424B5 1 v077356_424b5.htm
Prospectus Supplement
(To the prospectus dated June 16, 2006)
 
   
     
NovaStar Mortgage Funding Trust, Series 2007-2
Issuing Entity
 
 
$1,324,400,000
     
NovaStar Mortgage, Inc.
Sponsor and Servicer
 
     
NovaStar Mortgage Funding Corporation
Depositor 
 
 
NovaStar Home Equity Loan Asset-Backed Certificates, Series 2007-2
 
 
The certificates will be backed by a pool of residential, subprime mortgage loans. The pool contains both adjustable-rate mortgage loans and fixed-rate mortgage loans.
 
     
Consider carefully the risk factors starting on page S-12 of this prospectus supplement and page 5 of the prospectus before making a decision to invest in the certificates.
 
The offered certificates represent beneficial ownership interests in the issuing entity. The offered certificates are not interests in or obligations of the Sponsor, Servicer, the Depositor, any of their affiliates, or any other person.
 
No governmental agency or instrumentality has insured or guaranteed the offered certificates or the underlying mortgage loans.
 
The Certificates-
 
Interest and principal on each class of certificates is scheduled to be paid monthly on the 25th day of the month or, if such day is not a business day, the next succeeding business day. The first scheduled distribution date is June 25, 2007.
 
Credit Enhancement-
 
The more senior classes of certificates will have the benefit of the subordination of the more subordinated classes.
 
All classes of Class A and Mezzanine Certificates will be supported by overcollateralization, which is available to absorb losses.
 
Certain mortgage loans are covered by mortgage insurance policies.
 
Excess cashflow will be available to absorb losses and maintain or restore overcollateralization.
 
Pre-Funding-
 
The trust fund has a pre-funding feature.

   
Initial Aggregate
Certificate
Balance
 
Pass-Through Rate(1)
 
Price to
Public
 
Underwriting
Discount
 
Proceeds to the
Depositor (2)
 
Class A-1A Certificates
 
$
779,369,000
   
LIBOR + 0.20000
%
 
100.000000
%
 
0.19425
%
$
777,855,104
 
Class A-2A Certificates
 
$
140,080,000
   
LIBOR + 0.09000
%
 
100.000000
%
 
0.25000
%
$
139,729,800
 
Class A-2B Certificates
 
$
80,420,000
   
LIBOR + 0.16000
%
 
100.000000
%
 
0.25000
%
$
80,218,950
 
Class A-2C Certificates
 
$
49,730,000
   
LIBOR + 0.18000
%
 
100.000000
%
 
0.25000
%
$
49,605,675
 
Class A-2D Certificates
 
$
18,601,000
   
LIBOR + 0.27000
%
 
100.000000
%
 
0.25000
%
$
18,554,498
 
Class M-1 Certificates
 
$
70,700,000
   
LIBOR + 0.30000
%
 
100.000000
%
 
0.25000
%
$
70,523,250
 
Class M-2 Certificates
 
$
49,700,000
   
LIBOR + 0.32000
%
 
100.000000
%
 
0.25000
%
$
49,575,750
 
Class M-3 Certificates
 
$
23,800,000
   
LIBOR + 0.34000
%
 
100.000000
%
 
0.25000
%
$
23,740,500
 
Class M-4 Certificates
 
$
21,700,000
   
LIBOR + 0.50000
%
 
100.000000
%
 
0.25000
%
$
21,645,750
 
Class M-5 Certificates
 
$
21,700,000
   
LIBOR + 0.68000
%
 
100.000000
%
 
0.25000
%
$
21,645,750
 
Class M-6 Certificates
 
$
18,900,000
   
LIBOR + 0.95000
%
 
100.000000
%
 
0.25000
%
$
18,852,750
 
Class M-7 Certificates
 
$
18,900,000
   
LIBOR + 1.75000
%
 
100.000000
%
 
0.25000
%
$
18,852,750
 
Class M-8 Certificates
 
$
15,400,000
   
LIBOR + 2.50000
%
 
100.000000
%
 
0.25000
%
$
15,361,500
 
Class M-9 Certificates
 
$
15,400,000
   
LIBOR + 2.50000
%
 
91.546875
%
 
0.25000
%
$
14,059,719
 
Total
 
$
1,324,400,000
                   
$
1,320,221,746
 
 
(1)
Subject to increase as described herein and subject to an available funds cap rate described herein and a maximum rate of 11%, except for the Class A-2A Certificates which are not subject to a maximum rate.
 
(2)
Before deducting expenses, estimated to be $625,000.
 

 
Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or passed upon the accuracy or adequacy of this prospectus supplement. Any representation to the contrary is a criminal offense.
 
Greenwich Capital Markets, Inc., Wachovia Capital Markets, LLC and Deutsche Bank Securities Inc. as underwriters, will offer the underwritten certificates only after the underwritten certificates have been issued, delivered to and accepted by the underwriters. The underwriters have the right to reject any order. We expect to deliver the offered certificates on or about June 1, 2007 through The Depository Trust Company and upon request through Clearstream Banking Luxembourg or the Euroclear System.
 
RBS GREENWICH
CAPITAL
WACHOVIA
SECURITIES
DEUTSCHE BANK
SECURITIES
 
(Joint Lead Managers and Joint Book-Runners)
 
The date of this Prospectus Supplement is May 25, 2007.



Important notice about the information presented in this
prospectus supplement and the accompanying prospectus
 
We provide information to you about the offered certificates in two separate documents that progressively provide more detail: (1) the accompanying prospectus, which provides general information, some of which may not apply to your series of certificates, and (2) this prospectus supplement, which describes the specific terms of your series of certificates.
 
This prospectus supplement does not contain complete information about the offering of the certificates. Additional information is contained in the prospectus. You are urged to read both this prospectus supplement and the prospectus in full. We cannot sell the offered certificates to you unless you have received both this prospectus supplement and the accompanying prospectus.
 
The prospectus contemplates several different types of securities, some of which are not relevant to this offering. You should rely on the information in this prospectus supplement with respect to the certificates offered hereby.
 
The depositor has filed with the Securities and Exchange Commission a registration statement (Registration No. 333-134461) under the Securities Act of 1933, as amended, with respect to the certificates offered pursuant to this prospectus supplement. This prospectus supplement and the accompanying prospectus, which form a part of the registration statement, omit certain information contained in such registration statement pursuant to the rules and regulations of the Commission. You may inspect and copy the registration statement at the Public Reference Room at the Commission at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. and at the Commission’s regional offices at 233 Broadway, New York, New York, 10279 and Citicorp Center, 500 West Madison Street, Chicago, Illinois 60661. Please call the Commission at 1-800-SEC-0330 for further information on the Public Reference Rooms. In addition, the Commission maintains a site on the World Wide Web containing reports, proxy materials, information statements and other items. The address is http://www.sec.gov.
 
We include cross-references in this prospectus supplement and the accompanying prospectus to captions in these materials where you can find further related discussions. The following table of contents and the table of contents included in the accompanying prospectus provide the pages on which these captions are located.
 
i


TABLE OF CONTENTS
 
S-1
Description of the Certificates
S-1
Pre-Funding Feature
S-5
Distributions on the Certificates
S-5
Calculation of LIBOR
S-8
Credit Enhancement
S-8
Allocation of Losses
S-10
Removal and Substitution of Mortgage Loans
S-10
Advancing
S-11
Servicing Fee
S-11
Clean-up Call
S-11
Federal Income Tax Consequences
S-11
ERISA Considerations
S-11
Legal Investment
S-11
Ratings
S-12
Risk Factors
S-13
Use of Proceeds
S-26
Description of the Mortgage Pool
S-26
Adjustable Rate Feature of the ARM Loans
S-45
Mortgage Loan Groups
S-45
The Initial Group I Mortgage Loans
S-45
The Initial Group II Mortgage Loans
S-62
Conveyance of Subsequent Mortgage Loans and the Pre-Funding Account
S-79
The Originator
S-80
Underwriting Standards for the Mortgage Loans
S-80
Delinquency and Loss Information for the Mortgage Loans
S-84
Private Mortgage Insurance Policies
S-85
Additional Information
S-89
The Sponsor
S-89
Limitations on Liability
S-90
The Servicer
S-90
Foreclosure and Delinquency Experience with Non-Conforming Mortgage Loans
S-91
Static Pool Information
S-91
NovaStar Financial
S-92
The Depositor
S-92
The Trustee
S-93
General
S-93
DBNTC
S-93
The Custodian
S-94
The Back-Up Servicer
S-94
Countrywide Home Loans Servicing LP
S-94
The Hedge Providers
S-98
Wachovia Bank, National Association
S-98
The Royal Bank of Scotland plc
S-98
Deutsche Bank AG
S-98
Legal Proceedings
S-99
Affiliations
S-99
Description of the Certificates
S-99
General
S-99
 
ii

 
Payments
S-101
Certificates Supported by Each Group
S-101
Available Funds
S-101
Interest Payments on the Certificates
S-102
Supplemental Interest Trust
S-104
Summary of Interest Rate Hedge Agreements
S-104
Interest Allocations
S-107
Principal Allocations
S-109
Credit Enhancement
S-113
Overcollateralization Provisions, Allocation of Losses and Subsequent Recoveries
S-113
Definitions
S-115
Fees and Expenses
S-127
Calculation of One-Month LIBOR
S-127
Advances
S-128
Book-Entry Certificates
S-129
Assignment of Mortgage Loans
S-133
The Paying Agent
S-134
Optional Termination
S-134
Optional Purchase Pledge
S-134
Certain Yield and Prepayment Considerations
S-134
The Pooling and Servicing Agreement
S-160
Servicing and Other Compensation
S-160
Purchase of Delinquent Mortgage Loans
S-160
Servicing Defaults
S-160
Limitation on Suits
S-162
The Custodian and the Trustee
S-162
Material Federal Income Tax Consequences
S-163
REMIC Elections
S-163
Discount and Premium
S-164
Cap Contract
S-164
Other Matters
S-166
ERISA Considerations
S-166
Method of Distribution
S-168
Certain Legal Matters
S-170
Ratings
S-171
Legal Investment
S-171
Annex I Global Clearance, Settlement and Tax Documentation Procedures
S-172
Initial Settlement
S-172
S-172
Certain U.S. Federal Income Tax Documentation Requirements
S-174
 
iii


Flow of Funds Diagram - REMIC Trust (Interest)
 
remicinterest

iv


Flow of Funds Diagram - REMIC Trust (Principal)
 
remicprincipal
 
v


Flow of Funds Diagram - Supplemental Interest
 
supplementalinterest

vi

 
Summary
 
This summary highlights selected information from this prospectus supplement and does not contain all of the information that you need to consider in making your investment decision. To understand all of the terms of the offering of the certificates, read carefully this entire prospectus supplement and the accompanying prospectus.
 
This summary provides an overview of certain calculations, cash flow priorities and other information to aid your understanding and is qualified by the full description of these calculations, cash flow priorities and other information in this prospectus supplement and the accompanying prospectus.

Issuing Entity
 
NovaStar Mortgage Funding Trust, Series 2007-2.
 
Sponsor, Originator and Servicer
 
NovaStar Mortgage, Inc., a Virginia corporation.
 
Depositor
 
NovaStar Mortgage Funding Corporation, a Delaware corporation.
 
Trustee and Successor Servicer
 
Deutsche Bank National Trust Company, a national banking association organized under the laws of the United States.
 
Custodian
 
U.S. Bank National Association.
 
Back-up Servicer
 
Countrywide Home Loans Servicing LP.
 
NovaStar Financial, Inc.
 
NovaStar Financial, Inc., a Maryland corporation.
 
Hedge Providers
 
Deutsche Bank AG, The Royal Bank of Scotland plc and Wachovia Bank, National Association.
 
Mortgage Insurance Providers
 
Mortgage Guaranty Insurance Corporation
 
PMI Mortgage Insurance Co.
 
Radian Guaranty, Inc.
 
Closing Date
 
On or about June 1, 2007.
 
Cut-off Date
 
The “cut-off date” for the initial mortgage loans is the later of May 1, 2007, and the date of origination of such initial mortgage loan. The cut-off date for any subsequent mortgage loan is the later of (i) the first day of the month in which such subsequent mortgage loan is acquired by the trust and (ii) the date of origination of such subsequent mortgage loan.
 
Description of the Certificates
 
The issuing entity will issue Home Equity Loan Asset-Backed Certificates, Series 2007-2, in fifteen classes of Class A and Mezzanine Certificates: five classes of senior Class A Certificates, Class A-1A, Class A-2A, Class A-2B, Class A-2C and Class A-2D; and ten classes of subordinated, Mezzanine Certificates, Class M-1, Class M-2, Class M-3, Class M-4, Class M-5, Class M-6, Class M-7, Class M-8, Class M-9 and Class M-10. The Class A Certificates are senior to the Mezzanine Certificates. The Mezzanine Certificates with lower numerical class designations are senior to those Mezzanine Certificates with higher numerical class designations. The initial certificate balance of each class of offered certificates is shown on the front cover (subject to a variance of 10%).
 
S-1

 
The Class A, Class M-1, Class M-2, Class M-3, Class M-4, Class M-5, Class M-6, Class M-7, Class M-8 and Class M-9 Certificates are collectively referred to herein as the “offered certificates” or the “underwritten certificates.” Only the offered certificates are being offered by this prospectus supplement and the accompanying prospectus. The Class A-1A Certificates are referred to herein as the “Group I Certificates” and the Class A-2A, Class A-2B, Class A-2C and Class A-2D Certificates are referred to herein as the “Group II Certificates.”
 
The issuing entity will also issue four other classes of certificates which are not being offered by this prospectus supplement, including (a) a senior interest-only class of certificates, Class I (that is senior to the Class A and Mezzanine Certificates), (b) one mezzanine class of certificates, the Class M-10 Certificates, (c) one subordinated class of certificates, the Class C Certificates which (i) entitle the holder to receive payments from excess cashflow, (ii) entitle the holder to receive all collected prepayment penalties and (iii) represent the overcollateralization amount and (d) a REMIC residual interest.
 
The Issuing Entity
 
The certificates will represent ownership interests in the issuing entity, which will consist primarily of:
 
·
a pool of subprime mortgage loans consisting of two groups — a group of residential first-lien and second-lien, fixed and adjustable rate mortgage loans designated as Group I (which is comprised entirely of conforming balance mortgage loans) and a group of residential first-lien and second-lien, fixed and adjustable rate mortgage loans designated as Group II (which is comprised of conforming and non-conforming balance mortgage loans);
 
·
a security interest in the properties securing the mortgage loans;
 
·
collections on the mortgage loans;
 
·
certain hedge agreements (which agreements are not part of any REMIC), as described herein;
 
·
money on deposit in a pre-funding account which will be used to purchase subsequent mortgage loans for inclusion in the pool;
 
·
money on deposit in any interest coverage account which may be established to fund shortfalls in collections of interest due to the pre-funding feature; and
 
·
certain lender paid mortgage insurance policies and related proceeds.
 
The Mortgage Loans
 
The initial mortgage loans will consist of 5,877 loans, with an aggregate principal balance of $943,607,780. The initial Group I mortgage loans will consist of 4,772 loans, with an aggregate principal balance of $688,465,155. The initial Group II mortgage loans will consist of 1,105 loans with an aggregate principal balance of $255,142,625.
 
The initial mortgage loans have the following approximate characteristics as of the cut-off date:
 
Adjustable-rate mortgage loans: 65.06%
 
Fixed-rate mortgage loans: 34.94%
 
Interest only mortgage loans: 4.61%
 
Second lien mortgage loans: 2.80%
 
Range of mortgage rates: 5.100% to 14.200%
 
Weighted average mortgage rate: 9.079%
 
Range of gross margins of the adjustable-rate mortgage loans: 2.800% to 10.550%
 
Weighted average gross margin of the adjustable-rate mortgage loans: 5.966%
 
S-2

 
Range of minimum mortgage rates of the adjustable-rate mortgage loans: 4.450% to 12.650%
 
Weighted average minimum mortgage rate of the adjustable-rate mortgage loans: 9.211%
 
Range of maximum mortgage rates of the adjustable-rate mortgage loans: 10.875% to 19.650%
 
Weighted average maximum mortgage rate of the adjustable-rate mortgage loans: 16.207%
 
Weighted average next adjustment date of the adjustable-rate mortgage loans: April 2009
 
Weighted average remaining term to stated maturity: 347 months
 
Range of principal balances as of the cut-off date: $11,026 to $1,200,000
 
Average principal balance as of the cut-off date: $160,559
 
Range of original loan- to-value ratios(1): 10.62% to 100.00%
 
Weighted average original loan-to-value ratio(1): 80.77%
 
Geographic concentrations in excess of 5%:

Florida
   
21.61
%
California
   
10.01
%
Maryland
   
5.35
%
 

(1) As used in this prospectus supplement, the loan-to-value ratio for any second lien mortgage loan will mean the combined loan-to-value ratio.
 
The initial Group I Mortgage Loans have an aggregate principal balance of approximately $688,465,155 as of the cut-off date and have the following approximate characteristics as of the cut-off date:
 
Adjustable-rate Group I Mortgage Loans: 57.95%
 
Fixed-rate Group I Mortgage Loans: 42.05%
 
Interest-only Group I Mortgage Loans: 2.63%
 
Second lien Group I Mortgage Loans: 1.75%
 
Range of mortgage rates: 5.100% to 13.875%
 
Weighted average mortgage rate: 9.015%
 
Range of gross margins of the adjustable-rate Group I Mortgage Loans: 2.800% to 10.550%
 
Weighted average gross margin of the adjustable-rate Group I Mortgage Loans: 6.018%
 
Range of minimum mortgage rates of the adjustable-rate Group I Mortgage Loans: 5.100% to 12.600%
 
Weighted average minimum mortgage rate of the adjustable-rate Group I Mortgage Loans: 9.241%
 
Range of maximum mortgage rates of the adjustable-rate Group I Mortgage Loans: 11.625% to 19.600%
 
Weighted average maximum mortgage rate of the adjustable-rate Group I Mortgage Loans: 16.233%
 
Weighted average next adjustment date of the adjustable-rate Group I Mortgage Loans: April 2009
 
Weighted average remaining term to stated maturity: 348 months
 
Range of principal balances as of the cut-off date: $14,993 to $568,000
 
Average principal balance as of the cut-off date: $144,272
 
Range of original loan- to-value ratios(1): 10.62% to 100.00%
 
S-3

 
Weighted average original loan-to-value ratio(1): 79.49%
 
Geographic concentrations in excess of 5%:
 
Florida
   
19.78
%
California
   
5.94
%
Maryland
   
5.61
%
 

(1) As used in this prospectus supplement, the loan-to-value ratio for any second lien mortgage loan will mean the combined loan-to-value ratio.
 
The initial Group II Mortgage Loans have an aggregate principal balance of approximately $255,142,625 as of the cut-off date and have the following approximate characteristics as of the cut-off date:
 
Adjustable-rate Group II Mortgage Loans: 84.27%
 
Fixed-rate Group II Mortgage Loans: 15.73%
 
Interest-only Group II Mortgage Loans: 9.95%
 
Second lien Group II Mortgage Loans: 5.64%
 
Range of mortgage rates: 5.400% to 14.200%
 
Weighted average mortgage rate: 9.253%
 
Range of gross margins of the adjustable-rate Group II Mortgage Loans: 3.350% to 9.125%
 
Weighted average gross margin of the adjustable-rate Group II Mortgage Loans: 5.870%
 
Range of minimum mortgage rates of the adjustable-rate Group II Mortgage Loans: 4.450% to 12.650%
 
Weighted average minimum mortgage rate of the adjustable-rate Group II Mortgage Loans: 9.153%
 
Range of maximum mortgage rates of the adjustable-rate Group II Mortgage Loans: 10.875% to 19.650%
 
Weighted average maximum mortgage rate of the adjustable-rate Group II Mortgage Loans: 16.158%
 
Weighted average next adjustment date of the adjustable-rate Group II Mortgage Loans: March 2009
 
Weighted average remaining term to stated maturity: 347 months
 
Range of principal balances as of the cut-off date: $11,026 to $1,200,000
 
Average principal balance as of the cut-off date: $230,898
 
Range of original loan- to-value ratios(1): 11.60% to 100.00%
 
Weighted average original loan-to-value ratio(1): 84.25%
 
Geographic concentrations in excess of 5%:
 
Florida
   
26.53
%
California
   
21.00
%
 

(1) As used in this prospectus supplement, the loan-to-value ratio for any second lien mortgage loan will mean the combined loan-to-value ratio.
 
Certain of the conforming balance mortgage loans included in Group II might otherwise have been included in Group I, but were excluded from Group I because they did not meet Fannie Mae or Freddie Mac criteria (including published guidelines) for factors other than principal balance.
 
For additional information on the Mortgage Loans, see “Description of the Mortgage Pool” in this prospectus supplement.
 
S-4

 
Pre-Funding Feature
 
On the closing date, the depositor will deposit approximately $456,392,220 into a pre-funding account which will be used from time to time before the end of the pre-funding period to acquire subsequent mortgage loans to include in the mortgage pool, approximately $332,988,077 of which will be used to acquire subsequent mortgage loans for Group I and approximately $123,404,143 of which will be used to acquire subsequent mortgage loans for Group II.
 
The pre-funding period commences on the closing date and ends on the earlier of (i) the date on which the amount on deposit in the pre-funding account is less than $10,000 and (ii) a date not later than August 31, 2007.
 
Purchases of subsequent mortgage loans are subject to the same criteria as the initial mortgage loans and additional restrictions related to the composition of the related loan group following the acquisition of the subsequent mortgage loans, as described in this prospectus supplement.
 
To the extent that the issuing entity does not fully use amounts on deposit in the pre-funding account to purchase subsequent mortgage loans by the end of the pre-funding period, the issuing entity will apply the remaining amounts as a prepayment of principal to the related classes of certificates on the distribution date immediately following the end of the pre-funding period. Although no assurance is possible, we do not anticipate that a material amount of principal will be prepaid on the certificates from amounts in the pre-funding account.
 
If required by the rating agencies, an interest coverage account will be established and funded on the closing date. Funds so deposited will be used to cover shortfalls in collections of interest due to the pre-funding feature.
 
Final Scheduled Distribution Date
 
The final scheduled distribution date for all the certificates is the distribution date in September 2037.
 
We anticipate that the actual final payment on each class will occur significantly earlier than the indicated date.
 
Book-Entry Format
 
The Class A and Mezzanine Certificates will be issued, maintained and transferred on the book-entry records of The Depository Trust Company. The offered certificates will be offered in registered form, in minimum denominations of $25,000 and integral multiples of $1,000 in excess thereof, with a minimum investment of $100,000.
 
Distributions on the Certificates
 
Distribution Dates
 
Payments on the certificates will be made on the 25th day of each month or, if that day is not a business day, on the next business day, commencing on June 25, 2007.
 
Record Dates
 
The trustee will make payments to the certificateholders of record as of the related record date. The record date for a distribution date (i) for certificates in book-entry form is the close of business on the last business day prior to that distribution date and (ii) for certificates in definitive form is the close of business on the last business day of the month immediately preceding that distribution date or, in the case of the first distribution date, the closing date.
 
Distribution priorities
 
On each distribution date, the available funds representing interest collections on the mortgage pool remaining after paying the administrative fees will be distributed to pay interest on the certificates, up to their required amount, in the following order:
 
·
first, the available funds representing interest from both Groups of mortgage loans to the Class I Certificates,
 
S-5

 
·
second, concurrently, with equal priority in payment, (i) the remaining available funds representing interest from the Group I mortgage loans to the Group I Certificates and (ii) the remaining available funds representing interest from the Group II mortgage loans to the Group II Certificates,
 
·
third, from the remaining available funds representing interest from one group of mortgage loans to the class(es) of Class A Certificates related to the other group of mortgage loans, to the extent necessary to distribute any interest entitlement remaining undistributed, and
 
·
fourth, the remaining available funds representing interest from the Group I and Group II mortgage loans sequentially to the classes of Mezzanine Certificates according to numerical class designation.
 
Interest distributable to each group of certificates will be paid pro-rata among the classes of certificates in each group, based on their respective interest entitlements for the related date.
 
On each distribution date, the available funds representing principal collections on the Group I and Group II mortgage loans, including any amounts required to be funded from excess cashflow to the extent necessary to maintain or restore the overcollateralization amount to the required overcollateralization amount, net of any overcollateralization release amount (after making payments to the holders of the Class I Certificates in respect of any amounts due that remain unpaid from interest), will be distributed to pay principal on the certificates, up to their required amounts, in the following order:
 
·
first, the available funds representing principal and excess cashflow from the Group I mortgage loans, to the Class A-1A Certificates until retired;
 
·
second, the available funds representing principal and excess cashflow from the Group II mortgage loans, to the Class A-2A Certificates until retired, then to the Class A-2B Certificates, until retired, then to the Class A-2C Certificates, until retired, and then to the Class A-2D Certificates, until retired (however, if all of the Mezzanine Certificates are reduced or written down to zero, the related share of principal and excess cashflow from the Group II mortgage loans will be distributed to the Group II Certificates pro rata, based on certificate principal balance until their certificate principal balances are paid to zero); and
 
·
third, the remaining available funds representing principal and excess cashflow from the Group I and Group II mortgage loans to the Mezzanine Certificates according to numerical class designation, until retired.
 
In the event that available funds from one group of mortgage loans are insufficient to make a required payment of principal to its related Class A Certificates, then any available funds representing principal and excess cashflow from the other group remaining after payment of principal to its related Class A Certificates may be used for such required payment to the extent described in this prospectus supplement.
 
We refer you to “Description of the Certificates” herein for additional information.
 
Interest
 
Interest on the certificates will accrue at the applicable pass-through rate for that class of certificates during the related accrual period. For each distribution date, the accrual period for the Class A and the Mezzanine Certificates (the "LIBOR Certificates"), will run from the prior distribution date to and including the day preceding the applicable distribution date, except that for the first distribution date, interest begins to accrue on the closing date.
 
Interest for the LIBOR Certificates will be calculated on the basis of the actual number of days elapsed in the accrual period and a year consisting of 360 days.
 
S-6

 
Pass-Through Rates
 
The pass-through rate for each class of Class A and Mezzanine Certificates and any distribution date is the lesser of: (1) the formula rate for that class and distribution date and (2) the available funds cap rate for that class and distribution date.
 
The formula rate for each class of LIBOR Certificates, other than the Class A-2A Certificates, is the lesser of (1) the LIBOR Rate and (2) a maximum rate of 11%. The formula rate for the Class A-2A Certificates is the related LIBOR Rate.
 
The LIBOR Rate for each class of certificates is as follows:

Class
 
LIBOR Rate
Class A-1A Certificates
 
LIBOR plus 0.20000%
Class A-2A Certificates
 
LIBOR plus 0.09000%
Class A-2B Certificates
 
LIBOR plus 0.16000%
Class A-2C Certificates
 
LIBOR plus 0.18000%
Class A-2D Certificates
 
LIBOR plus 0.27000%
Class M-1 Certificates
 
LIBOR plus 0.30000%
Class M-2 Certificates
 
LIBOR plus 0.32000%
Class M-3 Certificates
 
LIBOR plus 0.34000%
Class M-4 Certificates
 
LIBOR plus 0.50000%
Class M-5 Certificates
 
LIBOR plus 0.68000%
Class M-6 Certificates
 
LIBOR plus 0.95000%
Class M-7 Certificates
 
LIBOR plus 1.75000%
Class M-8 Certificates
 
LIBOR plus 2.50000%
Class M-9 Certificates
 
LIBOR plus 2.50000%
Class M-10 Certificates
 
LIBOR plus 2.50000%
 
If the LIBOR Certificates remain outstanding after the first distribution date on which the clean-up call could be exercised, which is the distribution date on which the aggregate principal balance of the mortgage loans as of the end of the related due period is equal to or less than 10% of the sum of (i) the aggregate principal balance of the initial mortgage loans as of the cut-off date and (ii) amounts on deposit in the pre-funding account on the closing date, then the LIBOR Rate on each class of certificates will increase to the following rates:
 
Class
 
LIBOR Rate After Step Up
Class A-1A Certificates
 
LIBOR plus 0.40000%
Class A-2A Certificates
 
LIBOR plus 0.18000%
Class A-2B Certificates
 
LIBOR plus 0.32000%
Class A-2C Certificates
 
LIBOR plus 0.36000%
Class A-2D Certificates
 
LIBOR plus 0.54000%
Class M-1 Certificates
 
LIBOR plus 0.45000%
Class M-2 Certificates
 
LIBOR plus 0.48000%
Class M-3 Certificates
 
LIBOR plus 0.51000%
Class M-4 Certificates
 
LIBOR plus 0.75000%
Class M-5 Certificates
 
LIBOR plus 1.02000%
Class M-6 Certificates
 
LIBOR plus 1.42500%
Class M-7 Certificates
 
LIBOR plus 2.62500%
Class M-8 Certificates
 
LIBOR plus 3.75000%
Class M-9 Certificates
 
LIBOR plus 3.75000%
Class M-10 Certificates
 
LIBOR plus 3.75000%
 
S-7

 
Principal
 
On each distribution date, the certificateholders are scheduled to receive their share of an amount of principal generally equal to the sum of:
 
·
the scheduled principal on the mortgage loans collected or advanced during the related due period;
 
·
unscheduled principal on the mortgage loans (including recoveries on defaulted mortgage loans) collected during the prior prepayment period; and
 
·
excess interest to the extent necessary to maintain or restore the overcollateralization amount to the required overcollateralization amount minus any overcollateralization release amount.
 
The Mezzanine Certificates are unlikely to receive any principal payments until, at the earliest, the distribution date occurring in June 2010 (unless the aggregate principal balance of the Class A Certificates has been reduced to zero).
 
After the crossover date, principal will be distributed to the certificateholders of each class in accordance with a distribution priority which is designed to maintain a specified level of support below each class. This support consists of the certificates that are more subordinated to that class, overcollateralization, which is subordinated to all classes of Class A and Mezzanine Certificates, and excess interest from the mortgage loans.
 
Calculation of LIBOR
 
The London interbank offered rate (“LIBOR”) with respect to any distribution date will be determined by the trustee (provided that, in the case of each interest rate hedge agreement, it will be determined by the applicable Hedge Provider) and will equal the posted rate for United States dollar deposits for one month that appeared on Reuters Screen LIBOR01 as of 11:00 a.m., London time, on the second LIBOR Business Day prior to the immediately preceding distribution date (or, in the case of the first distribution date, the second LIBOR business day preceding the closing date). If no such posted rate appears, LIBOR will be determined on the basis of the offered quotation of the reference banks (which shall be four major banks that are engaged in transactions in the London interbank market) identified in the pooling and servicing agreement for United States dollar deposits for one month to prime banks in the London interbank market as of 11:00 a.m., London time, on such date. See “Description of the Certificates-Calculation of One-Month LIBOR” in this prospectus supplement.
 
Credit Enhancement
 
The credit enhancement provided to the holders of the Class A and Mezzanine Certificates will consist of subordination, overcollateralization, excess cashflow, mortgage insurance, limited cross-collateralization and interest rate hedge agreements.
 
Subordination
 
The rights of the holders of the Class A Certificates to receive distributions are subordinated, to the extent described in this prospectus supplement, to the rights of the holders of the Class I Certificates.
 
The rights of the holders of the Mezzanine Certificates to receive distributions will be subordinated, to the extent described in this prospectus supplement, to the rights of the holders of the Class I Certificates and the Class A Certificates.
 
S-8

 
The rights of the holders of the Mezzanine Certificates with higher numerical class designations to receive distributions will be subordinated, to the extent described in this prospectus supplement, to the rights of the holders of the Mezzanine Certificates with lower numerical class designations.
 
Subordination is intended to enhance the likelihood of regular distributions on the more senior certificates and to afford those certificates protection against losses.
 
Overcollateralization
 
The issuing entity will have an initial level of overcollateralization of approximately 4.25% of the sum of (i) the aggregate principal balance of the initial mortgage loans as of the cut-off date and (ii) the original pre-funded amount. On any distribution date after the closing date, the issuing entity is required to maintain or restore overcollateralization to the required level as described herein.
 
The overcollateralization is available for the benefit of all classes of Class A, Mezzanine and Class I Certificates.
 
Excess Cashflow
 
Excess cashflow (which includes excess interest from the mortgage loans) will be distributed as follows:
 
(i) to the class or classes of Class A and Mezzanine Certificates then entitled to receive distributions in respect of principal, in an amount equal to any Extra Principal Distribution Amount, distributable to such classes in the same order as the Group I Principal Distribution Amount and the Group II Principal Distribution Amount as described under “Description of the Certificates—Principal Allocations” herein;
 
(ii) to the supplemental interest trust to be distributed as described under “Description of the Certificates — Supplemental Interest Trust” herein; and
 
(iii) any remaining amounts to the holders of the residual certificates, as provided in the pooling and servicing agreement.
 
Mortgage Insurance
 
Certain of the initial mortgage loans will be covered by existing lender-paid mortgage insurance policies previously issued to the Servicer, the benefits of which will be assigned to the issuing entity with respect to such mortgage loans. More specifically, approximately 11.24% of the initial mortgage loans by the cut-off date principal balance will be covered by a mortgage insurance policy issued by Mortgage Guaranty Insurance Corporation (“MGIC”), approximately 0.03% of the initial mortgage loans by cut-off date principal balance are covered by a mortgage insurance policy issued by PMI Mortgage Insurance Co. (“PMI”) and approximately 0.01% of the mortgage loans by cut-off date principal balance are covered by a mortgage insurance policy issued by Radian Guaranty Inc. (“Radian”). Approximately 80.46% of the initial mortgage loans by cut-off date principal balance have an original loan-to-value ratio in excess of 60% and are not insured. Additionally, approximately 8.26% of the initial mortgage loans by cut-off date principal balance have an original loan-to-value ratio less than or equal to 60% and are not insured.
 
The mortgage insurance policies provided by MGIC, PMI and Radian insure a portion of the loss on the related mortgage loan to a level where the uninsured exposure of the mortgage loan is reduced to an amount equal to 55%, 51% and 50%, respectively, of the original loan-to-value ratio of such mortgage loan, as more fully described in the related mortgage insurance policy.
 
Limited Cross-Collateralization
 
The mortgage loans have been divided into two subpools, designated as the “Group I mortgage loans” and the “Group II mortgage loans.” The Group I mortgage loans primarily support the Group I Certificates. The Group II mortgage loans primarily support the Group II Certificates. Distributions of collections from both groups of mortgage loans will be used to pay interest and principal to the Mezzanine Certificates, the Class I Certificates and the Class C Certificates. To the extent that available funds representing interest from one group of mortgage loans are insufficient to make a required payment of interest to its related Class A Certificates, then any remaining available funds representing interest from the other group, after payment of interest to its related Class A Certificates, may be used to make such required payment as described in this prospectus supplement. Likewise, remaining funds representing principal from a group after making the required distribution of principal to its related Class A Certificates may be used to make required principal distributions on the other classes of Class A Certificates as described in this prospectus supplement.
 
S-9

 
Interest Rate Hedge Agreements
 
On the closing date or before the end of the pre-funding period, the supplemental interest trust will enter into two interest rate swap agreements and fourteen interest rate cap agreements with the Hedge Providers. Under each interest rate hedge agreement, on each distribution date after the supplemental interest trust has entered into that interest rate hedge agreement until that interest rate hedge agreement is retired, the supplemental interest trust will make a payment equal to a fixed rate on a notional amount to the hedge provider (on a “30/360” basis), and the supplemental interest trust will receive a payment from the hedge provider equal to the product of (a) in the case of the swap agreements, one-month LIBOR, and in the case of the cap agreements, the excess, if any, of one-month LIBOR over the related strike price, (b) the actual number of days elapsed in the related accrual period divided by 360 and (c) the applicable notional amount.
 
On each distribution date amounts received by the supplemental interest trust in respect of the interest rate hedge agreements will be available to restore the overcollateralization to the required level and to pay any available funds cap shortfall.
 
See “Description of the Certificates - Summary of Interest Rate Hedge Agreements” in this prospectus supplement.
 
Allocation of Losses
 
All realized losses on the mortgage loans will be allocated on each distribution date, sequentially as follows: first to the excess cash flow, second in reduction of the overcollateralization amount and third to the reduction of the principal balance of the classes of Mezzanine Certificates, in inverse order of priority.
 
See “Risk Factors—Potential inadequacy of credit enhancement” and “Description of the Certificates” in this prospectus supplement.
 
Removal and Substitution of Mortgage Loans
 
Upon the earlier of discovery or receipt of notice by the depositor of a breach of any of the representations and warranties contained in the mortgage loan purchase agreement which materially and adversely affects the value of the related mortgage loan or the interests of the certificateholders, the sponsor will have a period of sixty days to effect a cure. If the breach is not cured within the sixty-day period, the sponsor will, either (a) substitute for such mortgage loan a Qualified Substitute Mortgage Loan or (b) purchase such mortgage loan from the issuing entity. See “Description of the Certificates— Assignment of Mortgage Loans” in this prospectus supplement.
 
The custodian on behalf of the trustee will review each mortgage loan file and if during the process of reviewing the mortgage files, finds any document constituting a part of a mortgage file which is not executed, has not been received, is unrelated to the mortgage loan, or does not conform to the requirements in the pooling and servicing agreement, the custodian will promptly so notify the sponsor and the trustee in writing with details thereof. If, within 45 days after the custodian’s notice of such defect, the sponsor has not caused the defect to be remedied and the defect materially and adversely affects the value of the related mortgage loan or the interest of the certificateholders in the related mortgage loan, the sponsor will either (a) substitute such mortgage loan with a qualified substitute mortgage loan or (b) purchase such mortgage loan from the issuing entity. See “Description of the Certificates—Assignment of Mortgage Loans” in this prospectus supplement.
 
S-10

 
Advancing
 
The servicer will be required to advance amounts representing delinquent payments of scheduled principal and interest, other than balloon payments, as well as expenses to preserve and to protect the value of collateral, in each case to the extent considered recoverable. Reimbursement of these advances is senior to payments to the certificateholders.
 
Servicing Fee
 
The servicer will receive a servicing fee on each distribution date in an amount equal to interest at the servicing fee rate for a mortgage loan on the outstanding principal balance of that mortgage loan. The servicing fee rate with respect to each mortgage loan will be 0.50% per annum. The servicing fee will be paid out of available funds on each distribution date prior to any payments on the certificates.
 
Clean-up Call
 
The servicer or its designee has a clean-up call option which, if exercised, would result in early retirement of the certificates on any distribution date on or after the date on which the aggregate principal balance of the mortgage loans has declined to 10% or less of the sum of (i) the aggregate principal balance of the initial mortgage loans as of the cut-off date and (ii) the original pre-funded amount. See “Description of the Certificates—Optional Purchase Pledge” in this prospectus supplement.
 
Federal Income Tax Consequences
 
Elections will be made to treat certain portions of the issuing entity as one or more REMICs for federal income tax purposes. The Class A and Mezzanine Certificates represent ownership of “regular interests” in a REMIC, along with certain contractual rights and obligations as described herein. Certificateholders will be required to include interest on the certificates in income in accordance with an accrual method of accounting.
 
ERISA Considerations
 
After the end of the pre-funding period, the offered certificates may be purchased by ERISA plans provided that certain conditions are satisfied. A fiduciary of any ERISA plan that is considering a purchase of offered certificates should, among other things, consult with experienced legal counsel in determining whether all required conditions for purchase have been satisfied.
 
Legal Investment
 
The Class A and Mezzanine Certificates will not constitute “mortgage related securities” for purposes of SMMEA. Institutions whose investment activities are subject to legal investment laws and regulations or to review by certain regulatory authorities may be subject to restrictions on investment in the certificates.
 
S-11

 
Ratings
 
The certificates must receive at least the following ratings from Standard & Poor’s, a division of The McGraw-Hill Companies, Inc., and Moody’s Investors Service, Inc. in order to be issued:

 
 
Ratings
 
Class
   
S&P
 
 
Moody’s
 
A-1A
   
AAA
   
Aaa
 
A-2A
   
AAA
   
Aaa
 
A-2B
   
AAA
   
Aaa
 
A-2C
   
AAA
   
Aaa
 
A-2D
   
AAA
   
Aaa
 
M-1
   
AA+
   
Aa1
 
M-2
   
AA
   
Aa2
 
M-3
   
AA-
   
Aa3
 
M-4
   
A+
   
A1
 
M-5
   
A
   
A2
 
M-6
   
A-
   
A3
 
M-7
   
BBB+
   
Baa1
 
M-8
   
BBB
   
Baa2
 
M-9
   
BBB-
   
Baa3
 
M-10
   
BB+
   
Ba1
 
 
A security rating is not a recommendation to buy, sell or hold securities and may be subject to revision or withdrawal at any time by the assigning rating agency. A security rating does not address the frequency of principal prepayments or the collection thereof, the corresponding effect on yield to investors or the payment of any shortfall resulting from the application of the available funds cap rate.
 
S-12

 
Risk Factors
 
Prospective investors should consider, among other things, the items discussed under “Risk Factors” in the prospectus and the following factors in connection with the purchase of the offered certificates:
 
Substantially all of the loans in the mortgage pool were underwritten to non-conforming standards and may experience higher delinquency and loss rates
 
The underwriting standards for the mortgage loans are described under “Description of the Mortgage Pool—Underwriting Standards for the Mortgage Loans,” and are primarily intended to provide single family mortgage loans for non-conforming credits which do not satisfy the requirements of typical “A” credit borrowers. A “non-conforming credit” means a borrower whose mortgage loan would be ineligible for direct purchase by Fannie Mae due to credit characteristics that do not meet the Fannie Mae underwriting guidelines, for reasons such as creditworthiness and repayment ability. These mortgagors may have a record of credit write-offs, outstanding judgments, prior bankruptcies and other negative credit items. Accordingly, mortgage loans underwritten to non-conforming credit underwriting standards or to standards that do not meet the requirements for typical “A” credit borrowers are likely to experience rates of delinquency, foreclosure and loss that are higher, and may be substantially higher, than mortgage loans originated in accordance with the Fannie Mae underwriting guidelines or to typical “A” credit borrowers.
 
The mortgage pool contains high original loan-to-value loans which could cause losses to holders of the Class A and Mezzanine Certificates
 
Approximately 12.36% of the initial Group I mortgage loans and approximately 8.35% of the initial Group II mortgage loans (in each case, by aggregate principal balance of the related loan group as of the cut-off date), respectively, with an original loan-to-value ratio in excess of 60% will be covered by a lender-paid mortgage insurance policy (references to loan-to-value ratios in this prospectus supplement are references to combined loan-to-value ratios with respect to second-lien mortgage loans).
 
Approximately 47.10% and 55.20% of the initial Group I mortgage loans and initial Group II mortgage loans (in each case, by aggregate principal balance of the related loan group as of the cut-off date), respectively, have original loan-to-value ratios in excess of 80%. Mortgage loans with a loan-to-value ratio in excess of 80% will be affected to a greater extent than mortgage loans with a loan-to-value ratio equal to or less than 80% by any decline in the value of the related property securing such mortgage loans. We can give no assurance that values of the mortgaged properties have remained or will remain at their levels on the dates of origination of the related mortgage loans. If the residential real estate market should experience an overall decline in property values such that the outstanding balances of the mortgage loans, and any secondary financing on the mortgaged properties, become equal to or greater than the value of the mortgaged properties, the actual rates of delinquencies, foreclosures and losses could be higher than those now generally experienced in the mortgage lending industry.
 
Potential inadequacy of credit enhancement
 
The overcollateralization, subordination, limited cross-collateralization, loss allocation, excess cashflow and primary mortgage insurance features described in this prospectus supplement are intended to enhance the likelihood that the certificateholders will receive regular payments of interest and principal, but such credit enhancements are limited in nature and may be insufficient to cover all losses on the mortgage loans. The credit enhancement includes the subordination of excess interest to payments of interest and principal on the Class I Certificates, Class A Certificates and Mezzanine Certificates.
 
S-13

 
Further, while excess interest, if any, will be available to maintain or restore overcollateralization, there may not be sufficient funds available to make the required distribution of interest on the certificates. Such a shortfall would reduce the interest distributed: first, sequentially, to the Class M-10, Class M-9, Class M-8, Class M-7, Class M-6, Class M-5, Class M-4, Class M-3, Class M-2, and Class M-1 Certificates, second, to the Class A Certificates, pro rata, and third, to the Class I Certificates, in that order.
 
Although primary mortgage insurance policies have been acquired on behalf of the issuing entity from the mortgage insurance providers, such coverage will provide only limited protection against losses on defaulted covered mortgage loans. Unlike a financial guaranty policy, coverage under the mortgage insurance policies is subject to certain limitations and exclusions including, for example, losses resulting from fraud and physical damage to the mortgaged property and to certain conditions precedent to payment, such as notices and reports. As a result, coverage may be denied or limited on covered mortgage loans. In addition, since the amount of coverage depends on the loan-to-value ratio at the time of origination of the covered mortgage loan, a decline in the value of a mortgaged property will not result in increased coverage, and the issuing entity may still suffer a loss on a covered mortgage loan. The mortgage insurance providers also may affect the timing and conduct of foreclosure proceedings and other servicing decisions regarding defaulted mortgage loans covered by the policy.
 
Pledge of servicing rights
 
The servicing rights with respect to the mortgage loans may be pledged by the servicer to a third-party unrelated to the servicer. The pledgee of the servicing rights has the right, at its discretion, to transfer servicing responsibilities to another entity upon the occurrence of a servicer event of default under the pooling and servicing agreement, or upon a default of the servicer or its affiliates under the lending facility between the servicer and the pledgee of the servicing rights, if the pledgee of the servicing rights certifies to the trustee that such entity is a qualified servicer pursuant to the requirements of the pooling and servicing agreement, and such transfer does not cause any of the rating agencies to withdraw, downgrade or qualify the ratings they have assigned to any of the certificates. It is possible that the servicing responsibilities with respect to some or all of the mortgage loans may be transferred from the servicer to a third party in the future, which may or may not occur within a short time following the closing date. At any time that servicing responsibilities are transferred as described above, the mortgage loans may experience an increase in delinquencies and default during the transitions of servicing responsibilities. In addition, in the event of a servicer default under the pooling and servicing agreement, the pledgee of the servicing rights will have the right to require the replacement of the servicer, even if the certificateholders have waived the related default.
 
The mortgage pool includes balloon loans, which can create increased risk of losses
 
Approximately 26.44% and 39.45% of the initial Group I and the initial Group II mortgage loans (in each case, by aggregate principal balance of the related loan group as of the cut-off date), respectively, are fixed-rate “balloon loans”; that is, they require monthly payments of principal based on 30-year amortization schedules and have scheduled maturity dates of 15 years from the due date of the first monthly payment or they require monthly payments of principal based on 40-year amortization schedules and have scheduled maturity dates of 30 years from the due date of the first monthly payment, in each case leaving a substantial portion of the original principal amount due and payable on the respective scheduled maturity date; or they are adjustable rate “balloon loans”; that is, they have interest rates that are fixed for two, three or five years and then the interest rates float for twenty-eight, twenty-seven or twenty-five years respectively, and they require monthly payments of principal based on 40-year amortization schedules and have scheduled maturity dates of 30 years from the due date of the first monthly payment. The balloon loans entail a greater degree of risk for prospective investors because the ability of a mortgagor to make a balloon payment typically will depend upon the mortgagor’s ability either to refinance the related balloon loan or to sell the related mortgaged property. The mortgagor’s ability to sell or refinance will be affected by a number of factors, including the level of prevailing mortgage rates at the time of sale or refinancing, the mortgagor’s equity in the related mortgaged property, the financial condition and credit profile of the mortgagor, applicable tax laws and general economic conditions. No person is obligated to refinance any balloon loan.
 
S-14

 
The mortgage pool includes mortgage loans secured by second-liens on the related mortgaged property
 
Approximately 1.75% of the initial Group I mortgage loans and approximately 5.64% of the initial Group II mortgage loans (by aggregate principal balance as of the cut-off date) are secured by second-liens on the related mortgaged properties. The proceeds from any liquidation, insurance or condemnation proceedings will be available to satisfy the outstanding balance of such mortgage loans only to the extent that the claims of the related senior mortgages have been satisfied in full, including any related foreclosure costs. In circumstances when it has been determined to be uneconomical to foreclose on the mortgaged property, the servicer may write off the entire balance of such second-lien mortgage loan as a bad debt. The foregoing considerations will be particularly applicable to mortgage loans secured by second-liens that have high loan-to-value ratios because it is comparatively more likely that the servicer would determine foreclosure to be uneconomical in the case of such mortgage loans. The rate of default of second-lien mortgage loans may be greater than that of mortgage loans secured by first-liens on comparable properties.
 
An overall decline in the residential real estate markets could adversely affect the values of the mortgaged properties and cause the outstanding principal balances of the second-lien mortgage loans, together with the senior mortgage loans secured by the same mortgaged properties, to equal or exceed the value of the mortgaged properties. This type of a decline would adversely affect the position of a second mortgagee before having the same effect on the related first mortgagee. A rise in interest rates over a period of time and the general condition of a mortgaged property as well as other factors may have the effect of reducing the value of the mortgaged property from the appraised value at the time the mortgage loan was originated. If there is a reduction in value of the mortgaged property, the ratio of the amount of the mortgage loan to the value of the mortgaged property may increase over what it was at the time the mortgage loan was originated. This type of increase may reduce the likelihood of liquidation or other proceeds being sufficient to satisfy the second-lien mortgage loan after satisfaction of any senior liens.
 
The prepayment experience of the second lien loans may differ from that of the first lien loans. Second lien mortgage loans often are not viewed as permanent financing and may be more likely to be prepaid. However, the smaller monthly payment relative to that of a first lien mortgage loan may reduce the perceived benefits of refinancing. Changes in the tax laws governing deductibility of mortgage interest are likely to have a greater effect on second lien loans than on first lien loans.
 
The mortgage pool includes interest-only mortgage loans, which may have an increased risk of loss
 
Approximately 2.63% and 9.95% of the initial Group I and initial Group II mortgage loans (by aggregate principal balance of the related loan group as of the cut-off date), respectively, do not provide for any required payments of principal during the first five or ten years of their term. These loans are sometimes referred to as interest only loans. Interest only loans may have risks and payment characteristics that are not present with fully amortizing mortgage loans, including the following:
 
 
·
no principal distributions will be made to certificateholders from interest only loans during their interest only period except in the case of a prepayment, which may extend the weighted average lives of the notes;
 
S-15

 
 
·
during the interest only period interest only loans may be less likely to prepaid since the perceived benefits of refinancing may be less than with a fully amortizing mortgage loan;
 
 
·
as the end of the interest only period approaches, an interest only loan may be more likely to be refinanced in order to avoid the increase in the monthly payment required to amortize the loan over its remaining term;
 
 
·
interest only loans may be more likely to default than fully amortizing loans a the end of the interest only period due to the increased monthly payment required to amortize the loan over its remaining term; and
 
 
·
if an interest only loan defaults, the severity of loss may be greater due to the larger unpaid principal balance.
 
Seasoned Mortgage Loans
 
Up to approximately 0.26% by aggregate principal balance of the initial Mortgage Loans may be seasoned more than 12 months. These mortgage loans were included in prior securitization trusts of the sponsor, which recently have had their “clean-up calls.” Such mortgage loans were originated in accordance with the originator’s underwriting guidelines in place at the time of their origination. Certain of the borrowers on these mortgage loans may be in or may have emerged recently from bankruptcy proceedings, although any borrowers in bankruptcy are current under their respective bankruptcy plans. The prepayment and default experience on these well seasoned mortgage loans may differ from that on the other mortgage loans, either as a result of differing underwriting guidelines, or simply the passage of time, during which the borrower’s situation and/or needs may have changed
 
The mortgage loans have geographic concentrations which could cause losses to the holders if certain events occur in such regions
 
Approximately 19.78%, 5.94% and 5.61% of the initial Group I mortgage loans (by aggregate principal balance of the initial Group I mortgage loans as of the cut-off date) are secured by properties located in Florida, California and Maryland, respectively. Approximately 26.53% and 21.00% of the initial Group II mortgage loans (by aggregate principal balance of the initial Group II mortgage loans as of the cut-off date) are secured by properties located in Florida and California, respectively. In the event any of these states experiences a decline in real estate values, losses on the mortgage loans may be greater than otherwise would be the case. Such mortgage loans may be subject to prepayment or loss, both of which could affect the yield on the Class A and Mezzanine Certificates.
 
The final pool of mortgage loans will include mortgage loans which will differ from the pool of initial mortgage loans described in this prospectus supplement
 
Subsequent mortgage loans acquired by the issuing entity as a result of the pre-funding feature may have characteristics different from those of the initial mortgage loans. However, each subsequent mortgage loan must satisfy the eligibility criteria referred to under the “Description of the Mortgage Pool—Conveyance of Subsequent Mortgage Loans and the Pre-Funding Account” at the time of its conveyance to the issuing entity and must be underwritten in accordance with the criteria described under “Description of the Mortgage Pool—Underwriting Standards for the Mortgage Loans” herein. The statistical information presented in this prospectus supplement under “Description of the Mortgage Pool” describes a pool of mortgage loans consisting of the initial mortgage loans to be transferred to the trust on the closing date.
 
S-16

 
The pre-funding feature could result in a significant prepayment on the Class A Certificates at the end of the pre-funding period
 
If funds in the pre-funding account allocable to a Group of mortgage loans are not fully applied to the purchase of subsequent mortgage loans by the end of the pre-funding period, the related remaining funds will be used to make a principal prepayment on the Group I Certificates (to the extent the unapplied funds relate to the Group I mortgage loans), the Group II Certificates (to the extent the unapplied funds relate to the Group II mortgage loans). No assurances can be given that there will not be such a payment.
 
The rate and timing of principal prepayments on the mortgage loans could adversely affect the yield on the Class A and Mezzanine Certificates
 
The rate and timing of principal payments on the certificates will depend on the rate and timing of principal payments (including prepayments, defaults, liquidations, purchases of the mortgage loans due to a breach of a representation or warranty and the servicer’s limited right to purchase delinquent mortgage loans) on the mortgage loans. Accordingly, the certificates are subject to inherent cash-flow uncertainties because the mortgage loans may be prepaid at any time. The Group I Certificates will primarily bear the prepayment risk of the Group I mortgage loans, the Group II Certificates will primarily bear the prepayment risk of the Group II mortgage loans and the Mezzanine Certificates will bear the prepayment risk of both Groups of mortgage loans. Generally, when prevailing interest rates increase, prepayment rates on mortgage loans tend to decrease, resulting in a slower return of principal to investors at a time when reinvestment at such higher prevailing rates would be desirable. Conversely, when prevailing interest rates decline, prepayment rates on mortgage loans tend to increase, resulting in a faster return of principal to investors at a time when reinvestment at comparable yields may not be possible.
 
Approximately 62.74% and 64.62% of the initial Group I mortgage loans and initial Group II mortgage loans (in each case, by aggregate principal balance of the related loan group as of the cut-off date), respectively, are subject to prepayment penalties as of the cut-off date. Of the initial Group I mortgage loans that are subject to prepayment penalties, approximately 56.87% are ARM loans and 43.13% are fixed-rate mortgage loans. Of the initial Group II mortgage loans that are subject to prepayment penalties, approximately 85.62% are ARM loans and 14.38% are fixed-rate mortgage loans. Typically, the mortgage loans with a prepayment penalty provision provide for a prepayment penalty for partial prepayments and full prepayments. Prepayment penalties may be payable for a period of time ranging from one to five years from the related origination date. Such prepayment penalties may reduce the rate of prepayment on the mortgage loans. Under certain circumstances, as described in the pooling and servicing agreement, the servicer may waive the payment of any otherwise applicable prepayment penalty. Investors should conduct their own analysis of the effect, if any, that the prepayment penalties, and decisions by the servicer with respect to the waiver thereof, may have on the prepayment performance of the mortgage loans. The depositor makes no representations as to the effect that the prepayment penalties, and decisions by the servicer with respect to the waiver thereof, may have on the prepayment performance of the mortgage loans.
 
The yields to maturity on the certificates will depend on, among other things, the rate and timing of principal payments (including prepayments, defaults, liquidations, purchases of the mortgage loans due to a breach of a representation or warranty and purchases of delinquent loans by the servicer) on the mortgage loans. The yield to maturity on the certificates will also depend on the related certificate interest rate and the purchase price for such certificates.
 
S-17

 
If the certificates are purchased at a premium and principal payments thereon occur at a rate faster than anticipated at the time of purchase, the investor’s actual yield to maturity will be lower than that assumed at the time of purchase. Conversely, if the certificates are purchased at a discount and principal payments thereon occur at a rate slower than that assumed at the time of purchase, the investor’s actual yield to maturity will be lower than that assumed at the time of purchase. The certificates were structured assuming, among other things, a prepayment rate and corresponding weighted average lives as described herein. The prepayment, yield and other assumptions to be used for pricing purposes for the certificates may vary as determined at the time of sale.
 
See “Certain Yield and Prepayment Considerations” herein and “Description of the Securities—Weighted Average Life of the Securities” in the prospectus.
 
Effect of mortgage rates on the pass-through rates
 
The LIBOR Certificates accrue interest at pass-through rates based on a one-month LIBOR index plus a specified margin, but such pass-through rates are subject to an Available Funds Cap Rate. Each pass-through rate for the LIBOR Certificates, other than that for the Class A-2A Certificates, also is subject to a maximum rate. As a result of the effect of the Available Funds Cap Rate on the pass-through rates on the LIBOR Certificates, such certificates may accrue less interest than they would otherwise accrue if their pass-through rates were based solely on the one month LIBOR index plus the specified margin.
 
Substantially all of the adjustable-rate mortgage loans have mortgage rates that adjust based on a six-month LIBOR index. The adjustable-rate mortgage loans have periodic and maximum limitations on adjustments to their mortgage rates, and will have the first adjustment to their mortgage rates generally two years, three years, five years or seven years after the origination thereof. The fixed-rate mortgage loans have mortgage rates that will not adjust.
 
A variety of factors could limit the pass-through rates and adversely affect the yields to maturity on the Class A and Mezzanine Certificates. Some of these factors are described below.
 
· The pass-through rates for the LIBOR Certificates may adjust monthly while the mortgage rates on the adjustable-rate mortgage loans adjust less frequently and the mortgage rates on the fixed-rate mortgage loans do not adjust. Furthermore, the adjustable-rate mortgage loans will have the first adjustment to their mortgage rates generally two years, three years, five years or seven years following their origination. Consequently, the Available Funds Cap Rate on the pass-through rates on the LIBOR Certificates may prevent any increases in the pass-through rates on such certificates for extended periods.
 
· If prepayments, defaults and liquidations occur more rapidly on the mortgage loans with relatively higher mortgage rates than on the mortgage loans with relatively lower mortgage rates, the pass-through rates on the Class A and Mezzanine Certificates are more likely to be limited.
 
· The index used to determine the mortgage rates on the adjustable-rate mortgage loans may respond to different economic and market factors than does one-month LIBOR. It is possible that the mortgage rates on certain of the adjustable-rate mortgage loans may decline while the pass-through rates on the LIBOR Certificates are stable or rising. It is also possible that the mortgage rates on the adjustable-rate mortgage loans and the pass-through rates on the LIBOR Certificates may both decline or increase during the same period, but that the pass-through rates on the LIBOR Certificates may decline more slowly or increase more rapidly.
 
S-18

 
If the pass-through rate on any class of Class A and Mezzanine Certificates is limited by the Available Funds Cap Rate on any distribution date, the resulting Available Funds Cap Shortfalls may be recovered by the holders of such class of certificates on such distribution date or future distribution dates, to the extent that on such distribution dates there are Available Funds remaining after certain other payments on the Class A and Mezzanine Certificates and the payment of certain fees and expenses of the trust (including the fixed rate cap payment, net swap payment, or any hedge termination payment owed to a Hedge Provider other than a Defaulted Hedge Termination Payment).
 
Amounts used to pay such shortfalls on the Class A and Mezzanine Certificates may be supplemented by the Hedge Agreements to the extent described in this prospectus supplement. However, the amount received from the Hedge Provider under the Hedge Agreements may be insufficient to pay the holders of the applicable certificates the full amount of interest which they would have received absent the Available Funds Cap Rate.
 
Prepayment interest shortfalls and Servicemembers Civil Relief Act (“Relief Act”) shortfalls
 
When a mortgage loan is prepaid, the mortgagor is charged interest on the amount prepaid only up to the date on which the prepayment is made, rather than for an entire month. This may result in a shortfall in interest collections available for payment on the next distribution date. The servicer is required to cover a portion of such prepayment interest shortfall in interest collections that are attributable to prepayments, but only up to the amount of the servicer’s servicing fee for the related period. The servicer is not required to off-set prepayment interest shortfalls from any interest income or ancillary income otherwise payable to the servicer. In addition, certain shortfalls in interest collections arising from the application of the Relief Act or any state law providing for similar relief will not be covered by the servicer.
 
On any distribution date, any shortfalls resulting from the application of the Relief Act or any state law providing for similar relief and any prepayment interest shortfalls to the extent not covered by compensating interest paid by the servicer will be allocated, first, to the excess cashflow, and second to the monthly interest distributable amounts with respect to the Class A and Mezzanine Certificates on a pro rata basis based on the respective amounts of interest accrued on such certificates for such distribution date. The holders of the Class A and Mezzanine Certificates will not be entitled to reimbursement for any such interest shortfalls. If these are allocated to the Class A and Mezzanine Certificates, the amount of interest paid to those certificates will be reduced, adversely affecting the yield on your investment.
 
The assignment of certain of the mortgages in the name of MERS may result in delays and additional costs in commencing, prosecuting and completing foreclosure proceedings
 
The assignment of certain of the mortgages in the name of Mortgage Electronic Registration Systems, Inc. (“MERS”) is a new practice in the mortgage lending industry. The depositor expects that the servicer or successor servicer will be able to commence foreclosure proceedings on the mortgaged properties, when necessary and appropriate; however, public recording officers and others may have limited, if any, experience with lenders seeking to foreclose mortgages, assignments of which are registered with MERS. Accordingly, delays and additional costs in commencing, prosecuting and completing foreclosure proceedings, defending litigation commenced by third parties and conducting foreclosure sales of the mortgaged properties could result. Those delays and additional costs could in turn delay the distribution of liquidation proceeds to the certificateholders and increase the amount of realized losses on the mortgage loans.
 
S-19

 
The Mezzanine Certificates are particularly sensitive to the timing and amount of losses and prepayments on the mortgage loans
 
The weighted average lives of, and the yields to maturity on, the Mezzanine Certificates, in the increasing order of their numerical class designations, will be progressively more sensitive, in reverse order of such certificates’ distribution priority, to the rate and timing of mortgagor defaults and the severity of ensuing losses on the mortgage loans. If the actual rate and severity of losses on the mortgage loans is higher than those assumed by an investor in those certificates, the actual yield to maturity of such certificates may be lower than the yield anticipated by such holder based on such assumption. The timing of losses on the mortgage loans will also affect an investor’s actual yield to maturity, even if the rate of defaults and severity of losses over the life of the mortgage pool are consistent with an investor’s expectations. In general, the earlier a loss occurs, the greater the effect on an investor’s yield to maturity. Realized losses on the mortgage loans, to the extent they exceed the amount of excess interest and overcollateralization following distributions of principal on the related distribution date, will reduce the Certificate Balances of the classes of Mezzanine Certificates then outstanding in reverse order of their numerical class designation. As a result of such reductions, less interest will accrue on each such class of Mezzanine Certificates than would otherwise be the case. Once a realized loss is allocated to a Mezzanine Certificate, such amounts may be distributable as a result of Subsequent Recoveries on the Mortgage Loans with respect to such written down amount.
 
Unless the Certificate Balances of the Class A Certificates have been reduced to zero, the Mezzanine Certificates will not be entitled to any principal distributions until, at the earliest, the distribution date in June 2010. Even after the date on which the Mezzanine Certificates are scheduled to begin to amortize they may become locked out of receiving principal distributions during periods in which delinquencies or losses on the mortgage loans exceed certain levels. As a result, the weighted average lives of such certificates will be longer than would otherwise be the case if distributions of principal were allocated among all of the certificates at the same time. As a result of the longer weighted average lives of such certificates, the holders of such certificates have a greater risk of suffering a loss on their investments. Further, because such certificates might not receive any principal if certain delinquency levels occur, it is possible for such certificates, for so long as the Class A Certificates are outstanding, to receive no principal distributions even if no losses have occurred on the mortgage pool.
 
The structure of the Mezzanine Certificates causes the yield of such classes to be particularly sensitive to changes in the rates of prepayment of the mortgage loans. Because distributions of principal will be made to the holders of such certificates according to the priorities described in this prospectus supplement, the yield to maturity on such classes of certificates will be sensitive to the rates of prepayment on the mortgage loans experienced both before and after the commencement of principal distributions on such classes.
 
Ratings on the offered certificates are dependent upon the creditworthiness of the Mortgage Insurance Providers
 
The ratings assigned to the Class A and Mezzanine Certificates by the rating agencies will be based in part on the credit characteristics of the mortgage loans and on ratings assigned to the mortgage insurance providers. Mortgage Guaranty Insurance Corporation ("MGIC") insures all of the initial Group I mortgage loans having lender-paid mortgage insurance policies and approximately 98.35% of the initial Group II mortgage loans (by aggregate principal balance of the related loan group as of the cut-off date) having lender-paid mortgage insurance policies. PMI Mortgage Insurance Co. insures approximately 1.20% of the initial Group II mortgage loans (by aggregate principal balance of the related loan group as of the cut-off date) having lender-paid mortgage insurance policies. Radian Guaranty Inc. insures approximately 0.45% of the initial Group II mortgage loans (by aggregate principal balance of the related loan group as of the cut-off date) having lender-paid mortgage insurance policies. On February 6, 2007, MGIC Investment Corporation (“MGIC Investment”) announced that it had entered into an agreement to merge with Radian Group Inc. (“Radian Group”), with the new company to be called MGIC Radian Financial Group Inc. The merger will result in shares of MGIC Investment’s common stock being exchanged for shares of Radian Group’s common stock. The transaction has been approved by the shareholders and boards of directors of MGIC Investment and Radian Group and is subject to regulatory and other approvals. As a result of the merger announcement described above, Fitch placed MGIC’s rating on “rating watch negative”, and Moody’s changed the outlook for its rating from stable to negative. (See “The Originator—Private Mortgage Insurance Policies” herein for further information.) Any reduction in the ratings assigned to a mortgage insurance provider by the rating agencies could result in the reduction of the ratings assigned to the offered certificates. This reduction in ratings could adversely affect the liquidity and market value of the offered certificates.
 
S-20

 
The call of soldiers into active duty could limit the servicer’s ability to collect on the loans
 
As described in the prospectus, the Relief Act, as amended, and similar state laws limit the rate of interest and the ability of the servicer to foreclose on mortgages if the mortgagor is called into military service after the origination of the loan. A number of reservists and other soldiers have been recently called into active duty and additional soldiers could be called into service in the future. If any of the borrowers enter into active military duty, shortfalls and losses to the issuing entity and the certificates could result, particularly since any interest otherwise due to the certificateholders may be reduced by application of the Relief Act, as described herein.
 
Violation of various federal and state laws may result in losses on the mortgage loans
 
Numerous federal and state consumer protection laws impose requirements applicable to the origination of the contracts, including the Truth in Lending Act, the Federal Trade Commission Act, the Fair Credit Billing Act, the Fair Credit Reporting Act, the Equal Credit Opportunity Act, the Fair Debt Collection Practices Act and the Uniform Consumer Credit Code. In the case of some of these laws, the failure to comply with their provisions may affect the enforceability of the related contract.
 
In addition to the Home Ownership and Equity Protection Act of 1994 (the “Homeownership Act”), a number of legislative proposals have been introduced at the federal, state and municipal level that are designed to discourage predatory lending practices. Some states have enacted, or may enact, laws or regulations that prohibit inclusion of some provisions in mortgage loans that mortgage rates or origination costs in excess of prescribed levels, and require that borrowers be given certain disclosures prior to the consummation of such mortgage loans. In some cases, state law may impose requirements and restrictions greater than those in the Homeownership Act. The sponsor’s failure to comply with these laws could subject the issuing entity and other assignees of the mortgage loans, to monetary penalties and could result in the borrowers rescinding such mortgage loans whether held by the issuing entity or subsequent holders of the mortgage loans. Lawsuits have been brought in various states making claims against assignees of high cost loans for violations of state law. Named defendants in these cases include numerous participants within the secondary mortgage market, including some securitization trusts.
 
Violations of certain provisions of these laws may limit the ability of the servicer to collect all or part of the principal of or interest on the mortgage loans, could subject the issuing entity to damages and administrative enforcement and could result in the borrowers rescinding such mortgage loans against either the issuing entity or subsequent holders of the mortgage loans.
 
S-21

 
The sponsor will represent that as of the Closing Date or the Subsequent Transfer Date, as applicable, each mortgage loan is in compliance with applicable federal and state laws and regulations. In the event of a breach of such representation, the sponsor will be obligated to cure such breach or repurchase or replace the affected mortgage loan in the manner described under “Description of the Certificates—Assignment of Mortgage Loans” herein.
 
Recent developments in the residential mortgage market may adversely affect the market value of the Certificates
 
The residential mortgage market has recently encountered difficulties which may adversely affect the performance or market value of the Certificates.
 
In recent months, delinquencies and losses with respect to residential mortgage loans generally have increased and may continue to increase, particularly in the subprime sector. In addition, in recent months residential property values in many states have declined or remained stable, after extended periods during which those values appreciated. A continued decline or a lack of increase in those values may result in additional increases in delinquencies and losses on residential mortgage loans generally, especially with respect to second homes and investor properties, and with respect to any residential mortgage loans where the aggregate loan amounts (including any subordinate loans) are close to the related property values. In addition, a number of residential mortgage loan originators, particularly those who originate subprime loans, have recently experienced serious financial difficulties and, in some cases, bankruptcy. Those difficulties have resulted in part from declining markets for their mortgage loans as well as from claims for repurchases of mortgage loans previously sold under provisions that require repurchase in the event of early payment defaults.
 
All of these general market conditions may affect the performance of the mortgage loans backing the Certificates and, even if they do not affect performance, may adversely affect the market value of the Certificates.
 
Recent developments affecting NovaStar 
 
In March 2002, an action was filed against NovaStar Home Mortgage, Inc. (“NHMI”) in Superior Court of Orange County, California entitled American Interbanc Mortgage, LLC v. NovaStar Home Mortgage, Inc. et. al. In the action, the plaintiff alleged that NHMI and two other mortgage companies engaged in false advertising and unfair competition under a California statute permitting lawsuits by a competitor. On May 4, 2007, a jury returned a verdict by a 9-3 vote awarding plaintiff $15.9 million. Such award may be trebled under the applicable California statute. The award is joint and several against the three defendants including NHMI. It is unknown if the other two defendants have the financial ability to pay any of the award. NHMI is currently reviewing its alternatives and will first ask the trial court to overturn the verdict because NHMI does not believe the verdict is supported by the facts. Absent such a decision NHMI is currently reviewing its various options for appeal. There can be no assurances that these efforts will be successful. At this time, the trial court has not entered a judgment. Furthermore, NHMI has a variety of alternative legal steps that can be taken. As such, it is too early in the process to determine that a liability is probable nor estimatable, therefore, NovaStar Financial, Inc. (“NFI”) has not recorded any liability or corresponding charge to earnings related to this case.
 
Since April 2004, a number of substantially similar class action lawsuits have been filed and consolidated into a single action in the United States District Court for the Western District of Missouri. The consolidated complaint generally alleges that NFI made public statements that were misleading for failing to disclose certain regulatory and licensing matters. The plaintiffs purport to have brought this consolidated action on behalf of all persons who purchased NFI’s common stock (and sellers of put options on NFI’s stock) during the period from October 29, 2003 through April 8, 2004. On January 14, 2005, NFI filed a motion to dismiss this action, and on May 12, 2005, the court denied such motion. On February 8, 2007 the court granted plaintiffs’ motion for class certification and on February 20, 2007, NFI filed a motion to reconsider with the court. NFI believes that these claims are without merit and intends to vigorously defend against them.
 
S-22

 
In the wake of the securities class action, NFI has also been named as a nominal defendant in several derivative actions brought against certain of its officers and directors in Missouri and Maryland. The complaints in these actions generally claim that the defendants are liable to NFI for failing to monitor corporate affairs so as to ensure compliance with applicable state licensing and regulatory requirements. The parties have reached a settlement of the derivative actions under which NFI agrees to adopt certain corporate governance measures and NFI’s insurance carrier will pay attorney’s fees to plaintiffs’ counsel. The settlement agreement, which has not yet been finalized, will be subject to court approval after notice of the settlement terms is provided to shareholders.
 
Since February 2007, a number of substantially similar putative class actions have been filed in the United States District Court for the Western District of Missouri. The complaints name NFI and three of its executive officers as defendants and generally allege, among other things, that the defendants made materially false and misleading statements regarding NFI’s business and financial results. The plaintiffs purport to have brought the actions on behalf of all persons who purchased or otherwise acquired NFI’s common stock during the period May 4, 2006 through February 20, 2007. NFI believes that these claims are without merit and will vigorously defend against them.
 
In addition to those matters listed above, NFI and the Servicer are currently parties to various other legal proceedings and claims, including, but not limited to, breach of contract claims, class actions or individual claims for violations of the RESPA, FLSA, federal and state laws prohibiting employment discrimination, federal and state laws prohibiting discrimination in lending and federal and state licensing and consumer protection laws. Further, several putative class actions have been filed since February 2007 against NFI, alleging generally that NFI made materially false and misleading statements regarding its financial condition and its business.
 
While management, including internal counsel, currently believes that the ultimate outcome of all these proceedings and claims will not have a material adverse effect on NFI’s or the Servicer’s financial condition or results of operations, litigation is subject to inherent uncertainties. If an unfavorable ruling were to occur, there exists the possibility of a material adverse impact on NFI’s or the Servicer’s financial condition and results of operations.
 
On May 10, 2007, NFI reported first-quarter results. For the quarter ended March 31, 2007, NFI reported net income available to common shareholders of $44.4 million, or $1.18 per fully diluted common share. A one-time tax-related gain of $84.2 million was realized due to the Board’s decision to terminate the REIT status effective January 1, 2008. The Board’s decision to terminate the REIT was based on the fact that the REIT experienced a significant decline in taxable income in 2006 and was expected to recognize little or no taxable income during the period from 2007 through 2011. Given this outlook, and the operating efficiencies to be gained through operating as a traditional C corporation, the Board of Directors approved the formal plan to voluntarily revoke the REIT status. Without the one-time tax-related gain attributable to the REIT revocation, net income available to common shareholders would have been a loss of $39.8 million, or $1.06 per fully diluted share.
 
In its first-quarter report on Form 10-Q, NFI reported several factors that contributed to a significant change in its liquidity position. During the first quarter of 2007, bond spreads widened on mortgage-backed securities to uncommon levels as a result of investor concerns over credit quality in the subprime mortgage market. This widening caused a significant decline in the value of NFI’s mortgage securities as well as its mortgage loans held-for-sale. Consequently, during the first quarter of 2007, NFI was subject to cash margin calls of approximately $72.4 million and $23.8 million on its mortgage securities and mortgage loans held-for-sale, respectively. NFI could continue to be subject to additional margin calls if the value of its mortgage assets declines.
 
S-23

 
As the values of mortgage loans decreased in the first quarter of 2007, not only was NFI subject to cash margin calls but the capital required to invest in new originations increased at the time of funding. NFI has invested approximately $61.4 million of capital in its mortgage loans held-for-sale on its balance sheet as of March 31, 2007 which consists of the difference between the current principal on the loans and the lending value assigned to the loans by NFI’s lenders.
 
NFI also had significant cash outlays to repurchase loans sold to third parties. When whole pools are sold as opposed to securitized, the third party has recourse against NFI for certain borrower defaults. The cash NFI must have on hand to repurchase these loans is much higher than the principal amount of the loans as NFI generally must reimburse the investor for the remaining unpaid principal balance, any premium recapture, any unpaid accrued interest and any other out-of-pocket advances in accordance with the loan sale agreement. Typically, repurchased loans will subsequently be financed on NFI’s warehouse repurchase agreements if eligible and then liquidated or sold. NFI paid $82.0 million in cash during the first quarter of 2007 to repurchase loans sold to third parties in the first quarter of 2007. Significant capital is tied up in these assets as the amount NFI can borrow against these assets is very low and some may not be eligible for financing. As a result of all of these liquidity factors, NFI had $63.4 million in cash and cash equivalents at March 31, 2007, which was a decrease of $87.2 million from December 31, 2006.
 
In its first-quarter report on Form 10-Q, NFI also reported that it failed to satisfy the profitability covenant under one of its warehouse repurchase facilities. NFI’s GAAP net income, determined on a pre-tax basis, was not greater than $1 for the six months ended March 31, 2007 and NFI was unable to obtain a modification or waiver of this requirement. Because NFI only had $120,000 of borrowings outstanding under this facility as of March 31, 2007, the breach did not permit lenders under NFI’s other warehouse repurchase facilities to accelerate all amounts then outstanding under those facilities. The borrowing on this line was then paid in full on April 2, 2007. While management of NFI believes NFI was in compliance with all other applicable covenants as of March 31, 2007, any future breach or non-compliance could have a material adverse effect on NFI’s financial condition. On May 1, 2007, the lender under this facility delivered a notice of default to NFI demanding payment of $2.9 million representing fees owed under the agreement and notifying NFI that the lender was applying $2.9 million in cash that it held as collateral towards this amount.
 
In its servicing attestation for 2006, the Servicer reported “material noncompliance” with applicable servicing criteria as follows: certain monthly bank reconciliations were not prepared and reviewed timely, certain monthly bank reconciliations contained reconciling items that were not cleared timely, reassignment of loans within the Mortgage Electronic Registration System (MERS) was not performed and fidelity bond coverage was not at the level required by the servicing agreements. The Servicer also stated that control activities related to those items have been implemented and individual instances of noncompliance have been or are in the process of being corrected.
 
In March 2007, Fitch Ratings placed the servicer ratings of the Servicer on watch for possible downgrading. This action reflects the rating agency’s concerns regarding the financial pressures on the Servicer.
 
S-24

 
Thereafter, on April 24, 2007 Standard & Poor’s Ratings Services placed the Servicer's subprime and special servicer rankings on NovaStar Mortgage Inc. on CreditWatch with negative implications. According to S&P, “The negative CreditWatch placement reflects our revised assessment of the parent company’s (NovaStar Financial Inc.) financial position, which we currently deem as insufficient. Consequently, we have removed NovaStar Mortgage from our Select Servicer List. Standard & Poor’s will continue to monitor the situation and will take ranking actions as necessary based on any changes in the financial position of NovaStar Financial.”
 
On April 25, 2007 Moody’s Investors Service downgraded the servicer quality (“SQ”) rating of the Servicer as a primary servicer of subprime loans to SQ3+ from SQ2. According to Moody’s, the rating downgrade is primarily due to a reduction in the Servicer’s servicing stability. Moody’s has lowered the Servicer’s stability assessment to below average from average. The Servicer, like a number of other independent subprime mortgage finance companies, is facing lower profitability as well as a potential increase in the level of liquidity risk due to the challenging conditions in the subprime market.
 
In April 2007, NFI executed a Master Repurchase Agreement (2007 Residual Securities) (the “Securities Facility”) with Wachovia Investment Holdings, LLC and Wachovia Capital Markets, LLC ( “Wachovia Capital”), providing for the financing of certain of NFI’s existing residual securities and NFI also executed a Master Repurchase Agreement (2007 Servicing Rights) (the “Servicing Rights Facility”) with Wachovia Bank, NA and Wachovia Capital (collectively, with Wachovia Investment Holdings, LLC and their respective affiliates, “Wachovia”), providing for the financing of certain mortgage servicing rights.
 
On April 30, 2007, NFI entered into a commitment letter setting forth the terms of a commitment for a $1.9 billion comprehensive financing facility arranged by Wachovia Capital. The facility would expand and replace the whole-loan and securities repurchase agreements currently existing between Wachovia and NFI, other than the Servicing Rights Facility and the Residual Securities Facility. The intent of the comprehensive facility is to put in place a financing facility that will enable NFI to primarily use Wachovia for its short-term borrowing needs. The proposed facility is expected to consist of several separate agreements (collectively, the “Agreements”), the first of which, the Whole Loan Master Repurchase Agreement, closed on May 9, 2007. Financing capacity under the proposed facility will be in addition to the aggregate $100 million financing capacity under the Servicing Rights Facility and the Residual Securities Facility.
 
As part of its plan to address its liquidity situation, during the first quarter of 2007 NFI also initiated a formal process to explore a range of strategic alternatives, including, without limitation, a potential sale or other change of control transactions. On April 11, 2007, NFI announced that it had retained Deutsche Bank Securities Inc. as its financial advisor to evaluate various strategic alternatives. As this evaluation is ongoing, NFI is uncertain as to what strategic alternatives may be available to it, whether NFI will elect to pursue any such strategic alternatives, or what impact any particular strategic alternative will have on NFI’s stock price if pursued. There are various uncertainties and risks relating to NFI’s exploration of strategic alternatives, including: 
 
 
·
 
exploration of strategic alternatives may distract management and disrupt operations, which could have a material adverse impact on NFI’s operating results;
 
 
·
 
the process of exploring strategic alternatives may be time consuming and expensive;
 
 
·
 
NFI may not be able to successfully achieve the benefits of the strategic alternative it undertakes; and
 
S-25

 
 
·
 
perceived uncertainties as to NFI’s future direction may result in the loss of employees, customers or business partners.

If the exploration of strategic alternatives does result in a transaction, NFI is unable to predict what the market prices of its common stock would be after the announcement of such a transaction. In addition, the market price of NFI’s stock could be highly volatile for several months as it explores strategic alternatives and may continue to be more volatile if and when a transaction is announced or NFI announces that it is no longer exploring strategic alternatives. There can be no assurance as to the likelihood, timing, nature or consequences of any strategic alternatives.
 
Use of Proceeds
 
After deducting the estimated expenses of this offering, as identified on the cover page, the net proceeds to the depositor from the sale of the underwritten certificates are estimated to be $1,319,596,746. The depositor will use the entire net proceeds to pay the sponsor for the initial mortgage loans and to make the initial deposit to the pre-funding account and to any required interest coverage account. The sponsor anticipates that it will use a majority of the proceeds to repay indebtedness and accrued interest under its warehouse lines of credit, including those provided by one or more affiliates of the underwriters. The depositor and the sponsor believe that funds provided by the net proceeds of this offering will be sufficient to accomplish the purposes set forth above.
 
Description of the Mortgage Pool
 
The statistical information presented in this prospectus supplement describes the initial Group I mortgage loans and the initial Group II mortgage loans (collectively, the “initial mortgage loans”) that are expected to be included in the trust estate on the closing date. The statistical information does not describe the subsequent mortgage loans which may be acquired through the pre-funding feature using the funds on deposit in the pre-funding account.
 
The “cut-off date” for the initial mortgage loans is the later of May 1, 2007, and the date of origination of such initial mortgage loans. The cut-off date for any subsequent mortgage loan is the later of (i) the first day of the month in which such subsequent mortgage loan is acquired by the trust and (ii) the date of origination of such subsequent mortgage loan.
 
It is possible that some of the initial mortgage loans may be repaid or prepaid in full or in part, or otherwise removed from the mortgage pool prior to the closing date. In this event, other mortgage loans may be transferred to the issuing entity. The depositor believes that the information set forth herein with respect to the mortgage pool and each initial loan group as presently constituted is representative of the characteristics of the mortgage pool and each loan group as they will be constituted on the closing date, although some characteristics in the mortgage pool may vary.
 
All statistical information related to the initial mortgage loans and contained herein is stated as of the cut-off date, and all percentages, unless otherwise stated, are by aggregate principal balance.
 
This prospectus supplement contains information regarding the initial mortgage loans to be included in the pool as of the closing date. These initial mortgage loans consist of mortgage loans originated through May 1, 2007.
 
S-26

 
Subsequent mortgage loans are intended to be purchased by the issuing entity from the depositor from time to time before the end of the pre-funding period, from remaining funds on deposit in the pre-funding account as described below under “—Conveyance of Subsequent Mortgage Loans and the Pre-Funding Account.” The subsequent mortgage loans must conform to certain specified characteristics described below under “—Conveyance of Subsequent Mortgage Loans and the Pre-Funding Account.” Although these subsequent mortgage loans will have characteristics that differ somewhat from the initial mortgage loans we describe in this prospectus supplement, the depositor does not expect that their characteristics will vary materially from the initial mortgage loans. In addition, all subsequent mortgage loans must conform to the representations and warranties in the pooling and servicing agreement.
 
The mortgage pool will consist of conventional, monthly payment, first- and second-lien subprime mortgage loans with terms to maturity of not more than 30 years from the date of origination or modification. The mortgage pool will consist of both adjustable-rate mortgage (“ARM”) loans and fixed-rate mortgage loans.
 
NovaStar Mortgage, Inc., in its capacity as sponsor, will convey the mortgage loans to NovaStar Mortgage Funding Corporation pursuant to a mortgage loan purchase agreement. NovaStar Mortgage Funding Corporation will then convey the mortgage loans to the trust. All of the mortgage loans will be serviced by NovaStar Mortgage, Inc., as the servicer. The sponsor will make various representations and warranties regarding the mortgage loans under the purchase agreement and will have repurchase or substitution obligations if those representations or warranties are breached and such breach has a material adverse impact on the value of the mortgage loan or the certificateholders’ interest therein. The obligations of NovaStar Mortgage, Inc. under the mortgage loan purchase agreement will be guaranteed by an affiliate, NovaStar Financial, Inc. See “Description of the Certificates—Assignment of Mortgage Loans” herein.
 
The mortgages for certain mortgage loans were or may be, at the sole discretion of the servicer, originally recorded in the name of Mortgage Electronic Registration Systems, Inc. (“MERS”), solely as nominee for the sponsor, and its successors and assigns; furthermore, subsequent assignments of such mortgages were or may be, at the sole discretion of the servicer, registered electronically through the MERS System. For certain other mortgage loans, (i) the mortgage was originally recorded in the name of the sponsor, (ii) record ownership was later assigned to MERS, solely as nominee for the sponsor, and (iii) subsequent assignments of the mortgage were or may be, at the sole discretion of the servicer, registered electronically through the MERS System. For each of such mortgage loans, MERS serves as mortgagee of record on the mortgage solely as a nominee in an administrative capacity on behalf of the trustee, and does not have any beneficial interest in the mortgage loan.
 
Approximately 49.29% by principal balance of the initial mortgage loans have original loan-to-value ratios in excess of 80%. Approximately 11.28% of the initial mortgage loans have an original loan-to-value ratio in excess of 60% and are covered by a lender-paid primary mortgage insurance policy insuring first losses on the principal balance of each initial mortgage loan. See “The Originator—Private Mortgage Insurance Policies” herein. The remainder of the mortgage loans will either be covered by a borrower-paid mortgage insurance policy or will not be covered by a mortgage insurance policy.
 
As of the cut-off date, the minimum loan-to-value ratio at origination for the initial mortgage loans was approximately 10.62%, the maximum loan-to-value ratio at origination was approximately 100.00%, and the weighted average loan-to-value ratio at origination was approximately 80.77% (references to loan-to-value ratios in this prospectus supplement are references to combined loan-to-value ratios with respect to second-lien mortgage loans).
 
S-27

 
All of the initial mortgage loans will contain a customary “due-on-sale” clause, although the mortgage loans may be assumable if permitted by the servicer under certain circumstances. See “Certain Yield and Prepayment Considerations” herein. Pursuant to the terms of the pooling and servicing agreement, the servicer will be entitled to all late payment charges received on the mortgage loans as additional servicing compensation and such amounts will not be available for distribution on the certificates.
 
The initial mortgage loans have original terms to stated maturity of not more than 360 months.
 
Approximately 0.75% of the initial mortgage loans are 30 to 59 days delinquent as of the cut-off date.
 
Approximately 0.30% of the initial mortgage loans are 60 or more days delinquent as of the cut-off date.
 
Approximately 97.20% of the initial mortgage loans are secured by a first-lien on the related mortgaged property, and approximately 2.80% of the initial mortgage loans are secured by a second-lien on the related mortgaged property.
 
Approximately 9.83% of the initial mortgage loans are secured by a first-lien on the related mortgaged property for which a second-lien was originated at the same time as the first-lien.
 
None of the initial mortgage loans are subject to temporary buydown plans, pursuant to which the monthly payments made by the mortgage during the early years of the loan are less than the scheduled monthly payments thereon.
 
The due date for substantially all of the initial mortgage loans is the first day of the month.
 
Of the initial mortgage loans, approximately 65.06% by principal balance are ARM loans and approximately 34.94% are fixed-rate mortgage loans. The mortgage rates on substantially all of the ARM loans adjust semi-annually.
 
Prepayment Penalties
 
Of the initial mortgage loans, approximately 63.25% by principal balance are subject to prepayment penalties as of the cut-off date. Of the initial mortgage loans subject to prepayment penalties, approximately 64.81% are ARM loans, and approximately 35.19% are fixed-rate mortgage loans. The prepayment penalty provisions typically provide for payment of a prepayment penalty for partial prepayments and full prepayments. Prepayments may be payable for a period of time ranging from one to five years from the related origination date. Prepayment penalties received on the mortgage loans will be available for distribution on the Class C Certificates only.
 
The initial mortgage loans are expected to have the following characteristics as of the cut-off date (the sum in any column may not equal the total indicated due to rounding):
 
S-28

 
Geographic Distribution of the Mortgaged Properties of the Initial Mortgage Loans
 
Geographical Distribution
 
Number of Mortgage Loans
 
Aggregate Cut-off Date Principal Balance
 
Percentage of Aggregate Cut-off Date Principal Balance
 
Weighted Average Gross Coupon
 
Weighted Average Stated Remaining Term (Months)
 
Weighted Average Original LTV
 
Weighted Average FICO
 
Alabama
   
104
 
$
10,572,988.54
   
1.12
%
 
10.241
%
 
346
   
84.66
%
 
590
 
Alaska
   
7
   
1,577,285.34
   
0.17
   
9.815
   
358
   
88.63
   
636
 
Arizona
   
167
   
32,020,719.94
   
3.39
   
8.893
   
352
   
80.55
   
614
 
Arkansas
   
55
   
6,368,271.49
   
0.67
   
9.450
   
351
   
83.72
   
605
 
California
   
314
   
94,478,084.98
   
10.01
   
8.599
   
348
   
78.48
   
629
 
Colorado
   
58
   
9,661,530.08
   
1.02
   
9.293
   
341
   
83.21
   
594
 
Connecticut
   
68
   
12,416,308.99
   
1.32
   
8.865
   
350
   
82.18
   
623
 
Delaware
   
9
   
1,836,778.67
   
0.19
   
9.064
   
357
   
85.60
   
598
 
District of Columbia
   
20
   
5,170,037.17
   
0.55
   
9.254
   
352
   
70.88
   
596
 
Florida
   
1,103
   
203,884,337.51
   
21.61
   
8.978
   
350
   
79.79
   
623
 
Georgia
   
176
   
25,496,853.86
   
2.70
   
9.898
   
352
   
85.27
   
596
 
Hawaii
   
5
   
1,798,754.19
   
0.19
   
8.243
   
343
   
68.63
   
568
 
Idaho
   
24
   
3,044,014.02
   
0.32
   
9.331
   
348
   
80.21
   
612
 
Illinois
   
216
   
32,003,500.71
   
3.39
   
8.805
   
344
   
82.30
   
619
 
Indiana
   
132
   
13,901,262.33
   
1.47
   
9.200
   
338
   
85.93
   
618
 
Iowa
   
52
   
4,602,760.77
   
0.49
   
9.687
   
338
   
88.19
   
607
 
Kansas
   
74
   
7,810,249.99
   
0.83
   
9.706
   
345
   
85.34
   
597
 
Kentucky
   
61
   
6,014,437.27
   
0.64
   
9.574
   
341
   
87.11
   
590
 
Louisiana
   
87
   
10,381,861.13
   
1.10
   
9.536
   
354
   
82.66
   
598
 
Maine
   
19
   
3,155,204.05
   
0.33
   
9.029
   
355
   
82.78
   
633
 
Maryland
   
230
   
50,480,308.24
   
5.35
   
9.019
   
353
   
79.49
   
601
 
Massachusetts
   
84
   
18,304,935.14
   
1.94
   
8.925
   
352
   
78.89
   
600
 
Michigan
   
281
   
32,384,715.45
   
3.43
   
9.438
   
349
   
82.87
   
600
 
Minnesota
   
65
   
10,168,241.40
   
1.08
   
9.457
   
348
   
86.11
   
618
 
Mississippi
   
59
   
6,189,902.34
   
0.66
   
9.785
   
337
   
85.59
   
603
 
Missouri
   
192
   
19,563,360.81
   
2.07
   
9.367
   
344
   
85.02
   
603
 
Montana
   
4
   
907,897.77
   
0.10
   
10.426
   
359
   
83.35
   
601
 
Nebraska
   
10
   
793,432.79
   
0.08
   
9.089
   
343
   
79.53
   
592
 
Nevada
   
75
   
15,026,476.16
   
1.59
   
8.702
   
348
   
80.29
   
613
 
New Hampshire
   
22
   
3,547,514.00
   
0.38
   
9.418
   
348
   
75.23
   
584
 
New Jersey
   
149
   
34,261,165.41
   
3.63
   
9.081
   
352
   
75.92
   
599
 
New Mexico
   
57
   
7,819,554.43
   
0.83
   
9.288
   
342
   
82.62
   
594
 
 
 
S-29


 
Geographical Distribution
 
Number of Mortgage Loans
 
Aggregate Cut-off Date Principal Balance
 
Percentage of Aggregate Cut-off Date Principal Balance
 
Weighted Average Gross Coupon
 
Weighted Average Stated Remaining Term (Months)
 
Weighted Average Original LTV
 
Weighted Average FICO
 
New York
   
116
   
23,695,983.18
   
2.51
   
9.224
   
352
   
75.56
   
596
 
North Carolina
   
192
   
24,940,138.27
   
2.64
   
9.937
   
349
   
82.24
   
599
 
North Dakota
   
6
   
383,904.80
   
0.04
   
9.126
   
303
   
87.39
   
630
 
Ohio
   
90
   
10,000,386.77
   
1.06
   
9.295
   
343
   
84.30
   
594
 
Oklahoma
   
58
   
4,394,405.05
   
0.47
   
9.212
   
313
   
83.41
   
608
 
Oregon
   
36
   
6,844,215.53
   
0.73
   
8.848
   
347
   
81.51
   
617
 
Pennsylvania
   
333
   
37,650,654.18
   
3.99
   
8.806
   
342
   
80.74
   
602
 
Rhode Island
   
22
   
4,149,656.04
   
0.44
   
9.038
   
352
   
82.81
   
635
 
South Carolina
   
170
   
22,073,719.39
   
2.34
   
9.662
   
346
   
83.69
   
597
 
South Dakota
   
2
   
266,774.11
   
0.03
   
9.835
   
358
   
87.06
   
560
 
Tennessee
   
106
   
12,285,636.16
   
1.30
   
9.565
   
343
   
87.19
   
607
 
Texas
   
345
   
40,867,114.97
   
4.33
   
8.942
   
331
   
78.53
   
620
 
Utah
   
30
   
6,845,720.49
   
0.73
   
9.218
   
353
   
84.52
   
636
 
Vermont
   
4
   
631,336.63
   
0.07
   
8.902
   
359
   
81.75
   
623
 
Virginia
   
258
   
42,613,362.49
   
4.52
   
8.682
   
347
   
79.44
   
608
 
Washington
   
63
   
13,214,608.41
   
1.40
   
8.439
   
344
   
82.25
   
629
 
West Virginia
   
22
   
1,932,405.69
   
0.20
   
10.220
   
339
   
84.07
   
586
 
Wisconsin
   
36
   
4,199,121.80
   
0.45
   
9.778
   
354
   
86.30
   
592
 
Wyoming
   
9
   
975,890.88
   
0.10
   
9.051
   
347
   
85.17
   
646
 
Total
   
5,877
 
$
943,607,779.81
   
100.00
%
 
9.079
%
 
347
   
80.77
%
 
612
 

No more than approximately 0.37% (the highest concentration in a single zip code) of the initial mortgage loans will be secured by mortgaged properties located in Florida in zip code 33023.
 
Types of Mortgaged Properties of the Initial Mortgage Loans
 
Property Types
 
Number of Mortgage Loans
 
Aggregate Cut-off Date Principal Balance
 
Percentage of Aggregate Cut-off Date Principal Balance
 
Weighted Average Gross Coupon
 
Weighted Average Stated Remaining Term (Months)
 
Weighted Average Original LTV
 
Weighted Average FICO
 
Condo
   
240
 
$
41,472,438.20
   
4.40
%
 
9.299
%
 
350
   
81.96
%
 
634
 
Multi-Unit
   
172
   
36,530,385.93
   
3.87
   
9.164
   
351
   
80.22
   
622
 
PUD
   
667
   
137,406,687.66
   
14.56
   
9.128
   
348
   
82.30
   
623
 
Single Family Residence
   
4,798
   
728,198,268.02
   
77.17
   
9.053
   
347
   
80.45
   
608
 
Total
   
5,877
 
$
943,607,779.81
   
100.00
%
 
9.079
%
 
347
   
80.77
%
 
612
 
 
 
S-30

 
Loan Purpose of the Initial Mortgage Loans
 
Loan Purpose (1)
 
Number of Mortgage Loans
 
Aggregate Cut-off Date Principal Balance
 
Percentage of Aggregate Cut-off Date Principal Balance
 
Weighted Average Gross Coupon
 
Weighted Average Stated Remaining Term (Months)
 
Weighted Average Original LTV
 
Weighted Average FICO
 
Cash Out Refinance
   
4,571
 
$
735,282,879.35
   
77.92
%
 
8.949
%
 
348
   
78.93
%
 
602
 
Purchase
   
1,047
   
170,480,552.49
   
18.07
   
9.603
   
344
   
88.09
   
651
 
Rate/Term Refinance
   
259
   
37,844,347.97
   
4.01
   
9.242
   
346
   
83.63
   
624
 
Total
   
5,877
 
$
943,607,779.81
   
100.00
%
 
9.079
%
 
347
   
80.77
%
 
612
 

(1)
In general, in the case of a mortgage loan made for “rate/term” refinance purposes, substantially all of the proceeds are used to pay in full the principal balance of a previous mortgage loan of the mortgagor with respect to the related mortgaged property and to pay associated origination and closing costs. Mortgage loans made for “cash-out” refinance purposes may involve the use of the proceeds to pay in full the principal balance of a previous mortgage loan and related costs except that a portion of the proceeds are generally retained by the mortgagor for uses unrelated to the mortgaged property. The amount of these proceeds retained by the mortgagor may be substantial.
 
Occupancy Status of the Mortgaged Properties of the Initial Mortgage Loans
 
Occupancy Status
 
Number of Mortgage Loans
 
Aggregate Cut-off Date Principal Balance
 
Percentage of Aggregate Cut-off Date Principal Balance
 
Weighted Average Gross Coupon
 
Weighted Average Stated Remaining Term (Months)
 
Weighted Average Original LTV
 
Weighted Average FICO
 
Investment (Non-Owner Occupied)
   
297
 
$
43,807,207.06
   
4.64
%
 
9.577
%
 
355
   
80.76
%
 
655
 
Primary
   
5,457
   
873,497,981.13
   
92.57
   
9.045
   
347
   
80.65
   
608
 
Secondary Home
   
123
   
26,302,591.62
   
2.79
   
9.395
   
353
   
84.99
   
653
 
Total
   
5,877
 
$
943,607,779.81
   
100.00
%
 
9.079
%
 
347
   
80.77
%
 
612
 

 
S-31

Documentation Type of the Initial Mortgage Loans
 
Loan Documentation Types
 
Number of Mortgage Loans
 
Aggregate Cut-off Date Principal Balance
 
Percentage of Aggregate Cut-off Date Principal Balance
 
Weighted Average Gross Coupon
 
Weighted Average Stated Remaining Term (Months)
 
Weighted Average Original LTV
 
Weighted Average FICO
 
Full Documentation
   
3,908
 
$
537,503,964.42
   
56.96
%
 
8.838
%
 
344
   
80.85
%
 
598
 
Limited Documentation
   
24
   
5,522,915.51
   
0.59
   
9.210
   
350
   
80.36
   
610
 
No Documentation
   
302
   
60,204,907.96
   
6.38
   
8.865
   
353
   
80.95
   
681
 
Stated Income
   
1,643
   
340,375,991.92
   
36.07
   
9.495
   
351
   
80.63
   
621
 
Total
   
5,877
 
$
943,607,779.81
   
100.00
%
 
9.079
%
 
347
   
80.77
%
 
612
 

 
Risk Classification of the Initial Mortgage Loans
 
Risk Classification
 
Number of Mortgage Loans
 
Aggregate Cut-off Date Principal Balance
 
Percentage of Aggregate Cut-off Date Principal Balance
 
Weighted Average Gross Coupon
 
Weighted Average Stated Remaining Term (Months)
 
Weighted Average Original LTV
 
Weighted Average FICO
 
M1
   
3,277
   
495,884,159.09
   
52.55
   
8.976
   
344
   
82.69
   
614
 
M2
   
1,258
   
212,960,868.74
   
22.57
   
9.411
   
354
   
78.56
   
578
 
M3
   
323
   
52,814,322.50
   
5.60
   
9.603
   
354
   
71.88
   
556
 
M4
   
176
   
26,542,915.01
   
2.81
   
10.067
   
354
   
67.64
   
560
 
Alt A
   
840
   
155,134,865.82
   
16.44
   
8.607
   
345
   
82.98
   
677
 
Fico Enhanced
   
1
   
118,470.41
   
0.01
   
9.500
   
300
   
95.00
   
581
 
AA
   
1
   
95,879.11
   
0.01
   
8.000
   
72
   
80.00
   
583
 
A
   
1
 
$
56,299.13
   
0.01
%
 
10.250
%
 
172
   
85.00
%
 
536
 
Total
   
5,877
 
$
943,607,779.81
   
100.00
%
 
9.079
%
 
347
   
80.77
%
 
612
 

 
S-32

 
 
Original Loan-to-Value Ratios of the Initial Mortgage Loans
 
Range of LTV Ratios*(%)
 
Number of Mortgage Loans
 
Aggregate Cut-off Date Principal Balance
 
Percentage of Aggregate Cut-off Date Principal Balance
 
Weighted Average Gross Coupon
 
Weighted Average Stated Remaining Term (Months)
 
Weighted Average Original LTV
 
Weighted Average FICO
 
0.01-49.99
   
271
 
$
30,450,188.63
   
3.23
%
 
8.417
%
 
338
   
39.36
%
 
602
 
50.00-54.99
   
139
   
18,586,939.13
   
1.97
   
8.421
   
344
   
52.14
   
599
 
55.00-59.99
   
174
   
24,492,719.73
   
2.60
   
8.404
   
344
   
57.54
   
585
 
60.00-64.99
   
224
   
34,003,215.72
   
3.60
   
8.554
   
347
   
62.43
   
583
 
65.00-69.99
   
273
   
41,614,583.08
   
4.41
   
8.522
   
350
   
67.31
   
599
 
70.00-74.99
   
396
   
68,065,206.19
   
7.21
   
8.576
   
345
   
72.02
   
596
 
75.00-79.99
   
562
   
93,863,140.96
   
9.95
   
8.860
   
351
   
76.42
   
592
 
80.00
   
860
   
167,417,647.31
   
17.74
   
8.671
   
353
   
80.00
   
620
 
80.01-84.99
   
207
   
38,512,543.40
   
4.08
   
8.892
   
352
   
83.24
   
600
 
85.00-89.99
   
667
   
108,839,237.55
   
11.53
   
9.369
   
352
   
85.96
   
598
 
90.00-94.99
   
973
   
169,031,657.24
   
17.91
   
9.461
   
354
   
90.39
   
617
 
95.00-99.99
   
544
   
95,718,223.28
   
10.14
   
9.744
   
351
   
95.16
   
641
 
100.00
   
587
   
53,012,477.59
   
5.62
   
10.226
   
293
   
100.00
   
656
 
Total
   
5,877
 
$
943,607,779.81
   
100.00
%
 
9.079
%
 
347
   
80.77
%
 
612
 

*LTV Ratios calculated as of origination
Weighted Average: 80.77% (approximate)
 
S-33

 
Principal Balances of the Initial Mortgage Loans
 
Range of Cut-Off Date Principal Balances ($)
 
Number of Mortgage Loans
 
Aggregate Cut-off Date Principal Balance
 
Percentage of Aggregate Cut-off Date Principal Balance
 
Weighted Average Gross Coupon
 
Weighted Average Stated Remaining Term (Months)
 
Weighted Average Original LTV
 
Weighted Average FICO
 
0.01-50,000.00
   
492
 
$
17,862,664.85
   
1.89
%
 
10.895
%
 
231
   
84.96
%
 
631
 
50,000.01-100,000.00
   
1,694
   
126,868,341.81
   
13.45
   
9.382
   
329
   
78.34
   
602
 
100,000.01-150,000.00
   
1,298
   
162,952,734.80
   
17.27
   
9.195
   
348
   
79.73
   
600
 
150,000.01-200,000.00
   
883
   
153,708,594.69
   
16.29
   
9.039
   
351
   
79.74
   
604
 
200,000.01-250,000.00
   
610
   
137,125,310.36
   
14.53
   
9.024
   
354
   
81.00
   
610
 
250,000.01-300,000.00
   
298
   
81,827,559.01
   
8.67
   
8.975
   
356
   
81.26
   
611
 
300,000.01-350,000.00
   
191
   
61,859,117.88
   
6.56
   
8.900
   
354
   
83.07
   
621
 
350,000.01-400,000.00
   
142
   
53,189,943.82
   
5.64
   
8.684
   
355
   
81.41
   
624
 
400,000.01-450,000.00
   
70
   
29,722,986.37
   
3.15
   
8.880
   
353
   
82.02
   
632
 
450,000.01-500,000.00
   
64
   
30,450,136.32
   
3.23
   
8.846
   
358
   
86.12
   
619
 
500,000.01-550,000.00
   
38
   
19,896,175.23
   
2.11
   
8.990
   
355
   
82.19
   
629
 
550,000.01-600,000.00
   
31
   
17,928,034.27
   
1.90
   
8.583
   
358
   
83.00
   
646
 
600,000.01-650,000.00
   
21
   
13,050,208.63