the Bonds and such other transaction documents as we have considered necessary, and (iii) the Articles of Incorporation and other organizational documents of the Company, as amended and supplemented to date, and such resolutions, certificates, records, and other documents provided by the Company 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 2 Sequoia Funding Corporation April 28, 1997 Page 2 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. Although the discussion in the Prospectus and the Prospectus Supplement under the heading "Federal Income Tax Consequences" does not purport to discuss all possible United States federal income tax consequences of the purchase, ownership and disposition of the Bonds, in our opinion, such discussion constitutes in all material respects, a fair and accurate summary of the United States federal income tax consequences of the purchase, ownership and disposition of the Bonds under existing law. We note that the Prospectus Supplement relates to a specific transaction and that the above referenced description of "Federal Income Tax Consequences" may, under certain circumstances, require modification when additional transactions are done. Other than as expressly stated above, we express no opinion on any issue relating to the Company, or any series of Bonds other than the Bonds described in the Prospectus Supplement, 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 consent to the filing of this opinion as an Exhibit to the Registration Statement and to the reference to Giancarlo & Gnazzo, A Professional Corporation under the caption "Federal Income Tax Considerations" in the Prospectus and Prospectus Supplement included in the Registration Statement. Very truly yours, /s/ Giancarlo & Gnazzo -----END PRIVACY-ENHANCED MESSAGE-----