424B2 1 v307304_424b2.htm

 

Filed pursuant to Rule 424(b)(2)

Commission No. 333-159791 and 333-159791-01

  

Information contained herein is subject to completion or amendment. A registration statement relating to these securities has been filed with the Securities and Exchange Commission. This prospectus will not constitute an offer to sell or a solicitation of an offer to buy nor will there be any sale of the offered certificates in any State in which such offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of such State.

 

SUBJECT TO COMPLETION, DATED MARCH 26, 2012

Prospectus Supplement dated March ___, 2012

(To Prospectus dated March 26, 2012)

 

$322,851,000 (Approximate)

SEQUOIA MORTGAGE TRUST 2012-2

Mortgage Pass-Through Certificates, Series 2012-2

 

RWT Holdings, Inc., Sponsor

Sequoia Residential Funding, Inc., Depositor

Sequoia Mortgage Trust 2012-2, Issuing Entity

 

Consider carefully the risk factors beginning on page S-14 of this prospectus supplement and on page 1 of the prospectus.

 

For a list of defined terms used in this prospectus supplement, see the glossary of defined terms on page I-1 of this prospectus supplement.

 

The certificates represent beneficial interests in the issuing entity only and do not represent an interest in or obligation of the sponsor, the depositor, the trustee, the master servicer, the underwriter, the servicers or any of their affiliates.

 

This prospectus supplement may be used to offer and sell certificates only if accompanied by the prospectus.

The issuing entity will issue:

· Four classes of senior certificates, including a class of interest-only certificates;

· Five classes of subordinate certificates; and

· Two classes of residual certificates.

 

The classes of certificates offered by this prospectus supplement are listed, together with their initial class principal amounts and interest rates, under “The Offered Certificates” on page S-1 of this prospectus supplement. This prospectus supplement and the accompanying prospectus relate only to the offering of those certificates and not any other certificates issued by the issuing entity.

 

The certificates will represent ownership interests in a pool of fixed rate mortgage loans with original terms to maturity of thirty years. A portion of the mortgage loans provide for payments of interest at the related mortgage rate, but no payment of principal, for a period of ten years following their origination. All of the mortgage loans are secured by first liens on one- to four-family residential properties, condominiums, cooperative units and planned unit developments.

 

Principal and interest on the certificates are payable on the 25th day of each month, or if such day is not a business day, the next succeeding business day, commencing on April 25, 2012.

 

The certificates will have the benefit of credit enhancement in the form of subordination as described herein.

 

On or about March 29, 2012, delivery of the certificates offered by this prospectus supplement will be made through the book-entry facilities of the Depository Trust Company, Clearstream Banking Luxembourg and the Euroclear System.

 

The Class A-1, Class A-2 and Class A-3 Certificates and a portion of the Class B-1 Certificates offered by this prospectus supplement will be purchased by Barclays Capital Inc., as underwriter, from the depositor, and are being offered by the underwriter from time to time for sale to the public in negotiated transactions or otherwise at varying prices determined at the time of sale. The underwriter has the right to reject any order. Proceeds to the depositor from the sale of the Class A-1, Class A-2, Class A-3 Certificates and a portion of the Class B-1 Certificates offered by this prospectus supplement will be approximately [_____]% of the initial total class principal amounts of the Class A-1, Class A-2, Class A-3 Certificates and that portion of the Class B-1 Certificates before deducting expenses. There is no current underwriting arrangement for the Class A-IO Certificates, the portion of the Class B-1 Certificates that are not purchased by the underwriter, or the Class B-2 or Class B-3 Certificates.

 

The issuing entity will make one or more REMIC elections for federal income tax purposes.

 

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved these certificates or determined if this prospectus supplement or the accompanying prospectus is accurate or complete.  Any representation to the contrary is a criminal offense.

 

Barclays

 

Underwriter

 

 
 

 

Important Notice About Information Presented in this Prospectus Supplement

and the Accompanying Prospectus

 

We provide information to you about the certificates offered by this prospectus supplement in two separate documents that provide progressively more detail:  (1) the accompanying prospectus, which provides general information, some of which may not apply to your certificates and (2) this prospectus supplement, which describes the specific terms of your certificates.

 

The information presented in this prospectus supplement is intended to enhance the general terms of the accompanying prospectus.

 

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.

 

Dealers will deliver a prospectus supplement and prospectus when acting as underwriters of the certificates and with respect to their unsold allotments and subscriptions.  In addition, all dealers selling the certificates will be required to deliver a prospectus supplement and prospectus for ninety days following the date of this prospectus supplement.

 

This prospectus supplement and the accompanying prospectus contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933.  Specifically, forward-looking statements, together with related qualifying language and assumptions, are found in the materials, including tables, under the headings “Risk Factors” and “Yield, Prepayment and Weighted Average Life” in this prospectus supplement and “Risk Factors” and “Yield and Prepayment Considerations” in the prospectus.  Forward-looking statements are also found in other places throughout this prospectus supplement and the prospectus, and may be identified by accompanying language, including “expects,” “intends,” “anticipates,” “estimates” or analogous expressions, or by qualifying language or assumptions.  These statements involve known and unknown risks, uncertainties and other important factors that could cause the actual results or performance to differ materially from the forward-looking statements.  These risks, uncertainties and other factors include, among others, general economic and business conditions, competition, changes in political, social and economic conditions, regulatory initiatives and compliance with governmental regulations, customer preference and various other matters, many of which are beyond the depositor’s control.  These forward-looking statements speak only as of the date of this prospectus supplement and the prospectus, as applicable.  The depositor expressly disclaims any obligation or undertaking to distribute any updates or revisions to any forward-looking statements to reflect changes in the depositor’s expectations with regard to those statements or any change in events, conditions or circumstances on which any forward-looking statement is based.

 

 
 

 

For European Investors Only

 

In relation to each Member State of the European Economic Area which has implemented the Prospectus Directive (each, a “Relevant Member State”), each underwriter has represented and agreed that with effect from and including the date on which the Prospectus Directive is implemented in that Relevant Member State (the “Relevant Implementation Date”) it has not made and will not make an offer of certificates to the public in that Relevant Member State prior to the publication of a prospectus in relation to the certificates which has been approved by the competent authority in that Relevant Member State or, where appropriate, approved in another Relevant Member State and notified to the competent authority in that Relevant Member State, all in accordance with the Prospectus Directive, except that it may, with effect from and including the Relevant Implementation Date, make an offer of certificates to the public in that Relevant Member State at any time:

 

  (a) to legal entities which are authorized or regulated to operate in the financial markets or, if not so authorized or regulated, whose corporate purpose is solely to invest in securities;

 

  (b) to any legal entity which has two or more of (1) an average of at least 250 employees, during the last financial year; (2) a total balance sheet of more than €43,000,000; and (3) an annual net turnover of more than €50,000,000, as shown in its last annual or consolidated accounts; or

 

  (c) in any other circumstances which do not require the publication by the issuing entity of a prospectus pursuant to Article 3 of the Prospectus Directive.

 

For the purposes of this provision, the expression an “offer of certificates to the public” in relation to any certificates in any Relevant Member State means the communication in any form and by any means of sufficient information on the terms of the offer and the certificates to be offered so as to enable an investor to decide to purchase or subscribe the certificates, as the same may be varied in that Member State by any measure implementing the Prospectus Directive in that Member State and the expression “Prospectus Directive” means Directive 2003/71/EC and includes any relevant implementing measure in each Relevant Member State.

 

United Kingdom

 

Each underwriter has represented and agreed that:

 

(a)it has only communicated or caused to be communicated and will only communicate or cause to be communicated an invitation or inducement to engage in investment activity (within the meaning of Section 21 of the Financial Services and Markets Act (the “FSMA”)) received by it in connection with the issue or sale of the certificates in circumstances in which Section 21(1) of the FSMA does not apply to the issuer; and

 

(b)it has complied and will comply with all applicable provisions of the FSMA with respect to anything done by it in relation to the certificates in, from or otherwise involving the United Kingdom.

 

 
 

 

TABLE OF CONTENTS

 

  Page
   
THE OFFERED CERTIFICATES S-1
   
SUMMARY OF TERMS S-3
   
Sponsor S-3
   
Seller and Servicing Administrator S-3
Depositor S-3
Issuing Entity S-3
Trustee S-3
Master Servicer and Securities Administrator S-4
Servicers S-4
Originators S-4
Custodian S-4
Cut-off Date S-5
Closing Date S-5
The Certificates S-5
Distributions of Interest S-6
Distributions of Principal S-6
Priority of Distributions S-7
Limited Recourse S-7
Credit Enhancement S-7
Final Scheduled Distribution Date S-8
Fees and Expenses S-8
The Mortgage Loans S-9
Mortgage Loan Representations and Warranties S-10
Mortgage Loan Servicing S-11
Optional Termination S-12
Tax Status S-12
ERISA Considerations S-12
Legal Investment S-12
Certificate Rating S-13
Listing S-13
RISK FACTORS S-14
   
Turbulence in the Financial Markets and Economy May Adversely Affect the Performance and Market Value of Your Certificates and These Conditions May Not Improve in the Near Future S-14
   
Downgrade of Long-term Ratings of Eurozone Nations May Adversely Affect the Market Value of the Offered Certificates S-15
Recent Trends in the Residential Mortgage Market May Adversely Affect the Performance and Market Value of Your Certificates S-15
Financial Regulatory Reforms and Additional Proposed Regulations Could Have a Significant Impact on the Depositor, the Servicers or Any Successor Servicer or on the Value of the Certificates S-16
Potential Changes in Ratings Present Risks S-17
Ratings of the Certificates May Not Accurately Reflect Risks Associated With Those Certificates S-18
Additional Ratings of the Certificates or a Withdrawal of the Ratings May Adversely Affect Their Value and/or Limit Your Ability to Sell Your Certificates S-18
Appraisals May Not Accurately Reflect the Value or Condition of the Mortgaged Property S-19
Loan-to-Value Ratios May Be Calculated Based on Appraised Value, Which May Not Be an Accurate Reflection of Current Market Value; Borrowers May Have, or May in the Future Incur, Additional Indebtedness Secured by Mortgaged Properties S-19

 

i
 

 

TABLE OF CONTENTS

 

  Page
   
Governmental Actions May Affect Servicing of Mortgage Loans and May Limit the Servicers’ Ability to Foreclose S-20
Underwriting Standards May Affect Risk of Loss on the Mortgage Loans S-20
In Underwriting the Mortgage Loans, an Originator May Not Have Followed Its Underwriting Guidelines; Underwriting Guidelines May Not Identify or Appropriately Assess Repayment Risks S-21
Pre-offering Review of the Mortgage Loans Underlying the Certificates May Not Reveal Aspects of the Mortgage Loans Which Could Lead to Losses S-21
Risks Related to Mortgage Loans With Interest-Only Payments S-22
Geographic Concentration of Mortgage Loans S-22
The Return on Your Certificates Could Be Reduced by Shortfalls Due to the Servicemembers Civil Relief Act S-23
Potential Inadequacy of Credit Enhancement S-24
Unpredictability and Effect of Prepayments S-25
The Timing of Realized Losses May Impact Returns on the Certificates S-26
Delay in Receipt of Liquidation Proceeds; Liquidation Proceeds May Be Less Than Mortgage Balance S-26
Mortgage Loan Modification Programs and Future Legislative Action May Adversely Affect the Performance and Market Value of Your Certificates S-27
Special Assessments and Energy Efficiency Liens May Take Priority Over the Mortgage Lien S-28
Helping Families Save Their Homes Act S-28
Risks Associated With Potential New Laws Relating to Mortgage Loan Origination or Ownership S-28
Changes in the Accounting Rules May Affect You S-28
Reduced Lending Capacities May Hinder Refinancing and Increase Risk of Loss S-29
Market Exit of Originators and Servicers; Financial Condition of Originators, Servicers and the Seller S-29
Investors Will Be Dependent on Certain Third Parties Performing Their Responsibilities in an Accurate and Timely Manner S-30
Actions to Enforce Breaches of Representations and Warranties Relating to Mortgage Loan Characteristics May Take a Significant Amount of Time or Cause Delays or Reductions in the Amount of Payments Made to Certificateholders S-31
Bankruptcy or Insolvency of a Transferor Could Result in Losses on the Certificates S-32
Bankruptcy or Insolvency of a Servicer, the Servicing Administrator, the Owner of Servicing Rights or the Master Servicer Could Result in Losses on the Certificates S-33
The Trustee May Not Have a Perfected Interest in Collections Held by a Servicer S-34
Stricter Enforcement of Foreclosure Rules and Documentation Requirements May Cause Delays and Increase the Risk of Loss S-34
The Recording of the Mortgages in the Name of MERS Could Increase the Risk of Loss S-34
Delays in Endorsing Notes and Recording Assignments of Mortgage Could Increase Risk of Loss S-35
There May Be Conflicts of Interest Among Various Classes of Certificates S-36
Changes in the Market Value of the Certificates May Not Be Reflective of the Performance or Anticipated Performance of the Mortgage Loans Underlying the Certificates S-36
The Marketability of Your Certificates May Be Limited S-36
The Servicing Fee May Need to Be Increased in Order to Engage a Replacement Servicer S-37
DESCRIPTION OF THE MORTGAGE POOL S-37
   
General S-37
   
Prepayment Charges S-39
Primary Mortgage Insurance S-39
Certain Characteristics of the Mortgage Loans S-39

 

ii
 

 

TABLE OF CONTENTS

 

  Page
   
THE ORIGINATORS S-40
   
First Republic Bank S-40
   
PrimeLending, a PlainsCapital Company S-42
Other Originators S-43
PRE-OFFERING REVIEW OF THE MORTGAGE LOANS S-43
   
Introduction S-43
   
Credit and Compliance Component of Sponsor’s Pre-Offering Review S-43
Appraisal Component of Sponsor’s Pre-Offering Review S-45
Mortgage Loan Characteristics Component of Sponsor’s Pre-Offering Review S-46
Limitations of the Pre-offering Review Process S-47
STATIC POOL INFORMATION S-48
   
ADDITIONAL INFORMATION S-48
   
THE ISSUING ENTITY S-49
   
General S-49
   
DESCRIPTION OF THE CERTIFICATES S-50
   
General S-50
   
Book-Entry Certificates S-51
Payments on Mortgage Loans; Accounts S-54
Glossary of Terms S-55
Available Distribution Amount S-61
Distributions of Interest S-61
Distributions of Principal S-62
Priority of Distributions and Allocation of Shortfalls S-64
Subordination of Payments to the Subordinate Certificates S-65
Allocation of Realized Losses S-65
Final Scheduled Distribution Date S-66
Optional Purchase of the Mortgage Loans S-66
Credit Enhancement S-66
THE TRUSTEE S-67
   
THE ISSUING ENTITY S-67
   
FEES AND EXPENSES OF THE ISSUING ENTITY S-68
   
SPONSOR MATERIAL LEGAL PROCEEDINGS S-70
   
THE SPONSOR AND THE SELLER AND SERVICING ADMINISTRATOR S-72
   
THE DEPOSITOR S-73
   
AFFILIATIONS AND RELATED TRANSACTIONS S-74
   
THE MASTER SERVICER, THE SECURITIES ADMINISTRATOR, THE CUSTODIAN AND THE SERVICERS S-74
   
PHH Legal Proceedings S-74
   
First Republic Bank S-76
Cenlar FSB S-79
ADMINISTRATION OF THE ISSUING ENTITY S-83
   
Servicing and Administrative Responsibilities S-83
   
Issuing Entity Accounts S-85

 

iii
 

 

TABLE OF CONTENTS

 

  Page
   
Example of Payments S-86
THE AGREEMENTS S-86
   
General S-86
   
Assignment of the Mortgage Loans S-87
Representations and Warranties S-88
Mortgage Loan Servicing S-93
Reports to Certificateholders S-102
Voting Rights S-102
Termination of the Issuing Entity S-102
The Custodial Agreement S-103
YIELD, PREPAYMENT AND WEIGHTED AVERAGE LIFE S-104
   
General S-104
   
Subordination of the Subordinate Certificates S-105
Weighted Average Life S-106
Decrement Tables S-107
Class A-IO Certificates Yield Considerations S-114
USE OF PROCEEDS S-115
   
MATERIAL FEDERAL INCOME TAX CONSEQUENCES S-115
   
General S-115
   
Tax Treatment of the Offered Certificates S-115
Original Issue Discount S-115
Information Reporting S-116
Other Matters S-116
FATCA Tax Regime S-116
ERISA CONSIDERATIONS S-116
   
METHOD OF DISTRIBUTION S-118
   
LEGAL MATTERS S-119
   
RATINGS S-119
   
GLOSSARY OF DEFINED TERMS I-1
ANNEX A – CERTAIN CHARACTERISTICS OF THE MORTGAGE LOANS A-1
ANNEX B – GLOBAL CLEARANCE, SETTLEMENT AND TAX DOCUMENTATION PROCEDURES B-1

 

iv
 

 

THE OFFERED CERTIFICATES

 

The certificates consist of the classes of certificates listed in the tables below, together with the Class B-4, Class B-5, Class R and Class LT-R Certificates. This prospectus supplement and the accompanying prospectus relate only to the offering of the classes of certificates listed in the table below and not any other certificates issued by the issuing entity.

 

Class

Initial Class

Principal or

Notional

Amount(1)

 

Approximate

Initial Interest

Rate(2)

 

Interest Rate

Formula

  Principal Type  
A-1 $100,000,000   [____]%   (3)(4)   Senior  
A-2 $163,590,000   [____]%   (3)(4)   Senior  
A-3 $40,897,000   [____]%   (3)(4)   Senior  
A-IO $304,487,000   [____]%   (5)   Notional/Senior  
B-1 $8,854,000   4.325%   Net WAC(3)   Subordinate  
B-2 $5,739,000   4.325%   Net WAC(3)   Subordinate  
B-3 $3,771,000   4.325%   Net WAC(3)   Subordinate  

 

 

(1)   These principal and notional amounts are approximate and are subject to an increase or decrease of up to 5%, as described in this prospectus supplement.
     
(2)   Reflects the interest rate as of the closing date for the mortgage loans described in this prospectus supplement.
     
(3)   “Net WAC” means an annual rate equal to the weighted average of the net mortgage rates of the mortgage loans during the applicable period, as described in this prospectus supplement.
     
(4)   The interest rate on the Class A-1, Class A-2 and Class A-3 Certificates will be an annual rate equal to the lesser of (i) the Net WAC for such distribution date and (ii) [___]%.
     
(5)   The Class A-IO Certificates are interest-only certificates; they will not be entitled to distributions of principal.  As described in this prospectus supplement, the Class A-IO Certificates will accrue interest on a notional amount equal to the aggregate class principal amount of the Class A-1, Class A-2 and Class A-3 Certificates immediately prior to such distribution date.  The interest rate on the Class A-IO Certificates will be an annual rate equal to the excess, if any, of the Net WAC over [___]%.

 

S-1
 

 

The offered certificates will also have the following characteristics:

 

Class  

 

Record Date(1)

 

Delay/Accrual

Period(2)

  Interest Accrual Convention  

Final

Scheduled

Distribution
Date(3)

 

Expected Final

Distribution Date(4)

 

Minimum

Denomination or

Percentage

Interest

 

Incremental

Denomination

 

CUSIP

Number

A-1   (1)   24 Day   30/360   April 2042   December 2033   $100,000   $1   81744U AA2
A-2   (1)   24 Day   30/360   April 2042   March 2020   $100,000   $1   81744U AB0
A-3   (1)   24 Day   30/360   April 2042   December 2033   $100,000   $1   81744U AC8
A-IO   (1)   24 Day   30/360   April 2042   December 2033   100%   $1   81744U AD6
B-1   (1)   24 Day   30/360   April 2042   June 2027   $100,000   $1   81744U AE4
B-2   (1)   24 Day   30/360   April 2042   June 2027   $100,000   $1   81744U AF1
B-3   (1)   24 Day   30/360   April 2042   June 2027   $100,000   $1   81744U AG9

 

 

(1)   For the first distribution date, the closing date. For any other distribution date, the close of business on the last business day of the calendar month preceding the month of the related distribution date.
     
(2)   For any distribution date, the interest accrual period will be the calendar month immediately preceding that distribution date.
     
(3)   Determined by adding one month to the month of scheduled maturity of the latest maturing mortgage loan.
     
(4)   The expected final distribution date, based upon a constant prepayment rate of 15% per annum and the modeling assumptions used in this prospectus supplement for CPR, as described under “Yield, Prepayment and Weighted Average Life—Weighted Average Life.” The actual final distribution date for each class of offered certificates may be earlier or later, and could be substantially earlier or later, than the applicable expected final distribution date listed above.

 

S-2
 

 

SUMMARY OF TERMS

 

  · 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, you should carefully read this entire prospectus supplement and the accompanying prospectus.

 

  · While the summary contains an overview of certain calculations, cash flow priorities and other information to aid your understanding, you should read carefully the full description of these calculations, cash flow priorities and other information in this prospectus supplement and the accompanying prospectus before making any investment decision.

 

  · Whenever we refer to a percentage of some or all of the mortgage loans in the trust fund, that percentage has been calculated on the basis of the total stated principal balance of those mortgage loans as of the cut-off date unless we specify otherwise.  We explain in this prospectus supplement how the stated principal balance of a mortgage loan is determined.  Whenever we refer in this Summary of Terms or in the Risk Factors section to the total stated principal balance of any mortgage loans, we mean the total of their stated principal balances determined by that method, unless we specify otherwise.

 

Sponsor

 

RWT Holdings, Inc., a Delaware corporation and direct wholly-owned subsidiary of Redwood Trust, Inc.

 

Seller and Servicing Administrator

 

Redwood Residential Acquisition Corporation, a Delaware corporation and indirect wholly-owned subsidiary of Redwood Trust, Inc., will acquire the mortgage loans directly or indirectly from each originator. On the closing date, Redwood Residential Acquisition Corporation, as seller, will sell all of its interest in the mortgage loans to the depositor. Redwood Residential Acquisition Corporation will also act as servicing administrator with respect to the mortgage loans serviced by Cenlar FSB.

 

Depositor

 

Sequoia Residential Funding, Inc., a Delaware special purpose corporation and indirect wholly-owned subsidiary of Redwood Trust, Inc. On the closing date, Sequoia Residential Funding, Inc. will sell all of its interest in the mortgage loans to the trustee for the benefit of the certificateholders. The depositor’s address is One Belvedere Place, Suite 330, Mill Valley, California 94941, and its telephone number is (415) 389-7373.

 

Issuing Entity

 

Sequoia Mortgage Trust 2012-2, a common law trust formed under the laws of the State of New York.

 

Trustee

 

U.S. Bank National Association will act as trustee of the issuing entity under the pooling and servicing agreement.

 

S-3
 

 

Master Servicer and Securities Administrator

 

Wells Fargo Bank, N.A. will act as master servicer and securities administrator for the mortgage loans and the certificates pursuant to the pooling and servicing agreement.

 

As securities administrator, Wells Fargo Bank, N.A. will perform certain administrative duties with respect to the certificates, on behalf of the trustee, including acting as authentication agent, calculation agent, paying agent, certificate registrar and the party responsible for preparing distribution statements and tax information for certificateholders and preparing tax filings for the issuing entity.

 

Servicers

 

First Republic Bank, Cenlar FSB and PHH Mortgage Corporation will initially service the mortgage loans. First Republic Bank will service approximately 49.31% of the mortgage loans; Cenlar FSB will service approximately 38.61% of the mortgage loans and PHH Mortgage Corporation will service approximately 12.08% of the mortgage loans, in each case, by stated principal balance as of the cut-off date. Cenlar FSB is the servicer of mortgage loans originated by PrimeLending, a PlainsCapital Company and the other originators except for First Republic Bank and PHH Mortgage Corporation. With respect to approximately 9.92% of the mortgage loans by stated principal balance as of the cut-off date, the transfer of the servicing of such mortgage loans to Cenlar FSB from the related originators is scheduled to take place on April 1, 2012, after the closing date. Servicing may subsequently be transferred to servicers other than the initial servicers, in accordance with the pooling and servicing agreement and the servicing agreements, as described in this prospectus supplement. The initial servicers and any successor servicers under the servicing agreements will be referred to as the “servicers” in this prospectus supplement.

 

The servicers will service the mortgage loans, directly or through subservicers, pursuant to existing servicing agreements between the related servicer and the seller. The rights of the seller under the servicing agreements with respect to the mortgage loans sold to the issuing entity will be assigned to the depositor, and the depositor, in turn, will assign such rights to the trustee for the benefit of the certificateholders, in each case pursuant to an assignment, assumption and recognition agreement.

 

We refer you to “The Agreements — Mortgage Loan Servicing” in this prospectus supplement for more information.

 

Originators

 

Approximately 49.31% of the mortgage loans were originated by First Republic Bank; approximately 19.78% of the mortgage loans were originated by PrimeLending, a PlainsCapital Company; approximately 12.08% of the mortgage loans were originated or acquired by PHH Mortgage Corporation; and approximately 8.84% of the mortgage loans were originated by Flagstar Capital Markets Corporation, in each case by stated principal balance as of the cut-off date. The remainder of the mortgage loans were originated by various mortgage lending institutions, each of which originated less than 5% of the mortgage loans. First Republic Bank, PrimeLending, a PlainsCapital Company, PHH Mortgage Corporation and the various other mortgage lending institutions are referred to in this prospectus supplement as the “originators”.

 

We refer you to “The Originators” in this prospectus supplement for more information.

 

Custodian

 

Wells Fargo Bank, N.A. will maintain custody of the mortgage loan documents relating to the mortgage loans on behalf of the issuing entity.

 

S-4
 

 

Cut-off Date

 

March 1, 2012, the “cut-off date,” is the date after which the issuing entity will be entitled to receive all collections on and proceeds of the mortgage loans.

 

Closing Date

 

The closing date will be on or about March 29, 2012.

 

The Certificates

 

The classes of Sequoia Mortgage Trust Mortgage Pass-Through Certificates, Series 2012-2, issued with the initial approximate characteristics set forth under “The Offered Certificates” in the table on page S-1, together with the Class B-4, Class B-5, Class R and Class LT-R Certificates.

 

The offered certificates will be issued in book-entry form and in the minimum denominations (or multiples thereof) set forth under “The Offered Certificates” in the table beginning on page S-1.

 

The certificates will represent beneficial ownership interests in a pool of fixed rate mortgage loans of which all have original terms to maturity of thirty years.

 

A portion of the mortgage loans provide for payments of interest at the related mortgage rate, but no payment of principal, for a period of ten years following their origination. All of the mortgage loans are secured by first liens on one- to four-family residential properties, condominiums, cooperative units and planned unit developments.

 

The Class B-4, Class B-5, Class R and Class LT-R Certificates are not offered by this prospectus supplement.The offered certificates will have an approximate total initial principal amount of $322,851,000 as of the closing date.Any difference between the total principal amount of the offered certificates on the date they are issued and the approximate total principal amount of the offered certificates as reflected in this prospectus supplement will not exceed 5%. Notwithstanding any variance between the total stated principal balance of the mortgage loans and the total principal amount of the certificates reflected in this prospectus supplement, on the closing date, the initial total principal amount of the certificates will equal the total aggregate stated principal balance of the mortgage loans as of the cut-off date. The aggregate principal amount of the Class B-4 and Class B-5 Certificates as of the closing date will be approximately $5,084,218, subject to a permitted variance of 5%. The Class R and Class LT-R Certificates have no principal balance.

 

Principal and interest on the certificates will be payable on the 25th day of each month, beginning in April 2012. However, if the 25th day is not a business day, payments will be made on the next business day after the 25th day of the month. Distributions on each distribution date will be made to the certificateholders of record as of the related record date, except that the final distribution on the certificates will be made only upon presentment and surrender of the certificates at the corporate trust office of the securities administrator.

 

The rights of holders of the Class B-1, Class B-2 and Class B-3 Certificates to receive payments of principal and interest will be subordinate to the rights of the holders of certificates having a higher priority of distribution, as described in “—Credit Enhancement” below. We refer to the Class B-1, Class B-2, Class B-3, Class B-4 and Class B-5 Certificates as “subordinate” certificates, and we refer to the Class A-1, Class A-2, Class A-3 and Class A-IO Certificates as “senior” certificates. We refer to the Class R and Class LT-R Certificates as “residual” certificates.

 

The sponsor or one or more of its affiliates will initially purchase at least 5% of the aggregate certificate principal amount of all of the certificates, which will include the Class B-4, Class B-5, Class R and Class LT-R Certificates. Thereafter, the sponsor or one or more of its affiliates may or may not

 

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continue to retain certificates (referred to herein as the “retained certificates”) with an aggregate original certificate principal amount at least equal to 5% of the aggregate original certificate principal amount of the certificates. Once regulations governing sponsor/seller risk retention have been finalized and become effective, unless those regulations apply to Sequoia Mortgage Trust 2012-2 retroactively and require sponsors or sellers to retain a larger portion of the certificates than retained at that time, the sponsor or one or more of its affiliates would not plan to increase their holdings of certificates as a response to the finalization of risk retention regulations.

 

Distributions of Interest

 

On each distribution date, to the extent of the available distribution amount, each class of certificates will be entitled, subject to the limitations described herein, to receive accrued and unpaid interest determined on the basis of the outstanding class principal amount (or class notional amount, in the case of the Class A-IO Certificates) of such class immediately prior to such distribution date, the applicable certificate interest rate and the related accrual period.

 

Interest will accrue on each class of offered certificates as described above in the table under “The Offered Certificates.”

 

Interest payments will be allocated among certificateholders of a class of certificates on a pro rata basis.

 

We refer you to “Description of the Certificates—Distributions of Interest” in this prospectus supplement for more information.

 

Distributions of Principal

 

The amount of principal distributable on each class of certificates (other than the Class A-IO Certificates) will be determined by (1) funds received on the mortgage loans that are available to make payments of principal on the certificates, (2) distribution rules that allocate portions of principal payments received on the mortgage loans among different classes of certificates and (3) advances, if any, made by the servicers (other than Cenlar FSB) or the servicing administrator, as described in this prospectus supplement. Funds received on the mortgage loans may consist of monthly scheduled payments as well as unscheduled payments resulting from prepayments by borrowers, liquidation of defaulted mortgage loans or purchases of mortgage loans under the circumstances described in this prospectus supplement.

 

The senior certificates (other than the Class A-IO Certificates) will receive principal payments from the senior principal distribution amount. The Class B-1, Class B-2 and Class B-3 Certificates and the other subordinate classes generally will receive their pro rata share of scheduled principal collections, sequentially, as part of the subordinate principal distribution amount. However, with respect to unscheduled principal collections, except under the limited circumstances described in this prospectus supplement, the Class B-1, Class B-2 and Class B-3 Certificates and the other subordinate classes will not receive unscheduled principal collections on the mortgage loans until the distribution date in April 2017. From and after that distribution date, provided that certain tests are met, the subordinate classes will receive unscheduled principal collections in an amount equal to their allocated share of the subordinate principal distribution amount.

 

The manner of allocating payments of principal on the mortgage loans will differ, as described in this prospectus supplement, depending upon when a distribution date occurs, whether the delinquency and loss performance of the mortgage loans is worse than certain levels specified in the pooling and servicing agreement and, with respect to the subordinate certificates, depending upon the subordination available to the Class A-1, Class A-2 and Class A-3 Certificates and each class of subordinate certificates from classes with payment priorities subordinate to that class and, with respect to the subordinate certificates, whether certain conditions have been satisfied.

 

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We refer you to “Description of the Certificates—Distributions of Principal” in this prospectus supplement and “Distribution of the Securities—Distributions on Securities” in the prospectus for more information.

 

Priority of Distributions

 

On each distribution date, the available distribution amount in respect of the mortgage loans will be distributed in the following order of priority:

 

·first, to the Class A-1, Class A-2, Class A-3 and Class A-IO Certificates, pro rata, accrued and unpaid interest, as described under “Description of the Certificates — Priority of Distributions and Allocation of Shortfalls” in this prospectus supplement;

 

·second, to the Class A-1, Class A-2 and Class A-3 Certificates, the senior principal distribution amount, concurrently as follows:

 

(a)to the Class A-1 Certificates, a pro rata portion of the senior principal distribution amount based upon the aggregate of the class principal amounts of the Class A-1, Class A-2 and Class A-3 Certificates, until the class principal amount for such class has been reduced to zero; and

 

(b)to the Class A-2 and Class A-3 Certificates, sequentially in that order, the remaining portion of the senior principal distribution amount after the allocation to the Class A-1 Certificates, until their respective class principal amounts have been reduced to zero; and

 

·third, sequentially, to the Class B-1, Class B-2, Class B-3, Class B-4 and Class B-5 Certificates, in that order, accrued and unpaid interest and then the applicable amount of principal with both interest and the applicable amount of principal being paid to one class before any payments are made to the next class.

 

We refer you to “Description of the Certificates — Priority of Distributions and Allocation of Shortfalls” in this prospectus supplement for more information.

 

 Limited Recourse

 

The only source of cash available to make interest and principal payments on the certificates will be the assets of the issuing entity. The issuing entity will have no source of cash other than collections and recoveries on the mortgage loans through insurance or otherwise and advances made by the servicers (other than Cenlar FSB), the servicing administrator and the master servicer, which are reimbursable to the servicers (other than Cenlar FSB), the servicing administrator and the master servicer as discussed in this prospectus supplement. No other entity will be required or expected to make any payments on the certificates.

 

Credit Enhancement

 

The payment structure of the certificates includes limited subordination and loss allocation features to enhance the likelihood that holders of more senior classes of certificates will receive regular distributions of interest and principal.

 

The Class B-5 Certificates are more likely to experience losses than the Class B-1, Class B-2, Class B-3 and Class B-4 Certificates and the senior certificates; the Class B-4 Certificates are more likely to experience losses than the Class B-1, Class B-2 and Class B-3 Certificates and the senior certificates; the Class B-3 Certificates are more likely to experience losses than the Class B-1 and Class B-2 Certificates and the senior certificates; the Class B-2 Certificates are more likely to experience losses than the Class B-1

 

S-7
 

 

Certificates and the senior certificates; and the Class B-1 Certificates are more likely to experience losses than the senior certificates.

 

We refer you to “Risk Factors — Potential Inadequacy of Credit Enhancement,” “Description of the Certificates—Subordination of Payments to the Subordinate Certificates” and “—Allocation of Realized Losses” in this prospectus supplement.

 

Final Scheduled Distribution Date

 

The final scheduled distribution date for the certificates is the distribution date in April 2042, which is the distribution date in the month following the latest maturity date on any of the mortgage loans as of the cut-off date. The actual final distribution date for any class may be earlier or later, and could be substantially earlier or later, than the final scheduled distribution date. The servicers will be permitted to modify the mortgage loans to extend the maturity date beyond the final scheduled distribution date for the certificates.

 

Fees and Expenses

 

Before distributions are made on the certificates, each servicer will be paid from interest collections on the related mortgage loans, prior to deposit into the applicable custodial account, a monthly fee, calculated as provided in the related servicing agreement, equal to 0.25% per annum of the principal balance of each mortgage loan serviced by that servicer; provided, however, that with respect to mortgage loans serviced by Cenlar FSB, such fee will be allocated between Cenlar FSB and Redwood Residential Acquisition Corporation, as servicing administrator; and provided, further, that with respect to mortgage loans serviced by First Republic Bank, the servicing fee rate will be increased by the amount of any increase in the mortgage interest rate for any mortgage loan pursuant to the terms of the related mortgage note due to the termination of an automatic debit or direct deposit account. Each servicer will also be entitled to receive, to the extent provided in the applicable servicing agreement, additional compensation in the form of any interest or other income earned on funds it has deposited in the applicable custodial account pending remittance to the securities administrator, as well as late charges and certain fees paid by borrowers and, in certain cases, REO management fees.

 

Before distributions are made on the certificates, the master servicer will be paid from interest collections on the mortgage loans, prior to deposit into the distribution account, a monthly fee for each mortgage loan calculated as 0.0275% annually on the total principal balance of the mortgage loans.

 

The securities administrator will be paid a fee by the master servicer, from the master servicing fee, and as additional compensation, the securities administrator will retain investment income on funds in the distribution account.

 

As compensation for its services, the trustee will receive a fee of $6,000 per annum, together with its initial acceptance fee of $6,000, which will be paid by the master servicer from the master servicing fee pursuant to a separate agreement between the trustee and the master servicer.

 

The fees and expenses of the custodian will be paid by the master servicer from the master servicing fee. Expenses and indemnity amounts of the trustee, the master servicer, the securities administrator and the custodian that are permitted to be reimbursed under the pooling and servicing agreement and the custodial agreement will be paid by the issuing entity prior to any distributions to certificateholders, subject to an aggregate annual cap of $300,000 and subject to an annual cap of $100,000 with respect to aggregate amounts reimbursable to the trustee. Amounts payable to the trustee include fees for investigating and enforcing breaches of mortgage loan representations and warranties under certain circumstances. In addition, under the servicing agreements certain expenses of the servicers and the servicing administrator will be paid prior to distributions to certificateholders.

 

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See “Fees and Expenses of the Issuing Entity” and “The Agreements—Representations and Warranties” in this prospectus supplement.

 

The Mortgage Loans

 

General. On the closing date, the assets of the issuing entity will consist of 366 fixed rate mortgage loans with an aggregate principal balance as of the cut-off date of approximately $327,935,218. The mortgage loans will be secured by mortgages, deeds of trust or other security instruments, all of which are referred to in this prospectus supplement as mortgages.

 

All of the mortgage loans have an original term to maturity of thirty years.

 

Twenty-six of the mortgage loans (representing approximately 10.02% of the mortgage loans by stated principal balance as of the cut-off date) are interest-only loans that provide for payments of interest at the related mortgage rate, but no payments of principal, for a period of ten years following origination of such mortgage loan. Following such ten year period, the monthly payment with respect to each such mortgage loan will increase to an amount sufficient to pay interest and to amortize the principal balance of such mortgage loan over its remaining term at the fixed mortgage rate.

 

The mortgage loans will not be insured or guaranteed by any government agency.

 

The depositor expects that the mortgage loans will have the following approximate characteristics as of the cut-off date: 

 

Mortgage Pool Summary

 

    Approximate
Range or Total
   

Weighted

Average

   

Total

Percentage
(by Stated
Principal
Balance)

 
Number of Mortgage Loans     366              
Total Stated Principal Balance     $327,935,218              
Stated Principal Balances     $43,860.00 to $3,000,000.00       $895,998(*)        
Originator                        
£   First Republic Bank     $161,703,490             49.31%  
£   PrimeLending, a PlainsCapital Company     $64,851,765             19.78%  
£   PHH Mortgage Corporation     $39,610,462             12.08%  
£   Other Originators     $32,764,538             9.99%  
£   Flagstar Capital Markets Corporation     $29,004,964             8.84%  
                         
Servicer                        
£   First Republic Bank     $161,703,490             49.31%  
£   Cenlar FSB     $126,621,266             38.61%  
£   PHH Mortgage Corporation     $39,610,462             12.08%  
                         
Mortgage Rates     3.800% to 5.650%       4.603%        
Original Terms to Maturity (in months)     360 to 360       360        
Remaining Terms to Maturity (in months)     352 to 360       357        
Original Loan-to-Value Ratios     12.22% to 80.00%       63.50%        
Number of Interest-Only Mortgage Loans     26             10.02%  

 

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    Approximate
Range or Total
   

Weighted

Average

   

Total

Percentage
(by Stated
Principal
Balance)

 
Geographic Concentration by State in Excess of 10.00% of the Total Stated Principal Balance:                        
£   £California     $162,675,523             49.61%  
£   £Texas     $38,746,896             11.82%  
Maximum City Concentration                        
£   £San Francisco, California     $20,135,340             6.14%  
FICO Scores at Origination     683 to 818       769        
Number of Mortgage Loans with Prepayment Charges at Origination     127             45.49%  
Product Type                        
£   30 Year Fixed Rate     $327,935,218             100.00%  
Occupancy Type                        
£   Primary     $302,521,556             92.25%  
£   Second Home     $18,624,339             5.68%  
£   Investor     $6,789,323             2.07%  
Loan Purpose                        
£   Rate/Term Refinance     $169,367,109             51.65%  
£   Purchase     $133,631,651             40.75%  
£   Cashout Refinance     $24,936,458             7.60%  
Property Type                        
£   Single Family Detached Residence     $227,947,061             69.51%  
£   Planned Unit Development     $62,706,942             19.12%  
£   Condominium     $19,293,531             5.88%  
£   Cooperative unit     $10,140,905             3.09%  
£   Two-to-Four Family     $7,846,779             2.39%  
Documentation Type                        
£   Two Years Income With Asset Verification     $327,935,218             100.00%  

(*) Represents average.

 

Mortgage Loan Representations and Warranties

 

Each originator of the mortgage loans has made certain representations and warranties concerning the mortgage loans. The seller’s rights to these representations and warranties will be assigned to the depositor, and the depositor’s rights to these representations and warranties will be assigned to the trustee for the benefit of certificateholders pursuant to assignment, assumption and recognition agreements or assignment of representations and warranties agreements.

 

Following any originator’s discovery or receipt of notice of a breach of any representation or warranty that materially and adversely affects the value of a mortgage loan or the interest of the trustee, for the benefit of the certificateholders, in a mortgage loan, the originator will be required to (1) cure that breach, (2) repurchase the affected mortgage loan from the issuing entity, (3) in some circumstances, substitute another mortgage loan or (4) in some circumstances, make an indemnification payment in the amount of the reduction in value resulting from such breach. Each determination that there has been such a breach of a representation or warranty and each remedy for such a breach is required to be conducted on a mortgage loan-by-mortgage loan basis.

 

Under the mortgage loan purchase and sale agreement (the “mortgage loan purchase agreement”), the seller will be obligated as described herein to cure the breach, or repurchase or substitute for any mortgage loan as to which there has been an uncured breach of representations or warranties made

 

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by any originator other than First Republic Bank that materially and adversely affects the value of such mortgage loan or the interests of the certificateholders in such mortgage loan, but only if such originator is unable to cure such breach or repurchase, substitute for or make an indemnification payment with respect to such mortgage loan because it is subject to a bankruptcy or insolvency proceeding or no longer in existence.

 

Under the mortgage loan purchase agreement, the seller will agree to cure a breach or repurchase from the trust fund or substitute for any mortgage loan as to which a representation and warranty made by the originator was true and correct as of the date made by the originator but not true and correct as of the closing date, if such breach materially and adversely affects the value of the mortgage loan or the interests of the certificateholders in that mortgage loan.

 

In order to substitute a new mortgage loan for a mortgage loan that has been removed from the trust because of a breach of a representation or warranty, (a) substitution must take place within two years from the date the seller acquired the deleted mortgage loan and (b) the new mortgage loan must be materially similar to the deleted mortgage loan.

 

In some circumstances, an arbitration proceeding may be conducted to resolve a dispute arising out of an allegation of a breach of a representation or warranty concerning a mortgage loan. See “The Agreements—Representations and Warranties” in this prospectus supplement.

 

Mortgage Loan Servicing

 

Wells Fargo Bank, N.A. is the master servicer under the pooling and servicing agreement. The master servicer will monitor the performance of each servicer under the related servicing agreement.

 

Under the servicing agreements, the servicers (other than Cenlar FSB) are generally obligated to fund monthly advances of cash (to the extent such advances are deemed recoverable), which will be included with mortgage principal and interest collections, in an amount equal to any delinquent monthly payments due on the mortgage loans on the immediately preceding determination date. For mortgage loans serviced by Cenlar FSB, Redwood Residential Acquisition Corporation, as servicing administrator, will be obligated to fund such monthly advances. The master servicer will be obligated to fund any required advance if a servicer (other than Cenlar FSB) or the servicing administrator, as applicable, fails in its obligation to do so, to the extent described in this prospectus supplement. The master servicer, the servicers (other than Cenlar FSB) and the servicing administrator will be entitled to be reimbursed for any such advances from future payments and collections (including insurance or liquidation proceeds) with respect to those mortgage loans. However, if the master servicer, the servicers (other than Cenlar FSB) or the servicing administrator fund advances which are determined to be nonrecoverable from future payments and collections on the related mortgage loan, such parties will be entitled to reimbursement for such advances from other mortgage loans prior to any distributions to certificateholders.

 

The servicers (other than Cenlar FSB) and the servicing administrator will also make interest payments to compensate in part for any shortfall in interest payments on the certificates which results from a borrower prepaying a mortgage loan in whole or in part. However, the amount of such payments will not exceed, in the case of a servicer other than Cenlar FSB, the applicable servicing fees payable to the servicer for the related due period or, in the case of the servicing administrator, the aggregate of Cenlar FSB’s servicing fee and the servicing administrator fee for the related due period. If a servicer (other than Cenlar FSB) or the servicing administrator fails to make a required payment in respect of such shortfalls, the master servicer will be obligated to reduce its master servicing fee for the related period to the extent necessary to fund any such shortfall. Such master servicing fee may be insufficient to fund the entire shortfall.

 

We refer you to “The Agreements—Mortgage Loan Servicing” in this prospectus supplement for more detail.

 

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Optional Termination

 

On any date on which the total stated principal balance of the mortgage loans has declined to less than 10% of the initial total stated principal balance of the mortgage loans as of the cut-off date, subject to satisfaction of the conditions described in the pooling and servicing agreement, the master servicer may purchase all of the mortgage loans from the trust fund, excluding any servicing rights owned by the servicers, thereby causing an early retirement of the certificates.

 

We refer you to “Description of the Certificates—Optional Purchase of the Mortgage Loans” in this prospectus supplement for more information.

 

Tax Status

 

The securities administrator, on behalf of the trustee, will elect to treat all or a portion of the trust fund as one or more “real estate mortgage investment conduits” or “REMICs” for federal income tax purposes. Each of the offered certificates will represent ownership of “regular interests” in a REMIC.

 

The Class A-IO Certificates will, and certain other offered certificates may, be issued with original issue discount for federal income tax purposes.

 

We refer you to “Material Federal Income Tax Consequences” in this prospectus supplement and in the accompanying prospectus for additional information concerning the application of federal income tax laws to the certificates.

 

ERISA Considerations

 

A fiduciary of any employee benefit plan subject to the Employee Retirement Income Security Act of 1974, as amended (or “ERISA”), or Title I of Section 4975 of the Internal Revenue Code of 1986, as amended (or the “Code”) (each, a “Plan”), should carefully review with its legal advisors whether the purchase or holding of the Class A-1, Class A-2 and Class A-3 Certificates and Class B-1 Certificates that are placed by an underwriter could give rise to a transaction prohibited or not otherwise permissible under applicable law. Certain restrictions apply to the purchase, sale and holding by Plans of the Class A-IO, Class B-1, Class B-2 and Class B-3 Certificates that are not placed by an underwriter.

 

We refer you to “ERISA Considerations” in this prospectus supplement and in the accompanying prospectus for more information.

 

Legal Investment

 

Under current law, the Class A-1, Class A-2, Class A-3 and Class B-1 Certificates will constitute “mortgage related securities” for purposes of the Secondary Mortgage Market Enhancement Act of 1984, or SMMEA, so long as they are rated in one of the two highest rating categories by at least one nationally recognized statistical rating agency. See “Risk Factors—Financial Regulatory Reforms and Additional Proposed Regulations Could Have a Significant Impact on the Depositor, the Servicers or Any Successor Servicer or on the Value of the Certificates” for a discussion of pending changes to the definition of “mortgage related securities.”

 

There may be other restrictions on the ability of certain types of investors to purchase the certificates that prospective investors should also consider.

 

We refer you to “Legal Investment” in the prospectus for more information. Investors should note that the Office of Thrift Supervision, or the OTS,  has been merged into the Office of the Comptroller of the Currency, or OCC, and the regulations of the OTS are now under the jurisdiction of the OCC, in some cases, and the Board of Governors of the Federal Reserve System, in other cases.

 

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Certificate Rating

 

Each class of offered certificates is expected to receive a credit rating from one or more nationally recognized statistical rating organizations.

 

We refer you to “Ratings” in this prospectus supplement for a more complete discussion of the certificate ratings.

 

Listing

 

The offered certificates are not listed on any exchange, and no party to the transaction intends (or is obligated) to list the offered certificates on any exchange or to quote them in the automated quotation system of any registered securities organization.

 

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RISK FACTORS

 

The following information, which you should carefully consider, identifies certain significant sources of risk associated with an investment in the offered certificates. All statistical information referred to in this section is based on the mortgage pool as constituted as of the cut-off date. Such risks give rise to the potential for significant loss over the life of the offered certificates and could prevent you from fully recovering your initial investment in the offered certificates.

 

You should also review the risk factors described in the accompanying prospectus, which describe additional risks that apply to your investment in the offered certificates.

 

Turbulence in the Financial Markets and Economy May Adversely Affect the Performance and Market Value of Your Certificates and These Conditions May Not Improve in the Near Future

 

Market and economic conditions during the past several years have caused significant disruption in the credit markets. Continued concerns about the availability and cost of credit, the U.S. mortgage market, declining real estate markets in the U.S., economic conditions in the U.S. and Europe and the systemic impact of inflation or deflation, energy costs and geopolitical issues have contributed to increased market volatility and diminished expectations for the U.S. economy. Increased market uncertainty and instability in both U.S. and international capital and credit markets, combined with declines in business and consumer confidence and increased unemployment, have contributed to volatility in domestic and international markets.

 

As a result of these market conditions, the cost and availability of credit has been and may continue to be adversely affected by illiquid credit markets and wider credit spreads. Concern about the stability of the markets and the strength of counterparties has led many lenders and institutional investors to reduce, and in some cases cease, lending to borrowers. Continued turbulence in the U.S. and international markets and economies may negatively affect the U.S. housing market and the credit performance and market value of residential mortgage loans.

 

There is particular uncertainty about the prospects for growth in the U.S. economy. A number of factors influence the potential uncertainty, including, but not limited to, high current unemployment, rising government debt levels, prospective Federal Reserve policy shifts, the withdrawal of government interventions into the financial markets, changing U.S. consumer spending patterns, and changing expectations for inflation and deflation. Income growth and unemployment levels affect borrowers’ ability to repay mortgage loans, and there is risk that economic activity could be weaker than anticipated as the country begins to exit the recent serious recession.

 

In addition, the difficult economic environment and rate of unemployment and other factors (which may or may not affect real property values) may affect the mortgagors’ timely payment of scheduled payments of principal and interest on the mortgage loans and, accordingly, the actual rates of delinquencies, foreclosures and losses with respect to the mortgage loans. Excessive home building or historically high foreclosure rates resulting in an oversupply of housing in a particular area may increase the amount of losses incurred on defaulted mortgage loans.

 

These factors and general market conditions could adversely affect the performance and market value of your certificates. There can be no assurance that governmental or other actions will improve these conditions in the near future.

 

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Downgrade of Long-term Ratings of Eurozone Nations May Adversely Affect the Market Value of the Offered Certificates

 

In response to the economic situation facing the European Economic and Monetary Union, or Eurozone, based on factors including tightening credit conditions, higher risk premiums on Eurozone sovereigns and disagreement among European policy makers as to how best to address the declining market confidence with respect to the Eurozone, on January 13, 2012, Standard & Poor’s, a division of the McGraw-Hill Companies, Inc. (“S&P”), downgraded the long-term credit ratings on nine members of the Eurozone, including Austria, Cyprus, France, Italy, Malta, Portugal, Slovakia, Slovenia and Spain

 

Recent Trends in the Residential Mortgage Market May Adversely Affect the Performance and Market Value of Your Certificates

 

Since late 2006, delinquencies, defaults and foreclosures on residential mortgage loans have increased, and they may continue to increase in the future. These increases have not been limited to “subprime” mortgage loans, which are made to borrowers with impaired credit, but have also affected “Alt A” mortgage loans, which are made to borrowers often with limited documentation, and “prime” mortgage loans, which are made to borrowers with better credit who frequently provide full documentation. In addition to higher delinquency, default and foreclosure rates, loss severities on all types of residential mortgage loans have increased due to declines in residential real estate values, resulting in reduced home equity. Nationwide home price appreciation rates generally have been negative since late 2007, and this trend may continue for an indefinite period of time. Higher loan-to-value ratios generally result in lower recoveries on foreclosure, and an increase in loss severities above those that would have been realized had property values remained the same or continued to appreciate.

 

Mortgage loans that provide for the payment of interest, but not principal, for a certain period may also result in higher delinquency rates when, following the interest-only period, the monthly payment with respect to each of these mortgage loans is increased in order to amortize the principal balance of the mortgage loan over the remaining term and to pay interest at the applicable mortgage interest rate. See “Risk Factors—Risks Related to Mortgage Loans With Interest-Only Payments” below.

 

Current market conditions may impair borrowers’ ability to refinance or sell their residential properties, which may also contribute to higher delinquency and default rates. In response to increased delinquencies and losses with respect to mortgage loans, many mortgage loan originators recently have implemented more restrictive underwriting criteria for mortgage loans, which will likely result in reduced availability of refinancing alternatives for borrowers. These risks would be exacerbated to the extent that prevailing mortgage interest rates increase from current levels. Home price depreciation experienced to date, and any further price depreciation, may also leave borrowers with insufficient equity in their homes to enable them to refinance. Borrowers who intend to sell their homes on or before the maturity of their mortgage loans may find that they cannot sell their property for an amount equal to or greater than the unpaid principal balance of their mortgage loans.  While some mortgage loan originators and servicers have created or otherwise are participating in modification programs in order to assist borrowers with refinancing or otherwise meeting their payment obligations, not all borrowers will qualify for or will take advantage of these opportunities.

 

In response to these circumstances, federal, state and local authorities have enacted and continue to propose new legislation, rules and regulations relating to the origination, servicing and treatment of mortgage loans in default or in bankruptcy. These initiatives could result in delayed or reduced collections from mortgagors, limitations on the foreclosure process and generally increased servicing costs. Certain of these initiatives could also permit the servicer to take actions, such as with respect to the modification of mortgage loans, that might adversely affect the certificates, without any remedy or compensation to the holders of the certificates.

 

The conservatorships of Fannie Mae and Freddie Mac in September 2008 have impacted both the real estate market and the value of real estate assets generally. While Fannie Mae and Freddie Mac currently act as the primary sources of liquidity in the residential mortgage markets, both by purchasing

 

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mortgage loans for their own portfolios and by guaranteeing mortgage-backed securities, their long-term role is uncertain as the Obama administration has proposed reducing and eventually eliminating their role in the residential mortgage markets. A reduction in the ability of mortgage loan originators to access Fannie Mae and Freddie Mac to sell their mortgage loans may adversely affect the financial condition of mortgage loan originators. In addition, any decline in the value of securities issued by Fannie Mae and Freddie Mac may affect the value of residential mortgage-backed securities in general.

 

These adverse changes in market and credit conditions have had, and may continue to have, the effect of depressing the market values of residential mortgage-backed securities generally, and substantially reducing the liquidity of residential mortgage-backed securities generally. These developments may adversely affect the performance, marketability and overall market value of your certificates.

 

Financial Regulatory Reforms and Additional Proposed Regulations Could Have a Significant Impact on the Depositor, the Servicers or Any Successor Servicer or on the Value of the Certificates

 

In response to the financial crisis, Congress passed the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), which President Obama signed into law on July 21, 2010. The Dodd-Frank Act requires the creation of new federal regulatory agencies, and grants additional authorities and responsibilities to existing regulatory agencies to identify and address emerging systemic risks posed by the activities of financial services firms. The Dodd-Frank Act also provides for enhanced regulation of derivatives and mortgage-backed securities offerings, restrictions on executive compensation and enhanced oversight of credit rating agencies. Additionally, the Dodd-Frank Act establishes the Bureau of Consumer Financial Protection within the Federal Reserve System, a new consumer protection regulator tasked with regulating consumer financial services and products. The Dodd-Frank Act also limits the ability of federal laws to preempt state and local consumer laws.

 

The impact of the Dodd-Frank Act will depend significantly upon the content and implementation of the rules and regulations issued on its mandate. It is not yet clear how the Dodd-Frank Act and its associated rules and regulations will impact the mortgage-backed securities market and residential mortgage lending generally, and the issuing entity, the sponsor, the depositor, the servicers and their respective businesses and assets specifically. No assurance can be given that the new regulations will not have an adverse impact on these entities or the value of the certificates.

 

For example, the SEC has proposed rules to remove references to credit ratings from its regulations and to substitute alternative standards of creditworthiness, as required under the Dodd-Frank Act. Among other things, these proposed rules would remove the credit rating requirement in the term “mortgage related security” for purposes of SMMEA, and would require a replacement standard to go into effect on July 21, 2012. While the SEC has not determined an alternative standard of creditworthiness, and the proposed rules have not been finalized, it is possible the certificates will not constitute “mortgage related securities” for purposes of SMMEA if an alternative standard is adopted in the future. This could have a negative impact on the liquidity of your certificates.

 

In March 2011, the SEC issued a release soliciting public comment on proposed rules that, if adopted, would require, among other things, that the sponsor or an affiliate of the sponsor retain at least 5% of the credit risk of a non-exempt securitization, and in general prohibit the transfer or hedging, and restrict the pledge, of the retained credit risk. In April 2010, the SEC proposed rules, some of which were re-proposed in July 2011, that, if adopted, would further revise substantially Regulation AB and other rules regarding the offering process, disclosure and reporting for publicly-issued asset-backed securities. Among other things, the proposed changes would require (i) enhanced disclosure of loan level information at the time of securitization and on an ongoing basis, (ii) that the transaction agreements provide for review of the underlying assets by an independent credit risk manager if certain trigger events occur and (iii) periodic assessments of an asset-backed security issuer’s continued ability to conduct shelf offerings. We cannot predict what effect the proposed rules will have, if adopted, on the marketability of asset-backed securities such as the certificates. In addition, if the proposed rules are adopted, your certificates, which may not be subject to all of the requirements included in the proposed rules, may be less marketable than those that are offered in compliance with the proposed rules.

 

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In addition, other regulatory agencies, including the FDIC, recently have proposed or adopted financial reform regulations. It is not clear whether or when any proposed regulations will be adopted, what the final form of any such regulations will be, how they will be implemented, or if the depositor, the servicers or any successor servicer will be affected. No assurance can be given that any proposed regulations will not have an adverse impact on the issuing entity, sponsor, depositor, the servicers or any successor servicer or on the value of the certificates.

 

Prospective investors should independently assess and determine whether they are directly or indirectly subject to Article 122a of the Banking Consolidation Directive (Directive 2006/48/EC (as amended)) (“Article 122a”) as implemented by the Member States of the European Union. Any prospective investor that is subject to Article 122a should independently assess and determine their ability to comply with the initial and ongoing obligations imposed by Article 122a and the regulatory capital treatment that is required with respect to the purchase of an offered certificate and what impact any such regulatory capital treatment may have on the liquidity or market value of the offered certificates, in particular in the event that the minimum risk retention requirement or other obligations imposed by Article 122a are found to be not in compliance. Although the sponsor or one or more affiliates will purchase the Class B-4, Class B-5, Class R and Class LT-R Certificates at the closing, the sponsor is under no obligation to satisfy the minimum 5% net economic interest with respect to the offered certificates in one of the forms prescribed by Article 122a, there is no obligation on the part of the sponsor to maintain any level of risk retention in a manner that would comply with Article 122a, and none of the sponsor or affiliates of the sponsor make any representation or assurance to retain any such level of risk retention after the closing date. Investors who are subject to Article 122a should consider carefully investing in the offered certificates as a failure to comply with one or more of the requirements set out in Article 122a will result in the imposition of a penal capital charge in respect of the offered certificates acquired by the relevant investor.

 

On February 9, 2012, the Department of Justice, the Department of Housing and Urban Development, and attorneys general representing 49 states and the District of Columbia reached a settlement agreement with five large mortgage servicers in connection with servicing and foreclosure issues. Consent judgments implementing the agreement were filed in the U.S. District Court in Washington, D.C. in March, 2012. The settlement agreement provides for financial relief for homeowners, including mortgage loan principal reduction, refinancing and increased benefits and protections for servicemembers and veterans, and requires a comprehensive reform of mortgage servicing practices for the five servicers. While none of the servicers servicing mortgage loans included in the mortgage pool are subject to the settlement agreement, it is possible that future actions against additional servicers will result in similar agreements with similar terms, or regulations or rules enacted by the Consumer Financial Protection Bureau that could require the servicers to implement these types of reforms with respect to the mortgage loans. Any changes to the servicers’ servicing procedures could cause delays in payments to or increase losses to the certificateholders.

 

Potential Changes in Ratings Present Risks

 

Since mid-2007, the mortgage market has encountered difficulties which continue and which may adversely affect the performance or market value of your certificates. Residential mortgage-backed securities backed by mortgage loans originated in relatively recent years, particularly since 2005, have generally been the focus of attention due to a higher and earlier than expected rate of delinquencies, defaults and foreclosures. Many residential mortgage-backed securities, in particular those that were issued between 2005 and 2007, have been subject to rating agency downgrades. These downgrades have included downgrades of “AAA”-rated securities. There may be further downgrades of residential mortgage-backed securities in the future. In addition, the rating agency rating the certificates may change its ratings criteria after issuance and any changes in ratings criteria may adversely affect the ratings assigned to the certificates. There can be no assurance that the assigning rating agency will not downgrade the certificates or that any other rating agency will not assign ratings to the certificates that are lower than those assigned by the rating agency requested to assign ratings to the certificates.

 

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None of the sponsor, the depositor, the trustee, the master servicer, the securities administrator, the underwriter or any other person will have any obligation to cause any rating of any of the offered certificates to be maintained. Changes affecting the mortgage loans, the parties to the pooling and servicing agreement or other persons may have an adverse effect on the ratings of the offered certificates, and thus their market value. Any such adverse changes do not by themselves constitute a default under the servicing agreements or the pooling and servicing agreement.

 

Ratings of the Certificates May Not Accurately Reflect Risks Associated With Those Certificates

 

The ratings of the certificates depend primarily on an assessment of the mortgage loans that are assets of the issuing entity, the credit enhancement provided to the certificates by more subordinate certificates and the ability of the servicers to service the mortgage loans. Rating agencies rate debt securities based upon their assessment of the likelihood of the receipt of principal and interest payments. Rating agencies do not consider the risks of fluctuations in market value or other factors that may influence the value of debt securities and, therefore, the assigned credit rating may not fully reflect the true risks of an investment in the certificates. Credit rating agencies may change their methods of evaluating credit risk and determining ratings on securities backed by mortgage loans. These changes may occur quickly and often.

 

The ratings of the certificates by a rating agency:

 

  · only address the likelihood of receipt by holders of certificates of distributions in the amount of scheduled payments on the mortgage loans;

 

  · do not take into consideration any of the tax aspects associated with the certificates;

 

  · do not address the possibility that, as a result of principal prepayments, the yield on your certificates may be lower than anticipated; and

 

  · do not comment as to the market price or suitability of the certificates for a particular investor.

 

Additional Ratings of the Certificates or a Withdrawal of the Ratings May Adversely Affect Their Value and/or Limit Your Ability to Sell Your Certificates

 

The sponsor has hired two nationally recognized statistical rating agencies (each a “hired NRSRO”) and will pay them fees to assign ratings on the offered certificates. The sponsor has not hired any other nationally recognized statistical rating organization (each, a “non-hired NRSRO”) to assign ratings on the certificates. However, under newly effective Securities and Exchange Commission rules, information provided to a hired NRSRO for the purpose of assigning or monitoring the ratings on the certificates is required to be made available to each non-hired NRSRO in order to make it possible for such non-hired NRSROs to assign unsolicited ratings on the certificates. An unsolicited rating could be assigned at any time, including prior to the closing date, and none of the depositor, the sponsor, the underwriter or any of their affiliates will have any obligation to inform you of any unsolicited ratings.

 

NRSROs, including each hired NRSRO, have different methodologies, criteria, models and requirements. If any non-hired NRSRO assigns an unsolicited rating on the certificates, there can be no assurance that such rating will not be lower than the ratings provided by the hired NRSROs, which could adversely affect the market value of your certificates and/or limit your ability to sell your certificates. In addition, if the sponsor fails to make available to the non-hired NRSROs any information provided to the hired NRSROs for the purpose of assigning or monitoring the ratings on the certificates, the hired NRSROs could withdraw their ratings on the certificates, which could adversely affect the market value of your certificates and/or limit your ability to sell your certificates.

 

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Appraisals May Not Accurately Reflect the Value or Condition of the Mortgaged Property

 

In general, appraisals represent the analysis and opinion of the person performing the appraisal at the time the appraisal is prepared and are not guarantees of, and may not be indicative of, present or future value. We cannot assure you that another person would not have arrived at a different valuation, even if such person used the same general approach to and same method of valuing the property, or that different valuations would not have been reached by any originator based on its internal review of such appraisals. Investors are encouraged to make their own determination as to whether an appraisal is an accurate representation of the value of a mortgaged property.

 

The appraisals obtained in connection with the origination of the mortgage loans sought to establish the amount a typically motivated buyer would pay a typically motivated seller at the time they were prepared. Such amount could be significantly higher than the amount obtained from the sale of a mortgaged property under a distressed or liquidation sale. In addition, in many real estate markets property values have declined since the time the appraisals were obtained, and therefore the appraisals may not be an accurate reflection of the current market value of the mortgaged properties. The mortgage loans were originated between June 2011 and February 2012 and the appraisals were generally prepared at the time of origination. The current market value of the mortgaged properties could be lower, and in some cases significantly lower, than the values indicated in the appraisals obtained at the origination of the mortgage loans and included in the original loan-to-value ratios reflected in this prospectus supplement.

 

Performing valuation and risk analysis of high-cost properties (such as the mortgaged properties) can involve challenges that are not generally present with respect to properties whose values fall within the average price range of their respective markets. There may be fewer substitute properties available (from which to derive comparative values) in the high-cost market, unique buyer attitudes and preferences, and more difficult to quantify “appeal” issues, any of which can make valuations in the high-cost home segment less precise than for more average-priced housing. In addition, differences exist between valuations due to the subjective nature of valuations and appraisals, particularly between different appraisers performing valuations at different points in time.

 

Loan-to-Value Ratios May Be Calculated Based on Appraised Value, Which May Not Be an Accurate Reflection of Current Market Value; Borrowers May Have, or May in the Future Incur, Additional Indebtedness Secured by Mortgaged Properties

 

As further described below under “Description of the Mortgage Pool—General,” the loan-to-value ratios and original loan-to-value ratios that are disclosed in this prospectus supplement are determined, in the case of a purchase money loan, based on the lesser of the selling price of the mortgaged property and its appraised value at origination of such mortgage loan, or, in the case of a refinance loan, based on the appraised value of the mortgaged property at the time of origination of the refinanced mortgage loan. As described above, because appraisals may not accurately reflect the value or condition of the mortgaged property and because property values generally have declined since the time appraisals were obtained, the loan-to-value ratios and original loan-to-value ratios that are disclosed in this prospectus supplement may be lower, in some cases significantly lower, than the loan-to-value ratios that would be determined if current appraised values of the mortgaged properties were used to determine loan-to-value ratios. Investors are encouraged to make their own determination as to the degree of reliance they place on the loan-to-value and original loan-to-value ratios that are disclosed in this prospectus supplement.

 

In addition, mortgage loan borrowers may have, or may in the future incur, additional indebtedness secured by mortgaged properties. This additional indebtedness could increase the risk that the value of the mortgaged property is less than the total indebtedness secured by the mortgaged property and could increase the risk of default on the affected mortgage loan.

 

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Governmental Actions May Affect Servicing of Mortgage Loans and May Limit the Servicers’ Ability to Foreclose

 

The federal government, state and local governments, consumer advocacy groups and others continue to urge servicers to be aggressive in modifying mortgage loans to avoid foreclosure, and federal, state and local governmental authorities have enacted and continue to propose numerous laws, regulations and rules relating to mortgage loans generally, and foreclosure actions particularly. Any of these laws, regulations and rules may provide new defenses to foreclosure, insulate the servicers from liability for modification of loans without regard to the terms of the pooling and servicing agreement or the servicing agreements or result in limitations on upward adjustment of mortgage interest rates, reduced payments by borrowers, permanent forgiveness of debt, increased prepayments due to the availability of government-sponsored refinancing initiatives and/or increased reimbursable servicing expenses, all of which are likely to result in delays and may result in reductions in the distributions to be made on the certificates.

 

Several courts and state and local governments and their elected or appointed officials also have taken unprecedented steps to slow the foreclosure process or prevent foreclosures altogether. A number of these laws have been enacted, including in California. These laws, regulations and rules will result in delays in the foreclosure process, and may lead to reduced payments by borrowers or increased reimbursable servicing expenses.

 

Certificateholders will bear the risk that future regulatory and legal developments will result in losses on their certificates, to the extent not covered by the applicable credit enhancement. The effect on the certificates will likely be more severe if any of these future legal and regulatory developments occur in one or more states in which there is a significant concentration of mortgaged properties.

 

Underwriting Standards May Affect Risk of Loss on the Mortgage Loans

 

Generally, the mortgage loans have been originated using underwriting standards that are less stringent than the underwriting standards applied by certain other first lien mortgage purchase programs, such as those of Fannie Mae and Freddie Mac. Applying less stringent underwriting standards creates additional risks that losses on the mortgage loans will occur and will be allocated to certificateholders.

 

Mortgage loans originated under the originators’ underwriting criteria and which illustrate this additional risk include the following:

 

·mortgage loans secured by properties acquired as second homes or investments, which constitute approximately 7.75% of the mortgage pool by stated principal balance as of the cut-off date, may present a greater risk that the borrower will stop making monthly payments if the borrower’s financial condition deteriorates. This risk may be especially pronounced for borrowers with mortgage loans on more than two properties. Approximately 44.34% of the mortgage pool by stated principal balance as of the cut-off date are mortgage loans made to borrowers with mortgage loans on two or more properties, two borrowers have two mortgage loans included in the mortgage pool and one borrower has three mortgage loans included in the mortgage pool;

 

·mortgage loans made to borrowers who are self-employed, which constitute approximately 38.78% of the mortgage pool by stated principal balance as of the cut-off date, may present a greater risk that the borrower will default on the mortgage loan than mortgage loans made to salaried or commissioned borrowers because self-employed borrowers frequently have less predictable income, and self-employed borrowers who are small business owners may be personally liable for their business debt; and

 

·mortgage loans with a stated principal balance over $1,000,000, which constitute approximately 41.08% of the mortgage pool by stated principal balance as of the cut-off date, may present a greater risk than mortgage loans with a lower principal balance because

 

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defaults on a mortgage loan with a larger principal balance may result in greater losses allocated to the certificateholders.

 

We refer you to “The Originators” in this prospectus supplement and to “Risk Factors—Aspects of the Mortgage Loan Origination Process May Result in Higher than Expected Delinquencies” and “Loan Program—Underwriting Standards” in the prospectus.

 

In Underwriting the Mortgage Loans, an Originator May Not Have Followed Its Underwriting Guidelines; Underwriting Guidelines May Not Identify or Appropriately Assess Repayment Risks

 

As described below under “The Originators—First Republic Bank” and “—PrimeLending, a PlainsCapital Company,” each originator, when originating the mortgage loans, generally does so in accordance with underwriting guidelines it has established or in accordance with investor-specific underwriting guidelines it has adopted and, in certain cases, based on exceptions to those guidelines. These guidelines may not identify or appropriately assess the risk that the interest and principal payments due on a mortgage loan will be repaid when due, or at all, or whether the value of the mortgaged property will be sufficient to otherwise provide for recovery of such amounts. To the extent exceptions are made to an originator’s underwriting guidelines in originating a mortgage loan, those exceptions may increase the risk that principal and interest amounts may not be received or recovered and compensating factors, if any, which may have been the premise for making an exception to the underwriting guidelines may not in fact compensate for any additional risk. Furthermore, to the extent that the underwriting guidelines were not followed by an originator when originating the mortgage loans, there could also be an increased risk that principal and interest amounts may not be received or recovered.

 

See “Annex A—Exceptions to Underwriting Guidelines at Origination” and “Description of the Mortgage Pool—Certain Characteristics of the Mortgage Loans” for a discussion of the limitations on the use of credit or FICO scores.

 

Pre-offering Review of the Mortgage Loans Underlying the Certificates May Not Reveal Aspects of the Mortgage Loans Which Could Lead to Losses

 

The sponsor has undertaken certain limited loan review procedures with respect to various aspects of certain mortgage loans underlying the certificates, including a review of the underwriting of certain of the mortgage loans conducted by each originator and verification of certain aspects of the mortgage loans. In conducting these review procedures, the sponsor relied on information and resources available to it (which were limited and which, in most cases, were not independently verified) and on one or more third party agents. These review procedures were intended to discover certain material discrepancies and possible material defects in the mortgage loans reviewed. However, these procedures did not constitute a re-underwriting of the loans, and were not designed or intended to discover every possible discrepancy or defect. In addition, the sponsor engaged a third party to conduct procedures designed to sample the sponsor’s data regarding characteristics of the mortgage loans, which data were used to generate the numerical information about the mortgage pool included in this prospectus supplement. Also, the review included the recalculation by a third party of numerical disclosures regarding the mortgage loans selected by the sponsor and appearing in this prospectus supplement. There can be no assurance that any review process conducted uncovered relevant facts that could be determinative of how the reviewed mortgage loans will perform. Investors should note that the sponsor undertook these limited procedures with respect to a portion of the mortgage loans and did not undertake these loan review procedures for the remaining mortgage loans.

 

Furthermore, to the extent that the limited review conducted by the sponsor did reveal factors that could affect how the mortgage loans will perform, the sponsor may have incorrectly assessed the potential severity of those factors. For example, in cases where a third party reviewed an original appraisal and determined that it did not support the original appraised value, the third party reviewed a Limited Desktop Appraisal Analysis or similar appraisal product, such as a field review, to determine whether the original appraisal was correct. The review of the analyses by the sponsor and the seller may, erroneously, not have indicated a defect in the original appraisal, which could result in an increased risk that payments

 

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on these mortgage loans may not be received or recovered. Investors are encouraged to make their own determination as the extent to which they place reliance on the limited loan review procedures of the sponsor.

 

We refer you to “Pre-Offering Review of the Mortgage Loans” in this prospectus supplement.

 

Risks Related to Mortgage Loans With Interest-Only Payments

 

Approximately 10.02% of the mortgage loans by stated principal balance as of the cut-off date to be included in the trust fund provide for payment of interest at the related mortgage interest rate, but no payment of principal, for a period of ten years following the origination of the mortgage loan. Following the interest-only period, the monthly payment with respect to each of these mortgage loans will be increased to an amount sufficient to amortize the principal balance of the mortgage loan over the remaining term and to pay interest at the applicable mortgage interest rate. This increase may result in increased delinquencies by the related borrowers, particularly if interest rates have increased and the borrower is unable to refinance. In addition, losses may be greater on these mortgage loans since there will be no principal amortization during the early years of these mortgage loans.

 

Historical performance data for interest-only mortgage loans is limited compared to performance data for mortgage loans that amortize from origination. The performance of interest-only mortgage loans may be significantly different from mortgage loans that amortize from origination. In addition, these borrowers may expect to refinance their mortgage loans with new mortgage loans (if a refinancing opportunity is available), particularly at the end of the interest-only period, which may result in higher prepayment speeds than would otherwise be the case. Also, the failure by a borrower to build equity in a mortgaged property may present special default and prepayment risks, particularly if the value of the mortgaged property declines below the principal balance of the mortgage loan.

 

We refer you to “Yield, Prepayment and Weighted Average Life— General” in this prospectus supplement and “Risk Factors — Risks Related to Mortgage Loans With Interest-Only Payments” and “— Changes in U.S. Economic Conditions May Adversely Affect the Performance of Mortgage Loans, Particularly Adjustable Rate Loans of Various Types” in the accompanying prospectus.

 

Geographic Concentration of Mortgage Loans

 

Approximately 49.61% of the mortgage loans by stated principal balance as of the cut-off date to be included in the trust fund are secured by properties located in the State of California and approximately 11.82% of the mortgage loans by stated principal balance as of the cut-off date to be included in the trust fund are secured by properties located in the State of Texas. Furthermore, within these state concentrations are significant concentrations of mortgage loans by stated principal balance as of the cut-off date secured by mortgaged properties located within certain cities and regional areas within one or more states. For example, as set forth in the “Mortgage Pool Summary” beginning on page S-9 of this prospectus supplement, approximately 6.14% and 18.52% of the mortgage loans by stated principal balance as of the cut-off date to be included in the trust fund are secured by properties located in the city of San Francisco and in the San Francisco-Oakland-Fremont, CA Metropolitan Statistical Area, respectively. Adverse economic conditions and natural disasters in those regions or states with a higher concentration of mortgage loans will have a disproportionate impact on the rate of delinquencies, defaults and losses on the mortgage loans than if fewer of the mortgage loans were concentrated in those regions or states.

 

From time to time, areas of the United States may be affected by flooding, severe storms, hurricanes, landslides, wildfires, earthquakes or other natural disasters or the effects of global climate change (which may include flooding, drought or severe weather). Under the applicable purchase agreement, each originator will represent and warrant that as of the date that the seller acquired a mortgage loan, each mortgaged property was free of material damage. Under the mortgage loan purchase agreement, the seller will agree to cure a breach or repurchase from the trust fund or substitute for any mortgage loan as to which such representation and warranty made by the originator was true and correct as of the date made by the originator but not true and correct as of the closing date, if such breach materially and

 

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adversely affects the value of the mortgage loan or the interests of the certificateholders in that mortgage loan. In the event of a breach of this representation and warranty that materially and adversely affects the interests of certificateholders, the applicable originator or the seller, as applicable, will be required to cure the breach, repurchase the affected mortgage loan or substitute another mortgage loan, or, in certain circumstances, make an indemnification payment in the amount of the reduction in value resulting from such breach. If an originator or seller, as applicable, fails to cure the breach, repurchase or substitute for or make an indemnification payment with respect to the affected mortgage loan, no other party is obligated to do so. In addition, under the mortgage loan purchase agreement, Redwood Residential Acquisition Corporation will be obligated as described herein to cure the breach, or repurchase or substitute for any affected mortgage loan originated by any originator other than First Republic Bank if such originator is unable to cure such breach, repurchase or substitute for or make an indemnification payment with respect to such mortgage loan because it is subject to a bankruptcy or insolvency proceeding or no longer in existence. If any damage caused by flooding, storms, wildfires, landslides or earthquakes (or other causes) occurs after the closing date, no entity will have any remedy obligation. In addition, the standard hazard policies covering the mortgaged properties generally do not cover damage caused by earthquakes, hurricanes, flooding and landslides, and earthquake, hurricane, flood or landslide insurance may not have been obtained with respect to such mortgaged properties. As a consequence, realized losses could result. For example, a severe earthquake in the San Francisco area could result in losses on the certificates, including the senior certificates. In addition, significant changes in regional climate conditions could have effects that are difficult to foresee. To the extent that a locality becomes more susceptible to extreme temperatures or weather events or otherwise becomes less desirable as a place to live, property values could be adversely affected and rates of default could increase.

 

Hurricane and Tropical Storm Irene, which struck the east coast of the United States in August 2011, may have adversely affected mortgaged properties located in the impacted areas. The sponsor engaged real estate agents to inspect the mortgaged properties located in the federal emergency management agency (“FEMA”) designated individual assistance zones affected by Hurricane and Tropical Storm Irene.  No visible damage was detected from those inspections; however, because the inspections were conducted from the closest public road and may not have detected all material damage, no assurance can be given that such properties are free of material damage from the storm. Further, since not all of the mortgaged properties were inspected, no assurance can be given that those properties that were not inspected are free from material damage from the storm. 

 

Tornadoes hitting the midwest and southern regions of the United States in February and March, 2012 also may have adversely affected mortgaged properties in those areas.

 

We refer you to “Yield, Prepayment and Weighted Average Life” in this prospectus supplement and “Risk Factors — Geographic Concentration of the Mortgage Loans” in the accompanying prospectus. For additional information regarding the geographic concentration of the mortgage loans to be included in the mortgage pool, see the applicable table(s) in “Annex A—Certain Characteristics of the Mortgage Loans” of this prospectus supplement.

 

The Return on Your Certificates Could Be Reduced by Shortfalls Due to the Servicemembers Civil Relief Act

 

The Servicemembers Civil Relief Act, or “Relief Act,” provides relief to borrowers who enter active military service and to borrowers in reserve status who are called to active duty after the origination of their mortgage loan. The Relief Act provides generally that a borrower who is covered by the Relief Act may not be charged interest on a mortgage loan in excess of 6% per annum during the period of the borrower’s active duty. Current or future military operations of the United States may result in an increase in the number of borrowers who may be in active military service, and the activation of additional U.S. military reservists or members of the National Guard, which may in turn significantly increase the proportion of mortgage loans whose mortgage rates are reduced by application of the Relief Act. In addition, mortgage loans in the mortgage pool that have not been identified as such may already be subject to the Relief Act. The amount of interest available for payment to certificateholders will be reduced by any reductions in the amount of interest collectible as a result of application of the Relief Act or similar state or

 

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local laws and neither the servicers nor any other party will be required to fund any interest shortfall caused by any these reductions. Interest shortfalls on the mortgage loans due to the application of the Relief Act or similar legislation or regulations will be applied to reduce accrued interest on each class of the certificates on a pro rata basis in accordance with the amount of interest due on each class on the applicable distribution date.

 

The Relief Act also limits the ability of the servicers to foreclose on a mortgage loan during the borrower’s period of active duty and, in some cases, during an additional three month period thereafter. As a result, there may be delays in payment and increased losses on the mortgage loans. Those delays and increased losses will be borne primarily by the class of certificates with a certificate principal amount greater than zero with the lowest payment priority.

 

On February 9, 2012, the Department of Justice, the Department of Housing and Urban Development, and attorneys general representing 49 states and the District of Columbia reached a settlement agreement with five large mortgage servicers in connection with servicing and foreclosure issues. Consent judgments implementing the agreement were filed in the U.S. District Court in Washington, D.C. in March, 2012. The settlement agreement provides additional relief to servicemembers and veterans, including requiring the five servicers to compensate servicemembers who were foreclosed on in violation of the Relief Act since 2006 or who were charged interest in excess of 6% per annum, and to implement procedures designed to prevent delinquencies and foreclosures. While none of the servicers servicing mortgage loans included in the mortgage pool are subject to the settlement agreement, it is possible that the terms of the settlement agreement will become applicable to the mortgage loans in the future, through additional settlements or rules and regulations of general applicability, which could cause delays in payments to or increase losses to the certificateholders.

 

We do not know how many mortgage loans have been or may be affected by the application of the Relief Act or similar legislation or regulations.

 

We refer you to “Certain Legal Aspects of the Loans—Servicemembers Civil Relief Act” in the prospectus and “Risk Factors—Financial Regulatory Reforms and Additional Proposed Regulations Could Have a Significant Impact on the Depositor, the Servicers or Any Successor Servicer or on the Value of the Certificates” above.

 

Potential Inadequacy of Credit Enhancement

 

The certificates are not insured by any financial guaranty insurance policy. The credit enhancement features of subordination and loss allocation are intended to enhance the likelihood that holders of more senior classes of certificates will receive regular payments of interest and principal, but are limited in nature and may be insufficient to cover all losses on the mortgage loans.

 

Subordination and Allocation of Losses. The amount of any loss experienced on a mortgage loan will be applied to reduce the principal amount of the class of subordinate certificates with the highest numerical class designation, until the principal amount of that class has been reduced to zero. If this loss allocation to the subordinate certificates is insufficient to absorb losses, then holders of more senior classes will incur losses and may never receive all of their principal payments. You should consider that:

 

  · if you buy a Class B-3 Certificate and losses on the mortgage loans exceed the total principal amount of the Class B-4 and Class B-5 Certificates, the principal amount of your certificates will be reduced proportionately with the principal amounts of the other Class B-3 Certificates by the amount of that excess;
  · if you buy a Class B-2 Certificate and losses on the mortgage loans exceed the total principal amount of the Class B-3, Class B-4 and Class B-5 Certificates, the principal amount of your certificates will be reduced proportionately with the principal amounts of the other Class B-2 Certificates by the amount of that excess;
  · if you buy a Class B-1 Certificate and losses on the mortgage loans exceed the total principal amount of the Class B-2, Class B-3, Class B-4 and Class B-5 Certificates, the principal

 

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    amount of your certificates will be reduced proportionately with the principal amounts of the other Class B-1 Certificates by the amount of that excess; and
  · after the total principal amount of the subordinate certificates has been reduced to zero, losses on the mortgage loans may reduce the principal amounts of the senior certificates (other than the Class A-IO Certificates).

 

Losses on the mortgage loans will reduce the loss protection provided by the subordinate certificates to the senior certificates and will increase the likelihood that the senior certificates will not receive all of their expected principal payments.

 

In addition, interest shortfalls resulting from reductions in the amount of monthly interest payments on mortgage loans due to application of the Relief Act, and from borrowers’ prepayments of their mortgage loans (to the extent such shortfalls exceed the related servicing fee in any month) will be applied to reduce current interest on each class of certificates on a pro rata basis in accordance with the amount of interest due on each class on the applicable distribution date. Accordingly, subordination will not provide the senior certificates with protection against these interest shortfalls. In addition, servicing modifications that reduce the interest rate due on a mortgage loan will decrease the Net WAC, which may therefore reduce current interest on each class of certificates, and subordination will not protect holders of the senior certificates from these reductions.

 

No Primary Mortgage Insurance. None of the mortgage loans have primary mortgage insurance coverage. As a result, if a borrower defaults under a mortgage loan, foreclosure proceedings are brought by the related servicer, and the value of the mortgaged property is not adequate to pay principal and accrued interest on the mortgage loan along with related costs and expenses, there is unlikely to be any other source of payments available to reduce the amount of losses that would be incurred on that mortgage loan.

 

Unpredictability and Effect of Prepayments

 

The rate of principal distributions and yield to maturity on the certificates will be directly related to the rate of principal payments on the mortgage loans. The rate of prepayments on the mortgage loans will be sensitive to prevailing interest rates. Generally, if prevailing interest rates decline, mortgage loan prepayments may increase if refinancing is available at lower interest rates. If prevailing interest rates rise, prepayments on the mortgage loans may decrease.

 

For example, the mortgage loans could be subject to higher prepayment rates if fixed rate mortgage loans at competitive interest rates are available, allowing borrowers to refinance their mortgage loans to “lock-in” lower fixed interest rates. The features of adjustable rate mortgage loan programs and loans with specified interest-only periods during the past several years have varied significantly in response to market conditions including the interest rate environment, consumer demand, regulatory restrictions and other factors. The lack of uniformity of the terms and provisions of such mortgage loan programs have made it impracticable to compile meaningful comparative data on prepayment rates and, accordingly, we cannot assure you as to the rate of prepayments on the mortgage loans in stable or changing interest rate environments. The prepayment experience of the mortgage loans to be included in the trust may differ significantly from that of other first lien residential mortgage loans.

 

Borrowers may prepay their mortgage loans in whole or in part at any time. However, approximately 45.49% of the mortgage loans by stated principal balance as of the cut-off date, require prepayment charges if, during the first three, first four or first five years, as applicable, after the origination of the mortgage loan, either (a) the mortgage loan is prepaid in full or (b) the total of all prepayments during any twelve month period exceeds twenty percent (20%) of the original principal balance of the mortgage loan. The amount of the prepayment charge is equal to the lesser of (i) a range of one-half percent to one percent (0.5%-1%) of the sum of the principal balance after the prepayment and the amount by which the prepayment exceeds the allowable prepayment of twenty percent (20%) of the original principal balance or (ii) six months’ advance interest on the amount prepaid that exceeds the allowable

 

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twenty percent of the original principal balance, calculated at the interest rate in effect on the date of prepayment. Prepayment charges will not be paid to certificateholders. All of the mortgage loans that require prepayment charges were originated by First Republic Bank, which will receive any prepayment charges paid by borrowers as additional servicing compensation.

 

Prepayments on the mortgage loans may occur as a result of solicitations of the borrowers by mortgage loan lenders, including the originators.

 

The timing of prepayments of principal may also be affected by liquidations of or insurance payments on the mortgage loans. In addition, an originator of the mortgage loans may be required to purchase mortgage loans from the trust fund in the event that certain breaches of representations and warranties made with respect to the mortgage loans are not cured, or in the event that a borrower’s monthly payment with respect to a mortgage loan is one or more monthly payments delinquent within three months of the date of origination. These purchases will have the same effect on certificateholders as prepayments of mortgage loans.

 

In the event of an occurrence of a natural disaster in an area where mortgaged properties underlying the mortgage loans are located, the insurance proceeds received with respect to any damaged mortgaged properties that are not applied to the restoration of that property will be used to prepay the related mortgage loans in whole or in part. Any repurchases or repayments of the mortgage loans may reduce the weighted average lives and will reduce the yields on the offered certificates to the extent they are purchased at a premium.

 

A prepayment of a mortgage loan will usually result in a payment of principal on the certificates:

 

  · If you purchase certificates at a discount, and principal prepayments on the mortgage loans are received at a rate slower than you anticipate, then your yield may be lower than you anticipate.
     
  · If you purchase certificates at a premium and principal prepayments on the mortgage loans are received at a rate faster than you anticipate, then your yield may be lower than you anticipate.

 

 We refer you to “Yield, Prepayment and Weighted Average Life” in this prospectus supplement and “Yield and Prepayment Considerations” in the accompanying prospectus for a description of factors that may influence the rate and timing of prepayments on the mortgage loans.

 

The Timing of Realized Losses May Impact Returns on the Certificates

 

The timing of realized losses may impact the return earned on the certificates, in particular on the subordinate certificates. The timing of realized losses could be affected by the creditworthiness of the borrower, the borrower’s willingness and ability to continue to make payments, and new legislation, legal actions or programs that allow for the modification of loans or for borrowers to obtain relief through bankruptcy or other avenues. Because realized losses will be applied to reduce the aggregate principal amount of the subordinate certificates before being allocated to the senior certificates, they also reduce the interest paid on those certificates. Therefore, the timing of realized losses, and not just the overall level of such realized losses, will impact the return on the subordinate certificates.

 

Delay in Receipt of Liquidation Proceeds; Liquidation Proceeds May Be Less Than Mortgage Balance

 

Substantial delays could be encountered in connection with the liquidation of delinquent mortgage loans. Further, reimbursement of advances made by a servicer (other than Cenlar FSB) and the servicing administrator and liquidation expenses such as legal fees, real estate taxes and maintenance and

 

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preservation expenses may reduce the portion of liquidation proceeds payable to certificateholders. If a mortgaged property fails to provide adequate security for the related mortgage loan, you could incur a loss on your investment if the applicable credit enhancement is insufficient to cover the loss.

 

Mortgage Loan Modification Programs and Future Legislative Action May Adversely Affect the Performance and Market Value of Your Certificates

 

To limit losses on delinquent mortgage loans, in accordance with the servicing agreements, the servicers may use loss mitigation techniques, including forbearance agreements and other modification agreements and pre-foreclosure sales. Modifications of mortgage loans in an attempt to maximize the ultimate proceeds of such mortgage loans may have the effect of, among other things, reducing or otherwise changing the mortgage interest rate, forgiving payments of principal, interest or prepayment charges, extending the final maturity date, capitalizing or deferring delinquent interest and other amounts owed under the mortgage loans, deferring principal payments, with or without interest, or any combination of these or other modifications. Since all of the classes of offered certificates receive interest based on the weighted average net mortgage interest rate of the mortgage loans or are subject to a limitation on interest equal to that rate, modifications to mortgage interest rates may reduce interest payable on the offered certificates. In addition, while the U.S. Congress has failed to pass legislation to enhance the power of bankruptcy courts to reduce the principal amount of, or the interest rate on, a mortgage loan of an individual who is a debtor in bankruptcy secured by a primary residence, it is possible that such legislation could be enacted in the future.

 

A modification may result in reduced interest collections available for distribution to the certificates, reduced distributions of principal or the allocation of a realized loss to the most subordinate class of certificates outstanding. Modifications that are designed to maximize collections to the issuing entity in the aggregate may adversely affect a particular class of certificates. The servicers are required to consider the interests of all classes of certificates as a whole when making servicing decisions. If a servicer reduces the interest rate, extends the payment period or accepts a lesser amount than stated in the mortgage note in satisfaction of the mortgage note, or charges off or sells the mortgage loan, amounts available to make payments on the certificates will be reduced. The actual final distribution date for any class might be later, and could be significantly later, than the final scheduled distribution date if the related servicer extends the maturity date of a mortgage loan beyond the final scheduled distribution date for the certificates.

 

In 2008 and 2009, the federal government commenced implementation of programs designed to provide homeowners with assistance in avoiding residential mortgage loan foreclosures. In addition, certain mortgage lenders and servicers have voluntarily, or as part of settlements with law enforcement authorities, established loan modification programs relating to the mortgages they hold or service.  These programs may involve, among other things, the modification of mortgage loans to reduce the rate of interest payable on the loans, to extend the payment terms of the loans, to forgive principal or to forbear the payment of a portion of principal on the mortgage loan without interest. In addition, members of the U.S. Congress have indicated support for additional legislative relief for homeowners, including a proposed amendment of the bankruptcy laws to permit the modification of mortgage loans in bankruptcy proceedings. The Home Affordable Modification Program, or HAMP, administered by the U.S. Department of Treasury, provides incentives to servicers to modify mortgage loans by writing down principal, to offer permanent modifications and to provide homeowners with more alternatives to foreclosure. HAMP also requires servicers, in certain circumstances, to allow a 30-day response period after notice that a borrower has not been approved for HAMP before conducting a foreclosure sale, and prohibits servicers from referring a borrower to foreclosure until the borrower has been determined to be ineligible for HAMP or reasonable solicitation efforts have failed. Although HAMP currently does not apply to mortgage loans in the mortgage pool, its applicability requirements could be revised in the future. Similarly, a Federal Housing Administration, or FHA, program permits lenders to provide additional refinancing options to borrowers who owe more than their home is worth. These loan modification programs, as well as future law enforcement and legislative or regulatory actions, including changes to HAMP and amendments to the bankruptcy laws that result in the modification of outstanding mortgage loans, could adversely affect the amounts payable on and market value of your certificates. These

 

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programs may involve the modification of mortgage loans in default as well as mortgage loans where default is, in the judgment of the servicer, imminent.

 

It is not yet certain whether the servicers or any successor servicer will modify the terms of any mortgage loans, what form any modified terms may take, how or when modifications may be implemented, or how the certificates may be impacted by such modifications. No assurances can be given that the implementation of loan modifications or the failure to implement loan modifications will not adversely impact the certificates.

 

Special Assessments and Energy Efficiency Liens May Take Priority Over the Mortgage Lien

 

Mortgaged properties securing the mortgage loans may be subject to the lien of special property taxes and/or special assessments. These liens are superior to the liens securing the mortgage loans, irrespective of the date of the mortgage. In some instances, individual borrowers may be able to elect to enter into contracts with governmental agencies for Property Assessed Clean Energy (PACE) or similar assessments that are intended to secure the payment of energy and water efficiency and distributed energy generation improvements that are permanently affixed to their properties, possibly without notice to or the consent of the mortgagee. These assessments also have lien priority over the mortgages securing mortgage loans. No assurance can be given that any mortgaged property so assessed will increase in value to the extent of the assessment lien. Additional indebtedness secured by the assessment lien would reduce the amount of the value of the mortgaged property available to satisfy the affected mortgage loan.

 

Helping Families Save Their Homes Act

 

The Helping Families Save Their Homes Act of 2009, Public Law 111-22, 123 Stat. 1632, effective as of May 20, 2009, amends the Truth in Lending Act to require purchasers or assignees of mortgage loans secured by a borrower’s principal dwelling to mail or deliver notice to borrowers of the sale or transfer of their mortgage loan no later than 30 days after a sale or transfer. The sale of the mortgage loans from the depositor to the issuing entity will require that these notices be mailed or delivered reflecting the ownership of the mortgage loans by the issuing entity. Failure to comply with these notice requirements may result in civil claims for compensatory and punitive damages against the issuing entity. Any judgment against, or settlement by, the issuing entity relating to these violations would reduce the funds otherwise available for distribution to investors, and may result in shortfalls or losses on your certificates. The servicing agreements will require the servicers to deliver the required notices to borrowers.

 

Risks Associated With Potential New Laws Relating to Mortgage Loan Origination or Ownership

 

The U.S. Congress and various state and local legislatures are considering or have adopted legislation, which, among other things, would permit limited assignee liability for certain violations in the mortgage loan origination process. We cannot predict whether or in what form the U.S. Congress or various state and local legislatures may enact such legislation or how such legislation might impact your certificates. We are also unable to predict how changes by federal, state or local authorities to regulations currently in effect relating to assignee liability may affect your certificates.

 

Changes in the Accounting Rules May Affect You

 

The Financial Accounting Standards Board recently adopted changes to the accounting standards for investments, such as the offered certificates, in interests in securitization vehicles such as the issuing entity. These changes, and any other future changes in accounting standards, may affect the manner in which you must account for your investment in any offered certificates and, under some circumstances, may require that you consolidate the entire trust fund on your balance sheet. Prospective investors in the offered certificates should consult their accounting advisors to determine the effect that accounting standards, including the recent changes, may have on them. We make no representation or warranty regarding the treatment of any offered certificates or the trust fund for purposes of any accounting standards.

 

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Reduced Lending Capacities May Hinder Refinancing and Increase Risk of Loss

 

Since 2006, a number of originators and servicers of residential mortgage loans have experienced serious financial difficulties and, in some cases, have gone out of business. These 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 or for breaches of representations and warranties regarding loan quality and characteristics. Many originators with large servicing portfolios have experienced rising costs of servicing as mortgage loan delinquencies have increased, without a compensating increase in servicing compensation. The lack of a functioning secondary market for mortgage-backed securities and mortgage loans has also reduced the availability of certain types of mortgage products that do not fit within the criteria of Freddie Mac, Fannie Mae or Ginnie Mae.

 

These trends may reduce alternatives for mortgagors seeking to refinance their mortgage loans. The reduced availability of refinancing options for mortgagors may result in higher rates of delinquencies and losses on the mortgage loans. These trends may also make it more difficult to engage a successor servicer if that becomes necessary.

 

Market Exit of Originators and Servicers; Financial Condition of Originators, Servicers and the Seller

 

The financial difficulties of originators and servicers of residential mortgage loans may be exacerbated by higher delinquencies and defaults that reduce the value of mortgage loan portfolios, requiring originators to sell their portfolios at greater discounts to par. In addition, the costs of servicing an increasingly delinquent mortgage loan portfolio may be rising without a corresponding increase in servicing compensation. The value of many residual interests retained by sellers of mortgage loans in the securitization market has also been declining in these market conditions. Overall origination volumes are down significantly in the current economic environment. Many originators and servicers of residential mortgage loans also have been the subject of governmental investigations and litigations, many of which have the potential to impact the financial condition of those financial institutions. In addition, any regulatory oversight, proposed legislation and/or governmental intervention designed to protect consumers may have an adverse impact on originators and servicers. These factors, among others, may have the overall effect of increasing costs and expenses of originators and servicers while at the same time decreasing servicing cash flow and loan origination revenues, and in turn may lead to originators or servicers leaving the industry.

 

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Financial difficulties may result in the inability of originators to repurchase mortgage loans in the event of early payment defaults and other mortgage loan representation and warranty breaches or to make required advances of delinquent monthly payments which may also affect the value of residential mortgage-backed securities backed by those mortgage loans. Financial difficulties may also have a negative effect on the ability of servicers to pursue collections on mortgage loans that are experiencing increased delinquencies and defaults and to maximize recoveries on the sale of underlying properties following foreclosure. If a servicer is experiencing financial difficulties, it may not be able to perform its servicing duties, its advancing obligations (as applicable) or its obligations as originator to repurchase mortgage loans as required. For example, PHH Corporation, the parent of PHH Mortgage Corporation, an originator and servicer of approximately 12.08% of the mortgage loans by stated principal balance as of the cut-off date, was placed on “Rating Watch Negative” with respect to its long-term issuer default rating and its senior unsecured debt rating on January 10, 2012 by an NRSRO expected to rate the certificates. In placing PHH Corporation on “Rating Watch Negative,” that NRSRO noted, among other things, that PHH Corporation has significant unsecured debt maturities coming due in the next 14 months and that it would be evaluating the ability of PHH Corporation’s management to manage liquidity in light of these upcoming debt maturities. None of the sponsor, the depositor or the underwriter is required to repurchase the mortgage loans if an originator or servicer fails to do so.

 

As further described in this prospectus supplement under “The Agreements—Representations and Warranties,” in the mortgage loan purchase agreement, the seller will make certain limited representations and warranties with respect to the mortgage loans. The seller will also be obligated to cure the breach, or repurchase from the trustee or substitute for any mortgage loan as to which a representation and warranty made by an originator relating to the characteristics of the mortgage loans was true and correct as of the date made by such originator but not true and correct as of the closing date, if such breach materially and adversely affects the value of the mortgage loan or the interests of the certificateholders in that mortgage loan. In addition, with respect to representations and warranties made by each originator other than First Republic Bank, the seller will be obligated to cure a breach or repurchase or substitute for a mortgage loan because of a breach of any such representation and warranty that materially and adversely affects the value of the mortgage loan or the interests of the certificateholders in that mortgage loan to the extent such originator is unable to do so because it is subject to a bankruptcy or insolvency proceeding or no longer in existence. Therefore, if the seller experiences financial difficulties, it may be unable to perform these obligations, which may result in losses on the certificates.

 

Investors Will Be Dependent on Certain Third Parties Performing Their Responsibilities in an Accurate and Timely Manner

 

The mortgage loans held by the trust fund are serviced by third-party servicers. The obligation of each servicer (other than Cenlar FSB) and the servicing administrator to fund advances on behalf of a delinquent borrower is limited to the extent that it does not expect to recover the advances from the ultimate disposition of the mortgaged property securing the mortgage loan, which could therefore affect the timing and amount of payments available for distribution to the certificateholders. In addition, as with any external service provider, investors are subject to the risks associated with inadequate or untimely services for reasons such as errors or miscalculations. In the current economic environment, many servicers are experiencing higher delinquencies and defaults than they have in the past and, as a result, there is a risk that their operational infrastructures cannot properly process this increased volume. To the extent a servicer or the servicing administrator fails to fully perform its obligations, the certificates could experience losses. In addition, certificateholders generally do not have the right to directly enforce remedies against a servicer or the issuing entity and instead must rely on the trustee, the master servicer or the controlling holder, as the case may be, to enforce their rights under the pooling and servicing agreement. If none of the trustee, the master servicer or the controlling holder is required to take action under the terms of the pooling and servicing agreement, or if the applicable party fails to take action, certificateholders could experience losses.

 

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Under the assignment, assumption and recognition agreements and the assignment of representations and warranties agreements, the controlling holder is the holder of a majority of the class principal amount of the Class B-5 Certificates or, if the class principal amount of the Class B-5 Certificates has been reduced to zero, any holder of the majority of the class principal amount of the Class B-4 Certificates, and may not be the depositor or the seller but may be an affiliate of the sponsor. If the class principal amount of the Class B-4 Certificates has been reduced to zero, there is no longer a controlling holder. The controlling holder will have the right, in its sole discretion, to pursue an action in respect of an alleged breach by an originator of a representation and warranty relating to the characteristics of the mortgage loans. In addition, if certain conditions are satisfied, holders of more than 50% of the aggregate voting interests of the senior certificates can direct the trustee to pursue an action against the applicable originator with respect to such breach or against the seller if the seller has an obligation to cure such breach, or repurchase or substitute for a mortgage loan as described in this prospectus supplement. If there is no controlling holder, then, in certain circumstances, holders of more than 50% of the aggregate voting interests of the certificates can direct the trustee to pursue an action against such originator or the seller with respect to an alleged breach of a mortgage loan representation and warranty. The controlling holder is under no obligation to pursue such actions and the trustee will pursue such actions only under the limited circumstances described in this prospectus supplement. It may also be difficult to obtain the number of certificateholder votes needed to direct the trustee to pursue such an action. Furthermore, there can be no assurance that, if the controlling holder or the trustee pursues such an action, that such action will be successful, which could result in losses on your certificates. See “The Agreements—Representations and Warranties” in this prospectus supplement.

 

With respect to approximately 9.92% of the mortgage loans by stated principal balance as of the cut-off date, the transfer of the servicing of such mortgage loans to Cenlar FSB from the related originators is scheduled to occur on April 1, 2012, after the closing date. To the extent that the transfer of servicing of all or a portion of these mortgage loans is delayed or cancelled, there is a risk that such mortgage loans will be serviced by a party with inadequate resources or infrastructure to properly perform the necessary servicing obligations. A delay in the transfer of the servicing of these mortgage loans could in turn delay necessary servicing actions with respect to such mortgage loans, which could delay borrower payments or reduce the value realized from such mortgage loans. A transfer of servicing could cause a disruption in collections due to data input errors, misapplied or misdirected payments, inadequate borrower notification, system incompatibilities and other reasons, which could result in the affected mortgage loans experiencing increased delinquencies and defaults, at least for a period of time, until all of the borrowers are informed of the transfer and the related servicing mortgage files and records and all the other relevant data has been obtained by the new servicer. See “Risk Factors—Delinquencies Due to Servicing Transfers” in the accompanying prospectus.

 

Actions to Enforce Breaches of Representations and Warranties Relating to Mortgage Loan Characteristics May Take a Significant Amount of Time or Cause Delays or Reductions in the Amount of Payments Made to Certificateholders

 

The process for determining whether there has been a breach of a representation and warranty that materially and adversely affects the value of, or the interest of the certificateholders in, a mortgage loan, and the obligation to cure such breach, or to repurchase, substitute for or make an indemnification payment with respect to such mortgage loan, may be time-consuming and could result in delays in payments on the certificates. As described in the immediately preceding risk factor and as further described under “The Agreements—Representations and Warranties” below, the controlling holder or the trustee may pursue an action to enforce an alleged breach, which may include an arbitration proceeding. Additionally, the controlling holder or, if there is no longer a controlling holder, the trustee, will review or cause to be reviewed each mortgage loan that has been delinquent for more than 120 days, other than any such mortgage loan that was the subject of a previous arbitration proceeding under the related purchase agreement, to determine whether any breaches of the representations and warranties given by the originator under the related purchase agreement have occurred or if the seller has an obligation to cure a breach, or repurchase or substitute for a mortgage loan. If certain conditions are satisfied, the certificateholders may compel the controlling holder or the trustee to pursue an action even if, based upon its review, that party concluded that

 

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there was no evidence of a breach of a representation and warranty. These procedures may take substantial time, which could result in delays, increased costs and losses to certificateholders.

 

Bankruptcy or Insolvency of a Transferor Could Result in Losses on the Certificates

 

The seller will acquire, or has acquired, the mortgage loans either directly from an entity that originated mortgage loans or from a direct or indirect transferee of an entity that originated mortgage loans. The seller will then sell the mortgage loans to the depositor and the depositor will sell the mortgage loans to the issuing entity. The depositor believes, based on the terms of the relevant documents (in certain cases) and on certifications provided by transaction parties (in other cases) that each transfer of the mortgage loans by a transferor to a transferee will be a sale, so that the transferee will be the owner of the mortgage loans. Nonetheless, if any transferor were to go into bankruptcy or become the subject of a receivership or conservatorship, and a party in interest (including the transferor) were to assert that the transfer of the mortgage loans to the transferee was not a sale, but rather should be recharacterized as the grant of a security interest in the mortgage loans to secure a borrowing by the transferor, delays in distributions on the certificates could result. If a court were to adopt such a position, then delays or reductions in distributions on, or other losses with respect to, the certificates could result.

 

Should a transferor go into bankruptcy or become the subject of a receivership or conservatorship, there could be other adverse effects that could result in delays or reductions in distributions on, or other losses with respect to, the certificates. These adverse effects could include, but may not be limited to, one or more of the following. The parties may be prohibited (unless authorization is obtained from the court or the receiver or conservator) from taking any action to enforce any obligations of the transferor under any transaction document or to collect any amount owing by the transferor under any transaction document. In addition, with the authorization of the court or the receiver or conservator, the transferor may be able to repudiate any of the transaction documents to which it is a party. Such a repudiation would excuse the transferor from performing any of its obligations, and the rights of the transferee under the transaction documents may be limited or eliminated. Such a repudiation could also excuse the other parties to the transaction documents from performing any of their obligations. In particular, a transferor may be able to repudiate its obligations to cure breaches, or repurchase or substitute for mortgage loans as required by the transaction documents.

 

One or more of the transferors are banks that are subject to regulation by the FDIC. The FDIC recently has indicated that it may treat as property of a bank in receivership or conservatorship (i) any property that is shown as an asset on the financial statements of a bank, or (ii) any property that the bank previously transferred if the bank retains a continuing economic interest in the transferred assets. The FDIC has indicated that it may assert these positions notwithstanding that the assets have been sold as a matter of law. The depositor has taken certain steps to try to prevent any of the mortgage loans from being shown as assets on the financial statements of any transferor that is a bank. The depositor, however, can provide no assurances that its efforts will be successful. In addition, it is possible that a transferor that is a bank will purchase certificates and as a result, the FDIC will take the position that the bank has retained a continuing economic interest in the mortgage loans. The depositor cannot provide any assurance that a court will not accept the FDIC’s positions. As a result, should a transferor that is a bank become the subject of a receivership or conservatorship, should the mortgage loans be shown as assets on its financial statements or should it own any certificates, and should the FDIC’s position prevail, then the issuing entity may not own all the mortgage loans and there may be delays in payment or losses on the certificates. There may also be delays in payments while these issues are being resolved by the FDIC or a court.

 

Similar issues could arise if any transferor of mortgage loans, or any affiliate of a transferor, is designated by the Secretary of the Treasury as systemically important and then subjected to a receivership as set forth in the “orderly liquidation authority” provisions of Title II of the Dodd-Frank Act.

 

There may be other possible effects of a bankruptcy or insolvency of a mortgage loan transferor that could result in delays or reductions in distributions on, or other losses with respect to, the certificates.

 

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Regardless of any ruling made by a court, moreover, the mere fact that a mortgage loan transferor or any of its affiliates has become insolvent or gone into bankruptcy, conservatorship, or receivership could have an adverse effect on the value of the mortgage loans and on the liquidity and value of the certificates.

 

Bankruptcy or Insolvency of a Servicer, the Servicing Administrator, the Owner of Servicing Rights or the Master Servicer Could Result in Losses on the Certificates

 

Each servicer will be permitted to commingle collections on the mortgage loans with its own funds for up to two business days. In addition, each servicer will deposit collections in an account that is not under the control of the trustee, and collections will be held in this account before they are remitted each month to the securities administrator. In the event a servicer goes into bankruptcy or becomes the subject of a receivership or conservatorship, the issuing entity, the trustee and the holders of the certificates may not have a perfected or priority interest in any collections on mortgage loans that are in the servicer’s possession or have not been remitted to the securities administrator at the time of the commencement of the bankruptcy or similar proceeding. A servicer may not be required to remit to the securities administrator any collections on mortgage loans that are in its possession or have not been remitted to the securities administrator at the time it goes into bankruptcy or becomes subject to a similar proceeding.

 

To the extent that a servicer has commingled collections of mortgage loans with its own funds, the holders of the certificates may be required to return to the servicer as preferential transfer payments received on the certificates.

 

If a servicer, the servicing administrator or the master servicer were to go into bankruptcy or become the subject of a receivership or conservatorship, it may stop performing its functions as servicer, servicing administrator or master servicer, and it may be difficult to find a third party to act as successor servicer, servicing administrator or master servicer. Alternatively, a servicer, the servicing administrator or the master servicer may take the position that unless the amount of its compensation is increased or the terms of its obligations are otherwise altered, it will stop performing its functions as servicer, servicing administrator or master servicer. If it would be difficult to find a third party to act as successor servicer, servicing administrator or master servicer, the parties, as a practical matter, may have no choice but to agree to the demands of such servicer, the servicing administrator or the master servicer. A servicer, the servicing administrator or the master servicer may also have the power, with the approval of the court or the receiver or conservator, to assign its rights and obligations as servicer to a third party without the consent, and even over the objection, of the parties, and without complying with the requirements of the applicable documents.

 

If a servicer, the servicing administrator or the master servicer is in bankruptcy or the subject of a receivership or conservatorship, then the parties may be prohibited (unless authorization is obtained from the court or the receiver or conservator) from taking any action to enforce any obligations of such servicer, the servicing administrator or the master servicer under the applicable documents or to collect any amount owing by such servicer, the servicing administrator or the master servicer under the applicable documents.

 

If a servicer, the servicing administrator or the master servicer is in bankruptcy or the subject of a receivership or conservatorship, then, despite the terms of the documents, the parties may be prohibited from terminating the servicer, servicing administrator or master servicer and appointing a successor servicer, servicing administrator or master servicer.

 

It is possible that a period of adverse economic conditions resulting in high defaults and delinquencies on the mortgage loans will pose a potential bankruptcy risk to a servicer if its servicing compensation is less than its cost of servicing.

 

Redwood Residential Acquisition Corporation is in effect the owner of the servicing rights with respect to the mortgage loans serviced by Cenlar FSB. If the owner of servicing rights is in bankruptcy or is the subject of a receivership or conservatorship, then, despite the terms of the documents, the parties may be prohibited from terminating the related servicer or the servicing administrator. In addition, the owner of

 

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the servicing rights may have the power, with the approval of the bankruptcy court or the receiver or conservator, to transfer servicing from the servicer to a third party, or to transfer its rights as servicing administrator to a third party, without the consent, and even over the objection, of the parties, and without complying with the requirements of the applicable documents. Such an assignment may have the effect of terminating the existing servicer or servicing administrator, and replacing it with a new servicer or servicing administrator, regardless of the terms of the documents.

 

The occurrence of any of these events could result in delays or reductions in distributions on, or other losses with respect to, the certificates. There may also be other possible effects of a bankruptcy, receivership or conservatorship of a servicer, the servicing administrator, the master servicer or the owner of servicing rights that could result in delays or reductions in distributions on, or other losses with respect to, the certificates. Regardless of any specific adverse determinations in a bankruptcy, receivership or conservatorship of a servicer, the master servicer, the servicing administrator or the owner of servicing rights, the fact that such a proceeding has been commenced could have an adverse effect on the value of the mortgage loans and the liquidity and value of the certificates.

 

The Trustee May Not Have a Perfected Interest in Collections Held by a Servicer

 

Each servicer will be permitted to commingle collections on the mortgage loans with its own funds for up to two business days. In addition, each servicer will deposit collections in an account that is not under the control of the trustee, and collections will be held in this account before they are remitted each month to the securities administrator. If a servicer is unable to, or fails to, turn over collections as required by the transaction documents, then the issuing entity, the trustee and the holders of the certificates may not have a perfected or priority interest in any collections that are in such servicer’s possession or have not been remitted to the securities administrator.

 

Stricter Enforcement of Foreclosure Rules and Documentation Requirements May Cause Delays and Increase the Risk of Loss

 

Recently courts and administrative agencies have been enforcing more strictly existing rules regarding the conduct of foreclosures, and in some circumstances have been imposing new rules regarding foreclosures. Some courts have delayed or prohibited foreclosures based on alleged failures to comply with hypertechnical requirements. State legislatures have been enacting new laws regarding foreclosure procedures. In some cases, law enforcement personnel have been refusing to enforce foreclosure judgments. At least one county is reported to be refusing to allow foreclosure sales to be conducted on the courthouse steps. In addition, more borrowers are using legal actions, including filing for bankruptcy, to attempt to block or delay foreclosures. As a result, the servicers may be subject to delays in conducting foreclosures and the expense of foreclosures may increase, resulting in delays or reductions in payments on the certificates.

 

Borrowers have been increasingly successful in challenging or delaying foreclosures based on technical grounds, including challenges based on alleged defects in the mortgage loan documents and challenges based on alleged defects in the documents under which the mortgage loans were securitized. In a number of cases, such challenges have delayed or prevented foreclosures. Although the sponsor’s custodian will conduct a review of the mortgage files, as discussed under “The Agreements—Assignment of the Mortgage Loans,” such measures may not be sufficient to prevent document defects that could cause delays or prevent a foreclosure. It is possible that there will be an increase in the number of successful challenges to foreclosures by borrowers. Curing defective documents required to conduct a foreclosure will cause delays and increase costs, resulting in losses on the certificates.

 

The Recording of the Mortgages in the Name of MERS Could Increase the Risk of Loss

 

The mortgages or assignments of mortgage for some of the mortgage loans have been recorded in the name of Mortgage Electronic Registration Systems, Inc., or “MERS,” solely as nominee for the originator and its successors and assigns, including the issuing entity. The depositor intends to record assignments of these mortgages to the trustee after the closing date. However, in the event that these recordings do not take place, subsequent assignments of such mortgages will be registered electronically through the

 

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MERS system. If MERS discontinues the MERS system and it becomes necessary to record assignments of those mortgages to the trustee, any related expenses will be paid by the issuing entity and will reduce the amounts available to make distributions on the certificates.

 

The recording of mortgages in the name of MERS has been challenged in a number of states. Although many decisions have accepted MERS as mortgagee, some courts have held that MERS is not a proper party to conduct a foreclosure and have required that the mortgage be reassigned to the entity that is the economic owner of the mortgage loan before a foreclosure can be conducted. In states where such a rule is in effect, there may be delays and additional costs in commencing, prosecuting and completing foreclosure proceedings and conducting foreclosure sales of mortgaged properties. In addition, any expenses of recording an assignment of mortgage to the issuing entity, to the extent not previously recorded by the depositor after the closing date, will increase foreclosure costs, thereby reducing the amounts payable to certificateholders. These delays and additional costs could in turn delay the distribution of liquidation proceeds to certificateholders and increase the amount of losses on the mortgage loans.

 

In addition, borrowers are raising new challenges to the recording of mortgages in the name of MERS, including challenges questioning the ownership and enforceability of mortgage loans registered in MERS. An adverse decision in any jurisdiction may delay the foreclosure process and adversely affect payments on the certificates.

 

Delays in Endorsing Notes and Recording Assignments of Mortgage Could Increase Risk of Loss

 

After the closing date, assignments of mortgages to the trustee will be prepared and delivered to the custodian, and these assignments of mortgage will be recorded. As a result, for some period of time after the closing date, record title to each mortgage will not have been assigned to the trustee. Similarly, the mortgage notes will not be endorsed to the trustee until after the closing date.

 

The delay in recording the assignments of the mortgages in the name of the trustee could result in the loss of the underlying mortgage liens. For example, prior to the recording of the assignments, the mortgage lien could be discharged if the record owner filed a release or satisfaction of such mortgage lien, whether inadvertently or intentionally. A loss of the underlying mortgage lien also could occur if a governmental authority foreclosed on the mortgaged property and notice to the record owner was not forwarded to the servicer in a timely manner.

 

In addition, the delay in recording assignments of mortgage could impair the ability of the servicer to take timely servicing actions with respect to the mortgage loans, which could reduce the value realized from such mortgage loans. Some of the assignments may be assignments in blank that have been filled in. Questions have been raised about the validity and enforceability of assignments in blank. The servicer may have to record the related assignments of mortgage prior to filing a foreclosure proceeding. The expenses of recording will be treated as servicing advances and will reduce the amount available to make payments on the certificates. There could be delays in commencing the foreclosure proceedings as a result of the need to record assignments of mortgages, which could lead to delays or reductions in payments on the certificates. If the related assignments cannot be located at the time of foreclosure or if an assignment in blank that has been filled in cannot be recorded, it may not be possible to foreclose.

 

It may not be possible to commence foreclosure proceedings until the related mortgage note has been endorsed to the trustee. If a necessary endorsement is missing and cannot be obtained, it may not be possible to foreclose.

 

Furthermore, the inability of a servicer, because it is not the mortgagee of record, to timely release the lien of the mortgage on a mortgage loan that has been paid in full could expose the issuing entity to claims and liability for violations of applicable law, thus reducing the amount available to make payments on the certificates.

 

If the prior owner that is the mortgagee of record were to go into bankruptcy or similar proceedings within 90 days (or in some cases, one year) after the post-closing recording of any assignment, it may be possible for the recorded assignment to be avoided as a preferential transfer, so that

 

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there is no effective assignment of record, possibly leading to consequences of the type described above. There may be other consequences of a failure to record assignments if the prior owner goes into bankruptcy or similar proceedings before the relevant assignments are recorded. If the prior owner is a bank that goes into conservatorship or receivership, a failure to record assignments may permit the FDIC as receiver or conservator of the prior owner to challenge the transfer.

 

The occurrence of any of these circumstances could result in delays or reductions in payments on the certificates, or other losses.

 

There May Be Conflicts of Interest Among Various Classes of Certificates

 

There may be conflicts of interest among classes of certificates due to differing payment priorities and terms. Investors in the offered certificates should consider that certain decisions may not be in the best interests of each class of certificateholders and that any conflict of interest among different certificateholders may not be resolved in favor of investors in the offered certificates. For example, certificateholders may exercise their voting rights so as to maximize their own interests, resulting in certain actions and decisions that may not be in the best interests of different certificateholders.

 

Changes in the Market Value of the Certificates May Not Be Reflective of the Performance or Anticipated Performance of the Mortgage Loans Underlying the Certificates

 

The market value of the certificates can be volatile. These market values can change rapidly and significantly and changes can result from a variety of factors. However, a decrease in market value may not necessarily be the result of deterioration in the performance or anticipated performance of the mortgage loans underlying those certificates. For example, changes in interest rates, perceived risk, supply and demand for similar or other investment products, accounting standards, capital requirements that apply to regulated financial institutions, and other factors that are not directly related to the mortgage loans underlying the certificates can adversely and materially affect the market value of the certificates.

 

The Marketability of Your Certificates May Be Limited

 

The underwriter intends to make a secondary market for the Class A-1, Class A-2 and Class A-3 Certificates and a portion of the Class B-1 Certificates, but neither the underwriter nor any other person will have any obligation to do so. We cannot assure you that a secondary market for your certificates will develop or, if it develops, that it will continue. Consequently, you may not be able to find a buyer to buy your certificates readily or at prices that will enable you to realize a desired yield. Illiquidity can have a severe adverse effect on the market value of your certificates.

 

Recent developments in the residential mortgage market in the United States, and credit markets generally, have greatly reduced, and in some time periods, virtually eliminated, any liquidity for mortgage-backed securities, such as the certificates. The secondary mortgage markets have experienced and could continue to experience unprecedented and significant disruptions resulting from, among other things, reduced investor demand for mortgage loans and mortgage-backed securities, increased investor yield requirements for those loans and securities, downgrades of the ratings of mortgage-backed securities and monoline insurers by the rating agencies and liquidations of investment portfolios, collateralized debt obligations and structured investment vehicles that contain mortgage-backed securities. Fluctuating investor confidence in the mortgage industry also could contribute to illiquidity in the market for mortgage-backed securities, generally. As a result, the secondary market for mortgage-backed securities has recently experienced extremely limited liquidity. These conditions may continue or worsen in the future.

 

There have been very few issuances of non-agency residential mortgage-backed securities since January 2008. The absence of a market for new residential mortgage-backed securities issuances may adversely affect the marketability of the certificates, and may make it difficult to accurately value your certificates. Many new criteria have been proposed by rating agencies, industry groups, regulatory agencies, the U.S. Congress and the Obama administration with respect to residential mortgage-backed

 

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securities issuances going forward. To the extent that this transaction does not conform to those proposals, the market value of the certificates may be adversely affected.

 

The Servicing Fee May Need to Be Increased in Order to Engage a Replacement Servicer

 

The fee payable to each servicer (other than Cenlar FSB) is based on a fee rate equal to a percentage of the outstanding mortgage loan balances of the mortgage loans serviced by that servicer. The fees payable to Cenlar FSB are determined by other factors, as described in “Fees and Expenses of the Issuing Entity” herein, but the aggregate fees payable to Cenlar FSB and the servicing administrator are based on a percentage of the outstanding mortgage loan balance of the mortgage loans serviced by Cenlar FSB. No assurance can be made that such fee rate in the future will be sufficient to attract a replacement servicer to accept an appointment, although the master servicer will have the right to increase the servicing fee if necessary and appropriate in order to engage a replacement servicer. Any increase in the servicing fee paid to a replacement servicer will decrease the amount of collections available for distribution to the certificateholders.

 

DESCRIPTION OF THE MORTGAGE POOL

 

Wherever reference is made herein to a percentage of some or all of the mortgage loans, that percentage (unless otherwise specified) is determined on the basis of the total stated principal balance of such mortgage loans as of the cut-off date.

 

General

 

On the closing date, the assets of the issuing entity will include 366 fixed rate mortgage loans. Twenty-six of the mortgage loans (representing approximately 10.02% of the mortgage loans by stated principal balance as of the cut-off date) provide for payments of interest at the related mortgage rate, but no payment of principal, for a period of ten years following their origination (the “interest-only mortgage loans”). The aggregate principal balance of the mortgage loans as of the cut-off date was approximately $327,935,218. All of the mortgage loans are secured by first liens on one- to four-family residential properties, condominiums, cooperative units and planned unit developments. Substantially all of the mortgage loans have original terms to maturity of thirty years.

 

Approximately 49.31% of the mortgage loans were originated by First Republic Bank; approximately 19.78% of the mortgage loans were originated by PrimeLending, a PlainsCapital Company; approximately 12.08% of the mortgage loans were originated or acquired by PHH Mortgage Corporation, and approximately 8.84% of the mortgage loans were originated by Flagstar Capital Markets Corporation, in each case by stated principal balance as of the cut-off date. The remainder of the mortgage loans were originated by various mortgage lending institutions, each of which originated less than 5% of the mortgage loans.

 

The underwriting guidelines generally applied by First Republic Bank and PrimeLending, a PlainsCapital Company in originating or acquiring the mortgage loans are described under “The Originators—First Republic Bank” and “—PrimeLending, a PlainsCapital Company” below and the underwriting guidelines generally applied by the other originators in originating or acquiring the mortgage loans are described under “The Originators—Other Originators” and “Loan Program” in the accompanying prospectus. Approximately 8.71% of the mortgage loans by original principal balance were originated with exceptions to the underwriting guidelines, including debt-to-income ratios in excess of the guidelines, credit scores that were lower than required, loan-to-value ratios and combined loan-to-value ratios that were higher than program guidelines and borrower being a first time home buyer. In these instances, compensating factors were present such as documented excess funds in reserves, FICO scores within the guidelines, job stability and debt-to-income ratios below the guidelines. See “Annex A—Certain Characteristics of the Mortgage Loans—Exceptions to Underwriting Guidelines at Origination” in this prospectus supplement.

 

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The mortgage loans will be acquired, directly or indirectly, by the seller from each originator, will be acquired by the depositor from the seller and the depositor will, in turn, convey the mortgage loans to the issuing entity. The servicers will service the mortgage loans, directly or through subservicers, pursuant to existing servicing agreements with the seller, which have been assigned to the issuing entity with respect to the mortgage loans. We refer you to “The Agreements—Assignment of the Mortgage Loans” in this prospectus supplement.

 

Pursuant to its terms, each mortgage loan, other than a loan secured by a condominium unit, is required to be covered by a standard hazard insurance policy in an amount generally equal to the lower of the unpaid principal amount thereof or the replacement value of the improvements on the related mortgage loan. Generally, a condominium association is responsible for maintaining hazard insurance covering the entire building.

 

The interest-only mortgage loans provide for monthly payments of interest, but not principal, for a period of ten years following origination, after which the monthly payments will be increased to amounts sufficient to pay interest and to amortize the principal balances over the remaining terms. Because the monthly payment at the end of the interest-only period will be substantially higher than the interest-only payment, that loan may be subject to an increased risk of default.

 

None of the mortgage loans will be guaranteed by any governmental agency.

 

Approximately 49.61% and 11.82% of the mortgage loans by stated principal balance as of the cut-off date to be included in the trust fund are secured by properties located in the states of California Texas, respectively.

 

No more than approximately 6.14% of the mortgage loans are secured by properties located in any one city.

 

The mortgage loans were originated from June 2011 through February 2012. The latest stated maturity date of any mortgage loan is March 1, 2042.

 

As of the cut-off date, approximately 41.08% of the mortgage loans have a stated principal balance of more than $1,000,000 and the average stated principal balance of the mortgage loans is approximately $895,998.

 

As of the cut-off date, no payment required under any of the mortgage loans has been delinquent.

 

As of the cut-off date, the weighted average mortgage rate of the mortgage loans is approximately 4.603% per annum.

 

For the interest-only mortgage loans, the weighted average remaining term to maturity is approximately 355 months, and the weighted average remaining interest-only term is approximately 115 months.

 

The weighted average seasoning of the mortgage loans is approximately three months as of the cut-off date. The servicing fee rate for the mortgage loans is 0.25% per annum as of the cut-off date. The master servicing fee rate is 0.0275% per annum.

 

No mortgage loan, based on the original appraisals, had an original loan-to-value ratio at origination of more than 80%. In addition, none of the mortgage loans have original combined loan-to-value ratios in excess of 80%.

 

The “loan-to-value ratio” of a mortgage loan at any given time is a fraction, expressed as a percentage, the numerator of which is the principal balance of the related mortgage loan at the date of

 

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determination and the denominator of which is (a) in the case of a purchase money loan, the lesser of the selling price of the mortgaged property and its appraised value determined in an appraisal obtained by the originator at origination of such mortgage loan, or (b) in the case of a refinance loan, the appraised value of the mortgaged property at the time of origination of the refinanced mortgage loan. No assurance can be given that the value of any mortgaged property has remained or will remain at the level that existed on the appraisal or sale date. If residential real estate values generally or in a particular geographic area decline, the loan-to-value ratios might not be a reliable indicator of the rates of delinquencies, foreclosures and losses that could occur with respect to such mortgage loans. The “original loan-to-value ratio” means a fraction, expressed as a percentage, the numerator of which is the original principal balance of the related mortgage loan, and the denominator of which is the amount discussed above. The “combined loan-to-value ratio” means a fraction, expressed as a percentage, the numerator of which is the principal balance of the related mortgage loan at the date of determination, together with the full lien amount (drawn and undrawn) of any second mortgage, if available, and the denominator of which is the amount discussed above.

 

Prepayment Charges

 

Approximately 45.49% of the mortgage loans (by stated principal balance as of the cut-off date) require prepayment charges if, during either the first three years (with respect to approximately 1.22% of the mortgage loans), the first four years (with respect to approximately 0.45% of the mortgage loans) or the first five years (with respect to approximately 43.82% of the mortgage loans) after the origination of the mortgage loan, either (a) the mortgage loan is prepaid in full or (b) the total of all prepayments during any twelve month period exceeds twenty percent (20%) of the original principal balance of the mortgage loan. The amount of the prepayment charge is equal to the lesser of (i) a range of one-half percent to one percent (0.5%-1%) of the sum of the principal balance after the prepayment and the amount by which the prepayment exceeds the allowable prepayment of twenty percent (20%) of the original principal balance or (ii) six months’ advance interest on the amount prepaid that exceeds the allowable twenty percent of the original principal balance, calculated at the interest rate in effect on the date of prepayment.

 

Prepayment charges will not be paid to certificateholders. All of the mortgage loans that require prepayment charges were originated by First Republic Bank, which will receive any prepayment charges paid by borrowers as additional servicing compensation.

 

Primary Mortgage Insurance

 

None of the mortgage loans have primary mortgage insurance coverage. As a result, if a borrower defaults under a mortgage loan, foreclosure proceedings are brought by the servicer, and the value of the mortgaged property is not adequate to pay principal and accrued interest on the mortgage loan along with related costs and expenses, there is unlikely to be any other source of payments available to reduce the amount of losses that would be incurred on that mortgage loan.

 

Certain Characteristics of the Mortgage Loans

 

The mortgage loans are expected to have the approximate aggregate characteristics as of the cut-off date as set forth in Annex A attached to this prospectus supplement and incorporated by reference herein. Prior to the issuance of the certificates, mortgage loans may be removed from the mortgage pool as a result of incomplete documentation or otherwise, if the depositor deems such removal necessary or appropriate.

 

The FICO score information in the tables appearing in Annex A attached to this prospectus supplement shows the credit scores, if any, that each originator collected for some borrowers in connection with the origination of the mortgage loans. Third-party credit reporting organizations provide credit, or FICO, scores as an aid to lenders in evaluating the creditworthiness of borrowers. Although different credit reporting organizations use different methodologies, higher credit scores indicate greater creditworthiness. Credit scores do not necessarily correspond to the probability of default over the life of the related mortgage loan, because they reflect past credit history, rather than an assessment of future payment performance. In addition, the credit scores shown were collected from a variety of sources over a period of

 

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weeks or months, and the credit scores do not necessarily reflect the credit scores that would be reported as of the date of this prospectus supplement. Credit scores also only indicate general consumer creditworthiness, and credit scores are not intended to specifically apply to mortgage debt. Therefore, credit scores should not be considered as an accurate predictor of the likelihood of repayment of the related mortgage loans.

 

THE ORIGINATORS

 

First Republic Bank

 

Founded in 1985, First Republic Bank (“First Republic”) is a California-chartered commercial bank and trust company headquartered in San Francisco with deposits insured by the Federal Deposit Insurance Corporation (“FDIC”). First Republic divested from Bank of America and became independent again on July 1, 2010. First Republic’s business consists of providing personalized, relationship-based preferred banking, preferred business banking, real estate lending, trust and wealth management services to clients in metropolitan areas in the following geographies: San Francisco Bay Area, Los Angeles, Santa Barbara, Newport Beach, San Diego, Portland, Boston, Greenwich and the New York City metropolitan area. First Republic’s principal offices are located at 111 Pine Street, San Francisco, California, 94111, and its telephone number is (415) 392-1400.

 

See also “The Master Servicer, the Securities Administrator, the Custodian and the Servicers – First Republic Bank” below for additional information regarding First Republic’s loan origination and loss experience and servicing experience and procedures.

 

Origination Channels and Compensation

 

First Republic’s mortgage origination business is a retail lending operation. Primarily, First Republic sources mortgage loans by relationship managers employed by First Republic through a variety of means. First Republic does not typically utilize outside loan brokers to source business. Repeat customers or their direct referrals account for the most important source of the loans originated by First Republic. Mortgage loans are underwritten generally in accordance with the underwriting criteria described herein. Although the underwriting policies used in originating these mortgage loans change from time to time, the policies described herein generally apply to these mortgage loans.

 

First Republic originates fully-documented, “A” quality home loans with a focus on income, high credit scores, loan-to-values, and liquidity requirements. While the primary underwriting origination is conducted by its relationship managers, no relationship manager has approval authority. First Republic’s compensation structure provides that a relationship manager’s compensation is directly tied to the performance of the loan in that the relationship manager shares a “first loss” position on these mortgage loans which can be as much as three to six times the initial compensation earned for the origination of the loan.

 

Underwriting Process

 

First Republic has developed underwriting standards that have remained consistent historically through varying business cycles. Its underwriting standards include a matrix of approval requirements that vary depending on the size and type of loan and its aggregate exposure to the borrower. The underwriting process is intended to assess the prospective borrower’s credit standing, the ability to repay, and the value and adequacy of the mortgaged property as collateral. To assess the borrower’s ability to repay, First Republic analyzes the borrower’s cash flow, verified liquidity, credit-standing, employment history, and overall financial condition. In general, First Republic evaluates borrowers who choose adjustable rate loans at a rate that exceeds the initial start rate. This evaluation allows First Republic to make a determination as to the likelihood of whether the borrower is able to make the higher loan payments in the event that interest rates increase subsequent to origination. In general, First Republic does not originate loans with “teaser” rates or single family loans with the characteristics typically described as “subprime” or “high cost,” such as loans made to borrowers with little or no cash reserves and poor or limited credit using

 

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limited income documentation. As of December 31, 2011, the home loans originated by First Republic over the past two years had a weighted average credit score of 763. In addition, many of First Republic’s borrowers have high liquidity and a substantial net worth and First Republic’s residential loans are secured by these borrower’s single-family detached homes, condominiums, cooperative apartments, and two-to-four unit properties.

 

Documentation. Each prospective borrower submits an application package that includes documentation with respect to the applicant’s income and net assets. First Republic requires federal income tax returns for at least the last two or three years (depending on loan amount) in the case of salaried employees. Self-employed borrowers must submit personal and business tax returns for the past three years. First Republic requires business returns for any company if a borrower owns more than 25% of that company. Additionally, each borrower must supply information with respect to the applicant’s assets, liabilities, income, and employment history.

 

For all mortgage loans, First Republic obtains credit reports from three credit bureaus, including the applicant’s respective credit scores, and obtains the applicant’s consent to receive copies of tax returns directly from the Internal Revenue Service to verify income information. In substantially all cases of mortgage loans not reported on the credit report, First Republic will obtain a Verification of Mortgage and current mortgage statement. In general, information relative to significant adverse credit and legal actions must be explained in writing by the applicant and must be acceptable to First Republic. The origination process also requires that adequate title insurance, standard fire and hazard insurance and, where necessary, flood insurance be obtained and maintained. First Republic’s loan servicing group monitors all insurance renewals annually.

 

Underwriting evaluation. Mortgage loan applications are evaluated manually by a human underwriter and no automated underwriting system is used to make the credit decision. Once all applicable employment, credit and property information is received, a determination is made as to whether the prospective borrower has (1) sufficient income available to meet both housing and total debt obligation and (2) sufficient post-loan liquidity to carry the debt in the event of any personal setback or regional economic downturn. The borrower’s credit history and track record for accumulation of assets is another important factor in deciding the amount of credit to be extended. The amount of the loan may be limited by these factors, in addition to the established value of the mortgaged property.

 

An executive loan committee structure with multiple levels of approvals is employed depending on loan balance and nature of the relationship with the borrower. First Republic’s executive loan committee includes its Chairman and Chief Executive Officer, President and Chief Operating Officer, Executive Vice President and Chief Credit Officer, as well as Regional Managing Directors and senior credit officers. Appropriate members of the executive loan committee and various other credit underwriting officers review and approve every mortgage loan. In addition, larger loans and relationships are approved by a committee of the Board of Directors of First Republic, and the largest loans and relationships are approved by the entire Board of Directors prior to funding.

 

Valuations

 

Once the ability to repay has been substantiated, the value of the mortgaged property is considered as a measure of the extent of First Republic’s ability to recover in the event of the borrower’s default. To determine the adequacy of the property as collateral for a loan, appraisals are obtained from qualified outside appraisers approved by First Republic. These appraisers are chosen from a small group of third-party appraisers and their qualifications are reviewed at least annually. First Republic’s appraisal requirements satisfy or exceed the guidelines of Fannie Mae, Freddie Mac and the requirements prescribed in the FIRREA regulations and follows the Home Valuation Code of Conduct for all of the First Republic’s single family residential originations.

 

The appraiser is instructed to inspect the interior and exterior of the property and to prepare a report that includes a market data analysis based on the estimated current cost of constructing a similar home. In addition to receiving an independent, third-party appraisal on all real estate taken as collateral,

 

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substantially all underlying properties are visited by the originating relationship manager, and, for larger loans, an additional visit is generally made by one of the members of the executive loan committee or designee prior to loan closing. The vast majority of the mortgage loans originated by First Republic are secured by properties located within 30 miles of one of its offices. Both the outside appraiser’s report and the internal employee’s drive-by provide the basis for the final determination of the collateral value.

 

PrimeLending, a PlainsCapital Company

 

Founded in 1986 and headquartered in Dallas, Texas, PrimeLending, a PlainsCapital Company (“PrimeLending” or the “Company”), is a Texas corporation and a wholly owned subsidiary of PlainsCapital Bank

 

Mortgage Production Business

 

PrimeLending is licensed to originate and close mortgage loans in 50 states and the District of Columbia

 

In recent years, PrimeLending has expanded into new markets through hiring individual, as well as groups of, mortgage bankers as opportunities arise

 

For the nine months ended September 30, 2011, PrimeLending’s home purchases and refinancings by dollar volume were 71.7% and 28.3%, respectively, of total mortgage loan origination volume

 

General Underwriting Procedures

 

PrimeLending’s underwriting guidelines take into consideration the following factors:

 

·Borrower’s Credit: The borrower’s management of their present and prior debts

 

·Employment: The borrower’s ability to repay the loan, stability of income, and debt to income ratio

 

·Assets: Amount of borrower’s liquid assets for down payment and closing costs plus reserves

 

·Collateral: Type of property, use of property, and price, value and cost of home

 

·Appraisals: Ordered through an independent appraisal desk that is compliant with the appraiser independence requirements published by Fannie Mae

 

PrimeLending uses automated underwriting systems (“AUS”) as a tool to help evaluate eligibility and risk recommendations

 

Full documentation is required on all jumbo loans regardless of the AUS findings

 

Legal Proceedings

 

At the date of this prospectus supplement, there were no material pending legal proceedings to which PrimeLending was a party or of which any of its property was subject, or any material pending legal proceedings known to be contemplated by governmental authorities against PrimeLending, in each case that is material to holders of certificates.

 

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Other Originators

 

The underwriting criteria used in connection with the origination of the mortgage loans that were not originated by First Republic Bank or PrimeLending, a PlainsCapital Company are substantially similar to the underwriting procedures described under “—PrimeLending, a PlainsCapital Company” in this prospectus supplement. However, such other originators may employ automated underwriting systems and may originate a substantial portion of their mortgage loans through mortgage brokers. See “Loan Program” in the accompanying prospectus for additional information with respect to the underwriting criteria used by originators. See also “Annex A—Certain Characteristics of the Mortgage Loans—Exceptions to Underlying Guidelines at Origination” in this prospectus supplement.

 

 PRE-OFFERING REVIEW OF THE MORTGAGE LOANS

 

Introduction

 

The sponsor, prior to including the mortgage loans in the mortgage pool, conducted a review for the purpose of providing reasonable assurance that the disclosure regarding the mortgage pool in this prospectus supplement is accurate in all material respects. In conducting the review, the sponsor engaged third parties to assist it with certain elements of the review. The review conducted by the sponsor, including the portions of the review conducted with the assistance of the third parties, is referred to herein as the “sponsor’s pre-offering review.” The sponsor determined the nature, extent and timing of the sponsor’s pre-offering review and the level of assistance provided by any third party. The sponsor attributes all findings and conclusions of the sponsor’s pre-offering review to itself. The results of the sponsor’s pre-offering review were shared with the underwriter. The underwriter reviewed these findings in connection with its preparation for the offering of the offered certificates.

 

The sponsor’s pre-offering review included a credit and compliance component and a component consisting of a review of the independent appraisals of the mortgaged properties obtained by the originators in connection with the origination of the mortgage loans (referred to herein as the “original appraisals”), as more fully described below. None of the procedures conducted as part of the sponsor’s pre-offering review constituted, either separately or in combination, an independent underwriting of the mortgage loans. In addition, the procedures conducted as part of the review of the original appraisals were not re-appraisals of the mortgaged properties. To the extent that valuation tools were used as part of the appraisal review process they should not be relied upon as providing an assessment of value of the mortgaged properties comparable to that which an appraisal might provide. They also are not an assessment of the current value of any of the mortgaged properties.

 

The sponsor’s pre-offering review also included a component consisting of procedures designed to verify the sponsor’s data regarding the characteristics of the mortgage loans, which data were used to generate the numerical information about the mortgage pool included in this prospectus supplement. In addition, the review included the recalculation by a third party of numerical disclosures regarding the mortgage loans selected by the sponsor and appearing in this prospectus supplement.

 

See “—Limitations of the Pre-offering Review Process” below and “Risk Factors—Pre-offering Review of the Mortgage Loans Underlying the Certificates May Not Reveal Aspects of the Mortgage Loans Which Could Lead to Losses” for additional information regarding the limitations of the sponsor’s pre-offering review.

 

Credit and Compliance Component of Sponsor’s Pre-Offering Review

 

The sponsor, through its wholly-owned subsidiary, the seller, purchased closed mortgage loans either individually pursuant to an existing arrangement with an originator (referred to as “flow” purchases) or in bulk transactions, where mortgage loans are acquired from an originator as a group.

 

The sponsor has established certain eligibility criteria for the mortgage loans it purchases. The eligibility criteria include a matrix of factors such as loan purpose, property types, maximum LTV

 

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and CLTV ratios, maximum loan amounts, minimum FICO scores and maximum DTI ratios. The risk associated with one factor may be offset by other factors. For example, for a purchase money mortgage secured by a single-family primary residence, a loan of up to $1,000,000 with a FICO score of at least 720 may have an LTV/CLTV ratio of up to 80%, while a loan of up to $1,000,000 with a lower FICO score of at least 700 may have an LTV/CLTV ratio no higher than 70%. A mortgage loan with any permitted combination of factors included in the matrix would be in compliance with the eligibility criteria. The eligibility criteria also specify acceptable loan terms, reserve requirements, employment and income documentation and verification requirements and credit standards, among other factors.

 

The eligibility criteria are different for some originators due to their geographic market areas, the length of time that the sponsor has been purchasing mortgage loans from an originator, and other factors. For example, for the 13.9% (by aggregate principal balance) of the mortgage pool consisting of purchase money mortgages secured by primary residences originated by Prime Lending and certain other originators, a mortgage loan may have an LTV of 80% with a loan amount of no more than $1,000,000, and the borrower must have a FICO score of at least 720 and a DTI of no more than 45%. For the 19.7% (by aggregate principal balance) of the mortgage pool consisting of purchase money mortgages secured by primary residences originated by First Republic Bank, a mortgage loan may have an LTV of 80% with a loan amount of no more than $2,000,000, and the borrower must have a FICO score of at least 680 and a DTI of no more than 45%.The term “eligibility criteria” as used herein refers to the sponsor's eligibility criteria for the applicable originator, as in effect at the time of origination, unless the context otherwise requires.

 

The underwriting guidelines applicable to mortgage loans originated by First Republic Bank and PHH Mortgage Corporation were the guidelines established by the originator. The underwriting guidelines applicable to the mortgage loans originated by the remaining originators were the guidelines established by the seller and adopted by the originators for the mortgage loans to be sold to the seller with some variation among the originators. See “The Originators” for additional information regarding of the underwriting guidelines applicable to the mortgage loans.

 

Of the 366 mortgage loans included in the mortgage pool, 131 were originated by First Republic Bank and were purchased in bulk by the seller, and 235 were purchased on a flow basis from all of the originators, including First Republic Bank. Of the 131 mortgage loans originated by First Republic Bank and purchased in bulk transactions, 34 mortgage loans were sold by Barclays Bank PLC to the seller in a bulk transaction, and the remainder were purchased by the seller from First Republic Bank. In total, 254 mortgage loans were selected for the credit and compliance portion of the sponsor’s pre-offering review. Of the 131 mortgage loans purchased from First Republic Bank or Barclays Bank PLC in bulk transactions, 30 were randomly selected. Of the 235 mortgage loans purchased on a flow basis, 224 were selected as follows. All of the 211 mortgage loans purchased by the seller from originators other than First Republic Bank were selected. Of the 24 mortgage loans purchased on a flow basis from First Republic Bank, 13 were randomly selected.

 

As part of the credit and compliance component of the sponsor’s pre-offering review, for each mortgage loan selected, a third party reviewed the documentation in the originator’s loan file relating to the creditworthiness of the borrower (and any co-borrower), and assessed whether the characteristics of the mortgage loan and the borrower (and any co-borrower) conformed to the sponsor’s eligibility criteria and the applicable underwriting guidelines. As part of this review, any exceptions to the applicable underwriting guidelines that were permitted by the originator and related compensating factors were reviewed. This portion of the review is referred to herein as the “credit review”.

 

Twenty-nine mortgage loans, with an aggregate original principal balance of $28,708,130, were identified as having been originated with exceptions to applicable underwriting guidelines. See “Annex A—Certain Characteristics of the Mortgage Loans—Exceptions to Underwriting Guidelines at Origination” for additional information regarding those mortgage loans, including the exceptions permitted and related compensating factors. The information presented in the table was derived from documentation contained in each originator’s loan files. The sponsor determined to include all of those mortgage loans in the mortgage pool.

 

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Also as part of the credit and compliance component of the sponsor’s pre-offering review, the third party reviewed the selected mortgage loans to assess whether those mortgage loans were originated in compliance with applicable law and regulations. This assessment included, for example, whether prepayment penalties or late fees in excess of the amounts permitted by applicable federal or state law were charged to the borrower, the accuracy and completeness of information required to be included in the federal Notice of Right of Rescission and other disclosures required by the Truth-in-Lending Act, and whether any of the mortgage loans meet the definition of “high cost” loans under HOEPA or similar state or local law. This portion of the review is referred to as the “compliance review”.

 

No mortgage loans were excluded from the mortgage pool as a result of the credit and compliance component of the sponsor’s pre-offering review. A number of discrepancies from the applicable underwriting guidelines were found, however, that were determined by the sponsor to be immaterial, such as the absence of the initial mortgage loan application from the loan file where the information required to be included in the application was contained in other documents that were included in the loan file. In addition, a third party reviewer identified one mortgage loan that it determined was in material non-compliance with the Truth-in-Lending Act because the annual percentage rate of interest (APR) for that mortgage loan was lower by more than 0.125% from the amount previously disclosed, and a new disclosure was not sent to the borrower in advance of the loan closing. The sponsor determined that because the final APR was lower than the previously disclosed amount and because the final finance charge did not increase from the previously disclosed amount, it was consistent with industry practice to conclude that the failure to provide new disclosure to the borrower in advance of the loan closing was not a material failure to comply with the Truth-in-Lending Act.

 

Investors should note that only those 254 mortgage loans selected as described above were subject to any credit or compliance review as part of the sponsor’s pre-offering review and that mortgage loans not selected as described above were not the subject of a credit or compliance review. See “—Limitations of the Pre-offering Review Process,” below and “Risk Factors—Pre-offering Review of the Mortgage Loans Underlying the Certificates May Not Reveal Aspects of the Mortgage Loans Which Could Lead to Losses.”

 

Appraisal Component of Sponsor’s Pre-Offering Review

 

As part of the appraisal component of the sponsor’s pre-offering review, the same 254 mortgage loans selected for a credit and compliance review as described above were also selected for a review of the original appraisal of the mortgaged property that was obtained in connection with the origination of that mortgage loan.

 

As part of the appraisal component, the original appraisal of the mortgaged property was reviewed by an on-staff underwriter and, in some cases, an on-staff appraiser employed by the third party in order to assess compliance with the applicable appraisal guidelines in effect at the time of origination. Each originator’s appraisal guidelines include adherence to the appraiser independence requirements published by Fannie Mae, which include, among other things, that payments for the appraisal may not be conditioned upon a particular valuation, and that future business from the lender may not be used to influence or attempt to influence the valuation. In addition, as part of this assessment, the on-staff underwriter and, in some cases, the on-staff appraiser made a determination as to the reasonableness of the value of the mortgaged property set forth in the original appraisal. This reasonableness determination was generally made by analyzing the comparable sales listed in the original appraisal and reviewing other comparable sales information such as publicly available website and MLS listings.

 

In addition, for some of the mortgage loans selected, the third party reviewed a Limited Desktop Appraisal Analysis (“LDAA”) or similar appraisal product, such as a field review, obtained by the sponsor from an independent party. An LDAA is a valuation analysis performed by a certified appraiser who reviews the original appraisal to determine if the original value is supported. That appraiser makes a separate selection of comparable sales, which may be the same as those used in the original appraisal and, using a rules-based valuation model, makes an independent determination as to whether the original

 

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appraised value is supported. A field review is a valuation analysis performed by a certified appraiser who reviews the original appraisal and performs a visual inspection of the exterior areas of the property, inspects the neighborhood, performs a visual analysis of each of the comparable sales, performs data research and analysis to determine the appropriateness and accuracy of the data in the original appraisal, searches public records and presents an opinion as to whether the appraised value is supported.

 

Of the 254 mortgage loans for which the original appraisal of the mortgaged property was reviewed by the third party, the third party concluded that the original appraisal did not support the value set forth in the original appraisal with respect to seven mortgage loans.  For this purpose, the third party concluded that the appraised value was not supported if it determined that the value of the mortgaged property might have a negative variance of 10% or more from the appraised value.  In all of those cases the LDAA concluded that the original valuation was supported. The sponsor reviewed the results of both analyses and agreed with the original appraisal. As a result, the sponsor determined not to exclude any mortgage loans from the mortgage pool as a result of any findings from the appraisal review.

 

Mortgage Loan Characteristics Component of Sponsor’s Pre-Offering Review

 

The sponsor prepared a mortgage loan data tape that includes certain characteristics of the mortgage loans. Certain information included in the data tape was provided by the originator of the mortgage loan, and a third party reviewed a sampling of that information based on a review of electronic copies of the original mortgage loan documents. The remaining information in the data tape was added by the third party, also based on a review of electronic copies of the original mortgage loan documents. That data tape, including any adjustments made by the sponsor, was used to generate the numerical information regarding the mortgage loans included in this prospectus supplement.

 

A comparison with respect to certain fields on the data tape was performed by a third party with respect to a sampling of the mortgage loans. This comparison was conducted by comparing electronic copies of the original mortgage loan documents provided by the sponsor to the corresponding information set forth on the data tape. The sampling was randomly selected from the mortgage pool and included approximately 50% of the mortgage loans by number. The comparisons were performed with respect to 19 mortgage loan characteristics, including original loan balance, initial interest rate, state, zip code, appraised value, sales price (if applicable), property type, and loan-to-value ratios. Discrepancies with respect to one or more characteristics were identified with respect to approximately 9% of the mortgage loans sampled. Examples of the discrepancies include a difference in the initial interest rate, a difference in the balance of a junior lien, a difference in the appraised value, a difference in monthly principal and interest payments due, and a difference in property type.

 

As a result of the discrepancies in the initial interest rates, the sponsor reviewed the initial interest rates on all the mortgage loans not reviewed by the third party, and identified no additional discrepancies. There were six discrepancies related to the monthly principal and interest payments due. In most of these cases, the sponsor determined that this was due to a discrepancy in the interest rate for that mortgage loan. There were three discrepancies related to the loan-to-value ratio or combined loan-to-value ratio. In two such cases, the sponsor determined that the related mortgage loan involved a refinancing within 12 months after the date of purchase, and the appraised value rather than the sales price was used in the calculation. In the third such case, the sponsor determined that the discrepancy was due to a difference in the junior lien balance used.

 

In all cases, the sponsor corrected the data tape for each discrepancy and determined not to exclude any of the sampled mortgage loans from the mortgage pool due to the results of this review.

 

An additional component of the sponsor’s pre-offering review consisted of recalculations of the numerical disclosures selected by the sponsor and appearing in the prospectus supplement. These disclosures include the percentages of mortgage loans with certain characteristics, which are included under the caption “Description of the Mortgage Pool,” and the numerical information contained in “Annex A—Certain Characteristics of the Mortgage Loan,” other than the information in the table entitled “—Exceptions to Underwriting Guidelines at Origination” (together, the “Mortgage Pool Disclosures”). The

 

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recalculations were performed using the data tape, including any adjustments made by the sponsor, and the results of those recalculations were compared to the corresponding Mortgage Pool Disclosures.

 

Limitations of the Pre-offering Review Process

 

As noted above under the Risk Factor captioned “Pre-offering Review of the Mortgage Loans Underlying the Certificates May Not Reveal Aspects of the Mortgage Loans Which Could Lead to Losses,” there can be no assurance that the sponsor’s pre-offering review uncovered all relevant factors relating to the origination of the mortgage loans, their compliance with applicable law and regulation and the original appraisals relating of the mortgaged properties or uncovered all relevant factors that could affect the future performance of the mortgage loans. The sponsor’s pre-offering review did not include all of the mortgage loans in the mortgage pool and the mortgage loans that were included in the pre-offering review may have characteristics that were not discovered, noted or analyzed as part of the pre-offering review that could, nonetheless, result in those mortgage loans failing to perform in the future.

 

Although sampling techniques were employed that the sponsor believes were appropriate for the purpose of the sponsor’s pre-offering review of this mortgage pool, sampling has some limitations. For example, sampling of mortgage loans in connection with the comparison of certain data fields on the mortgage loan data tape may not have detected all of the discrepancies in the data tape regarding the sampled mortgage loans. In addition, the information on the data tape regarding the mortgage loans that were not sampled may contain more discrepancies or additional types of discrepancies than were found with respect to the sampled mortgage loans.

 

Investors are encouraged, in particular, to note the following with respect to the appraisal review that was conducted as part of the sponsor’s pre-offering review.

 

•        Differences may exist among and between estimated valuations due to the subjective nature of estimated valuations and appraisals, particularly between different appraisers estimating valuations or performing appraisals at different points in time, as well as among appraisers and other persons reviewing the appraisals or other valuations.

 

•        Estimating or appraising the value of, and performing other analyses of, high-cost properties (such as most of the mortgaged properties) can involve challenges that may not generally be present with respect to properties whose values fall within the average price range of their respective markets. There may be fewer substitute properties available (from which to derive comparative values) in the high-cost residential property market, unique buyer attitudes and preferences, and more difficult to quantify “appeal” issues, any of which can make valuations in the high-cost home segment less precise than for more average-priced housing.

 

•        Estimates of value for high-cost properties (such as the above-described) are imprecise. The unique nature of some of these properties, the use in some cases of highly customized and top-quality materials, overall interior design/appeal issues, and in many cases limited notations in the original appraisal report regarding key elements that drove the original property valuation, pose challenges for a subsequent reviewer. Also, the reviewer (or the preparer of an LDAA) does not typically have independent access to an interior inspection of the property and therefore is not able to independently analyze the interior appointments and amenities associated with the valuation of these types of properties.

 

•        Appraisals and other valuations represent the analysis and opinion of the person performing the appraisal or valuation at the time it is prepared, and are not guarantees of, and may not be indicative of, the present or future value of the mortgaged property.

 

Investors are encouraged to make their own determination as the extent to which they place reliance on the limited loan review procedures carried out as part of the sponsor’s pre-offering review

 

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STATIC POOL INFORMATION

 

Static pool information with respect to mortgage loans similar to the mortgage loans of the issuing entity for the period from January 2007 to January 2012 is available online at http://www.sequoia-reports.com, displayed or referenced under “SEMT 2012-2” for the deal name. Access to this web address is unrestricted and free of charge. Information available at this web address and displayed or referenced under “SEMT 2012-2” is deemed to be part of this prospectus supplement, unless such information relates to (a) any issuing entity established before January 1, 2006 or (b) information with respect to mortgage loans originated or purchased by an originator for periods before January 1, 2006.

 

Various factors may affect the prepayment, delinquency and loss performance of the mortgage loans over time. The various mortgage loans for which performance information is shown at the above internet addresses had initial characteristics that differed, and may have differed in ways that were material to the performance of those mortgage loans. These differing characteristics include, among others, product type, credit quality, geographic concentration, average principal balance, weighted average interest rate, weighted average loan-to-value ratio, weighted average term to maturity and the presence or absence of prepayment charges. We do not make any representation, and you should not assume, that the performance information shown at the above internet addresses is in any way indicative of the performance of the mortgage loans in the trust fund. The mortgage loans will continue to be serviced in accordance with accepted servicing practices through charge-off, which we define as the ultimate liquidation of the loan or any REO acquired in respect of the loan. For purposes of Form 10-D reporting and other such reporting under the Securities Exchange Act of 1934, delinquency information on the mortgage loans will be provided through charge-off in thirty (30) day segments, measured as of the end of the month prior to the reporting month.

 

As used in the static pool information and in this prospectus supplement, a loan is considered to be “30 to 59 days” or “30 or more days” delinquent when a payment due on any scheduled due date remains unpaid as of the close of business on the last business day immediately prior to the next following monthly scheduled due date; “60 to 89 days” or “60 or more days” delinquent when a payment due on any scheduled due date remains unpaid as of the close of business on the last business day immediately prior to the second following monthly scheduled due date; and so on. The determination as to whether a mortgage loan falls into these categories is made as of the close of business on the last business day of each month. Grace periods and partial payments do not affect these determinations.

 

ADDITIONAL INFORMATION

 

The depositor has filed the registration statement with the Securities and Exchange Commission (the “SEC”) (Registration Nos. 333-159791 and 333-159791-01). The depositor is also subject to some of the information requirements of the Securities Exchange Act of 1934 (the “Exchange Act”), and, accordingly, will file reports thereunder with the SEC. The registration statement and the exhibits thereto, and reports and other information filed by the depositor under the Exchange Act can be inspected and copied at the public reference facilities maintained by the SEC at 100 F Street, N.E., Washington, D.C. 20549, and at certain of its regional offices located as follows: Chicago Regional Office, Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661-2511; and Northeast Regional Office, 233 Broadway, New York, New York 10279 and electronically through the SEC’s Electronic Data Gathering, Analysis and Retrieval System at the SEC’s website (http://www.sec.gov).

 

The description in this prospectus supplement of the trust fund and the mortgaged properties is based upon the mortgage pool as it is expected to be constituted at the close of business on the cut-off date, as adjusted for the scheduled principal payments due on or before the cut-off date and by principal prepayments received prior to the cut-off date. Prior to the issuance of the offered certificates, mortgage loans may be removed from the trust fund as a result of incomplete documentation or otherwise, if the depositor deems that removal necessary or appropriate. A limited number of other mortgage loans may be added to the trust fund prior to the issuance of the offered certificates. The depositor believes that the

 

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information in this prospectus supplement will be substantially representative of the characteristics of the mortgage pool as it will be constituted at the time the offered certificates are issued although the range of mortgage rates and maturities and some other characteristics of the mortgage loans in the trust fund may vary.

 

A current report on Form 8-K will be available to purchasers of the offered certificates and will be filed, together with the pooling and servicing agreement, with the SEC after the initial issuance of the offered certificates. In the event a material number of mortgage loans are removed from or added to the trust fund as described in the preceding paragraph, that removal or addition will be noted in the current report.

 

Pursuant to the pooling and servicing agreement, the securities administrator will prepare a monthly statement to certificateholders containing the information described under “The Agreements — Reports to Certificateholders.” The securities administrator will make available each month, to any interested party, the monthly statement to certificateholders via the securities administrator’s website. The securities administrator’s website will be located at www.ctslink.com, and assistance in using the website can be obtained by calling the securities administrator’s customer service desk at 1-866-846-4526. Parties that are unable to use the above distribution option are entitled to have a paper copy mailed to them via first class mail by notifying the securities administrator at the following address: Wells Fargo Bank, N.A., 9062 Old Annapolis Road, Columbia, Maryland, 21045, Attention: Client Manager—Sequoia Mortgage Trust 2012-2.

 

In addition, within a reasonable period of time after the end of each calendar year, the securities administrator will, upon request, prepare and deliver to each certificateholder of record during the previous calendar year a statement containing information necessary to enable certificateholders to prepare their tax returns. These statements will not have been examined and reported upon by an independent public accountant.

 

See “Available Information” in the accompanying prospectus.

 

THE ISSUING ENTITY

 

General

 

The issuing entity is a common law trust formed under the laws of the State of New York by a pooling and servicing agreement dated as of March 1, 2012. The issuing entity was formed for the sole purpose of issuing the certificates. The depositor is the settlor of the issuing entity. The depositor is a limited purpose finance corporation and an indirect wholly-owned subsidiary of Redwood Trust, Inc., a Maryland corporation. None of the depositor, Redwood Trust, Inc. or any of their respective affiliates has guaranteed or is otherwise obligated with respect to payment of the certificates and no person or entity other than the issuing entity is obligated to pay the certificates.

 

The issuing entity’s assets will consist almost entirely of the mortgage loans conveyed to the trustee.

 

The only source of cash available to make interest and principal payments on the certificates will be the assets of the issuing entity. The issuing entity will have no source of cash other than collections and recoveries on the mortgage loans through insurance or otherwise and advances funded by the servicers (other than Cenlar FSB) or the servicing administrator, which are reimbursable to the servicers (other than Cenlar FSB) and the servicing administrator as discussed in this prospectus supplement. The amount of funds available to pay the certificates may be affected by, among other things, realized losses incurred on defaulted mortgage loans.

 

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DESCRIPTION OF THE CERTIFICATES

 

General

 

On the closing date, the certificates will be issued pursuant to the pooling and servicing agreement. Set forth below are summaries of the specific terms and provisions pursuant to which the certificates will be issued. The following summaries are subject to, and are qualified in their entirety by reference to, the provisions of the pooling and servicing agreement. Capitalized terms used in this prospectus supplement to describe payment characteristics of the certificates are defined under “—Glossary of Terms” below.

 

The Sequoia Mortgage Trust 2012-2 Mortgage Pass-Through Certificates will consist of:

 

·the Class A-1, Class A-2, Class A-3 and Class A-IO Certificates, or the senior certificates;

 

·the Class B-1, Class B-2, Class B-3, Class B-4 and Class B-5 Certificates, or the subordinate certificates; and

 

·the Class R and Class LT-R Certificates, or the residual certificates.

 

The Class A-1, Class A-2, Class A-3, Class A-IO, Class B-1, Class B-2 and Class B-3 Certificates are collectively referred to herein as the “offered certificates.” Only the Class A-1, Class A-2, Class A-3, Class A-IO, Class B-1, Class B-2 and Class B-3 Certificates are offered by this prospectus supplement. The Class B-4, Class B-5, Class R and Class LT-R Certificates are referred to in this prospectus supplement as the “non-offered certificates.” The non-offered certificates are not offered under this prospectus supplement. Accordingly, the description of the non-offered certificates provided in this prospectus supplement is solely for informational purposes. On the closing date, the sponsor or one or more of its affiliates will purchase the Class B-4, Class B-5, Class R and Class LT-R Certificates.

 

On the closing date, the initial total Class Principal Amount of the certificates will equal the total principal balance of the mortgage loans as of the cut-off date. The offered certificates will be issued in the initial class principal amounts and notional amounts set forth in the table under “The Offered Certificates.” The Class B-4 and Class B-5 Certificates will be issued in the approximate initial class principal amounts of $1,640,000 and $3,444,218, respectively. The Class R and Class LT-R Certificates will not have a principal balance. The initial issued amount of each class may be increased or decreased by up to 5% to the extent that the principal balance of the mortgage loans is increased or decreased as described under “Description of the Mortgage Pool.”

 

The minimum denominations and incremental denominations of the offered certificates are set forth in the table on page S-2.

 

The certificates represent beneficial ownership interests in the issuing entity. On the closing date, the assets of the issuing entity will consist primarily of (1) the mortgage loans; (2) such assets as from time to time are identified as deposited in respect of the mortgage loans in the custodial accounts and the distribution account (see “— Payments on Mortgage Loans; Accounts” below); (3) the issuing entity’s rights under the assignment, assumption and recognition agreements and assignment of representations and warranties agreements pursuant to which the seller and the depositor assigned their respective interests in the purchase agreements and servicing agreements with respect to the mortgage loans originally entered into between the seller and each originator and servicer and the servicing administrator; (4) the issuing entity’s rights under the mortgage loan purchase agreement, as described above under “The Agreements — Assignment of the Mortgage Loans”; (5) property acquired by foreclosure of the mortgage loans or deed in lieu of foreclosure; (6) any applicable insurance policies; and (7) the proceeds of all of the foregoing.

 

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Book-Entry Certificates

 

The offered certificates will be book-entry certificates. Persons acquiring beneficial ownership interests in the offered certificates, or certificate owners, may elect to hold their certificates through the Depository Trust Company, or DTC, in the United States, or Clearstream Banking, societe anonyme (formerly Cedelbank), commonly known as Clearstream, Luxembourg, or Euroclear (in Europe) if they are participants of such systems, or indirectly through organizations which are participants in such systems.

 

The book-entry certificates will be issued in one or more global certificates which equal the initial principal amount of each class and will initially be registered in the name of Cede & Co., the nominee of DTC. Clearstream, Luxembourg and Euroclear will hold omnibus positions on behalf of their participants through customers’ securities accounts in Clearstream, Luxembourg’s and Euroclear’s names on the books of their respective depositaries which in turn will hold such positions in customers’ securities accounts in the depositaries’ names on the books of DTC. Except as described below, no person acquiring a book-entry certificate, or beneficial owner, will be entitled to receive a physical certificate representing such certificate. Unless and until definitive certificates are issued, it is anticipated that the only “certificateholders” of the certificates will be Cede & Co., as nominee of DTC. Certificate owners will not be certificateholders as that term is used in the pooling and servicing agreement. Certificate owners are only permitted to exercise their rights indirectly through the participating organizations that utilize the services of DTC, including securities brokers and dealers, banks and trust companies and clearing corporations and certain other organizations, or Participants, and DTC.

 

The beneficial owner’s ownership of a book-entry certificate will be recorded on the records of the brokerage firm, bank, thrift institution or other financial intermediary (each, a Financial Intermediary) that maintains the beneficial owner’s account for such purpose. In turn, the Financial Intermediary’s ownership of such book-entry certificate will be recorded on the records of DTC (or of a participating firm that acts as agent for the Financial Intermediary, whose interest will in turn be recorded on the records of DTC, if the beneficial owner’s Financial Intermediary is not a DTC participant, and on the records of Clearstream, Luxembourg or Euroclear, as appropriate).

 

Certificate owners will receive all payments of principal of, and interest on, the certificates from the securities administrator through DTC and DTC participants. While the certificates are outstanding (except under the circumstances described below), under the rules, regulations and procedures creating and affecting DTC and its operations (or the Rules), DTC is required to make book-entry transfers among Participants on whose behalf it acts with respect to the certificates and is required to receive and transmit payments of principal of, and interest on, the certificates. Participants and indirect participants which have indirect access to the DTC system, such as banks, brokers, dealers and trust companies that clear through or maintain a custodial relationship with a Participant, either directly or indirectly (or the Indirect Participants), with whom certificate owners have accounts with respect to certificates are similarly required to make book-entry transfers and receive and transmit such payments on behalf of their respective certificate owners. Accordingly, although certificate owners will not possess certificates, the Rules provide a mechanism by which certificate owners will receive payments and will be able to transfer their interest.

 

Certificate owners will not receive or be entitled to receive certificates representing their respective interests in the certificates, except under the limited circumstances described below. Unless and until definitive certificates are issued, certificate owners who are not Participants may transfer ownership of certificates only through Participants and Indirect Participants by instructing such Participants and Indirect Participants to transfer certificates, by book-entry transfer, through DTC for the account of the purchasers of such certificates, which account is maintained with their respective Participants. Under the Rules and in accordance with DTC’s normal procedures, transfers of ownership of certificates will be executed through DTC and the accounts of the respective Participants at DTC will be debited and credited. Similarly, the Participants and Indirect Participants will make debits or credits, as the case may be, on their records on behalf of the selling and purchasing certificate owners.

 

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Because of time zone differences, credits of securities received in Clearstream, Luxembourg or Euroclear as a result of a transaction with a Participant will be made during subsequent securities settlement processing and dated the business day following the DTC settlement date. Such credits or any transactions in such securities settled during such processing will be reported to the relevant Euroclear or Clearstream, Luxembourg Participants on such business day. Cash received in Clearstream, Luxembourg or Euroclear as a result of sales of securities by or through a Clearstream, Luxembourg Participant (as defined herein) or Euroclear Participant (as defined herein) to a DTC Participant will be received with value on the DTC settlement date but will be available in the relevant Clearstream, Luxembourg or Euroclear cash account only as of the business day following settlement in DTC.

 

Transfers between Participants will occur in accordance with DTC rules. Transfers between Clearstream Luxembourg Participants and Euroclear Participants will occur in accordance with their respective rules and operating procedures.

 

Cross-market transfers between persons holding directly or indirectly through DTC, on the one hand, and directly or indirectly through Clearstream Luxembourg Participants or Euroclear Participants, on the other, will be effected in DTC in accordance with the DTC rules on behalf of the relevant European international clearing system by the relevant depositary; however, such cross market transactions will require delivery of instructions to the relevant European international clearing system by the counterparty in such system in accordance with its rules and procedures and within its established deadlines (European time). The relevant European international clearing system will, if the transaction meets its settlement requirements, deliver instructions to the relevant depositary to take action to effect final settlement on its behalf by delivering or receiving securities in DTC, and making or receiving payment in accordance with normal procedures for same day funds settlement applicable to DTC. Clearstream Luxembourg Participants and Euroclear Participants may not deliver instructions directly to the European depositaries.

 

DTC, which is a New York-chartered limited purpose trust company, performs services for its participants, some of which (and/or their representatives) own DTC. In accordance with its normal procedures, DTC is expected to record the positions held by each DTC participant in the book-entry certificates, whether held for its own account or as a nominee for another person. In general, beneficial ownership of book-entry certificates will be subject to the rules, regulations and procedures governing DTC and DTC participants as in effect from time to time.

 

Clearstream Luxembourg is incorporated under the laws of Luxembourg as a professional depository. Clearstream Luxembourg holds securities for its participating organizations (“Clearstream Luxembourg Participants”) and facilitates the clearance and settlement of securities transactions between Clearstream Luxembourg Participants through electronic book-entry changes in accounts of Clearstream Luxembourg Participants, thereby eliminating the need for physical movement of certificates. Transactions may be settled in Clearstream Luxembourg in any of various currencies, including United States dollars. Clearstream Luxembourg provides to its Clearstream Luxembourg Participants, among other things, services for safekeeping, administration, clearance and settlement of internationally-traded securities and securities lending and borrowing. Clearstream Luxembourg interfaces with domestic markets in several countries. As a professional depository, Clearstream Luxembourg is subject to regulation by the Luxembourg Monetary Institute. Clearstream Luxembourg Participants are recognized financial institutions around the world, including underwriters, securities brokers and dealers, banks, trust companies, clearing corporations and certain other organizations. Indirect access to Clearstream Luxembourg is also available to others, such as banks, brokers, dealers and trust companies that clear through or maintain a custodial relationship with a Clearstream Luxembourg Participant, either directly or indirectly.

 

Euroclear was created in 1968 to hold securities for its participants (or Euroclear Participants) and to clear and settle transactions between Euroclear Participants through simultaneous electronic book-entry delivery against payment, thereby eliminating the need for physical movement of certificates and any risk from lack of simultaneous transfers of securities and cash. Transactions may be settled in any of various currencies, including United States dollars. Euroclear includes various other services, including securities lending and borrowing, and interfaces with domestic markets in several countries generally

 

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similar to the arrangements for cross-market transfers with DTC described above. Euroclear is operated by Euroclear Bank, S.A./N.V. (or the Euroclear Operator). All operations are conducted by the Euroclear Operator, and all Euroclear securities clearance accounts and Euroclear cash accounts are accounts with the Euroclear Operator. Euroclear Participants include banks (including central banks), securities brokers and dealers and other professional financial intermediaries. Indirect access to Euroclear is also available to other firms that clear through or maintain a custodial relationship with a Euroclear Participant, either directly or indirectly.

 

Securities clearance accounts and cash accounts with the Euroclear Operator are governed by the Terms and Conditions Governing Use of Euroclear and the related Operating Procedures of the Euroclear System and applicable Belgian law (collectively, the Terms and Conditions). The Terms and Conditions govern transfers of securities and cash within Euroclear, withdrawals of securities and cash from Euroclear, and receipts of payments with respect to securities in Euroclear. All securities in Euroclear are held on a fungible basis without attribution of specific certificates to specific securities clearance accounts. The Euroclear Operator acts under the Terms and Conditions only on behalf of Euroclear Participants, and has no record of or relationship with persons holding through Euroclear Participants.

 

Payments on the book-entry certificates will be made on each distribution date by the securities administrator to DTC. DTC will be responsible for crediting the amount of such payments to the accounts of the applicable DTC participants in accordance with DTC’s normal procedures. Each DTC participant will be responsible for disbursing such payment to the beneficial owners of the book-entry certificates that it represents and to each Financial Intermediary for which it acts as agent. Each such Financial Intermediary will be responsible for disbursing funds to the beneficial owners of the book-entry certificates that it represents.

 

Under a book-entry format, certificate owners of the book-entry certificates may experience some delay in their receipt of payments, since such payments will be made by the securities administrator to Cede & Co. Payments with respect to certificates held through Clearstream Luxembourg or Euroclear will be credited to the cash accounts of Clearstream Luxembourg Participants or Euroclear Participants in accordance with the relevant system’s rules and procedures, to the extent received by the relevant depositary. Such payments will be subject to tax reporting in accordance with relevant United States tax laws and regulations. See “Federal Income Tax Consequences — Withholding with Respect to Certain Foreign Investors” and “— Backup Withholding” in the accompanying prospectus.

 

Because DTC can only act on behalf of Financial Intermediaries, the ability of a beneficial owner to pledge book-entry certificates to persons or entities that do not participate in the Depository system, or otherwise take actions in respect of such book-entry certificates, may be limited due to the lack of physical certificates for such book-entry certificates. In addition, issuance of the book-entry certificates in book-entry form may reduce the liquidity of such certificates in the secondary market since certain potential investors may be unwilling to purchase certificates for which they cannot obtain physical certificates.

 

Monthly and annual reports will be provided to Cede & Co., as nominee of DTC, and may be made available by Cede & Co. to beneficial owners upon request, in accordance with the rules, regulations and procedures creating and affecting the Depository, and to the Financial Intermediaries to whose DTC accounts the book-entry certificates of such beneficial owners are credited.

 

DTC has advised the depositor that, unless and until definitive certificates are issued, DTC will take any action permitted to be taken by the holders of the book-entry certificates under the pooling and servicing agreement only at the direction of one or more Financial Intermediaries to whose DTC accounts the book-entry certificates are credited, to the extent that such actions are taken on behalf of Financial Intermediaries whose holdings include such book-entry certificates. Clearstream Luxembourg or the Euroclear Operator, as the case may be, will take any other action permitted to be taken by a certificateholder under the pooling and servicing agreement on behalf of a Clearstream Luxembourg

 

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Participant or Euroclear Participant only in accordance with its relevant rules and procedures and subject to the ability of the relevant depositary to effect such actions on its behalf through DTC. DTC may take actions, at the direction of the related Participants, with respect to some book-entry certificates which conflict with actions taken with respect to other certificates.

 

Although DTC, Clearstream Luxembourg and Euroclear have agreed to the foregoing procedures in order to facilitate transfers of book-entry certificates among participants of DTC, Clearstream Luxembourg and Euroclear, they are under no obligation to perform or continue to perform such procedures and such procedures may be discontinued at any time.

 

None of the seller, the depositor, the servicer or the securities administrator will have any responsibility for any aspect of the records relating to or payments made on account of beneficial ownership interests of the book-entry certificates held by Cede & Co., as nominee of DTC, or for maintaining, supervising or reviewing any records relating to such beneficial ownership interests or transfers thereof.

 

Definitive certificates will be issued to certificate owners or their nominees, respectively, rather than to DTC or its nominee, only under the limited conditions set forth in the accompanying prospectus under “Description of the Securities — Book-Entry Registration of Securities.” Upon the occurrence of an event described in the penultimate paragraph thereunder, the securities administrator is required to direct DTC to notify Participants that have ownership of book-entry certificates as indicated on the records of DTC of the availability of definitive certificates for the book-entry certificates. Upon surrender by DTC of the definitive certificates representing the book-entry certificates, and upon receipt of instruction from DTC for re-registration, the securities administrator will re-issue the book-entry certificates as definitive certificates in the respective principal amounts owned by the individual beneficial owner and thereafter the trustee and the securities administrator will recognize the holders of such definitive certificates as certificateholders under the pooling and servicing agreement.

 

For information relating to tax documentation procedures relating to the certificates, see “Material Federal Income Tax Consequences — Withholding with Respect to Certain Foreign Investors” and “— Backup Withholding” in the prospectus and “Global Clearance, Settlement and Tax Documentation Procedures — Certain U.S. Federal Income Tax Documentation Requirements” in Annex B hereto, which Annex B is attached to this prospectus supplement and is incorporated by reference herein.

 

Payments on Mortgage Loans; Accounts

 

On or prior to the closing date, each servicer will establish and maintain or cause to be established and maintained a “custodial account,” which will be a separate account or accounts for the collection of payments on the mortgage loans and which will be separate from the servicer’s other assets. In the event that the rating of the depository institution where a custodial account is maintained, which may be a servicer, falls below requirements specified in the applicable servicing agreement, the custodial account will be transferred within 30 days to a depository institution satisfying those requirements.

 

On or prior to the closing date, the securities administrator will establish the “distribution account,” which will be an account established by the securities administrator in trust for the benefit of the certificateholders. In the event that the rating of the securities administrator falls below requirements specified in the pooling and servicing agreement, the distribution account will be transferred within 30 days to a depository institution satisfying those requirements. On the Servicer Remittance Date immediately preceding each distribution date, each servicer will withdraw from the applicable custodial account collections and recoveries in respect of the mortgage loans that are required to be distributed to the certificateholders on the next distribution date, and will remit such amounts to the securities administrator for deposit in the distribution account.

 

On each distribution date, to the extent of the Available Distribution Amount on deposit in the distribution account, the securities administrator, on behalf of the trustee, will withdraw the Certificate

 

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Distribution Amount to pay the Certificateholders. The “Certificate Distribution Amount” for any distribution date will equal the sum of (i) the respective Interest Distribution Amounts with respect to each class of Certificates, (ii) the Senior Principal Distribution Amount and (iii) the Subordinate Principal Distribution Amount.

 

Funds credited to a custodial account may be invested at the direction of the applicable servicer for the benefit and at the risk of such servicer in eligible investments, as defined in the related servicing agreement, that are scheduled to mature on or prior to the business day preceding the next Servicer Remittance Date. Funds credited to the distribution account may be invested at the direction of the securities administrator for the benefit and at the risk of the securities administrator in eligible investments, as defined in the pooling and servicing agreement, that are scheduled to mature on or prior to the next distribution date.

 

Glossary of Terms

 

The following terms are given the meanings shown below to help describe the cash flows on the certificates:

 

Accrual Period” means, with respect to any distribution date and for each class of certificates, the calendar month immediately preceding the month in which the distribution date occurs. For each distribution date and each related Accrual Period, interest will be calculated on the basis of a 360-day year consisting of twelve 30-day months.

 

Aggregate Expense Rate” means the sum of the servicing fee rate and the master servicing fee rate.

 

Applicable Credit Support Percentage” means, for each class of subordinate certificates and any distribution date, the sum of the Class Subordination Percentage of that class and the aggregate Class Subordination Percentage of all other classes (if any) of subordinate certificates having higher numerical class designations than that class.

 

The approximate original Applicable Credit Support Percentages for each class of subordinate certificates on the date of issuance of such certificates are expected to be as follows:

 

Class B-1 7.15%
Class B-2 4.45%
Class B-3 2.70%
Class B-4 1.55%
Class B-5 1.05%

 

Available Distribution Amount means, with respect to any distribution date, the sum of the following amounts:

 

(i) all scheduled payments of interest (net of the servicing fees, the servicing administrator fee and the master servicing fee) and principal due during the related Due Period, together with any advances in respect thereof; (ii) Insurance Proceeds received during the related Prepayment Period; (iii) Liquidation Proceeds received during the related Prepayment Period (net of unreimbursed expenses incurred in connection with a liquidation or foreclosure and unreimbursed advances, if any); (iv) Subsequent Recoveries received during the related Prepayment Period; (v) all partial or full prepayments of principal, together with any accrued interest thereon, identified as having been received on the mortgage loans during the related Prepayment Period, plus any amounts received from the servicers (other than Cenlar FSB), the servicing administrator or the master servicer in respect of Prepayment Interest Shortfalls on such mortgage loans; (vi) amounts received with respect to such distribution date as the Substitution Amount and the purchase price in respect of a deleted mortgage loan or a mortgage loan purchased by an originator or the seller as of such distribution date as a result of a breach of a representation or warranty; (vii) the purchase price paid by the master servicer to purchase the mortgage loans and terminate the trust fund, if applicable;

 

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minus:

 

(A) amounts applied to reimburse advances and servicing advances previously made and other amounts as to which the servicers (other than Cenlar FSB) and the servicing administrator are entitled to be reimbursed pursuant to the servicing agreements;

 

(B) amounts applied to reimburse advances and servicing advances previously made as to which the master servicer is entitled to be reimbursed pursuant to the pooling and servicing agreement; and

 

(C) the sum of all related fees, charges and costs, including indemnification amounts and costs of arbitration (other than the master servicing fee and amounts required to be paid by the master servicer from the master servicing fee) payable or reimbursable to the master servicer, the securities administrator and the trustee from the trust fund under the pooling and servicing agreement and the custodian under the custodial agreement, subject to an aggregate maximum amount of $300,000 annually (per year from the closing date to the first anniversary of the closing date and each subsequent anniversary year thereafter) to be paid to such parties collectively, in the order claims for payment of such amounts are received by the securities administrator; provided, however, that if a claim is presented for an amount that, when combined with the amount of prior claims paid during that year, would exceed $300,000, then only a portion of such claim will be paid that will make the total amount paid during that year equal to $300,000 and the excess remaining unpaid, together with any additional claims received during that year, will be deferred until the following anniversary year and if the total amount of such deferred claims exceeds $300,000 then payment in such following anniversary year (and each subsequent anniversary year as may be needed until such deferred claims are paid in full) shall be apportioned among the master servicer, the securities administrator, the custodian and the trustee, in proportion to the aggregate amount of deferred claims submitted by such entity as of the last day of the prior year; provided that, in no event will the aggregate amount reimbursable to the Trustee exceed $100,000 annually (per year from the closing date to the first anniversary of the closing date and each subsequent anniversary year thereafter).

 

Certificate Interest Rate” means, for any class of certificates (other than the senior certificates) and any distribution date, the Net WAC for that distribution date. For the Class A-1, Class A-2 and Class A-3 Certificates and any distribution date, the lesser of (i) the Net WAC for that distribution date and (ii) [____]% per annum. For the Class A-IO Certificates and any distribution date, a per annum rate equal to the excess, if any, of the Net WAC for that distribution date over [____]%.

 

Certificate Principal Amountmeans, for any certificate (other than the Class A-IO, Class R and Class LT-R Certificates) and any distribution date, the maximum specified dollar amount of principal to which the holder of the certificate is then entitled, that amount being equal to the initial principal amount set forth on the face of the certificate, as reduced by the amount of all principal distributions previously made with respect to that certificate, the principal portion of any Realized Losses previously allocated to that certificate and any Certificate Writedown Amount previously allocated to that certificate; provided, however, that on any distribution date on which a Subsequent Recovery is distributed, the Certificate Principal Amount of any certificate then outstanding to which a Certificate Writedown Amount or Realized Loss amount has been applied will be increased, sequentially in order of seniority, by an amount equal to the lesser of (i) the principal portion of any Certificate Writedown Amount or Realized Loss amount previously allocated to that certificate to the extent not previously recovered and (ii) the principal portion of any Subsequent Recovery allocable to such certificate, after application (for this purpose) to more senior classes of certificates, and provided further that on any distribution date on which the aggregate Stated Principal Balance of the mortgage loans exceeds the aggregate of the Certificate Principal Amounts of the certificates, such excess (including any excess attributable to the allocation of Principal Forbearance Amounts) will be allocated to increase the Certificate Principal Amount of any certificate then outstanding to which a Certificate Writedown Amount or Realized Loss amount has previously been allocated, sequentially in order of seniority, up to the principal amount of such Certificate Writedown Amount or Realized Loss to the extent not previously recovered.

 

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Certificate Writedown Amount” means the amount by which the aggregate Certificate Principal Amount of all the certificates (other than the Class A-IO, Class R and Class LT-R Certificates) on any distribution date (after giving effect to distributions of principal and allocations of Realized Losses on that distribution date) exceeds the aggregate Stated Principal Balance of the mortgage loans for the distribution date.

 

Class Notional Amount means, in respect of the Class A-IO Certificates on any distribution date, an amount equal to the aggregate Class Principal Amount of the Class A-1, Class A-2 and Class A-3 Certificates immediately prior to such distribution date.

 

Class Principal Amount means, for each class of certificates on any distribution date, an amount equal to the aggregate Certificate Principal Amounts of the certificates of that class immediately prior to each distribution date.

 

Class Subordination Percentage” means, for any distribution date and each class of subordinate certificates, an amount equal to a fraction (expressed as a percentage), the numerator of which is the Class Principal Amount of that class prior to any distributions of principal or allocations of Realized Losses on that distribution date and the denominator of which is the aggregate of the Class Principal Amounts of all classes of certificates (other than the Class A-IO, Class R and Class LT-R Certificates) prior to any distributions of principal or allocation of Realized Losses on that distribution date.

 

Controlling Holder” means, at any time, the holder of the majority of the Class Principal Amount of the Class B-5 Certificates or, if the Class Principal Amount of the Class B-5 Certificates has been reduced to zero, the holder of the majority of the Class Principal Amount of the Class B-4 Certificates, and may not be the depositor or the seller but may be an affiliate of the sponsor. If the Class Principal Amount of the Class B-4 and Class B-5 Certificates is zero, then there is no longer a Controlling Holder. It is expected that the initial Controlling Holder will be the sponsor or an affiliate of the sponsor, other than the depositor or the seller.

 

Credit Support Depletion Date” means the date on which the aggregate Class Principal Amount of the subordinate certificates has been reduced to zero.

 

Current Interest” means, for each class of certificates on any distribution date, an amount equal to the interest accrued during the related Accrual Period on the related Class Principal Amount prior to any distributions of principal or allocations of Realized Losses on that distribution date (or in the case of the Class A-IO Certificates, the Class Notional Amount immediately prior to that distribution date) at the applicable Certificate Interest Rate.

 

Due Datemeans, with respect to a mortgage loan, the date specified in the related mortgage note on which the monthly scheduled payment of interest and principal (or interest only during the applicable interest-only period following origination with respect to the interest-only mortgage loans) is due, exclusive of any days of grace, which is generally the first day of the calendar month.

 

Due Periodmeans, with respect to any distribution date, the period beginning on the second day of the calendar month preceding the month in which the distribution date occurs and ending on the first day of the calendar month in which that distribution date occurs.

 

Insurance Proceeds” means all proceeds of any insurance policies with respect to the mortgage loans, to the extent such proceeds are not applied to the restoration of the related mortgaged property or released to the related borrower in accordance with the servicer’s normal servicing procedures and excluding insured expenses.

 

Interest Distribution Amountmeans, for each class of certificates on any distribution date, the Current Interest for that class on that distribution date as reduced by each such class’ share of Net Interest Shortfalls, which will be allocated to each class on a pro rata basis based on the amount of Current Interest payable to each such class.

 

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Interest Shortfall” means, as to any class of certificates and any distribution date, the amount by which (i) the Interest Distribution Amount for such class on all prior distribution dates exceeds (ii) amounts distributed in respect of interest to such class on prior distribution dates.

 

Liquidated Mortgage Loanmeans a defaulted mortgage loan as to which the servicer has determined that all recoverable Liquidation Proceeds and Insurance Proceeds have been received.

 

Liquidation Proceeds” means all cash amounts received in connection with the liquidation of defaulted mortgage loans, by foreclosure or otherwise, including net proceeds from any REO Property or amounts received in connection with a condemnation or partial release of a mortgaged property.

 

Net Interest Shortfall” means, with respect to the mortgage loans and any distribution date, the sum of (i) any Net Prepayment Interest Shortfalls for that distribution date and (ii) the amount of interest that would otherwise have been received with respect to any mortgage loan that was subject to a reduction in the amount of monthly interest payment on a mortgage loan pursuant to the Relief Act or similar state or local law.

 

Net Mortgage Rate” means, respect to any mortgage loan and any distribution date, the related mortgage rate as of the Due Date in the month preceding the month of such distribution date, reduced by the Aggregate Expense Rate.

 

Net Prepayment Interest Shortfallmeans, with respect to a mortgage loan and any distribution date, the amount by which a Prepayment Interest Shortfall for the related Due Period exceeds the amount that a servicer, the servicing administrator or the master servicer is obligated to remit pursuant to the related servicing agreement and/or the pooling and servicing agreement to cover such shortfall for such Due Period.

 

Net WAC” means, for any distribution date, the weighted average of the Net Mortgage Rates of the mortgage loans as of the first day of the related Due Period, weighted on the basis of their Stated Principal Balances.

 

Original Subordinate Class Principal Amount” means the aggregate Class Principal Amount of the subordinate certificates as of the closing date.

 

Prepayment Interest Shortfallmeans, with respect to a mortgage loan and any distribution date, the amount by which interest paid by a borrower in connection with a prepayment of principal on a mortgage loan is less than one month’s interest at the related mortgage rate on the Stated Principal Balance of that mortgage loan as of the preceding distribution date.

 

Prepayment Period” means, for any distribution date, the calendar month preceding the month of that distribution date.

 

Principal Forbearance Amountmeans, with respect to a mortgage loan that was the subject of a servicing modification, the amount of principal of the mortgage loan that has been deferred and that does not accrue interest.

 

Realized Loss” means (a) with respect to each Liquidated Mortgage Loan, an amount (not less than zero or more than the Stated Principal Balance of the mortgage loan plus accrued interest) as of the date of such liquidation, equal to (i) the unpaid principal balance of the Liquidated Mortgage Loan as of the date of such liquidation, plus (ii) interest at the Net Mortgage Rate from the Due Date as to which interest was last paid by the borrower up to the Due Date in the month in which Liquidation Proceeds are required to be distributed on the Stated Principal Balance of such Liquidated Mortgage Loan from time to time, minus (iii) the net Liquidation Proceeds received during the month in which such liquidation occurred, to the extent not previously applied as recoveries of interest at the Net Mortgage Rate and to principal of the Liquidated Mortgage Loan, (b) the amount by which, in the event of bankruptcy of a borrower, a bankruptcy court reduces the secured debt to the value of the related mortgaged property, (c) with respect to a mortgage loan that has been the subject of a servicing modification, any principal due on the mortgage

 

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loan that has been written off by the servicer and any Principal Forbearance Amount or (d) with respect to each Class of Certificates, the amount by which the related Class Principal Amount is reduced as a result of clauses (a), (b) or (c) above.

 

REMIC Provisions” means the provisions of the federal income tax law relating to real estate mortgage investment conduits, which appear at sections 860A through 860G of the Code, and related provisions, and regulations, including proposed regulations and rulings, and administrative pronouncements promulgated thereunder, as the foregoing may be in effect from time to time.

 

REO Property” means a mortgaged property acquired by the trust fund through foreclosure or deed-in-lieu of foreclosure in connection with a defaulted mortgage loan or otherwise treated as having been acquired pursuant to the REMIC Provisions.

 

Senior Percentage” means, for any distribution date, the percentage equivalent of a fraction, the numerator of which is the aggregate Class Principal Amount of the Class A-1, Class A-2 and Class A-3 Certificates prior to any distributions of principal or allocations of Realized Losses on such distribution date and the denominator of which is the aggregate Stated Principal Balance of all of the mortgage loans as of the preceding distribution date.

 

Senior Prepayment Percentage” means, for any distribution date occurring before the distribution date in April 2017, 100%. For any distribution date in or after April 2017, Senior Prepayment Percentage means the following:

 

·for any distribution date occurring in or after April 2017 to and including March 2018, the related Senior Percentage plus 70% of the related Subordinate Percentage for that date;

 

·for any distribution date occurring in or after April 2018 to and including March 2019, the related Senior Percentage plus 60% of the related Subordinate Percentage for that date;

 

·for any distribution date occurring in or after April 2019 to and including March 2020, the related Senior Percentage plus 40% of the related Subordinate Percentage for that date;

 

·for any distribution date occurring in or after April 2020 to and including March 2021, the related Senior Percentage plus 20% of the related Subordinate Percentage for that date; and

 

·for any distribution date occurring in April 2021 and thereafter, the related Senior Percentage for that date;

 

provided, however, that there will be no reduction in the Senior Prepayment Percentage (other than as a result of a reduction of the Senior Percentage) on any distribution date unless the Step-Down Test is satisfied; and provided, further, that if on any distribution date in or after the distribution date in April 2017, the Senior Percentage exceeds the initial Senior Percentage, the Senior Prepayment Percentage for that distribution date will again equal 100%.

 

In addition, if on any distribution date the allocation to the senior certificates then entitled to distributions of principal of full and partial principal prepayments and other amounts in the percentage required above would reduce the aggregate of the Class Principal Amounts of those certificates to below zero, the Senior Prepayment Percentage for that distribution date will be limited to the percentage necessary to reduce the Class Principal Amount to zero.

 

Senior Principal Distribution Amount” has the meaning set forth under “Description of the Certificates—Distributions of Principal—Senior Principal Distribution Amount.

 

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Servicer Remittance Date” means the 18th of any month, or if such 18th day is not a business day, the first business day immediately following that 18th day.

 

Stated Principal Balance” means, for a mortgage loan at any date of determination, the unpaid principal balance of the mortgage loan as of the most recent Due Date as determined by the amortization schedule for the mortgage loan at the time relating thereto (before any adjustment to that amortization schedule by reason of any moratorium or similar waiver or grace period) after giving effect to any previous servicing modification, principal prepayments and related Liquidation Proceeds allocable to principal and to the payment of principal due on such Due Date (but not unscheduled principal prepayments received on such Due Date) and irrespective of any delinquency in payment by the related borrower. For the avoidance of doubt, the Stated Principal Balance of any mortgage loan that has been prepaid in full or has become a Liquidated Mortgage Loan during the related Prepayment Period will be zero.

 

Step-Down Test” means, as to any distribution date, the test that will be satisfied if both of the following conditions are met: first, the outstanding principal balance of all mortgage loans delinquent 60 days or more (including mortgage loans in foreclosure, REO Property or bankruptcy status) and all mortgage loans subject to a servicing modification within the 12 months prior to that distribution date, averaged over the preceding six-month period, as a percentage of the aggregate Class Principal Amounts on such distribution date (without giving effect to any payments on such distribution date) of the subordinate certificates, does not equal or exceed 50%; and second, cumulative Realized Losses on the mortgage loans do not exceed:

 

·for each distribution date occurring in the period from April 2017 to and including March 2018, 30% of the Original Subordinate Class Principal Amount;

 

·for each distribution date occurring in the period from April 2018 to and including March 2019, 35% of the Original Subordinate Class Principal Amount;

 

·for each distribution date occurring in the period from April 2019 to and including March 2020, 40% of the Original Subordinate Class Principal Amount;

 

·for each distribution date occurring in the period from April 2020 to and including March 2021, 45% of the Original Subordinate Class Principal Amount; and

 

·for the distribution date in April 2021 and thereafter, 50% of the Original Subordinate Class Principal Amount.

 

Subordinate Class Percentage” means, with respect to any distribution date and any class of subordinate certificates, the percentage equivalent of a fraction, the numerator of which is the Class Principal Amount of such class on such distribution date and the denominator of which is the aggregate of the Class Principal Amounts of all classes of subordinate certificates on such distribution date.

 

Subordinate Percentage” means, with respect to any distribution date, an amount equal to the difference between 100% and the Senior Percentage on that distribution date. The initial Subordinate Percentage will be approximately 7.15%.

 

Subordinate Prepayment Percentage” means, with respect to any distribution date, the difference between 100% and the Senior Prepayment Percentage on that distribution date.

 

Subordinate Principal Distribution Amount” has the meaning set forth under “Description of the Certificates—Distributions of Principal—Subordinate Principal Distribution Amount.

 

Subsequent Recovery” means any amount recovered by a servicer (i) with respect to a Liquidated Mortgage Loan (after reimbursement of any unreimbursed advances or expenses relating to such Liquidated Mortgage Loan as well as any previously Liquidated Mortgage Loans) with respect to which a

 

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Realized Loss was incurred after the liquidation or disposition of such mortgage loan or (ii) as a Principal Forbearance Amount.

 

Substitution Amount” means, for any month in which an originator or the seller substitutes one or more qualified substitute mortgage loans for one or more deleted mortgage loans as a result of a breach of a representation or warranty with respect to a mortgage loan, the amount by which the aggregate purchase price of all of the deleted mortgage loans exceeds the aggregate Stated Principal Balance of the qualified substitute mortgage loans, together with one month’s interest at the Net Mortgage Rate.

 

Available Distribution Amount

 

Distributions on the certificates will be made by the securities administrator on each distribution date, which will be the 25th day of each month, or if such day is not a business day, on the first business day thereafter commencing in April 2012, to the persons in whose names such certificates are registered on the applicable record date. For this purpose, a “business day” is any day other than (i) a Saturday or Sunday, (ii) a legal holiday in the State of New York, the State of Maryland, the State of Minnesota, the State of Missouri or the State of California, (iii) a day on which banks in the State of New York, the State of Maryland, the State of Minnesota, the State of Missouri or the State of California are authorized or obligated by law or executive order to be closed or (iv) a day on which the New York Stock Exchange or the Federal Reserve Bank of New York is closed.

 

Payments on each distribution date will be made by check mailed to the address of the holder of the certificate entitled thereto as it appears on the applicable certificate register or, in the case of a certificateholder who holds 100% of the Class R Certificate or the Class LT-R Certificate or who holds certificates with an aggregate initial Certificate Principal Amount of $1,000,000 or more, by wire transfer in immediately available funds to the account of such certificateholder at a bank or other depository institution having appropriate wire transfer facilities. However, the final payment in retirement of the certificates will be made only upon presentment and surrender of the certificates at the corporate trust office of the securities administrator. See “— Book Entry Certificates” above for the method of payment to beneficial owners of Book-Entry Certificates.

 

Distributions will be made on each distribution date from, and to the extent of, the Available Distribution Amount as described under “—Priority of Distributions and Allocation of Shortfalls” below.

 

Distributions of Interest

 

General. The Certificate Interest Rate for each class of certificates for each distribution date is described in the definition of Certificate Interest Rate in this prospectus supplement. On each distribution date, to the extent of funds available therefor, each class of certificates will be entitled to receive Current Interest for such date and class, as reduced by that class’s share of Net Interest Shortfalls.

 

Net Interest Shortfalls for any distribution date will be allocated among all classes of senior certificates and all classes of subordinate certificates proportionately based on Current Interest otherwise distributable on each class on such distribution date.

 

If on a particular distribution date there is an Interest Shortfall, interest will be distributed on each certificate of equal priority within such classes of certificates based on the pro rata amount of interest it would otherwise have been entitled to receive in the absence of such shortfall. Any unpaid interest amount on a class of certificates will be carried forward and added to the amount which holders of those classes of certificates will be entitled to receive on the next distribution date. An Interest Shortfall could occur, for example, if losses realized on the mortgage loans were exceptionally high or were concentrated in a particular month. Any unpaid interest amount so carried forward will not bear interest.

 

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 Distributions of Principal

 

General. All payments and other amounts received in respect of principal of the mortgage loans will be allocated between the senior certificates (other than the Class A-IO Certificates in respect of principal payments) and the subordinate certificates as described below. On each distribution date, the senior certificates will be entitled to the Senior Principal Distribution Amount and the subordinate certificates will be entitled to the Subordinate Principal Distribution Amount.

 

Senior Principal Distribution Amount. On each distribution date, the Available Distribution Amount remaining after payment of interest with respect to the senior certificates, up to the amount of the Senior Principal Distribution Amount for such distribution date, will be distributed as principal to the Class A-1, Class A-2 and Class A-3 Certificates.

 

The “Senior Principal Distribution Amount” for any distribution date will equal the sum of:

 

(1)        the product of (a) the Senior Percentage and (b) the principal portion of the scheduled payment due on each mortgage loan on the related Due Date, whether or not received;

 

(2)        the product of (a) the Senior Prepayment Percentage and (b) each of the following amounts: (i) the principal portion of each full and partial principal prepayment made by a borrower on a mortgage loan during the related Prepayment Period; (ii) each other unscheduled collection, including Subsequent Recoveries, Insurance Proceeds and net Liquidation Proceeds (other than with respect to any mortgage loan that was finally liquidated during the related Prepayment Period) representing or allocable to recoveries of principal of the mortgage loans received during the related Prepayment Period; (iii) the principal portion of the purchase price of each mortgage loan purchased by an originator or seller due to a material breach of a representation and warranty with respect to such mortgage loan or, in the case of a permitted substitution of a defective mortgage loan, the amount representing any Substitution Amount in connection with any such replaced mortgage loan included in the Available Distribution Amount for such distribution date; and (iv) the principal portion of the purchase price for mortgage loans paid by the master servicer in exercising its right to terminate the trust fund;

 

(3)        with respect to each mortgage loan that became a Liquidated Mortgage Loan during the related Prepayment Period, the lesser of (a) the net Liquidation Proceeds allocable to principal and (b) the product of (i) the Senior Prepayment Percentage for that distribution date and (ii) the remaining principal balance of the mortgage loan at the time of liquidation; and

 

(4)        any amounts described in clauses (1) through (3) above that remain unpaid with respect to the senior certificates from prior distribution dates.

 

If on any distribution date the allocation to the Class A-1, Class A-2 and Class A-3 Certificates of full and partial principal prepayments and other amounts in the percentage required above would reduce the aggregate Class Principal Amount of such certificates below zero, the distribution to such classes of certificates of the Senior Prepayment Percentage of those amounts for such distribution date will be limited to the percentage necessary to reduce the aggregate Class Principal Amount to zero.

 

In addition, until the aggregate Class Principal Amount of the Class A-1, Class A-2 and Class A-3 Certificates is reduced to zero, if on any distribution date the aggregate of the Class Principal Amounts of the subordinate certificates is less than or equal to 1.25% of the Stated Principal Balance of the mortgage loans as of the closing date, the Senior Principal Distribution Amount for such distribution date and each succeeding distribution date will include all principal collections on the mortgage loans distributable on that distribution date, and the Subordinate Principal Distribution Amount will be zero.

 

In addition, until the aggregate Class Principal Amount of the Class A-1, Class A-2 and Class A-3 Certificates is reduced to zero, if on any distribution date, the Subordinate Percentage for such distribution date is less than 7.15%, the Senior Principal Distribution Amount for such distribution date will

 

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include all principal collections on the mortgage loans distributable on that distribution date, and the Subordinate Principal Distribution Amount will be zero.

 

Subordinate Principal Distribution Amount. To the extent funds are available, and except as provided in the last four paragraphs under the heading “—Subordinate Principal Distribution Amount,” each class of subordinate certificates will be entitled to receive, on each distribution date, its pro rata share of the “Subordinate Principal Distribution Amount” for that date. Distributions of principal with respect to the subordinate certificates will be made on each distribution date in the order of their numerical class designations, beginning with the Class B-1 Certificates. See “— Priority of Distributions and Allocation of Shortfalls.

 

The “Subordinate Principal Distribution Amount” for each distribution date is equal to the sum of:

 

(1) the product of (a) the Subordinate Percentage and (b) the principal portion of each scheduled payment on each mortgage loan due during the related Due Period, whether or not received;

 

(2) the product of (a) the Subordinate Prepayment Percentage and (b) each of the following amounts: (i) the principal portion of each full and partial principal prepayment made by a borrower on a mortgage loan during the related Prepayment Period, (ii) each other unscheduled collection, including Subsequent Recoveries, Insurance Proceeds and net Liquidation Proceeds (other than with respect to any mortgage loan that was finally liquidated during the related Prepayment Period), representing or allocable to recoveries of principal of mortgage loans received during the related Prepayment Period; (iii) the principal portion of the purchase price of each mortgage loan that was purchased by an originator or seller due to a material breach of a representation and warranty with respect to such mortgage loan or, in the case of a permitted substitution of a defective mortgage loan, the amount representing any Substitution Amount in connection with any such replaced mortgage loan included in the Available Distribution Amount for such distribution date; and (iv) the principal portion of the purchase price for mortgage loans paid by the master servicer in exercising its right to terminate the trust fund;

 

(3) with respect to unscheduled recoveries allocable to principal of any mortgage loan that was finally liquidated during the related Prepayment Period, the related net Liquidation Proceeds allocable to principal, to the extent not distributed pursuant to clause (3) of the definition of Senior Principal Distribution Amount); and

 

(4) any amounts described in clauses (1) through (3) for any previous distribution date that remain unpaid.

 

Notwithstanding the above, with respect to any class of subordinate certificates (other than the Class B-1 Certificates), if on any distribution date the sum of the Class Subordination Percentage of such class and the aggregate Class Subordination Percentages of all classes of subordinate certificates which have higher numerical class designations than that class is less than the Applicable Credit Support Percentage for that class on the closing date, no distribution of principal will be made to any such classes on such distribution date. Instead, the Subordinate Principal Distribution Amount on that distribution date will be allocated among the more senior classes of subordinate certificates, pro rata, based upon their respective Class Principal Amounts, and principal and interest will be distributed in the order described below under “— Priority of Distributions and Allocation of Shortfalls.”

 

Notwithstanding the above, with respect to each class of subordinate certificates (other than the Class B-1 Certificates), if on any distribution date the Class Principal Amount of that class and the aggregate of the Class Principal Amounts of all classes of subordinate certificates which have a lower payment priority than that class is less than or equal to 1.25% of the Stated Principal Balance of the mortgage loans as of the closing date, the portion of the Subordinate Principal Distribution Amount otherwise distributable to such class or classes on such distribution date and each succeeding distribution date will be allocated among the subordinate certificates with a higher payment priority then entitled to

 

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principal, pro rata, based on their respective Class Principal Amounts and the excess, if any, will be included in the Senior Principal Distribution Amount for such distribution date.

 

In addition, until the aggregate Class Principal Amount of the Class A-1, Class A-2 and Class A-3 Certificates is reduced to zero, if on any distribution date the aggregate of the Class Principal Amounts of the subordinate certificates is less than or equal to 1.25% of the Stated Principal Balance of the mortgage loans as of the closing date, the Senior Principal Distribution Amount for such distribution date and each succeeding distribution date will include all principal collections on the mortgage loans distributable on that distribution date, and the Subordinate Principal Distribution Amount will be zero.

 

In addition, until the aggregate Class Principal Amount of the Class A-1, Class A-2 and Class A-3 Certificates is reduced to zero, if on any distribution date, the Subordinate Percentage for such distribution date is less than 7.15%, the Senior Principal Distribution Amount for such distribution date will include all principal collections on the mortgage loans distributable on that distribution date, and the Subordinate Principal Distribution Amount will be zero.

 

Priority of Distributions and Allocation of Shortfalls

 

On each distribution date, the Available Distribution Amount for such date will be applied to distributions on the certificates in the following order of priority:

 

  (1)   to the Class A-1, Class A-2, Class A-3 and Class A-IO Certificates, pro rata, such class’ Interest Distribution Amount and any accrued but unpaid Interest Shortfalls;
       
  (2)   to the Class A-1, Class A-2 and Class A-3 Certificates, the Senior Principal Distribution Amount, concurrently as follows:
       
      (a)   to the Class A-1 Certificates, a pro rata portion of the Senior Principal Distribution Amount based upon the aggregate of the Class Principal Amounts of the Class A-1, Class A-2 and Class A-3 Certificates, until its Class Principal Amount has been reduced to zero; and
       
      (b)   to the Class A-2 and Class A-3 Certificates, sequentially in that order, the remaining portion of the Senior Principal Distribution Amount after the allocation to the Class A-1 Certificates, until their respective Class Principal Amounts have been reduced to zero;
       
  (3)   to the Class B-1 Certificates, the Interest Distribution Amount for such date and class and any accrued but unpaid Interest Shortfalls for such date and class;
       
  (4)   to the Class B-1 Certificates, such class’ Subordinate Class Percentage of the Subordinate Principal Distribution Amount payable to such class for such date, until its Class Principal Amount has been reduced to zero;
       
  (5)   to the Class B-2 Certificates, the Interest Distribution Amount for such date and class and any accrued but unpaid Interest Shortfalls for such date and class;
       
  (6)   to the Class B-2 Certificates, such class’ Subordinate Class Percentage of the Subordinate Principal Distribution Amount payable to such class for such date, until its Class Principal Amount has been reduced to zero;
       
  (7)   to the Class B-3 Certificates, the Interest Distribution Amount for such date and class and any accrued but unpaid Interest Shortfalls for such date and class;
       
  (8)   to the Class B-3 Certificates, such class’ Subordinate Class Percentage of the Subordinate Principal Distribution Amount payable to such class for such date, until its Class Principal Amount has been reduced to zero;
             

 

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  (9)   to the Class B-4 Certificates, the Interest Distribution Amount for such date and class and any accrued but unpaid Interest Shortfalls for such date and class;
       
  (10)   to the Class B-4 Certificates, such class’ Subordinate Class Percentage of the Subordinate Principal Distribution Amount payable to such class for such date, until its Class Principal Amount has been reduced to zero;
       
  (11)   to the Class B-5 Certificates, the Interest Distribution Amount for such date and class and any accrued but unpaid Interest Shortfalls for such date and class;
       
  (12)   to the Class B-5 Certificates, such class’ Subordinate Class Percentage of the Subordinate Principal Distribution Amount payable to such class for such date, until its Class Principal Amount has been reduced to zero;
       
  (13)   to the Class R and Class LT-R Certificates, any remaining amounts allocated between such classes in the manner specified in the pooling and servicing agreement (with any such amounts representing net gain resulting from the sale of any REO Properties or other Liquidation Proceeds allocated solely to the Class LT-R Certificate).

 

Notwithstanding the above, on any distribution date on and after the Credit Support Depletion Date, the Senior Principal Distribution Amount will be distributed to the Class A-1, Class A-2 and Class A-3 Certificates, pro rata in accordance with their respective Class Principal Amounts

 

Subordination of Payments to the Subordinate Certificates

 

The rights of the holders of the subordinate certificates to receive payments with respect to the mortgage loans will be subordinated to the rights of the holders of the senior certificates and the rights of the holders of each class of subordinate certificates (other than the Class B-1 Certificates) to receive such payments will be further subordinated to the rights of the class or classes of subordinate certificates with lower numerical class designations, in each case only to the extent described in this prospectus supplement. The subordination of the subordinate certificates to the senior certificates and the further subordination among the subordinate certificates is intended to provide the certificateholders having higher relative payment priority with protection against Realized Losses and shortfalls in the Available Distribution Amount.

 

Allocation of Realized Losses

 

If a Realized Loss occurs on the mortgage loans (including a servicing modification resulting in a reduction of the outstanding principal amount of such mortgage loan or a principal forbearance), then, on each distribution date, the principal portion of that Realized Loss will be allocated first, to reduce the Class Principal Amount of each class of subordinate certificates, in inverse order of priority, until the Class Principal Amount thereof has been reduced to zero (that is, such Realized Losses will be allocated to the Class B-5 Certificates while those certificates are outstanding, then to the Class B-4 Certificates while those certificates are outstanding, then to the Class B-3 Certificates while those certificates are still outstanding, and so forth) and second, to the senior certificates (other than the Class A-IO Certificates), pro rata, until their respective Class Principal Amounts have been reduced to zero. In determining whether a Realized Loss is a loss of principal or of interest, Liquidation Proceeds and other recoveries on a mortgage loan will be applied first to outstanding expenses incurred with respect to such mortgage loan, then to accrued, unpaid interest, and finally to principal.

 

The Class Principal Amount of the lowest ranking class of subordinate certificates then outstanding will be reduced by the Certificate Writedown Amount and if no subordinate certificates are then outstanding, the Class Principal Amounts of the Class A-1, Class A-2 and Class A-3 Certificates will be reduced, pro rata, in accordance with their respective Class Principal Amounts, by the Certificate Writedown Amount.

 

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Any class of certificates whose Class Principal Amount has been reduced to zero due to the allocation of Realized Losses will nonetheless remain outstanding under the pooling and servicing agreement and will continue to be entitled to receive Subsequent Recoveries until the termination of the trust fund; provided that any such class of certificates will not have any voting rights with respect to matters under the pooling and servicing agreement requiring or permitting actions to be taken by the certificateholders.

 

Subsequent Recoveries will be distributed to the certificates still outstanding, in accordance with the priorities described under “—Priority of Distribution and Allocation of Shortfalls,” and the Class Principal Amount of each class of certificates then outstanding that has been reduced due to application of a Certificate Writedown Amount or Realized Loss will be increased, pro rata in accordance with their respective Class Principal Amounts with respect to the senior certificates, and sequentially in order of seniority with respect to the subordinate certificates, by the lesser of (i) the amount of such Subsequent Recovery (reduced by any amounts applied for this purpose to senior ranking certificates) and (ii) the Realized Loss amount previously allocated to such class. Any Subsequent Recovery that is received during a Prepayment Period will be distributed together with the Available Distribution Amount for the related distribution date.

 

Final Scheduled Distribution Date

 

The final scheduled distribution date for each class of certificates is the distribution date in the month immediately following the latest maturity date of any mortgage loan as of the cut-off date. The final scheduled distribution date of each class of certificates is the distribution date in April 2042. The actual final distribution date for any class may be earlier or later, and could be substantially earlier or later, than the final scheduled distribution date. The servicer will be permitted to modify mortgage loans to extend the maturity date beyond that date.

 

Optional Purchase of the Mortgage Loans

 

When the total Stated Principal Balance of the mortgage loans is less than 10% of the total Stated Principal Balance of the mortgage loans as of the cut-off date, the master servicer will have the option to purchase the mortgage loans, any REO Property and any other property remaining in the trust fund other than any servicing rights held by the servicers or the servicing administrator at a price equal to 100% of the unpaid principal balance of each mortgage loan (or, if less than such unpaid principal balance in the case of any REO Property, the fair market value of any REO Property) on the day of repurchase, plus accrued interest thereon, to, but not including, the first day of the month in which the repurchase price is distributed; provided that the master servicer has provided not less than 30 days prior written notice to the securities administrator. Distributions on the certificates relating to any optional termination will be paid first to reimburse the trustee, the depositor, the servicers, the servicing administrator, the master servicer, the securities administrator and the custodian for any advances, accrued and unpaid servicing fees, servicing administrator fees or master servicing fees or other amounts with respect to the mortgage loans reimbursable to such parties, and then to the certificateholders in the order of priority set forth above under “—Priority of Distributions and Allocation of Shortfalls.” The proceeds of any such distribution may not be sufficient to distribute the full amount of principal and accrued and unpaid interest on each class of certificates to the extent of any such unpaid fees and expenses and if the purchase price is based in part on the fair market value of any REO Property and the fair market value is less than 100% of the unpaid principal balance of the related mortgage loan. If such option is exercised, the trust fund will be terminated. 

 

Credit Enhancement

 

Credit enhancement for the senior certificates will be provided by the subordinate certificates.

 

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THE TRUSTEE

 

U.S. Bank National Association is the trustee under the pooling and servicing agreement.

 

U.S. Bank National Association, or U.S. Bank, a national banking association, will act as trustee under the pooling and servicing agreement. 

 

U.S. Bancorp, with total assets exceeding $330 billion as of December 31, 2011, is the parent company of U.S. Bank, the fifth largest commercial bank in the United States. As of December 31, 2011, U.S. Bancorp served approximately 17 million customers and operated over 3,000 branch offices in 25 states. A network of specialized U.S. Bancorp offices across the nation provides a comprehensive line of banking, brokerage, insurance, investment, mortgage, trust and payment services products to consumers, businesses, governments and institutions.

 

U.S. Bank has one of the largest corporate trust businesses in the country with office locations in 48 Domestic and 3 International cities.The Pooling and Servicing Agreement will be administered from U.S. Bank’s corporate trust office located at 60 Livingston Avenue, EP-MN-WS3D, St. Paul, Minnesota 55107-1419.

 

U.S. Bank has provided corporate trust services since 1924.As of December 31, 2011, U.S. Bank was acting as trustee with respect to over 88,000 issuances of securities with an aggregate outstanding principal balance of over $3.5 trillion. This portfolio includes corporate and municipal bonds, mortgage-backed and asset-backed securities and collateralized debt obligations.

 

As of December 31, 2011, U.S. Bank (and its affiliate U.S. Bank Trust National Association) was acting as trustee on 1,064 issuances of prime mortgage-backed securities with an outstanding aggregate principal balance of approximately $235,494,000,000.

 

At the date of this prospectus supplement, there are no legal proceedings pending, or to the best of the trustee’s knowledge, contemplated by governmental authorities, against the trustee or any property of the trustee that would be material to holders of the certificates issued by the issuing entity.

 

THE ISSUING ENTITY

 

On the closing date, and until the termination of the issuing entity pursuant to the pooling and servicing agreement, Sequoia Mortgage Trust 2012-2, the issuing entity, will be a common law trust formed under the laws of the State of New York. The issuing entity will be created under the pooling and servicing agreement by the depositor for the sole purpose of issuing the certificates and its assets will consist of the trust fund.

 

On the closing date, the assets included in the trust fund will be the only assets of the issuing entity. The issuing entity will not have any liabilities as of the closing date, other than as provided in the pooling and servicing agreement. The fiscal year end of the issuing entity will be December 31 of each year.

 

The issuing entity will not have any employees, officers or directors. The trustee, the master servicer, the securities administrator, the depositor, the servicers and the custodian will act on behalf of the issuing entity, and may only perform those actions on behalf of the issuing entity that are specified in the pooling and servicing agreement, the servicing agreements or the custodial agreement, as set forth in this prospectus supplement.

 

The trustee, on behalf of the issuing entity, is only permitted to take such actions as are specifically provided in the pooling and servicing agreement. Under the pooling and servicing agreement, the trustee on behalf of the issuing entity will not have the power to issue additional certificates representing interests in the issuing entity, borrow money on behalf of the issuing entity or make loans from the assets of the issuing entity to any person or entity without the amendment of the pooling and

 

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servicing agreement by certificateholders and the other parties thereof as described in the accompanying prospectus under “The Agreements—The Pooling and Servicing Agreement—Amendment.”

 

If the assets of the issuing entity are insufficient to pay the certificateholders all principal and interest owed, holders of some or all classes of certificates will not receive their expected payments of interest and principal and will suffer a loss. The risk of loss to holders of subordinate certificates is greater than to holders of senior certificates. See “Risk Factors— Potential Inadequacy of Credit Enhancement” in this prospectus supplement. The issuing entity, as a common law trust, may not be eligible to be a debtor in a bankruptcy proceeding. In the event of a bankruptcy of the seller, the depositor or an originator, it is not anticipated that the issuing entity would become part of the bankruptcy estate of such entity.

 

FEES AND EXPENSES OF THE ISSUING ENTITY

 

In consideration of their duties on behalf of the trust fund, the servicers, the master servicer, the securities administrator, the trustee and the custodian will receive from the assets of the issuing entity certain fees as set forth in the following table:

 

 Fee Payable
to:
 

Frequency

of Payment:

 

 

Amount of Fee:

 

How and When

Fee Is Payable:

             
Servicers   Monthly  

A monthly fee paid to each servicer, from amounts that would otherwise be distributed to certificateholders in respect of interest, calculated on the Stated Principal Balance of each mortgage loan serviced by that servicer as of the first day of the related Due Period, at a per annum rate of 0.25% for all servicers other than Cenlar FSB plus all income earned on amounts on deposit in the custodial account maintained by that servicer. Each servicer will also be entitled to a fee of 1.5% of the sale price of an REO Property (or, in the case of certain loans serviced by First Republic Bank, the lesser of 1.5% of such sale price or $1,200) in accordance with the applicable servicing agreement. With respect to mortgage loans serviced by First Republic Bank, the servicing fee rate will be increased by the amount of any increase in the mortgage interest rate for any mortgage loan pursuant to the terms of the related mortgage note due to the termination of an automatic debit or direct deposit account.

 

Cenlar FSB will receive monthly servicing fees in an amount ranging from $4.30 to $50.25 per

  Withdrawn from each custodial account in respect of each mortgage loan before distribution of any amounts to certificateholders.

 

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 Fee Payable
to:
 

Frequency

of Payment:

 

 

Amount of Fee:

 

How and When

Fee Is Payable:

        loan, subject to certain minimum monthly servicing fee requirements.  Such fees vary on a loan-by-loan basis generally depending upon whether the loan is a fixed rate loan or an adjustable rate loan and the delinquency status of the loan.  In no event will the aggregate monthly servicing and servicing administrator fees payable to Cenlar FSB, as servicer, and RRAC, as servicing administrator, exceed 0.25% per annum of the stated principal balance of the mortgage loans serviced by Cenlar FSB.    
             
Servicing Administrator   Monthly  

A monthly fee paid to the servicing administrator, from amounts that would otherwise be distributed to certificateholders in respect of interest, calculated on the Stated Principal Balance of each mortgage loan serviced by Cenlar FSB as of the first day of the related Due Period, at a per annum rate of 0.25% less the servicing fee payable to Cenlar FSB.

  Withdrawn from the custodial account in respect of each mortgage loan serviced by Cenlar FSB before distribution of any amounts to certificateholders.
             
 Master Servicer   Monthly   

A monthly fee paid to the master servicer, from amounts that would otherwise be distributed to certificateholders in respect of interest, calculated at a rate of 0.0275% per annum on the Stated Principal Balance of the mortgage loans as of the first day of the related Due Period.

  Retained by the master servicer from the distribution account before distribution of any amounts to certificateholders.
             
Securities Administrator   Monthly  

A monthly fee paid to the securities administrator, from the master servicing fee.

  Paid by the master servicer from the master servicing fee.
             
    Monthly   All investment earnings on amounts on deposit in the distribution account.  

Retained by the securities administrator from the distribution account before distribution of any amounts to certificateholders.

             
Trustee   Annually   A fixed annual fee of $6,000, in addition to an initial acceptance fee of $6,000.   Paid by the master servicer from the master servicing fee pursuant to a separate agreement between the master servicer and the trustee.
             
Custodian   Monthly   A variable fee (depending on   Paid by the master servicer from

 

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 Fee Payable
to:
 

Frequency

of Payment:

 

 

Amount of Fee:

 

How and When

Fee Is Payable:

        services provided by the custodian), payable monthly from the master servicing fee.   the master servicing fee.

 

The custodian’s fees set forth in the table above may not be increased without amendment of the custodial agreement. The servicing fees set forth in the table above may not be increased without amendment of the servicing agreement as described under “ The Agreements— Mortgage Loan Servicing— Amendment of the Servicing Agreements and Pooling and Servicing Agreement” in this prospectus supplement, provided that under certain circumstances if the master servicer is required to engage a successor servicer, the servicing fee may be increased as necessary to engage a successor servicer. The fees of the master servicer, the securities administrator and the trustee set forth in the table above may not be increased without amendment of the pooling and servicing agreement as described under “The Agreements— Mortgage Loan Servicing— Amendment of the Servicing Agreements and Pooling and Servicing Agreement” in this prospectus supplement. See also “The Agreements – Mortgage Loan Servicing – Servicing Compensation and Payment of Expenses.”

 

Certain expenses of the servicers, the master servicer, the securities administrator, the trustee and the custodian will be reimbursed before distributions are made on the certificates. Amounts payable to the trustee include fees for investigating and enforcing breaches of mortgage loan representations and warranties under certain circumstances. Expenses of the master servicer, the securities administrator, the trustee and the custodian will be reimbursed up to $300,000 annually before distributions of interest and principal are made on the certificates (subject, in the case of the trustee, to an aggregate limit of $100,000 annually).

 

SPONSOR MATERIAL LEGAL PROCEEDINGS

 

At the date of this prospectus supplement, other than litigation in the ordinary course of business, such as litigation involving foreclosures or other exercise of its rights as a creditor, and other than as described below, there were no material pending legal proceedings to which any of the sponsor, the seller, the depositor or the issuing entity was a party or of which any of their property was subject, and, other than as described below, the depositor is not aware of any material pending legal proceedings known to be contemplated by governmental authorities against the sponsor, the seller, the depositor or the issuing entity.

 

On December 23, 2009, the Federal Home Loan Bank of Seattle (the “FHLB-Seattle”) filed a claim in Superior Court for the State of Washington (case number 09-2-46348-4 SEA) against the depositor, Redwood Trust, Inc., Morgan Stanley & Co., and Morgan Stanley Capital I, Inc. (collectively, the “FHLB-Seattle Defendants”). The FHLB-Seattle alleges claims under the Securities Act of Washington (Section 21.20.005, et seq.) and seeks to rescind the purchase of a mortgage pass-through certificate (or, residential mortgage backed securities, “RMBS”) issued as part of the Sequoia Mortgage Trust 2005-4 (“SEMT 2005-4”) securitization transaction and purchased by the FHLB-Seattle. The FHLB-Seattle seeks to collect interest on the original purchase price at the statutory interest rate of 8% per annum from the date of original purchase (net of interest received), as well as attorneys’ fees and costs. On June 10, 2010, the FHLB-Seattle filed an amended complaint. Subsequently, on October 18, 2010, the FHLB-Seattle Defendants filed motions to dismiss the FHLB-Seattle’s complaint. Redwood Trust, Inc. and the depositor additionally moved to dismiss the complaint for lack of personal jurisdiction. The FHLB-Seattle alleges that the FHLB-Seattle Defendants’ offering materials for the SEMT 2005-4 RMBS contained materially untrue statements and omitted material facts about the SEMT 2005-4 RMBS and the credit quality of the mortgage loans that backed the SEMT 2005-4 RMBS. Among other things, the FHLB-Seattle alleges that the FHLB-Seattle Defendants made untrue statements or omissions regarding (1) the loan-to-value ratios of the mortgage loans that backed the SEMT 2005-4 RMBS and the appraisals of the properties that secured them, (2) the occupancy status of those properties, (3) the underwriting standards of

 

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the originators of the mortgage loans that backed the SEMT 2005-4 RMBS, and (4) the ratings assigned to the SEMT 2005-4 RMBS. In a series of rulings issued between June 23, 2011 and August 15, 2011, the Superior Court for the State of Washington dismissed the allegations relating to occupancy status and denied other grounds for dismissal. On July 19, 2011, the court granted Redwood Trust, Inc. and the depositor’s motion to dismiss for lack of personal jurisdiction. The FHLB-Seattle’s claims against the underwriters of this RMBS were not dismissed for lack of personal jurisdiction. Redwood Trust, Inc. and the depositor do not know whether the FHLB-Seattle will appeal or otherwise contest the dismissal, or file a claim in another jurisdiction. The SEMT 2005-4 RMBS that is the subject of the FHLB-Seattle’s claim was issued with an original principal amount of approximately $133 million and, as of December 31, 2011, had a remaining outstanding principal balance of approximately $28.3 million. The depositor and Redwood Trust, Inc. believe that the claims against them in this matter are without merit and intend to defend the action vigorously.

 

On August 18, 2010, the depositor received service of process with respect to a case filed on July 15, 2010 in Superior Court for the State of California in San Francisco (case number CGC-10-501610) by The Charles Schwab Corporation (“Schwab”). In the claim, Schwab is suing the depositor and 26 other named defendants (collectively, the “Schwab Defendants”) in relation to RMBS sold or issued by the Schwab Defendants. With respect to the depositor, Schwab alleges a cause of action of negligent misrepresentation under California state law and seeks unspecified damages and attorneys’ fees and costs with respect to a RMBS issued as part of the SEMT 2005-4 securitization transaction (which is the same securitization transaction at issue in the litigation initiated by the FHLB-Seattle described in the preceding paragraph). Among other things, Schwab alleges that the offering materials for the SEMT 2005-4 RMBS contained materially untrue statements or omissions about the SEMT 2005-4 RMBS and the loans securitized in this securitization transaction, including untrue statements or omissions regarding (1) the loan-to-value ratios of the mortgage loans that backed the SEMT 2005-4 RMBS and the appraisals of the properties that secured them, (2) the occupancy status of those properties, (3) the underwriting standards of the originators of the mortgage loans that backed the SEMT 2005-4 RMBS, and (4) the ratings assigned to the SEMT 2005-4 RMBS. On September 22, 2011, the Schwab Defendants moved to dismiss the complaint, which motions are now pending. The RMBS that is the subject of Schwab’s cause of action was issued with an original principal amount of approximately $14.8 million and, as of December 31, 2011, had a remaining outstanding principal balance of approximately $3.1 million. The depositor believes that the claims against it in this matter are without merit and intends to defend the action vigorously.

 

On October 15, 2010, the Federal Home Loan Bank of Chicago (the “FHLB-Chicago”) filed a claim in the Circuit Court of Cook County, Illinois (case number 10-CH-45033) against the depositor and more than 45 other named defendants (collectively, the “FHLB-Chicago Defendants”) in relation to RMBS sold or issued by the FHLB-Chicago Defendants or by entities controlled by the FHLB-Chicago Defendants. In an amended complaint filed on March 16, 2011, FHLB-Chicago added as defendants Redwood Trust, Inc. and another one of its subsidiaries, RWT Holdings, Inc. With respect to Redwood Trust, Inc. and the depositor, the FHLB-Chicago alleges that the offering materials for two RMBS issued as part of the Sequoia Mortgage Trust 2006-1 (“SEMT 2006-1”) securitization transaction contained untrue and misleading statements and material representations in violation of Illinois Securities Law (815 ILCS Sections 5/12(F)-(H)) and North Carolina Securities Law N.C.G.S.A. §78A-8(2) & §78A-56(a)) and alleges claims of negligent misrepresentations under Illinois common law. On some of the causes of action, the FHLB-Chicago seeks to rescind the purchase of these RMBS and to collect interest on the original purchase price at the statutory interest rate of 10% per annum from the date of original purchase (net of interest received). On one cause of action, the FHLB-Chicago seeks unspecified damages. The FHLB-Chicago also seeks attorneys’ fees and costs. Among other things, the FHLB-Chicago alleges that the offering materials for the SEMT 2006-1 RMBS contained materially untrue statements or omissions regarding the SEMT 2006-1 RMBS and the loans securitized in this securitization transaction, including untrue statements or omissions regarding (1) the loan-to-value ratios the mortgage loans that backed the SEMT 2006-1 RMBS and the appraisals of the properties that secured them, (2) the occupancy status of those properties, (3) the underwriting standards of the originators of the mortgage loans that backed the SEMT 2006-1 RMBS, (4) the ratings assigned to the SEMT 2006-1 RMBS, and (5) the due diligence performed on the mortgage loans that backed the SEMT 2006-1 RMBS. The first of these two SEMT 2006-1 RMBS was issued with an original principal amount of approximately $105 million and, as of December 31, 2011, had a remaining outstanding principal balance of approximately $42.1 million. The

 

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second of these two SEMT 2006-1 RMBS was issued with an original principal amount of approximately $379 million and, as of December 31, 2011, had a remaining outstanding principal balance of approximately $151.7 million. On March 27, 2011, the FHLB-Chicago Defendants moved to dismiss the amended complaint, which motions are now pending. Redwood Trust, Inc, RWT Holdings, Inc. and the depositor believe that the claims against them in this matter are without merit and intend to defend the action vigorously.

 

The business of the sponsor, the depositor, the seller and their affiliates has included, and continues to include, activities relating to the acquisition and securitization of residential mortgage loans. In addition, the business of the sponsor has, in the past, included activities relating to the acquisition and securitization of debt obligations and other assets through the issuance of collateralized debt obligations (commonly referred to as CDO transactions). Because of their involvement in the securitization and CDO businesses, the sponsor, the depositor, the seller and their affiliates could become the subject of litigation relating to these businesses, including additional litigation of the type described above, and could also become the subject of governmental investigations, enforcement actions, or lawsuits and governmental authorities could allege that these entities violated applicable law or regulation in the conduct of their business.

 

In fact, the sponsor and its affiliates have received, and responded to, information requests and subpoenas from two governmental authorities (one by the SEC relating to the sponsor’s CDO business and one by the National Credit Union Administration relating to a residential mortgage securitization conducted by the sponsor and the depositor). It is possible that the sponsor, the depositor, the seller or their affiliates might not be successful in defending or responding to any litigation, governmental investigation or related action and any losses incurred as a result of the resolution of any such action or investigation could have a material adverse effect on the sponsor, the depositor, the seller or their affiliates. In any case, regardless of the merits of any allegation or legal action that may be brought against the sponsor, the depositor, the seller or their affiliates, or of their success in defending against such allegations or legal actions, the costs of defending against any such allegation or legal action may be significant or material and could have a material adverse effect on the sponsor, the depositor, the seller or their affiliates.

 

THE SPONSOR AND THE SELLER AND SERVICING ADMINISTRATOR

 

RWT Holdings, Inc. (“RWT Holdings”) is a Delaware corporation and wholly-owned subsidiary of Redwood Trust, Inc. and is headquartered in Mill Valley, California. RWT Holdings has acquired residential mortgage loans, directly or indirectly, from originators since it was organized in February 1998. RWT Holdings has been a sponsor in the securitization market since 2002. As a sponsor, RWT Holdings acquires, directly or indirectly through its subsidiaries, residential mortgage loans in the secondary mortgage market and initiates the securitization of these loans by having them transferred to the depositor, which ultimately transfers them to the issuing entity for the related securitization.

 

As of December 31, 2011, RWT Holdings has sponsored the securitization of approximately $26.69 billion of residential mortgage loans ($4,077,538,500 in 2002, $6,198,200,700 in 2003, $10,199,107,364 in 2004, $1,440,123,400 in 2005, $1,035,362,200 in 2006, $2,833,909,600 in 2007, $237,838,333 in 2010 and $670,664,551 in 2011). RWT Holdings acquires, directly or indirectly through its subsidiaries, residential mortgage loans secured by first and second liens on one- to four- family residential properties under several loan purchase agreements from mortgage loan originators or sellers nationwide that meet its seller/servicer eligibility requirements. We refer you to “Loan Program—Qualifications of Sellers” in the prospectus for a general description of the characteristics used to determine eligibility of collateral sellers. Prior to acquiring the mortgage loans, RWT Holdings conducts a review of the related mortgage loan seller and of the mortgage loans. We refer you to “Risk Factors—Appraisals May Not Accurately Reflect the Value or Condition of the Mortgaged Property” and “—Pre-offering Review of the Mortgage Loans Underlying the Certificates May Not Reveal Aspects of the Mortgage Loans Which Could Lead to Losses” and “Pre-offering Review of the Mortgage Loans” above for a discussion of the pre-offering review procedures conducted by the sponsor with respect to the mortgage loans. No assurance can be made that the mortgage pool does not contain mortgage loans as to which there may be

 

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breaches of the original representations and warranties or that the mortgage loans will not default for other reasons.

 

During calendar year 2011, no mortgage loans securitized by the sponsor were the subject of a demand to repurchase or replace for breach of the representations and warranties concerning the pool assets contained in the related underlying transaction documents, or any related activity, for all asset-backed securities held by non-affiliates of the sponsor during such calendar year. The most recent Form ABS-15G was filed by the sponsor on February 6, 2012. The sponsor’s CIK number is 0001530239.

 

The seller, Redwood Residential Acquisition Corporation (“RRAC”), is a Delaware corporation and wholly-owned subsidiary of RWT Holdings and Redwood Trust, Inc. and is headquartered in Mill Valley, California. Descriptions of, and references to, RWT Holdings’ acquisition of residential mortgage loans include the acquisition of such loans by RRAC. RRAC was organized in 2009 and commenced its business of acquiring residential mortgage loans for securitization in July 2010. On the closing date, RRAC, as seller, will sell all of its interest in the mortgage loans to the depositor. RWT Holdings and RRAC work in coordination with the underwriters in structuring each securitization transaction. RWT Holdings and RRAC do not currently service mortgage loans but rather contract with third party servicers for servicing of the mortgage loans that they acquire. Third party servicers are assessed based upon the servicing rating and the credit quality of the servicing institution, as well as for their systems and reporting capabilities, review of collection procedures and confirmation of servicers’ ability to provide detailed reporting on the performance of the securitization pool.

 

RRAC will act as servicing administrator with respect to the mortgage loans serviced by Cenlar FSB. As servicing administrator, RRAC’s role is limited to (a) funding servicing advances and advances of delinquent scheduled interest and principal payments for the mortgage loans serviced by Cenlar FSB, unless it determines that such amounts would not be recoverable, (b) paying prepayment interest shortfalls that occur with respect to any mortgage loans serviced by Cenlar FSB, up to the amount of the aggregate of Cenlar FSB’s servicing fee and the servicing administrator fee for such loans for the related month, (c) paying termination fees to Cenlar FSB if RRAC elects to terminate Cenlar FSB as a servicer absent an event of default and appoint a successor, with the consent of the master servicer and (d) having the authority to remove Cenlar FSB as servicer if Cenlar FSB defaults in its servicing obligations and retaining a successor servicer, with the consent of the master servicer. RRAC has not previously acted as servicing administrator with respect to any securitization transactions other than the Sequoia Mortgage Trust 2012-1 securitization transaction.

 

THE DEPOSITOR

 

Sequoia Residential Funding, Inc., a Delaware corporation and indirect wholly-owned subsidiary of Redwood Trust, Inc., was organized in September 1999 and is headquartered in Mill Valley, California. The depositor has been engaged since the end of 2001 in the securitization of mortgage loans of the types described in the accompanying prospectus.  Since 2002, Sequoia Residential Funding, Inc. has been the depositor on 34 securitization deals that have issued approximately $26.1 billion of residential mortgage securities ($1.7 billion in 2002, $10.8 billion in 2003, $8.3 billion in 2004, $0.80 billion in 2005, $0.80 billion in 2006, $2.9 billion in 2007, $0.23 billion in 2010 and $0.67 billion in 2011 and $0.42 billion in 2012). 

 

The certificate of incorporation of the depositor limits its activities to those necessary or convenient to carry out its securitization activities. The depositor will have limited obligations with respect to a series of securities. The depositor will purchase the mortgage loans from the sponsor/seller and on the closing date will sell all of its interest in the mortgage loans to the trustee for the benefit of certificateholders. In addition, the depositor may have certain approval or consent rights as described in this prospectus supplement.

 

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AFFILIATIONS AND RELATED TRANSACTIONS

 

The seller and servicing administrator, the sponsor and the depositor are each wholly-owned subsidiaries of Redwood Trust, Inc. Barclays Capital Inc., the underwriter, is an affiliate of Barclays Bank PLC, from which the depositor purchased some of the mortgage loans as to which First Republic Bank is the originator.

 

There is not currently, and there was not during the past two years, any material business relationship, agreement, arrangement, transaction or understanding that is or was entered into outside the ordinary course of business or is or was on terms other than would be obtained in an arm’s length transaction with an unrelated third party, between (a) any of the seller, the sponsor, the depositor and the issuing entity on the one hand and (b) any of the trustee, any servicer, the custodian, the master servicer or any originator of the mortgage loans on the other hand.

 

THE MASTER SERVICER, THE SECURITIES ADMINISTRATOR, THE CUSTODIAN AND THE SERVICERS

 

First Republic Bank will service approximately 49.31% (by cut-off date stated principal balance) of the mortgage loans. Cenlar FSB will service approximately 38.61% (by cut-off date stated principal balance) of the mortgage loans. PHH Mortgage Corporation (together with First Republic Bank and Cenlar FSB, the “servicers” and each, a “servicer”) will service approximately 12.08% (by cut-off date stated principal balance) of the mortgage loans. The servicers will initially have primary responsibility for servicing the mortgage loans, directly or through subservicers, including, but not limited to, all collection, loan-level reporting obligations, maintenance of escrow accounts, maintenance of insurance and enforcement of foreclosure proceedings with respect to the mortgage loans and related mortgaged properties. The master servicer will supervise the activities of the servicers but will not be responsible for supervising any subservicers. Cenlar FSB is the servicer of mortgage loans originated by PrimeLending, a PlainsCapital Company, Flagstar Capital Markets Corporation and all of the other originators except for First Republic Bank and PHH Mortgage Corporation. With respect to approximately 9.92% of the mortgage loans by stated principal balance as of the cut-off date, the transfer of the servicing of such mortgage loans to Cenlar FSB from the related originators is scheduled to take place on April 1, 2012, after the closing date.

 

PHH Legal Proceedings

 

PHH Mortgage Corporation (“PHH”) is party to various claims and legal proceedings from time to time related to contract disputes and other commercial, employment and tax matters.

 

In January 2012, PHH was notified that the Consumer Financial Protection Bureau (the “CFPB”) had opened an investigation to determine whether PHH’s mortgage insurance premium ceding practices to captive reinsurers comply with the Real Estate Settlement Procedures Act and other laws enforced by the CFPB. The CFPB requested certain related documents and information for review. PHH has provided reinsurance services in exchange for premiums ceded and believe that it has complied with the Real Estate Settlement Procedures Act and other laws. PHH did not provide reinsurance on loans originated after 2009. There can be no assurance whether or not this investigation will result in the imposition of any penalties and fines against PHH.

 

In connection with the heightened focus on foreclosure practices across the mortgage industry in 2010 and 2011, PHH has received inquiries from regulators and attorneys general of certain states as well as from the Committee on Oversight and Government Reform of the U.S. House of Representatives and the U.S. Senate Judiciary Committee, requesting information regarding foreclosure practices, processes and procedures, among other things. Although PHH has not been assessed any material penalties associated with its foreclosure practices through December 31, 2011, it has been assessed compensatory fees for failing to meet foreclosure timelines outlined in the Fannie Mae and Freddie Mac servicing guides. PHH

 

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expects that the higher level of focus on foreclosure practices will result in higher legal and servicing related costs as well as potential regulatory fines and penalties.

 

It is reasonably possible that PHH could experience an increase in foreclosure-related litigation in the future

 

Wells Fargo Bank, N.A

 

Wells Fargo Bank, N.A. (“Wells Fargo Bank”), will act as master servicer and securities administrator under the pooling and servicing agreement. Wells Fargo Bank is a national banking association and a wholly-owned subsidiary of Wells Fargo & Company. A diversified financial services company, Wells Fargo & Company is a U.S. bank holding company with approximately $1.3 trillion in assets and more than 270,000 employees as of September 30, 2011 which provides banking, insurance, trust, mortgage and consumer finance services throughout the United States and internationally. Wells Fargo Bank provides retail and commercial banking services and corporate trust, custody, securities lending, securities transfer, cash management, investment management and other financial and fiduciary services. The depositor, the sponsor, the seller and the servicers may maintain banking and other commercial relationships with Wells Fargo Bank and its affiliates.

 

Wells Fargo Bank maintains principal corporate trust offices located at 9062 Old Annapolis Road, Columbia, Maryland 21045-1951 (among other locations), and its office for certificate transfer services is located at Sixth Street and Marquette Avenue, Minneapolis, Minnesota 55479.

 

Wells Fargo Bank serves or may have served within the past two years as loan file custodian for various mortgage loans owned by the sponsor or an affiliate of the sponsor and anticipates that one or more of those mortgage loans may be included in the assets of the issuing entity. The terms of any custodial agreement under which those services are provided by Wells Fargo Bank are customary for the mortgage-backed securitization industry and provide for the delivery, receipt, review and safekeeping of mortgage loan files.

 

The assessment of compliance with applicable servicing criteria for the twelve months ended December 31, 2011, furnished pursuant to Item 1122 of Regulation AB by the Corporate Trust Services division of Wells Fargo Bank (the “2011 Wells Assessment”), discloses that material instances of noncompliance occurred with respect to the servicing criteria described in Items 1122(d)(3)(i)(B) and 1122(d)(3)(ii) of Regulation AB. Specifically, (a) certain amounts allocated and remitted to investors were not calculated in accordance with the terms specified in the transaction agreements, and (b) certain reports to investors did not provide information calculated in accordance with the terms specified in the transaction agreements with respect to waterfall calculations and/or reporting disclosures.

 

As of December 31, 2011, the platform to which the 2011 Wells Assessment relates consisted, in part, of (i) approximately 2,052 RMBS transactions with over 24,000 payment/reporting cycles, and (ii) approximately 279 CMBS transactions with over 3,000 payment/reporting cycles. The errors that contributed to the material instances of noncompliance described on the 2011 Wells Assessment occurred on certain RMBS and CMBS transactions in the platform and consisted of (x) payment errors and corresponding investor reporting errors that impacted approximately 2.2% of the RMBS payment/reporting cycles and approximately 0.2% of the CMBS payment/reporting cycles, and (y) investor reporting errors without corresponding payment errors that impacted approximately 0.6% of the RMBS payment/reporting cycles and approximately 0.4% of the CMBS payment/reporting cycles. The 2011 Wells Assessment discusses certain payment and reporting errors that occurred on RMBS transactions containing multi-group features, which are a subset of the errors impacting RMBS payment/reporting cycles described above.

 

The 2011 Wells Assessment also states that necessary adjustments have been made to the waterfall models and investor reports to correct the errors that contributed to the material instance of noncompliance and such adjustments are expected to prevent similar future errors.

 

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Wells Fargo Bank serves or has served within the past two years as warehouse master servicer for various mortgage loans owned by the sponsor or an affiliate of the sponsor and anticipates that one or more of those mortgage loans may be included in the trust. The terms of the warehouse master servicing agreement under which those services are provided by Wells Fargo Bank are customary for the mortgage-backed securitization industry.

 

Wells Fargo Bank acts as master servicer pursuant to the pooling and servicing agreement. The master servicer is responsible for the aggregation of monthly servicer reports and remittances and for the oversight of the performance of the servicers under the terms of their respective underlying servicing agreements. In particular, the master servicer independently calculates monthly loan balances based on servicer data, compares its results to servicer loan-level reports and reconciles any discrepancies with the servicers. The master servicer also reviews the servicing of defaulted loans for compliance with the terms of the pooling and servicing agreement. In addition, upon the occurrence of certain servicer events of default under the terms of any underlying servicing agreement, the master servicer may be required to enforce certain remedies on behalf of the issuing entity against such defaulting servicer. Wells Fargo Bank has been engaged in the business of master servicing since June 30, 1995. As of December 31, 2011, Wells Fargo Bank was acting as master servicer for approximately 1,808 series of residential mortgage-backed securities with an aggregate outstanding principal balance of approximately $448,892,000,000.

 

Under the terms of the pooling and servicing agreement, Wells Fargo Bank also is responsible for securities administration, which includes pool performance calculations, distribution calculations and the preparation of monthly distribution reports. As securities administrator, Wells Fargo Bank is responsible for the preparation and filing of all REMIC tax returns on behalf of the issuing entity and the preparation of monthly reports on Form 10-D, certain current reports on Form 8-K and annual reports on Form 10-K that are required to be filed with the Securities and Exchange Commission on behalf of the issuing entity. Wells Fargo Bank has been engaged in the business of securities administration since June 30, 1995. As of December 31, 2011, Wells Fargo Bank was acting as securities administrator with respect to more than $727,809,000,000 of outstanding residential mortgage-backed securities.

 

Wells Fargo Bank is also acting as custodian of the mortgage files pursuant to the custodial agreement. In that capacity, Wells Fargo Bank is responsible to hold and safeguard the related mortgage notes and other contents of the mortgage files on behalf of the trustee and the certificateholders. Wells Fargo Bank maintains each mortgage file in a separate file folder marked with a unique bar code to assure loan-level file integrity and to assist in inventory management. Files are segregated by transaction or investor. Wells Fargo Bank has been engaged in the mortgage document custody business for more than 25 years.

 

At the date of this prospectus supplement, there were no material pending legal proceedings to which Wells Fargo Bank was a party or of which any of its property was subject, or any material pending legal proceedings known to be contemplated by governmental authorities against Wells Fargo Bank, in each case that is material to holders of certificates.

 

First Republic Bank

 

First Republic is the servicer of certain mortgage loans. First Republic has been servicing loans since the inception of its residential lending business. As of December 31, 2011, First Republic’s mortgage loan servicing portfolio of loans serviced for others contained loans with an aggregate principal balance of approximately $3.4 billion. For the years ending December 31, 2010, December 31, 2009, December 26, 2008, and December 28, 2007, total loans serviced for others were $3.8 billion, $4.0 billion, $4.3 billion and $4.9 billion, respectively.

 

Servicing Procedures

 

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Upon origination of a mortgage loan, information is boarded onto First Republic’s servicing system. First Republic’s monthly collection of mortgage payments revolves around the banking relationship it has with its clients. Approximately 97% of First Republic’s single family residential loans are paid via auto-debit from a borrower’s checking account, and more than 60% of First Republic’s clients have direct deposit into a First Republic deposit account.

 

First Republic applies its collection policies uniformly to both its portfolio loans and loans serviced for others. First Republic requires that its relationship managers remain involved in the on-going performance of its mortgage loans. The relationship managers, along with the special assets department staff, participate in the collection activities relating to any delinquent mortgage loans. Losses suffered on a mortgage loan impact the compensation paid to the respective relationship manager.

 

At a minimum, First Republic adheres to Fannie Mae and Freddie Mac servicing guidelines with respect to collection and foreclosure procedures. Generally, delinquencies are reviewed weekly and legal actions are taken quickly to minimize losses.

 

Non-judicial foreclosures are handled by First Republic’s collections department. Judicial foreclosures, if necessary, are typically assigned to outside counsel licensed to practice in the same state as the mortgaged property. Bankruptcies filed by borrowers are similarly assigned to appropriate local counsel. The status of foreclosures and bankruptcies is monitored by First Republic.

 

Prior to a foreclosure sale, First Republic determines the market value of the property. This analysis may include a current valuation using a drive-by appraisal or broker’s price opinion conducted by an independent appraiser and/or a real estate broker; an evaluation of the amount owed, if any, for real estate taxes; and estimated carrying costs, brokers’ fees, repair costs and other related costs associated with real estate owned properties. First Republic bases the amount it will bid at foreclosure sales on this analysis.

 

If First Republic acquires title to a property at a foreclosure sale or otherwise, it markets the property by means of a real estate broker. The real estate broker is responsible for ensuring the property is maintained while being marketed.

 

Origination Experience and Loan Losses

 

First Republic’s loan origination policies and consistent underwriting standards have resulted in low historical loan loss experience. Since First Republic’s inception in 1985, it has originated approximately $49.4 billion of single family residential loans (including HELOCs, single family owner occupied construction loans and single family loans sold in the secondary market) and has experienced approximate cumulative net loan losses of only $28.8 million, or 6 basis points, in 26 years, including losses on loans sold. A summary of First Republic’s single family residential loss experience is below.

 

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First Republic Bank Historical Single Family Residence Net Losses

$ Thousands

 

    Total  

Net Losses

Year

 

Originations

 

Amount

 

%Total

             
1985   $32,000   $0   0.00%
1986   $128,000   $0   0.00%
1987   $120,000   $0   0.00%
1988   $230,000   $0   0.00%
1989   $170,000   $371   0.22%
1990   $144,525   $618   0.43%
1991   $257,448   $1,282   0.50%
1992   $547,909   $562   0.10%
1993   $756,876   $26   0.00%
1994   $598,878   $0   0.00%
1995   $428,549   $0   0.00%
1996   $684,806   $0   0.00%
1997   $856,845   $0   0.00%
1998   $1,179,266   $0   0.00%
1999   $1,220,391   $0   0.00%
2000   $1,275,876   $0   0.00%
2001   $1,858,733   $0   0.00%
2002   $2,688,262   $0   0.00%
2003   $3,081,006   $592   0.02%
2004   $2,891,483   $851   0.03%
2005   $3,313,909   $2,816   0.08%
2006   $2,927,310   $5,223   0.18%
2007   $3,388,579   $12,534   0.37%
2008   $5,647,715   $3,907   0.07%
2009   $4,044,015   $0   0.00%
2010   $4,611,242   $0   0.00%
2011   $6,278,232   $0   0.00%
Totals  

$49,361,856

 

$28,782

 

0.05%

 

·Includes prior experience with loans retained by Bank of America.
·Originations include single family, home equity lines of credit, single family residence loans sold in secondary market, and single family residence owner occupied construction loans.
·Losses are calculated based on year originated.
·Losses include $6,572,976 for secondary market investors.

 

Legal Proceedings

 

At the date of this prospectus supplement, there were no material pending legal proceedings to which First Republic was a party or of which any of its property was subject, or any material pending legal proceedings known to be contemplated by governmental authorities against First Republic, in each case that is material to holders of certificates.

 

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Cenlar FSB

 

Cenlar FSB (“Cenlar”) is a federally chartered capital stock savings bank formed in 1984 from the combination of a thrift institution located in Mercer County, New Jersey and an employee-owned mortgage banking business. In September 1996, Cenlar completed its transition to a wholesale bank by selling all of its remaining retail branches to an institution that assumed substantially all deposit liabilities. Its corporate headquarters is located at 425 Phillips Boulevard, Ewing, New Jersey 08618, telephone number (609) 883-3900.

 

Cenlar has been servicing and subservicing mortgage loans since 1958. It is primarily engaged in servicing and subservicing mortgage loans for approximately 120 clients that include banks, thrifts, credit unions, mortgage companies and agencies. Cenlar is an approved seller/servicer in good standing with Ginnie Mae (GNMA), Fannie Mae, Freddie Mac, the Federal Housing Administration (FHA), the Federal Home Loan Bank (FHLB), Veterans Administration (VA), and many state housing agencies. As of December 15, 2011, Cenlar serviced or subserviced approximately 650,000 loans with an aggregate principal balance of $85-$90 billion consisting of conventional, FHA and VA loans, for approximately 1,200 investors in all 50 states, the District of Columbia, Puerto Rico, and the Virgin Islands. Cenlar’s servicing is rated “Strong” by Standard & Poor’s (S&P).

 

The table below captioned “Cenlar—Delivery and Foreclosure Experience—Residential Mortgage Portfolio Serviced” shows a significant growth in Cenlar’s servicing portfolio, representing a 235% growth over the stated 30 month period. This growth is attributable to several factors:

 

·An organic growth in loan volume from its existing client base

 

·The addition of 27 new clients over that period which includes

 

o82,000 units from the credit union market,

 

o43,000 units in the mortgage banking market; and

 

·150,000 units in Government Sponsored Entity supported transactions.

 

Servicing and subservicing includes collecting and remitting loan payments, administering escrow funds for the payment of real estate taxes and insurance premiums, contacting delinquent mortgagors, supervising foreclosures in the event of non-remedied defaults, and generally administering the loans.

 

More specifically, Cenlar’s subservicing activities include:

 

(1)            setting up and maintaining new loan production on Cenlar’s servicing system, and testing the validity and accuracy of designated data elements;

 

(2)            transferring loan data from a bulk transferee’s servicing system to Cenlar’s servicing system and verifying the quality of the data;

 

(3)            data integrity review of designated data elements for all loans added to Cenlar’s servicing system;

 

(4)            processing payments, depositing checks received within two business days into a clearing account and clearing check disbursements, reconciling funds received and transactions posted in Cenlar’s servicing system, processing pay-off transactions, and related satisfactions;

 

(5)            monitoring loans that are in default, collecting funds on loans that are delinquent or in default, conducting loss mitigation activities, including arranging repayment plans, arranging to lift stays or

 

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take other action in bankruptcy proceedings involving borrowers, administering foreclosures, making insurance or other claims against insurance companies, sureties or other guarantors and REO processing and management;

 

(6)            processing activity related to the payment of taxes and insurance and other items escrowed pursuant to the applicable documents;

 

(7)            answering borrower inquiries received and performing needed research in connection with such inquiries, managing the escrow analysis function to determine appropriate escrow amounts and preparation of required reporting to borrowers;

 

(8)            remitting funds to the master servicer or when applicable, to other appropriate parties and reviewing the accuracy and completeness of investor reports, and coordinating conversion of new investor records set up;

 

(9)            confirming that all loans, where required, are covered under tax service contracts and flood determination contracts; and

 

(10)          transferring data when loans or servicing is transferred and coordinating the various notices, transfer of records and reconciliations, and managing interim loan servicing function and processing loan modifications.

 

Cenlar has implemented comprehensive controls and technologies to preserve confidentiality of borrowers’ nonpublic personal financial information.

 

Cenlar has assigned compliance personnel within its Default Department that keep up with on-going federal and state regulatory, as well as investor, changes. Cenlar meets or exceeds Fannie Mae’s and Freddie Mac’s requirements for mortgage servicing and delinquency management.

 

Cenlar’s goal is to provide opportunities to borrowers who are experiencing financial difficulties through various resolution programs, thus avoiding circumstances that are more serious to both the borrowers and the investors. Cenlar’s Collection Department is structured to make and/or attempt contact throughout a borrower’s delinquency via phone calls and/or letters. Through use of specific calling campaigns, calls are directed to collection representatives in an attempt to contact all delinquent borrowers according to specific service levels established between Cenlar and its clients. Cenlar follows Fannie Mae guidelines in the absence of other agreed upon guidelines for all collection practices

 

Borrowers are called based on their payment history, which is determined by Early Indicator Scoring Models. Contact attempts are made to all borrowers due for one payment or more based on existing service level agreements. Normally, collection calls on prime loans begin after the late charge day and call campaigns on subprime loans can begin as early as three (3) days past due. The predictive dialer is used to maximize the number of attempts made to the borrower and to relieve the collector from handling no answers, busy signals, and answering machines thereby allowing additional concentration when a right party contact is made. Follow-up calls on prime loans are made weekly until a promise to pay has been arranged with a borrower.

 

Delinquency reports are generated after each month-end for management review, and are supplied to the Master Servicer and other appropriate parties.

 

Cenlar’s Loss Mitigation Department is structured to leverage its experience in handling Agency (e.g.: Fannie Mae, Freddie Mac, FHA, and VA) servicing, employing the “standard” Agency model for loss mitigation, and client asset servicing, where Cenlar employs a client specific philosophy and rule set around loan modifications.

 

Borrowers are referred to the Loss Mitigation Department by three primary departments: Collections, Customer Interaction, and Solicitation. Each of these departments has trained personnel that

 

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can identify a borrower’s financial hardship and explain the financial assistance programs (e.g. alternatives to foreclosure) that may be available to that borrower. After the loss mitigation process has been explained to the borrower, a loss mitigation package is sent to the borrower for completion and return to Cenlar for review. Loss Mitigation packages are received by Cenlar in a number of ways such as regular and overnight mail, fax, e-mail, and through its website. The combination of hardship, intent (retention or liquidation), and financial standing are used to determine the appropriate foreclosure alternative based on the nature of the loan and the investor requirements.

 

Foreclosures are initiated following the review and approval from Cenlar’s internal Default Compliance Unit and based on a review of the borrower’s circumstances, Cenlar’s loss mitigation efforts and on investor/client timelines. Once referred, the foreclosure case is assigned to a foreclosure technician for complete monitoring of the case. If a borrower files bankruptcy, the case is referred to a bankruptcy technician for complete monitoring.

 

The table below sets forth certain information with respect to Cenlar’s total residential mortgage portfolio serviced and delinquency and foreclosure experience.

 

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Cenlar – Delinquency & Foreclosure Experience – Residential Mortgage Portfolio Serviced

 

    As of December 31, 2008   As of December 31, 2009   As of December 31, 2010   As of December 31, 2011
    Number of
Loans
  Principal 
Balance
  Number of
Loans
  Principal 
Balance
  Number of
Loans
  Principal 
Balance
  Number of
Loans
  Principal 
Balance
                                 
Total Portfolio [1]   206,151   $42,072,213,838   474,401   $87,780,087,363   466,181   $76,239,252,568   534,247   $85,823,808,349
                                 
A]     PAST DUE LOANS                                
Period of Delinquncy [1]                                
30 days   5,223   $850,083,731   29,863   $4,981,679,790   20,150   $3,086,386,449   13,423   $1,934,809,769
Percent Delinquent   2.53%   2.02%   6.29%   [4]           5.68%   4.32%   4.05%   2.51%   2.25%
                                 
60 days   1,408   $311,229,137   7,461   $1,312,150,083   5,016   $798,013,185   3,881   $589,203,960
Percent Delinquent   0.69%   0.74%   1.57%   1.49%   1.08%   1.05%   0.73%   0.69%
                                 
90 days   1,473   $270,021,652   4,596   $865,985,659   6,465   $1,118,599,694   5,427   $871,420,015
Percent Delinquent   0.71%   0.64%   0.97%   0.99%   1.39%   1.47%   1.02%   1.02%
Total Delinquencies [1]   8,104   $1,431,334,520   41,920   $7,159,815,532   31,631   $5,002,999,328   22,731   $3,395,433,744
                                 
Total Past Due by Percentage of Total Portfolio   3.93%   3.40%   8.83%   8.16%   6.79%   6.57%   4.25%   3.96%
                                 
B]          Foreclosure   3,848   $979,356,409   6,469   $1,865,173,427   6,021   $1,192,155,348   12,197   $2,191,816,162
     Bankruptcy [2]   1,445   $170,501,112   2,684   $405,990,749   3,454   $494,660,388   4,190   $577,087,641
Total Foreclosure’s and Bankruptcies   5,293   $1,149,857,521   9,153   $2,271,164,176   9,475   $1,686,815,736   16.387   $2,768,903,803
                                 
Real Estate Owned [3]   0   $0   0   $0   0   $0   0   $0
                                 
Percent of Total Portfolio in Foreclosure or Bankruptcy   2.57%   2.73%   1.93%   2.59%   2.03%   2.21%   3.07%   3.23%
                                 
Total Delinquent
[Past Due + FCL]
   6.50%    6.13%    10.76%    10.75%    8.82%    8.78%    7.32%    7.18%

 

[1]Delinquency numbers in Section [1] exclude loan foreclosure totals from the Section below

 

[2]Bankruptcy counts & balances are also added to the delinquency totals based on actual paid through date of loans. 57% of all bankruptcy loans are delinquent, 43% are current

 

[3]No material REO loans owned by Cenlar. REO's are owned & managed by GSE's (Fannie & Freddie), or in process of conveyance to FHA or VA and are in either case counted in the foreclosure totals above

 

[4]Cenlar Supported a Freddie Mac 911 transaction and due to bankruptcy of large bank clearing loan payments a portion of borrower payments were held up in bankruptcy

 

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Legal Proceedings

 

At the date of this prospectus supplement, there were no material pending legal proceedings to which Cenlar was a party or of which any of its property was subject, or any material pending legal proceedings known to be contemplated by governmental authorities against Cenlar, in each case that is material to holders of certificates.

 

ADMINISTRATION OF THE ISSUING ENTITY

 

Servicing and Administrative Responsibilities

 

The servicers, the master servicer, the depositor, the securities administrator, the trustee and the custodian will have the following responsibilities with respect to the issuing entity:

 

Servicers. Performing the servicing functions with respect to the mortgage loans and the mortgaged properties in accordance with the provisions of the applicable servicing agreement, including, but not limited to:

 

·collecting monthly remittances of principal and interest on the mortgage loans from the related borrowers, depositing such amounts (net of the related servicing fees) in the applicable custodial account, and delivering all amounts on deposit in the applicable custodial account to the securities administrator for deposit in the distribution account on the Servicer Remittance Date;

 

·collecting amounts in respect of taxes and insurance from the related borrowers for mortgage loans subject to escrows, depositing such amounts in the related escrow account, and paying such amounts to the related taxing authorities and insurance providers, as applicable;

 

·funding monthly advances with respect to delinquent payments of principal and interest on the mortgage loans, to the extent the servicer believes these monthly advances will be recoverable, provided that for mortgage loans serviced by Cenlar FSB, such monthly advances will be funded by the servicing administrator rather than Cenlar FSB;

 

·funding servicing advances in respect of reasonable and customary “out of pocket” costs and expenses, provided that for mortgage loans serviced by Cenlar FSB, such servicing advances will be funded by the servicing administrator rather than Cenlar FSB;

 

·providing monthly loan-level reports to the securities administrator;

 

·maintaining certain insurance policies relating to the mortgage loans; and

 

·initiating foreclosure proceedings and other methods of default resolution.

 

We refer you to “The Agreements—Mortgage Loan Servicing” below.

 

Master Servicer. Performing the master servicing functions in accordance with the provisions of the pooling and servicing agreement, including but not limited to:

 

monitoring the servicers’ and servicing administrator’s performance and enforcing the servicers’ and servicing administrator’s obligations under the servicing agreements;

 

overseeing certain matters relating to the servicing of defaulted mortgage loans including, but not limited to,

 

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approving certain loan modifications, reviewing environmental reports relating to foreclosed properties to determine whether to proceed with a foreclosure, approving certain actions relating to the management of REO property and approving the release of the original borrower in connection with mortgage loan assumptions;

 

gathering the monthly loan-level reports delivered by the servicers and providing a comprehensive loan-level report to the securities administrator with respect to the mortgage loans;

 

terminating the rights and obligations of any servicer and the servicing administrator, if in the master servicer’s judgment it determines that such servicer or servicing administrator should be terminated in accordance with the related servicing agreement, giving notice thereof to the trustee and the rating agencies and taking such other action as it deems appropriate;

 

upon the termination of a servicer or the servicing administrator, appointing a successor servicer or successor servicing administrator or servicing the related mortgage loans itself, as provided in the pooling and servicing agreement;

 

upon the failure of a servicer (other than Cenlar FSB) or the servicing administrator to fund advances with respect to a mortgage loan in accordance with the related servicing agreement, funding those monthly advances, to the extent provided in the pooling and servicing agreement; and

 

upon the failure of a servicer (other than Cenlar FSB) or the servicing administrator to pay prepayment interest shortfalls, paying such shortfalls, up to the amount of the master servicing fee for the related period.

 

We refer you to “The Agreements—Mortgage Loan Servicing” below.

 

Securities Administrator. Performing the securities administrator functions in accordance with the provisions of the pooling and servicing agreement, including but not limited to:

 

acting as authentication agent, calculation agent, paying agent and certificate registrar with respect to the certificates;

 

collecting monthly remittances from the servicers for deposit in the distribution account and distributing all amounts on deposit in the distribution account to the certificateholders, in accordance with the priorities described under “Description of the Certificates—Priority of Distributions and Allocation of Shortfalls” on each distribution date;

 

preparing and distributing to certificateholders the monthly distribution date statement based on mortgage loan data provided by the servicers and the master servicer;

 

preparing and filing periodic reports with the SEC on behalf of the issuing entity with respect to the certificates;

 

preparing and distributing annual investor reports necessary to enable certificateholders to prepare their tax returns; and

 

preparing and filing annual federal and (if required) state tax returns on behalf of the issuing entity.

 

We refer you to “The Agreements—Reports to Certificateholders” below.

 

Trustee. Performing the trustee functions in accordance with the provisions of the pooling and servicing agreement, including but not limited to:

 

·after an Event of Default has occurred of which a responsible officer of the trustee has actual knowledge, giving written notice thereof to the master servicer and the rating agencies;

 

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·after an Event of Default has occurred of which a responsible officer of the trustee has actual knowledge, until a successor master servicer is appointed, acting as successor master servicer in the event the master servicer resigns or is removed by the trustee; and

 

·in certain circumstances as described herein, pursuing an action against an originator in respect of an alleged breach of a representation and warranty, or against the seller if the seller has an obligation to cure a breach, or repurchase or substitute for or make an indemnification payment with respect to a mortgage loan as described herein.

 

We refer you to “The Agreements—Reports to Certificateholders” and “—Representations and Warranties” below.

 

Depositor. Filing certain current reports with the SEC on behalf of the issuing entity with respect to the certificates.

 

Custodian. Performing the custodial functions in accordance with the provisions of the custodial agreement, including but not limited to holding and maintaining the mortgage loan documents related to the mortgage loans on behalf of the trustee.

 

We refer you to “The Agreements—The Custodial Agreement” below.

 

Issuing Entity Accounts

 

All amounts in respect of principal and interest received from the borrowers or other recoveries in respect of the mortgage loans will, at all times before payment thereof to the certificateholders, be deposited in the applicable custodial accounts and the distribution account (collectively, the “issuing entity accounts”). Each custodial account will be established in the name of the applicable servicer in trust, or as trustee and/or bailee, for the trustee as trustee of the trust, and the distribution account will be established in the name of the securities administrator in trust for the benefit of the certificateholders. Funds on deposit in the issuing entity accounts will be invested in eligible investments. The issuing entity accounts will be established by the applicable parties listed below, and any investment income earned on each issuing entity account will be retained or distributed as follows:

 

Issuing Entity
Account
  Responsible Party:   Application of any Investment Earnings:
         
Custodial Account   Servicers   Any investment earnings (net of any losses realized) will be paid as compensation to the servicers and will not be available for payments to certificateholders.
         
Distribution Account   Securities Administrator   Any investment earnings (net of any losses realized) will be paid as compensation to the securities administrator and will not be available for payments to certificateholders. 

 

If funds deposited in a custodial account or the distribution account are invested by the responsible party identified in the table above, the amount of any net losses incurred in respect of any such investments will be deposited in the related issuing entity account by such responsible party, out of its own funds, without any right of reimbursement therefor.

 

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Example of Payments

 

The following sets forth an example of collection of payments from borrowers on the mortgage loans, transfers of amounts among the issuing entity accounts and payments on the certificates for the distribution date in April 2012:

 

 March 2 through April 1   Due Period:   Payments due during the related Due Period (March 2 through April 1) from borrowers will be deposited in each servicer’s custodial account as received and will include scheduled principal and interest payments due during the related Due Period.
         
March 1 through March 31  

Prepayment Period for

partial and full prepayments

received from mortgage

loans:

  Partial principal prepayments and principal prepayments in full received by each servicer during the related Prepayment Period (March 1 through March 31) will be deposited into each servicer’s custodial account for remittance to the securities administrator on the servicer remittance date (April 18).
         
March 29   Record Date:   Distributions will be made to certificateholders of record for all classes of certificates as of the closing date, for the first distribution date, and for any other distribution date, as of the last business day of the calendar month preceding the month of the related distribution date.
       

 

April 18   Servicer Remittance Date:   Each servicer will remit collections and recoveries in respect of the mortgage loans to the securities administrator for deposit into the distribution account on or prior to the 18th day of each month (or if the 18th day is not a business day, the next business day).
         
April 25   Distribution Date:   On the 25th day of each month (or if the 25th day is not a business day, the next business day), the securities administrator will make payments from amounts on deposit in the distribution account to certificateholders.

 

Succeeding months follow the same pattern.

 

THE AGREEMENTS

 

General

 

The following summary describes certain terms of the “pooling and servicing agreement,” the mortgage loan purchase agreement, the purchase agreements, the servicing agreements and the custodial agreement. The summary does not purport to be complete and is subject to, and qualified in its entirety by reference to, all the provisions of the agreements. The following summary supplements, and to the extent inconsistent with, replaces, the description of the general terms and provisions of the agreements under the heading “The Agreements” in the accompanying prospectus.

 

The certificates will be issued pursuant to the pooling and servicing agreement, dated as of March 1, 2012, among the depositor, the master servicer, the securities administrator and the trustee. Reference is made to the accompanying prospectus for information in addition to that set forth in this

 

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prospectus supplement regarding the terms and conditions of the pooling and servicing agreement and the offered certificates. Certificates in certificated form will be transferable and exchangeable at the corporate trust office of the securities administrator, which will also serve as certificate registrar and paying agent. The securities administrator will provide to a prospective or actual certificateholder, without charge, on written request, an electronic copy (without exhibits) of the pooling and servicing agreement. Requests should be addressed to 9062 Old Annapolis Road, Columbia, Maryland 21045, Attention: Client Manager – Sequoia Mortgage Trust 2012-2.

 

Assignment of the Mortgage Loans

 

Under the mortgage loan purchase agreement, Redwood Residential Acquisition Corporation, as seller, will sell the mortgage loans to the depositor. Pursuant to the pooling and servicing agreement, on the closing date the depositor will sell, transfer, assign, set over and otherwise convey without recourse to the trustee all of its right, title and interest to the mortgage loans. Under the purchase agreements, the originators have made certain representations, warranties and covenants relating to, among other things, certain characteristics of the mortgage loans. The representations and warranties of the originators under the purchase agreements will include the representations and warranties set forth under “—Representations and Warranties” below and “Loan Program—Representations and Warranties; Repurchases” in the prospectus and will be assigned to the depositor and then to the trustee pursuant to the assignment, assumption and recognition agreements and the assignment of representations and warranties agreements. Subject to the limitations described below, the originator under the applicable purchase agreement will be obligated as described herein to cure, repurchase, substitute a similar mortgage loan for or make an indemnification payment with respect to any mortgage loan as to which there has been an uncured breach of any such representation or warranty that materially and adversely affects the value of such mortgage loan or the interests of the certificateholders in such mortgage loan.

 

Under the mortgage loan purchase agreement, Redwood Residential Acquisition Corporation will be obligated as described herein to cure the breach, or repurchase or substitute for any mortgage loan as to which there has been an uncured breach of representations or warranties made by the originators other than First Republic Bank that materially and adversely affects the value of such mortgage loan or the interests of the certificateholders in such mortgage loan, but only if such originator is unable to cure such breach or repurchase or substitute for such mortgage loan because it is subject to a bankruptcy or insolvency proceeding or no longer in existence.

 

The representations and warranties regarding the characteristics of each mortgage loan that were made by the respective originator and assigned to the trustee were made by the originator as of the date on which the originator sold that mortgage loan.  The dates of sale range between zero and eight months prior to the closing date.  It is possible that some representations and warranties that were true and correct on the date a mortgage loan was sold by the originator are not true and correct as of the closing date.  The seller will agree to cure a breach or repurchase from the trust fund any mortgage loan as to which a representation and warranty made by the originator was true and correct as of the date made by the originator but not true and correct as of the closing date, if such breach materially and adversely affects the value of the mortgage loan or the interests of the certificateholders in that mortgage loan.  Other than as described in the preceding paragraph, the seller generally will not repurchase any mortgage loan or provide any remedy with respect to any breach of a representation and warranty as of the date made by the originator.

 

Pursuant to the assignment, assumption and recognition agreements and the assignment of representations and warranties agreements, the Controlling Holder will have the right to enforce the obligation of the originators under the purchase agreements to cure, repurchase or substitute for or make an indemnification payment with respect to a mortgage loan. The obligations of the originators under the purchase agreements that are assigned to the trustee for the benefit of the certificateholders are limited to the obligation to repurchase, substitute for or make an indemnification payment with respect to defective mortgage loans. If the Class Principal Amount of each of the Class B-5 and Class B-4 Certificates have been reduced to zero, then no entity will have any rights as a Controlling Holder. In this circumstance, all of the rights of the Controlling Holder described in this prospectus supplement would revert to the trustee

 

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on behalf of the certificateholders. Pursuant to the pooling and servicing agreement, the trustee will also have the right to enforce the obligation of the seller, if any, under the mortgage loan purchase agreement to cure the breach, or repurchase or substitute for a mortgage loan for which a breach has occurred.

 

In connection with such transfer and assignment of the mortgage loans, pursuant to a custodial agreement dated as of March 1, 2012, among the depositor, the seller, the master servicer, the trustee and the custodian, the depositor will deliver or cause to be delivered to Wells Fargo Bank, N.A., as custodian, on behalf of the trustee, among other things, the original promissory note, or mortgage note, (and any modification or amendment thereto) endorsed in blank without recourse, the original instrument creating a first lien on the related mortgaged property, or mortgage, with evidence of recording indicated thereon, an assignment in recordable form of the mortgage for each non-MERS mortgage loan, the title policy with respect to the related mortgaged property and, if applicable, all recorded intervening assignments of the mortgage and any riders or modifications to such mortgage note and mortgage, except for any such document not returned from the public recording office, which is required to be delivered by the originators under the servicing agreements to the trustee or custodian as soon as the same is available. These documents are referred to, collectively, as the mortgage loan documents.

 

With respect to mortgage loans that are not recorded in the name of MERS, assignments of the mortgage loans to the trustee (or its nominee) will be recorded by the depositor in the appropriate public office for real property records. With respect to mortgage loans that are recorded in the name of MERS, the depositor will cause the trustee (or its nominee) to be recorded as the beneficial owner of the mortgage loans pursuant to the MERS rules for electronically tracking changes in ownership rights.

 

The custodian will review the mortgage loan documents with respect to a mortgage loan generally within one business day of the later of its receipt of the mortgage loan documents or the mortgage loan schedule. If an originator does not cure any material defect or omission in the mortgage loan documents within the applicable cure period, it will be required to repurchase the mortgage loan. In the case of documents that are required to be recorded, such as an original mortgage or an original assignment of mortgage, the originator is permitted to deliver a copy of that document pending return of the original or a file stamped copy from the recording office.  If the recorded documents are not returned from the recording office within approximately one year after the date that the originator sold the mortgage loan to the seller, the Controlling Holder may, but is not obligated to, request the originator to repurchase the mortgage loan.

 

In lieu of repurchasing a mortgage loan as provided above, during the period that ends two years after the date the seller acquired such mortgage loan, in some cases the originator may remove that mortgage loan, or a deleted mortgage loan, from the trust fund and substitute in its place another mortgage loan, or a replacement mortgage loan. Any replacement mortgage loan generally will, on the date of substitution, among other characteristics set forth in the related servicing agreement, (i) have a principal balance, after deduction of all scheduled payments due in the month of substitution (or in the case of a substitution of more than one mortgage loan for a deleted mortgage loan, an aggregate principal balance), not in excess of the stated principal balance of the deleted mortgage loan, (ii) have a mortgage rate not less than and not more than one percentage point greater than that of the deleted mortgage loan, (iii) have a remaining term to maturity not greater than (and not more than one year less than) that of the deleted mortgage loan, (iv) have a loan-to-value ratio at origination no greater than that of the deleted mortgage loan and (vi) be in material compliance with all of the representations and warranties set forth in the related servicing agreement as of the date of substitution. This cure, repurchase or substitution obligation constitutes the sole remedy available to certificateholders or the trustee for omission of, or a material defect in, a mortgage loan document.

 

Representations and Warranties

 

Except as described below, the representations and warranties made by each originator with respect to each mortgage loan sold by it include the representations and warranties substantially in the form

 

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set forth under “Loan Program—Representations and Warranties; Repurchases” in the prospectus, as well as the following representations and warranties, among others, in substantially the following form:

 

·Each mortgage loan either (i) was underwritten in substantial conformance with the originator’s underwriting guidelines in effect at the time of origination without regard to any underwriter discretion or (ii) if not underwritten in conformance with the originator’s underwriting guidelines, has reasonable and documented compensating factors. The methodology used in underwriting the extension of credit for the mortgage loan includes objective mathematical principles that relate to the relationship between the borrower’s income, assets and liabilities and the proposed payment.

 

·The originator has given due consideration to factors, including but not limited to, other real estate owned by a borrower, commuting distance to work, appraiser comments and notes, the location of the property and any difference between the mailing address active in the servicing system and the subject property address to evaluate whether the occupancy status of the property as represented by the borrower is reasonable.

 

·With respect to each mortgage loan, the originator verified the borrower’s income, employment, and assets in accordance with its written underwriting guidelines and employed procedures designed to authenticate the documentation supporting the income, employment and assets. This verification may include the transcripts received from the Internal Revenue Service pursuant to a filing of IRS Form 4506-T and, in some cases, may include public and/or commercially available information acceptable to the purchaser.

 

·Each mortgage file contains a written appraisal prepared by a qualified appraiser. The appraisal was written, in form and substance, to (i) customary Fannie Mae or Freddie Mac standards or forms for mortgage loans of the same type as the related mortgage loans and (ii) Uniform Standards of Professional Appraisal Practice standards, and satisfies applicable legal and regulatory requirements. The appraisal was made and signed prior to the final approval of the mortgage loan application. The person performing any property valuation (including an appraiser) received no benefit from, and that person’s compensation or flow of business from the originator was not affected by, the approval or disapproval of the mortgage loan. The selection of the person performing the property valuation was made independently of the broker (where applicable) and the originator’s loan sales and loan production personnel. The selection of the appraiser met the criteria of Fannie Mae and Freddie Mac for selecting an independent appraiser.

 

·Any and all requirements of any federal, state or local law including, without limitation, usury, truth-in-lending, real estate settlement procedures, consumer credit protection, equal credit opportunity, or disclosure laws applicable to the mortgage loans at origination have been complied with in all material respects or any such noncompliance was cured subsequent to origination as permitted by applicable law.

 

In lieu of the representation and warranty regarding fraud set forth in the prospectus, each originator has made a representation and warranty in its purchase agreement regarding fraud with respect to each mortgage loan that it sold, as set forth below:

 

·With respect to each mortgage loan originated by First Republic Bank and certain other originators, no fraud, material misrepresentation or negligence has taken place in connection with the origination or servicing of the mortgage loan on the part of (1) the originator, (2) the borrower, (3) any broker or correspondent, (4) any appraiser, escrow

 

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agent, closing attorney or title company involved in the origination of the mortgage loan or (5) the servicer.

 

·With respect to each mortgage loan originated by PHH Mortgage Corporation, no fraud, error, omission, misrepresentation, negligence or similar occurrence with respect to the mortgage loan has taken place on the part of the seller, the borrower, any guarantor, any co-borrower, the servicer or any other person, including, without limitation, any appraiser, title company, closing or settlement agent, realtor, builder or developer or any other party involved in the origination or sale of the mortgage loan or the sale of the mortgaged property, that would impair in any way the rights of the purchaser in the mortgage loan or mortgaged property or that violated applicable law.

 

·With respect to each mortgage loan originated by PrimeLending, a PlainsCapital Company and certain other originators, no fraud, error, omission, misrepresentation, negligence or similar occurrence with respect to the mortgage loan has taken place on the part of the mortgagor, the seller or any other person, including, without limitation, any appraiser, title company, closing or settlement agent, realtor, builder or developer or any other party involved in the origination or sale of the mortgage loan or the sale of the mortgaged property, that would impair in any way the rights of the purchaser in the mortgage loan or mortgaged property or that violated applicable law.

 

If the originator under a purchase agreement cannot cure a breach of a representation and warranty made by it, which breach materially and adversely affects the value of, or the interest of the certificateholders in, that mortgage loan, within 90 days of the originator’s discovery or receipt of notice of that breach, then such originator will be obligated to repurchase or substitute a replacement mortgage loan for the mortgage loan or, in some cases, make an indemnification payment in the amount of the reduction in value resulting from such breach. This cure, repurchase, substitution or indemnification obligation constitutes the sole remedy available to certificateholders or the trustee for these breaches. Neither the seller nor the depositor has any obligation to cure a breach or repurchase or substitute for a mortgage loan if the originator fails to do so, other than the obligation of the seller to cure the breach, or repurchase or substitute for a mortgage loan originated by any originator other than First Republic Bank if there has been an uncured breach of a representation or warranty that materially and adversely affects the value of such mortgage loan or the interests of the certificateholders in such mortgage loan if the applicable originator is unable to cure such breach, repurchase or substitute for or make an indemnification payment with respect to such mortgage loan because it is subject to a bankruptcy or insolvency proceeding or no longer in existence. In addition, the seller will agree to cure a breach or to repurchase, substitute for or make an indemnification payment with respect to any mortgage loan as to which a representation and warranty made by the originator was true and correct as of the date made by the originator but not true and correct as of the closing date, if such breach materially and adversely affects the value of the mortgage loan or the interests of the certificateholders in that mortgage loan.

 

Pursuant to the purchase agreements, the assignment, assumption and recognition agreements, the assignment of representations and warranties agreements and the pooling and servicing agreement, the Controlling Holder will have the right to enforce the obligations of the originators under the purchase agreements to cure any breach of a representation and warranty which materially and adversely affects the value of, or the interest of the certificateholders in, any mortgage loan, or to repurchase, substitute for or make an indemnification payment with respect to, such mortgage loan if such breach is not cured.

 

The trustee will be obligated to pursue an action against an originator in respect of any alleged breach of a representation and warranty by an originator, or against the seller if the seller has an obligation to cure a breach, or repurchase, substitute for or make an indemnification payment with respect to a mortgage loan as described herein, upon its receipt of (i) (a) written direction to do so by the holders of more than 50% of the aggregate voting interests of the senior certificates, if there is a Controlling Holder under the pooling and servicing agreement or (b) written direction to do so by the holders of more than 50% of the aggregate voting interests of the certificates, if there is no longer a Controlling Holder under the

 

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pooling and servicing agreement and (ii) an agreement by holders directing the trustee to take such action to provide in advance to the trustee funds to pay for any fees, costs and expenses incurred by the trustee, and provide any indemnification reasonably requested by the trustee. However, certificateholders will not have the right to require the trustee to pursue any action with respect to any mortgage loan as to which a final and binding decision by an arbitrator has already been issued. Prior to taking any action at the direction of certificateholders, the trustee will notify the Controlling Holder, if any. In connection with any such action, the trustee will seek to recover its fees, costs and expenses from the originator under the terms of the applicable purchase agreement or from the seller under the terms of the mortgage loan purchase agreement if directed to do so by the certificateholders that provided such funds to the trustee as described above. If the trustee recovers any such fees, costs and expenses, it will be obligated to pay such amounts to such certificateholders. To the extent not reimbursed by the originator or the seller, as applicable, or the applicable certificateholders, the trustee will be reimbursed by the trust fund, subject to the annual expense limits as described in the definition of Available Distribution Amount.

 

In addition, if the trustee receives written notice, from a person in a position to have knowledge of the facts and circumstances stated in such notice, of any breach of a representation or warranty regarding a mortgage loan made by an originator or the seller, which would give rise to an obligation to cure such breach, or repurchase, substitute for or make an indemnification payment in respect of any related mortgage loan as described herein, then, unless a final and binding decision by an arbitrator has been issued with respect to such mortgage loan, the trustee in reliance on such notice shall (i) demand that the applicable originator or the seller, if the seller has such an obligation, cure such breach, or repurchase, substitute for or make an indemnification payment with respect to the related mortgage loan, and (ii) notify the certificateholders of the trustee’s receipt of such notice and of the trustee’s submission of such demand. If the originator or seller, as applicable, responds to the demand within 60 days of the date of the demand, the trustee will negotiate with such party so long as such party is pursuing negotiations in good faith. If the originator or seller does not respond within 60 days of the date of the demand, or if the demand is not resolved within 180 days of such date, then the trustee will not be required to pursue further action in connection with such demand unless it has received (i) (a) written direction to do so by the holders of more than 50% of the aggregate voting interests of the senior certificates, if there is a Controlling Holder under the pooling and servicing agreement or (b) written direction to do so by the holders of more than 50% of the aggregate voting interests of the certificates, if there is no longer a Controlling Holder under the pooling and servicing agreement and (ii) an agreement by holders directing the trustee to take such action to provide in advance to the trustee funds to pay for any fees, costs and expenses incurred by the trustee, and provide any indemnification reasonably requested by the trustee. Prior to taking any action at the direction of certificateholders, the trustee will notify the Controlling Holder, if any. The trustee will seek to recover its fees, costs and expenses from the originator under the terms of the applicable purchase agreement or from the seller under the terms of the mortgage loan purchase agreement if directed to do so by the certificateholders that provided such funds to the trustee as described above. If the trustee recovers any such fees, costs and expenses, it will be obligated to pay such amounts to such certificateholders. To the extent not reimbursed by the originator or the seller, as applicable, or the fees, costs and expenses ofapplicable certificateholders, the trustee will be reimbursed by the trust fund, subject to the annual expense limits as described in the definition of Available Distribution Amount.

 

In addition, the Controlling Holder or, if there is no longer a Controlling Holder, the trustee, will review or cause to be reviewed each mortgage loan that has been delinquent for more than 120 days, other than any such mortgage loan that was the subject of a previous arbitration proceeding under the related purchase agreement, to review whether any breaches of the representations and warranties given by the originator under the related purchase agreement have occurred or if the seller has an obligation to cure a breach, or repurchase or substitute for a mortgage loan as described herein. The Controlling Holder will engage a third party to perform such review and report its findings. If there is no longer a Controlling Holder, the trustee may engage a third party to perform, or may itself perform, such review and report its findings. A third party reviewer must provide an attestation to the Controlling Holder or the trustee, as applicable, that its review and report were not influenced or affected by interested parties. Any such review will include, at a minimum, a review as to whether the mortgage loan was underwritten in accordance with the originator’s underwriting standards in effect at the time of origination, whether the mortgage loan was originated in accordance with all applicable laws and regulations, and whether any fraud may have

 

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occurred in connection with the origination of the mortgage loan. If, as a result of such review, there is evidence that a breach of a representation or warranty may have occurred requiring the originator or the seller to cure such breach, repurchase or substitute for or make an indemnification payment with respect to the related mortgage loan, then the Controlling Holder or the trustee, as applicable, will enforce such obligation, including participating in an arbitration proceeding pursuant to the purchase agreement, if necessary. If the Controlling Holder is the same entity as or an affiliate of the party against which an enforcement action is to be taken, then the trustee will enforce the remedy obligation of such party. If the trustee is obligated to take such an action, the trustee shall first (i) demand that the applicable originator or the seller, if the seller has such an obligation, cure such breach, or repurchase, substitute for or make an indemnification payment with respect to the related mortgage loan, and (ii) notify the certificateholders of the trustee’s submission of such demand. If the originator or seller, as applicable, responds to the demand within 60 days of the date of the demand, the trustee will negotiate with such party so long as such party is pursuing negotiations in good faith. If the originator or seller does not respond within 60 days of the date of the demand, or if the demand is not resolved within 180 days of such date, then the trustee will not be required to pursue further action in connection with such demand unless it has received (i) (a) written direction to do so by the holders of more than 50% of the aggregate voting interests of the senior certificates, if there is a Controlling Holder under the pooling and servicing agreement or (b) written direction to do so by the holders of more than 50% of the aggregate voting interests of the certificates, if there is no longer a Controlling Holder under the pooling and servicing agreement and (ii) an agreement by holders directing the trustee to take such action to provide in advance to the trustee funds to pay for any fees, costs and expenses incurred by the trustee, and provide any indemnification reasonably requested by the trustee. In connection with any such action against an originator or the seller, the Controlling Holder or the trustee, as applicable, will pursue reimbursement for its fees, costs and expenses from such originator under the terms of the purchase agreement or from the seller under the terms of the mortgage loan purchase agreement, if directed to do so by the certificateholders that provided such funds to the trustee as described above. If the trustee recovers any such fees, costs and expenses, it will be obligated to pay these amounts to such certificateholders. To the extent not reimbursed by the originator or the seller, as applicable, or the applicable certificateholders, the trustee will be reimbursed by the trust fund, subject to the annual expense limits as described in the definition of Available Distribution Amount.

 

If, as a result of a review of a mortgage loan that has been delinquent for more than 120 days, the Controlling Holder or the trustee, as applicable, concludes that a breach of a representation or warranty that would require the originator or the seller to cure, repurchase or substitute for or make an indemnification payment with respect to the related mortgage loan has not occurred, then the certificateholders will be notified of this decision and provided details of the review. The certificateholders may direct the trustee to pursue a remedy obligation despite such a determination by either the Controlling Holder or the trustee if, within thirty days of notification of the certificateholders, (i) the trustee receives written direction to do so by the holders of more than 50% of the aggregate voting interests of the certificates and (ii) the holders directing the trustee to pursue the remedy obligation agree to provide in advance to the trustee funds to pay for any fees, costs and expenses incurred by that party and to provide any indemnification reasonably requested by the trustee. In connection with any such action against an originator or the seller, the Controlling Holder or the trustee, as applicable, will pursue reimbursement for its fees, costs and expenses from such originator under the terms of the purchase agreement or from the seller under the terms of the mortgage loan purchase agreement, if directed to do so by the certificateholders that provided such funds to the trustee as described above. If the trustee recovers any such fees, costs and expenses, it will be obligated to pay such amounts to the certificateholders that provided such funds to the trustee as described above. To the extent not reimbursed by the originator or the seller, as applicable, or the applicable certificateholders, the trustee will be reimbursed by the trust fund, subject to the annual expense limits as described in the definition of Available Distribution Amount.

 

As of the closing date, the seller and the depositor will each represent and warrant that immediately prior to its transfer of the mortgage loans, it will own and have good and marketable title to the mortgage loans free and clear of any lien, claim or encumbrance of any person. If the seller cannot cure a breach of its representation or warranty within 90 days of the seller’s discovery or receipt of notice of that breach, then the trustee will enforce the seller’s obligation under the mortgage loan purchase agreement to repurchase or substitute for that mortgage loan. This representation and warranty is the only representation

 

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and warranty concerning the mortgage loans made by the depositor and one of a limited number of representations and warranties concerning the mortgage loans made by the seller; all other representations and warranties concerning the mortgage loans are made only by the originators. However, the seller will be obligated to cure the breach, or repurchase from the trustee any mortgage loan as to which a representation and warranty made by an originator was true and correct as of the date made by such originator but not true and correct as of the closing date, if such breach materially and adversely affects the value of the mortgage loan or the interests of the certificateholders in that mortgage loan. In addition, with respect to representations and warranties made by each originator other than First Republic Bank, if such originator is obligated to cure a breach, repurchase or substitute for or make an indemnification payment with respect to a mortgage loan because of a breach of any such representation and warranty but is unable to do because it is subject to a bankruptcy or insolvency proceeding or no longer in existence, the seller will be obligated to cure the breach, or repurchase or substitute for such mortgage loan under the mortgage loan purchase agreement.

 

Pursuant to the purchase agreements, the assignment, assumption and recognition agreements, the assignment of representations and warranties agreements, the mortgage loan purchase agreement and the pooling and servicing agreement, if an allegation of a breach of a representation or warranty is not resolved to the satisfaction of the party pursuing an action and the applicable originator or the seller, as the case may be, either party may initiate an arbitration proceeding to resolve the dispute. Arbitration will be conducted in accordance with the rules of the American Arbitration Association. Each party to the arbitration will bear its own costs of arbitration, except that the cost of the arbitrator will be shared equally. The finding of the arbitrator shall be final and binding upon all parties, including the seller, the certificateholders and the trustee.

 

There can be no assurance that the procedures described above will be adequate to identify all breaches of representations and warranties or to enforce the obligations of an originator or the seller to cure a breach, or to repurchase or substitute for or make an indemnification payment with respect to a mortgage loan if such breach is not cured.

 

Mortgage Loan Servicing

 

Each servicer will service the mortgage loans pursuant to an existing servicing agreement, as modified pursuant to the applicable assignment, assumption and recognition agreement, or the “servicing agreement.” The rights of the seller under the servicing agreements will be assigned to the depositor, and the depositor, in turn, will assign such rights to the trustee for the benefit of certificateholders. Any transfer of servicing to a successor servicer will be subject to the conditions set forth in the applicable servicing agreement and the pooling and servicing agreement.

 

The servicers will have primary responsibility for servicing the mortgage loans, including, but not limited to, all collection, advancing (other than in the case of Cenlar FSB) and loan-level reporting obligations, maintenance of custodial and escrow accounts, maintenance of insurance and enforcement of foreclosure proceedings with respect to the mortgage loans and the mortgaged properties, in accordance with the provisions of the servicing agreement.

 

The master servicer will have the authority to terminate a servicer for certain events of default which indicate that either the servicer is not performing, or is unable to perform, its duties and obligations under the servicing agreement. If the master servicer terminates a servicer, the master servicer will be required to appoint a successor servicer as provided in the pooling and servicing agreement. The master servicer will have the right to increase the servicing fee rate if it determines that an increase is necessary and appropriate in order to engage a successor servicer. Any increase in the servicing fee rate to engage a successor servicer will reduce the Net Mortgage Rate for purposes of calculating the Net WAC, and may thus reduce the Certificate Interest Rate payable to the Certificateholders.

 

In addition, the servicing administrator will have the authority to terminate Cenlar FSB as a servicer, with or without cause, and appoint a successor servicer, with the consent of the master servicer.

 

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The servicers generally may not transfer the servicing to a successor servicer without the consent of the master servicer. 

 

Waiver or Modification of Mortgage Loan Terms. The servicers will proceed diligently to collect all payments due under the mortgage loans and will follow such collection procedures as are customary with respect to mortgage loans that are comparable to the mortgage loans. Consistent with the above, each servicer may waive, modify or vary the term of any mortgage loan so long as the modifications are consistent with the applicable servicing agreement and subject to the REMIC Provisions; provided, that the servicer may not enter into a payment plan or agreement to modify payments with a borrower lasting more than twelve months or permit a modification with respect to a mortgage loan that would change the mortgage rate, agree to the capitalization of arrearages, including interest, fees or expenses owed under a mortgage loan, make any future advances or extend the final maturity date with respect to a mortgage loan, or accept substitute or additional collateral or release any collateral for a mortgage loan unless the borrower is in default with respect to its mortgage loan or where default is, in the judgment of the servicer, imminent or, in some cases, reasonably foreseeable, and the master servicer has approved the modification. In the case of mortgage loans serviced by First Republic Bank and Cenlar FSB, such modifications must also be in accordance with the customary procedures of the servicer, which may change from time to time, or industry-accepted programs. In the case of mortgage loans serviced by PHH Mortgage Corporation, such modifications must also be in accordance with the general servicing standard applicable to such mortgage loans. The applicable monthly advancing obligations will reflect the new payment terms of the modified mortgage loans.

 

Due-on-Sale Clauses; Assumptions. Under each servicing agreement, when any mortgaged property has been conveyed by the borrower, the servicer will, to the extent it has knowledge of the conveyance, exercise its rights on behalf of the trustee to accelerate the maturity of the mortgage loan under any “due-on-sale” clause applicable to the mortgage loan, if any, unless (1) the servicer is prohibited by law from exercising those rights, or (2) if the exercise of those rights would impair or threaten to impair any recovery under the related insurance policy, if any. Under certain circumstances, the servicers are authorized to take or enter into an assumption and modification agreement or substitution of liability agreement, as specified in the servicing agreements, from or with the person to whom such mortgaged property has been or is about to be conveyed, pursuant to which that person becomes liable under the mortgage note. In connection with any such assumption or substitution of liability, the monthly payment and mortgage interest rate and the lifetime cap (if applicable) of the related mortgage note will not be changed, and the term of the mortgage loan will not be increased or decreased. See “Certain Legal Aspects of the Mortgage Loans—Due-on-Sale Clauses” in the prospectus.

 

Prepayment Interest Shortfalls. When a borrower prepays a mortgage loan in full between Due Dates, the borrower is required to pay interest on the amount prepaid only to the date of prepayment and not thereafter. In general, partial prepayments are treated as having been paid on the most recent Due Date, so no interest on the partial prepayment amount will accrue. Principal prepayments by borrowers received by a servicer during the related Prepayment Period for a distribution date will be distributed to certificateholders on the related distribution date. Thus, less than one month’s interest may have been collected on mortgage loans that have been prepaid in full or in part with respect to any distribution date. Pursuant to each servicing agreement, either (i) the related servicing fee (or in the case of Cenlar FSB, the related servicing fee and the servicing administrator fee) for any month will be reduced (but not below zero) by the amount of any Prepayment Interest Shortfall or (ii) the servicer (other than Cenlar FSB) or the servicing administrator will be required to make payments in respect of Prepayment Interest Shortfalls from its own funds with respect to the mortgage loans, to the extent of the aggregate amount of servicing fees (and, in the case of Cenlar FSB, the servicing administrator fee) actually received for that month. The amount of interest available to be paid to certificateholders will be reduced by any uncompensated Prepayment Interest Shortfalls.

 

Advances. Subject to the limitations described in the following paragraph, each servicer (other than Cenlar FSB) and the servicing administrator (with respect to mortgage loans serviced by Cenlar FSB)

 

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will be required to advance prior to each distribution date, from its own funds, or funds in the applicable custodial account that are not otherwise required to be remitted to the distribution account for such distribution date, an amount equal to the scheduled payment of interest at the related mortgage rate (less the servicing fee rate) and scheduled principal payments on each mortgage loan which were due on the related Due Date and which were not received prior to the related determination date (any such advance, a monthly advance).

 

Monthly advances are intended to maintain a regular flow of scheduled interest and principal payments on the certificates rather than to guarantee or insure against losses. Each servicer (other than Cenlar FSB) and the servicing administrator (with respect to mortgage loans serviced by Cenlar FSB) is obligated to fund monthly advances with respect to delinquent payments of interest and principal on each mortgage loan serviced by it, to the extent that such monthly advances are, in its reasonable judgment, recoverable from future payments and collections or insurance payments or proceeds of liquidation of the related mortgage loans. Any failure by a servicer (other than Cenlar FSB) or the servicing administrator to fund a monthly advance as required under the applicable servicing agreement will constitute a default thereunder, and the master servicer or a successor servicer (or successor servicing administrator in the case of the mortgage loans serviced by Cenlar FSB) appointed by the master servicer will be required to make a monthly advance in accordance with the terms of the pooling and servicing agreement; provided, however, that in no event will the master servicer, the securities administrator or a successor servicer or servicing administrator be required to make a monthly advance that is not, in its reasonable judgment, recoverable from future payments and collections or insurance payments or proceeds of liquidation of the related mortgage loans. If a servicer (other than Cenlar FSB) or the servicing administrator determines on any determination date to make a monthly advance, such monthly advance will be included with the payment to certificateholders on the related distribution date. To the extent a servicer (other than Cenlar FSB) or the servicing administrator uses funds in the applicable custodial account that are not otherwise required to be remitted to the distribution account for such distribution date to fund monthly advances, such servicer or the servicing administrator, as applicable, is required to replenish those funds prior to the remittance date on which those funds are to be distributed.

 

Each servicer (other than Cenlar FSB) and the servicing administrator may be reimbursed from collections on the related mortgage loans for which a monthly advance was made with its own funds, or was made with funds held for a future distribution and replenished with its own funds.

 

Each servicer (other than Cenlar FSB) and the servicing administrator may be reimbursed for monthly advances from amounts in the applicable custodial account to the extent those monthly advances are nonrecoverable from collections on the related mortgage loan for which the monthly advance was made, provided that the mortgage loan is not required to be repurchased by such servicer or the servicing administrator as a result of a breach of a representation or warranty relating to that mortgage loan.

 

Each servicer (other than Cenlar FSB) and the servicing administrator may also be reimbursed for monthly advances and servicing advances at the time of a servicing modification where the servicer adds those amounts to the stated principal balance of the mortgage loans as part of the modification.

 

Servicing Compensation and Payment of Expenses. Each servicer other than Cenlar FSB will be entitled to receive, from interest actually collected on each mortgage loan serviced by it, a servicing fee equal to the product of (1) the stated principal balance of the mortgage loans as of the first day of the related Due Period and (2) a per annum rate, or the servicing fee rate, equal to 0.25% annually. With respect to loans serviced by Cenlar FSB, the aggregate servicing fee rate will also be 0.25% annually, with such amount allocated between Cenlar FSB and the servicing administrator. Cenlar FSB’s portion of such fee will be determined as described under “Fees and Expenses of the Issuing Entity.” Each servicer will also be entitled to receive, to the extent provided in the servicing agreement, additional compensation in the form of any interest or other income earned on funds it has deposited in the applicable custodial account pending remittance to the distribution account, as well as, in certain cases, late charges and certain fees paid by borrowers and, in certain cases, REO management fees. First Republic Bank will also be entitled to retain as additional servicing compensation any prepayment charges received with respect to mortgage

 

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loans it services and any increases in the mortgage interest rates payable by borrowers under the terms of the related mortgage notes due to termination of an automatic debit or direct deposit account; provided that any increase in such mortgage interest rate for any mortgage loan due to termination of an automatic debit or direct deposit account will not exceed 1%. The amount of the servicing fee of each servicer (other than Cenlar FSB) and the servicing administrator’s fee are subject to adjustment with respect to prepaid mortgage loans, as described above under “— Prepayment Interest Shortfalls.”

 

As compensation for its obligations to fund monthly advances and certain servicing advances with respect to mortgage loans serviced by Cenlar FSB and to pay prepayment interest shortfalls with respect to such loans, the servicing administrator will be entitled to receive, from interest actually collected on each mortgage loan serviced by Cenlar FSB, the difference, if positive, between the aggregate servicing fee based on the per annum rate equal to 0.25% annually and the fees payable to Cenlar FSB under the applicable servicing agreement.

 

As compensation for its services, the master servicer will be paid a monthly fee, or the master servicing fee, with respect to each mortgage loan, calculated as 0.0275% per annum, or the master servicing fee rate, of the stated principal balance of each mortgage loan as of the first day of the related due period.

 

The amounts of the master servicing fee, the servicing administrator fee and the servicers’ servicing fees are subject to adjustment with respect to prepaid mortgage loans, as described above under “—Prepayment Interest Shortfalls.”

 

Evidence as to Compliance. The servicing agreements will require each servicer and the servicing administrator to deliver to the securities administrator, on or before the date in each year specified in the servicing agreement, and, if required, deliver to the securities administrator for filing with the SEC as part of a Report on Form 10-K filed on behalf of the issuing entity, the following documents:

 

·a report on its assessment of compliance during the preceding calendar year with all applicable servicing criteria set forth in relevant SEC regulations with respect to asset-backed securities transactions taken as a whole involving the servicer that are backed by the same types of assets as those backing the offered securities, as well as similar reports on assessment of compliance received from certain other parties participating in the servicing function as required by relevant SEC regulations;

 

·with respect to each assessment report described in the immediately preceding bullet point, a report by a registered public accounting firm that attests to, and reports on, the assessment made by the asserting party, as set forth in relevant SEC regulations; and

 

·a statement of compliance from the servicer and the servicing administrator, and similar statements from certain other parties involved in servicing the mortgage loans as required by relevant SEC regulations, signed by an authorized officer, to the effect that: (a) a review of the servicer’s or the servicing administrator’s activities during the reporting period and of its performance under the servicing agreement has been made under such officer’s supervision; and (b) to the best of such officer’s knowledge, based on such review, the servicer or the servicing administrator has fulfilled all of its obligations under the servicing agreement in all materials respects throughout the reporting period or, if there has been a failure to fulfill any such obligation in any material respect, specifying each such failure known to such officer and the nature and status thereof.

 

Events of Default. Events of default with respect to each servicer under each servicing agreement include (i) any failure of the servicer to remit to the securities administrator any required payment which continues unremedied for two business days, subject in some cases to certain notice or knowledge requirements and subject to certain force majeure exceptions and conditions in the case of the servicing agreement with PHH Mortgage Corporation; (ii) any failure by the servicer duly to observe or perform in

 

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any material respect any of its other covenants or agreements in the servicing agreement which continues unremedied for 30 days after the giving of written notice of such failure by the master servicer to the servicer; (iii) if the servicer is also the originator, any failure of the originator or the servicer to repurchase a mortgage loan or make the appropriate indemnification payment within 30 days of the final decision of an arbitrator that the originator or the servicer, as the case may be, is obligated to repurchase or make an indemnification payment with respect to the mortgage loan; and (iv) certain events of insolvency, readjustment of debt, marshalling of assets and liabilities or similar proceeding and certain actions by or on behalf of the servicer indicating its insolvency, reorganization or inability to pay its obligations.

 

If an event of default involving the failure of a servicer (other than Cenlar FSB) or the servicing administrator to fund a monthly advance prior to the related distribution date occurs, the master servicer is required to terminate such servicer or, in the case of such an event of default involving the servicing administrator, the servicing administrator and, at the master servicer’s option, Cenlar FSB, and either appoint a successor servicer or servicing administrator in accordance with the servicing agreement and the pooling and servicing agreement or succeed to the responsibilities of the terminated servicer or servicing administrator, unless 100% of the certificateholders waive the default of the servicer or servicing administrator. If any other event of default by a servicer under a servicing agreement has occurred, the master servicer may, at its option, and will, if it determines such action to be in the best interests of certificateholders, terminate the defaulting servicer. The servicing administrator will not be terminated as a result of such an event of default by Cenlar FSB. In the event that the master servicer removes a servicer or the servicing administrator, the master servicer will, in accordance with the pooling and servicing agreement, act as successor servicer or successor servicing administrator under the related servicing agreement or will appoint a successor servicer or successor servicing administrator in accordance with the pooling and servicing agreement. Upon termination of the servicer, there will be a period of transition of not more than 90 days before the servicing functions of the servicer can be fully transferred to a successor servicer (including the master servicer as successor servicer). In connection with the appointment of a successor servicer, the master servicer may make arrangement for the compensation of the successor servicer as the master servicer and successor servicer agree. The master servicer will have the right to agree to compensation of a successor servicer in excess of that permitted to a servicer under the servicing agreements if, in its good faith judgment, an increase is necessary or advisable to engage a successor servicer. To the extent a successor servicer is paid a servicing fee in excess of that permitted to a servicer under the servicing agreements, any resulting shortfall will be allocated to the certificates by operation of the payment priorities.

 

An “Event of Default” with respect to the master servicer under the pooling and servicing agreement includes (i) any failure by the master servicer to furnish the securities administrator certain mortgage loan data which continues unremedied for one business day after the date upon which written notice of such failure has been given as required under the pooling and servicing agreement; (ii) any failure on the part of the master servicer duly to observe or perform in any material respect any other of certain covenants or agreements on the part of the master servicer contained in the pooling and servicing agreement which continues unremedied for a period of 30 days after the date on which written notice of such failure has been given as required under the pooling and servicing agreement; (iii) any failure of the master servicer to make any advances when such advances are due, which failure continues unremedied for one business day; and (iv) certain events of insolvency, readjustment of debt, marshalling of assets and liabilities or similar proceeding and certain actions by or on behalf of the master servicer indicating its insolvency, reorganization or inability to pay its obligations.

 

If an Event of Default involving the failure of the master servicer to make a monthly advance prior to the related distribution date occurs, the trustee is required to terminate the master servicer and either appoint a successor master servicer or succeed to the responsibilities of the terminated master servicer in accordance the pooling and servicing agreement, unless 100% of the certificateholders waive the default of the master servicer. If any other Event of Default by the master servicer has occurred, the trustee may, at its option, and will, if it has been directed to do so by either (a) certificateholders holding more than 50% of the Class Principal Amount (or Class Notional Amount) of each class of certificates, or (b) certificateholders holding 50% of the aggregate Class Principal Amount of the subordinate certificates, terminate the defaulting master servicer and either appoint a successor master servicer in accordance with

 

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the pooling and servicing agreement or succeed to the responsibilities of the terminated master servicer. However, in the event of (b) above, the trustee will provide written notice to all of the certificateholders within two business days of receiving such direction prior to terminating the master servicer and will not terminate the master servicer if, within 30 days of sending such written notice, the trustee has received contrary instructions from certificateholders holding more than 50% of the aggregate voting interests of the certificateholders. If the same entity is acting as both the securities administrator and the master servicer, the trustee will direct the depositor to remove the securities administrator in accordance with the pooling and servicing agreement. Upon termination of the master servicer, the trustee, unless a successor master servicer is appointed by the trustee, will succeed to all responsibilities, duties and liabilities of the master servicer under the pooling and servicing agreement, and will be entitled to reasonable servicing compensation not to exceed the master servicing fee, together with other compensation as provided in the pooling and servicing agreement. Notwithstanding the foregoing, the trustee may, if it shall be unwilling so to act, or shall, if it is legally unable to act, appoint or petition a court of competent jurisdiction to appoint, a successor master servicer in accordance with the pooling and servicing agreement.

 

To the extent that the costs and expenses incurred by the trustee in connection with any alleged or actual default by the master servicer, the termination of the master servicer, any appointment of a successor master servicer and/or any transfer and assumption of master servicing by the trustee or any successor master servicer are not fully and timely reimbursed by the terminated master servicer, then (a) the successor master servicer will deduct these amounts from any amounts that it otherwise would have paid to the predecessor master servicer in reimbursement of outstanding advances, and the successor master servicer will reimburse itself and the trustee for any unreimbursed costs and expenses, and (b) if the trustee is not required to be reimbursed by the master servicer or if those costs and expenses are not satisfied pursuant to clause (a) within 90 days, then the trustee and successor master servicer will be entitled to reimbursement of such costs and expenses from the distribution account, subject to an annual limit of $300,000 as described in the definition of Available Distribution Amount.

 

Limitation on Liability of the Servicers and Master Servicer. Each servicing agreement provides that the servicer and any director, officer, employee or agent of the servicer may rely on any document of any kind which it in good faith reasonably believes to be genuine and to have been properly adopted or signed with respect to matters arising under the servicing agreement. A servicer generally will have no obligation to appear with respect to, prosecute or defend any legal action that is not incidental to its duty to service the mortgage loans in accordance with its servicing agreement.

 

The pooling and servicing agreement provides that neither the master servicer nor any of its directors, officers, employees or agents will be under any liability to the trustee or the certificateholders for any action taken or for refraining from the taking of any action in good faith pursuant to the pooling and servicing agreement, or for errors in judgment; provided, however, that this provision does not protect the master servicer or any such person against any liability that would otherwise be imposed by reason of willful misfeasance, bad faith or negligence in its performance of its duties or by reason of reckless disregard for its obligations and duties under the pooling and servicing agreement. The master servicer and any director, officer, employee or agent of the master servicer may rely in good faith on any document of any kind prima facie properly executed and submitted by any person respecting any matters arising under the pooling and servicing agreement. The master servicer generally will have no obligation to appear with respect to, prosecute or defend any legal action that is not incidental to its duties to master service the mortgage loans in accordance with the pooling and servicing agreement.

 

The pooling and servicing agreement further provides that the master servicer will not be liable for any acts or omissions of any servicer except to the extent that damages or expenses are incurred as a result of such act or omissions and such damages and expenses would not have been incurred but for the negligence, willful misfeasance, bad faith or recklessness of the master servicer in supervising, monitoring and overseeing the obligations of the servicers under the pooling and servicing agreement.

 

Resignation of the Servicers and the Master Servicer. Each of the master servicer and the servicers may not resign from its obligations and duties under the pooling and servicing agreement or the applicable servicing agreement or assign or transfer its rights, duties or obligations except upon a

 

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determination that its duties thereunder are no longer permissible under applicable law and the incapacity cannot be cured. No such resignation will become effective until a successor has assumed the master servicer’s or such servicer’s obligations and duties under the pooling and servicing agreement or the applicable servicing agreement, as the case may be.

 

Any person into which the master servicer or a servicer may be merged or consolidated, any person resulting from any merger or consolidation to which the master servicer or a servicer is a party, any person succeeding to the business of the master servicer or a servicer or any person to whom the master servicer or a servicer assigns or transfers its duties and obligations, will be the successor of the master servicer or such servicer, as the case may be, under the pooling and servicing agreement or the applicable servicing agreement; provided, however, that any successor to the master servicer whose primary business is the servicing of conventional residential mortgage loans must be qualified and approved to service mortgage loans for Fannie Mae or Freddie Mac and shall have a net worth of not less than $15,000,000.

 

Limitation on Rights of Certificateholders. No certificateholder will have any right under the pooling and servicing agreement to institute any suit, action or proceeding with respect to the pooling and servicing agreement unless (1) that certificateholder previously gave written notice to the trustee of an event of default, (2) certificateholders evidencing not less than 25% of the Class Principal Amount or Class Notional Amount of certificates of each class affected by the event of default have made written request to the trustee to institute proceedings in its own name as trustee and have offered to the trustee reasonable indemnity, (3) the trustee, for 60 days after its receipt of such notice, request and offer of indemnity, has failed to institute any proceeding and (4) no direction inconsistent with such written request has been given to the trustee during that 60-day period by certificateholders evidencing not less than 25% of the Class Principal Amount or Class Notional Amount of certificates of each affected class.

 

Amendment of the Servicing Agreements and Pooling and Servicing Agreement. Each servicing agreement may generally be amended by written agreement between the parties thereto without notice to or consent of the certificateholders. The pooling and servicing agreement may be amended by written agreement between the depositor, the master servicer, the securities administrator and the trustee, without notice to or consent of the certificateholders, (i) to cure any ambiguity or mistake, (ii) to cause the provisions of the pooling and servicing agreement to conform to or be consistent with or in furtherance of the statements made with respect to the certificates, the trust fund or the pooling and servicing agreement in this prospectus supplement and the accompanying prospectus, or to correct any error, (iii) to make any other provisions with respect to matters or questions arising under the pooling and servicing agreement, (iv) to add, delete or amend any provisions to the extent necessary or desirable to comply with any requirements imposed by the Code and the REMIC Provisions or (v) if necessary in order to avoid a violation of any applicable law or regulation.

 

The pooling and servicing agreement may also be amended by the trustee, the master servicer, the securities administrator and the depositor with the consent of the holders of certificates of each class affected by the amendment, in each case evidencing not less than 66 2/3% of the aggregate percentage interests constituting that class, for the purpose of adding any provisions to or changing in any manner or eliminating any of the provisions of the pooling and servicing agreement or of modifying in any manner the rights of the certificateholders; provided, however, that no amendment may (i) reduce in any manner the amount of or delay the timing of, collections of payments on the mortgage loans or distributions that are required to be made on a certificate of any class without the consent of the holder of that certificate or (ii) reduce the percentage of certificates of any class the holders of which are required to consent to that amendment unless the holders of all certificates of that class have consented to the change in percentage. The trustee will not be entitled to consent to an amendment to the pooling and servicing agreement without having first received an opinion of counsel to the effect that the proposed amendment will not cause the issuing entity to fail to qualify as a REMIC, and the trustee and securities administrator prior to executing such an amendment may require an opinion of counsel stating that the execution of such amendment is duly authorized and permitted under the pooling and servicing agreement.

 

Duties of the Trustee and the Securities Administrator.Each of the securities administrator and the trustee will be required to perform only those duties specifically required of it under the pooling and

 

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servicing agreement unless, in the case of the trustee, a master servicer event of default has occurred, whereupon the trustee may take such additional actions as described above under “—Events of Default.” Upon receipt of the various certificates, statements, reports or other instruments required to be furnished to it, each of the trustee and the securities administrator will be required to examine them to determine whether they are in the form required by the pooling and servicing agreement; however, neither the trustee nor the securities administrator will be responsible for the accuracy or content of any documents furnished to such party by any other party; in addition, neither will be required to verify or recompute any mortgage loan data received from the servicers or the master servicer, but will be entitled to rely conclusively on such information.

 

Neither the trustee nor the securities administrator will have any liability arising out of or in connection with the pooling and servicing agreement, except that such party may be held liable for its own negligent action or failure to act, or for its own willful misconduct; provided, however, that the trustee will not be personally liable with respect to any action taken, suffered or omitted to be taken by it in good faith in accordance with the direction of the certificateholders during a master servicer event of default. The trustee will not be deemed to have notice of any master servicer event of default unless an officer of the trustee has actual knowledge of the master servicer event of default or written notice of a master servicer event of default is received by the trustee at its corporate trust office.Except when the master servicer is the securities administrator, the securities administrator generally will not be deemed to have notice of any master servicer event of default unless an officer of the securities administrator has actual knowledge of the master servicer event of default or written notice of a master servicer event of default is received by the securities administrator at the address specified in the pooling and servicing agreement. Neither the trustee nor the securities administrator is required to expend or risk its own funds or otherwise incur any financial liability in the performance of any of its duties under the pooling and servicing agreement, or in the exercise of any of its rights or powers, if it has reasonable grounds for believing that repayment of those funds or adequate indemnity against risk or liability is not reasonably assured to it.

 

The trustee will have no duties under the pooling and servicing agreement with respect to any claim, notice or other document (other than a claim or notice relating to the obligation of the trustee to enforce a remedy for a breach of a representation or warranty) it may receive or which may be alleged to have been delivered to or served upon it by the parties as a consequence of the assignment of any mortgage loan under the pooling and servicing agreement; however, the trustee will remit to the applicable servicer, with a copy to the master servicer, any claim, notice or other document it may receive which is delivered to the trustee’s corporate trust office, of which an officer of the trustee has actual knowledge and which contains information sufficient to permit the trustee to make a determination that the real property to which such document relates is a mortgaged property.None of the provisions in the pooling and servicing agreement will in any event require the trustee or the securities administrator to perform, or be responsible for the manner of performance of, any of the obligations of the master servicer, any servicer or any other party under the pooling and servicing agreement, the servicing agreements or the custodial agreement, except during such time as the trustee is the successor to, and is vested with the rights, duties, powers and privileges of, the master servicer.Neither the trustee nor the securities administrator will be responsible for any act or omission of the master servicer, the depositor or any other party; however, if the master servicer is the securities administrator, the securities administrator will be responsible for any act or omission of the master servicer.

 

Neither the trustee nor the securities administrator will be responsible for (a) any recording, filing or depositing of any agreement or of any financing statement or continuation statement evidencing a security interest, or the maintenance of any such recording or filing or depositing or any rerecording, refiling, or redepositing, (b) the payment of any insurance, (c) the payment or discharge of any tax, assessment, or other governmental charge or any lien or encumbrance of any kind owing with respect to, assessed or levied against, any part of the trust fund, other than from funds available in the distribution account, or (d) confirming or verifying the contents or any reports or certificates of the master servicer or any servicer delivered to the trustee or the securities administrator pursuant to the pooling and servicing agreement or any servicing agreement believed by the trustee or the securities administrator, as applicable, to be genuine and properly signed or presented.Neither the trustee nor the securities administrator is

 

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responsible for the validity of the pooling and servicing agreement or the certificates or the validity, priority, perfection or sufficiency of the security for the certificates.

 

Expenses and Indemnities of the Trustee and the Securities Administrator.Each of the trustee and the securities administrator will be entitled to reimbursement of all reasonable expenses, disbursements and advances incurred or made by such party in accordance with the pooling and servicing agreement, except for expenses, disbursements and advances incurred by such party in the routine administration of its duties under the pooling and servicing agreement and other transaction documents and except for any expenses arising from its negligence or willful misconduct. The trustee and the securities administrator will also be entitled to indemnification from the issuing entity for any loss, liability or expense arising out of, or incurred in connection with, the acceptance or administration of the trusts created under the pooling and servicing agreement or in connection with the performance of their duties under the pooling and servicing agreement, including the costs and expenses of defending themselves against any claim in connection with the exercise or performance of any of their powers or duties under the pooling and servicing agreement, except for any expenses arising from the such party's negligence or willful misconduct.

 

The trustee and the securities administrator will be entitled to reimbursement for its expenses and indemnification amounts as described above from collections (subject to the aggregate annual cap of $300,000 and subject to an annual cap of $100,000 with respect to the trustee, in each case as further described elsewhere in this prospectus supplement), prior to distribution of any amounts to certificateholders.

 

Resignation of Trustee and Securities Administrator.Each of the trustee and securities administrator may, upon written notice to the other party, the depositor and the master servicer, resign at any time, in which event the depositor will appoint a successor trustee or successor securities administrator.If no successor trustee or successor securities administrator has been appointed and has accepted the appointment within thirty days after the notice of resignation is given by the trustee or the securities administrator, the resigning party may petition any court of competent jurisdiction for appointment of a successor trustee or successor securities administrator.

 

Each of the trustee and the securities administrator may be removed at any time by the depositor if (a) such party ceases to be eligible to continue to act as trustee or securities administrator under the pooling and servicing agreement, (b) with respect to the securities administrator only, the securities administrator fails to perform its obligations under the pooling and servicing agreement to make distributions to the certificateholders, which failure continues unremedied for one business day after receipt of notice from the trustee or the depositor, (c) with respect to the securities administrator only, the securities administrator fails to provide certain certificates as required pursuant to the pooling and servicing agreement, (d) the trustee or the securities administrator becomes incapable of acting, or is adjudged bankrupt or insolvent, or a receiver of the trustee or the securities administrator is appointed, (e) with respect to the trustee only, a tax is imposed or threatened with respect to the issuing entity by any state in which the trustee or the trust fund held by the trustee is located or (f) the continued use of the trustee or the securities administrator would result in a downgrading of the rating by any rating agency of any class of certificates.In addition, each of the trustee and the securities administrator may be removed at any time by holders of more than 50% of the class principal amount (or percentage interest) of each class of certificates upon 30 days’ written notice to the depositor and the trustee or the securities administrator, as applicable. If the same person is acting as both the securities administrator and the master servicer, then, in the event of the removal of the securities administrator, the depositor will direct the trustee to remove the master servicer in accordance with the terms of the pooling and servicing agreement.

 

Any resignation or removal of the trustee or the securities administrator, as applicable, and appointment of a successor trustee or successor securities administrator will not become effective until acceptance of the appointment by the successor trustee or the securities administrator, as applicable, whereupon the predecessor trustee or predecessor securities administrator, as applicable, will mail notice of the succession of the successor trustee or the successor securities administrator, as applicable, to all

 

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certificateholders; the expenses of the mailing are to be borne by such predecessor party; provided, if such party has been removed without cause, such expenses will be borne by the trust fund.

 

The predecessor trustee will be required to deliver to the successor trustee (or assign to the successor trustee its interest under the custodial agreement, to the extent permitted) all mortgage loan files, and will be required to assign, transfer, deliver and pay over to the successor trustee the entire trust fund, together with all necessary instruments of transfer and assignment or other documents properly executed necessary to effect that transfer.In addition, the master servicer and the predecessor trustee or predecessor securities administrator will be required to execute and deliver such other instruments and do such other things as may reasonably be required to vest in the successor trustee or successor securities administrator, as applicable, all such rights, powers, duties and obligations.

 

See “The Agreements—The Pooling and Servicing Agreement and the Trusteein the prospectus.

 

Reports to Certificateholders

 

On each distribution date, the securities administrator will make available on the securities administrator’s website at www.ctslink.com a distribution statement containing certain of the items set forth under “The Agreements—Reports to Certificateholders” in the prospectus and as specified in the pooling and servicing agreement, based solely on information received from the servicers. For purposes of any electronic version of this prospectus supplement, the preceding uniform resource locator, or URL, is an inactive textual reference only. The depositor has taken steps to ensure that this URL reference was inactive at the time the electronic version of this prospectus supplement was created. This URL can be accessed in an internet browser at https:// followed by the URL. In addition, for so long as the issuing entity is required to file reports with the SEC under the Exchange Act, the issuing entity’s annual report on Form 10-K, distribution reports on Form 10-D, current reports on Form 8-K and amendments to those reports will be made available on such website as soon as reasonably practicable after such materials are electronically filed with, or furnished to, the SEC.

 

Voting Rights

 

Voting rights under the pooling and servicing agreement will be allocated as follows:

 

·99% to the classes of certificates, other than the Class A-IO Certificates, in proportion to their respective outstanding Class Principal Amounts; and

 

·1% to the Class A-IO Certificates.

 

Termination of the Issuing Entity

 

The issuing entity will terminate upon the payment to the holders of all classes of certificates of all amounts required to be paid to the holders and upon the last to occur of:

 

·the final payment or other liquidation, or any related advance, of the last mortgage loan;

 

·the disposition of all property acquired in respect of any mortgage loan remaining in the trust fund; and

 

·exercise by the master servicer of its right to purchase the mortgage loans and other property of the trust as described under “Description of the Certificates—Optional Purchase of the Mortgage Loans” in this prospectus supplement.

 

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The Custodial Agreement

 

In connection with the sale of the mortgage loans by the depositor to the issuing entity on the closing date, the depositor will be required to deliver a loan file to the custodian with respect to each mortgage loan consisting of, as to each mortgage loan that is not a cooperative loan:

 

·the original mortgage note endorsed in blank;

 

·the original recorded mortgage or a certified copy thereof, or, if the original mortgage has not yet been returned from the applicable public recording office, a certified copy of the original mortgage;

 

·for any mortgage loan not recorded with MERS(R) System, the original assignment of the mortgage in blank, in recordable form;

 

·each original recorded intervening assignment of the mortgage, or if any assignment has been submitted for recordation but has not been returned from the applicable public recording office or is otherwise not available, a certified copy thereof;

 

·the original title insurance policy, note of title insurance or written commitment, or a copy of such policy;

 

·the original or copies of each assumption agreement and modification agreement, if any; and

 

·the original or copies of each power of attorney, if any.

 

As to each cooperative loan, the depositor will be required to deliver a loan file to the custodian consisting of:

 

·the original mortgage note together with any applicable riders, endorsed in blank, with all prior and intervening endorsements as may be necessary to show a complete chain of endorsements;

 

·the original security agreement;

 

·the original stock certificate representing the shares of stock issued by a cooperative corporation and allocated to a cooperative unit (or the “Cooperative Shares”) and original stock power in blank;

 

·the original lease on a cooperative unit evidencing the possessory interest of the owner of the Cooperative Shares in such cooperative unit (or the “Proprietary Lease”) and an original assignment of the Proprietary Lease in blank;

 

·the original recognition agreement;

 

·the original UCC-1 financing statement with evidence of filing; and

 

·the original UCC-3 assignment in blank.

 

Limitation on Liability of Custodian. The custodial agreement provides, among other privileges and protections, that neither the custodian nor any of its directors, officers, agents or employees will be liable for any action taken or omitted to be taken in good faith pursuant to the custodial agreement and believed to be within the purview of the custodial agreement.

 

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Resignation and Removal of Custodian. The custodian may resign from its obligations and duties under the custodial agreement upon 60 days’ prior written notice to the trustee, and the trustee may remove the custodian upon 60 days’ prior written notice to the custodian, whereupon the trustee will either take custody of the mortgage files itself or appoint a successor custodian. If the trustee has neither taken custody of the mortgage files nor appointed a successor custodian within 30 days after notice of resignation or removal was given, the custodian may petition any court of competent jurisdiction for the appointment of a successor custodian.

 

Any person into which the custodian may be merged or consolidated, any person resulting from any merger or consolidation to which the custodian is a party, any person succeeding to the business of the custodian or any person to whom the custodian assigns or transfers its duties and obligations, will be the successor to the custodian under the custodial agreement.

 

See “The Agreements—The Custodial Agreement” in the prospectus.

 

 

YIELD, PREPAYMENT AND WEIGHTED AVERAGE LIFE

 

General

 

The yields to maturity (or to early termination) of the offered certificates will be affected by the rate of principal payments (including prepayments, which may include amounts received by virtue of purchase, condemnation, insurance or foreclosure) on the mortgage loans to reduce the Class Principal Amounts or Class Notional Amount, as applicable, of the certificates. Yields will also be affected by the extent to which mortgage loans bearing higher mortgage rates prepay at a more rapid rate than mortgage loans with lower mortgage rates, the amount and timing of borrower delinquencies and defaults resulting in Realized Losses, the purchase price paid by investors for the offered certificates, and other factors.

 

Yields on the offered certificates will be affected by the rate of principal payments on the mortgage loans. Principal prepayments may be influenced by a variety of economic, geographic, demographic, social, tax, legal and other factors, including the credit quality of the mortgage loans. In general, if prevailing interest rates fall below the interest rates on the mortgage loans, the mortgage loans are likely to be subject to a higher rate of prepayments than if prevailing rates remain at or above the interest rates on the mortgage loans. Conversely, if prevailing interest rates rise above the interest rates on the mortgage loans, the rate of prepayment would be expected to decrease. Other factors affecting prepayment of the mortgage loans include such factors as changes in borrowers’ housing needs, job transfers, unemployment, borrowers’ net equity in the mortgaged properties, changes in the values of mortgaged properties, mortgage market interest rates and servicing decisions, as well as refinancings resulting from solicitations by mortgage lenders. The mortgage loans generally have due-on-sale clauses. In addition, approximately 45.49% of the mortgage loans (by stated principal balance as of the cut-off date) require prepayment charges for certain prepayments made during the first three, four or five years, as applicable, from the date of loan origination, as described under “Description of the Mortgage Pool – Prepayment Charges.”

 

In addition, the rate of principal prepayments may also be influenced by programs offered by a servicer and its affiliates or by other lenders. Many mortgage lenders solicit borrowers to refinance their loans. These refinancings may increase the rate of prepayment of the mortgage loans.

 

The interest-only mortgage loans provide for payment of interest at the related mortgage rate, but no payment of principal, for a period of ten years following the origination of the related mortgage loan. Following the applicable interest-only period, the monthly payment with respect to these mortgage loans will be increased to an amount sufficient to amortize the principal balance of such mortgage loan over its remaining term, and to pay interest at the related mortgage rate.

 

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In recent years, modifications and other default resolution procedures other than foreclosure, such as deeds in lieu of foreclosure and short sales, have become more common and those servicing decisions, rather than foreclosure, may affect the rate of principal prepayments on the mortgage loans.

 

The rate of principal payments on the mortgage loans will also be affected by the amortization schedules of the mortgage loans, the rate and timing of prepayments thereon by the borrowers, liquidations of defaulted mortgage loans and repurchases of mortgage loans due to certain breaches of representations and warranties. The timing of changes in the rate of prepayments, liquidations, purchases of and indemnification payments with respect to the mortgage loans may, and the timing of Realized Losses will, significantly affect the yield to an investor, even if the average rate of principal payments experienced over time is consistent with an investor’s expectation. Because the rate and timing of principal payments on the mortgage loans will depend on future events and on a variety of factors (as described more fully herein and in the prospectus under “Yield and Prepayment Considerations”), no assurance can be given as to such rate or the timing of principal payments on the offered certificates. In general, the earlier a prepayment of principal of the mortgage loans, the greater will be the effect on an investor’s yield. The effect on an investor’s yield of principal payments occurring at a rate higher (or lower) than the rate anticipated by the investor during the period immediately following the issuance of the certificates may not be offset by a subsequent like decrease (or increase) in the rate of principal payments.

 

Prepayments, liquidations, purchases of and indemnification payments with respect to mortgage loans will result in payments to holders of certificates of principal amounts that would otherwise be paid over the remaining terms of such mortgage loans. The rate of defaults on the mortgage loans will also affect the rate and timing of principal payments on the mortgage loans. In general, defaults on mortgage loans are expected to occur with greater frequency in their early years, and after the initial fixed rate period, as increases in monthly payments may result in a default rate higher than on level payment mortgage loans. Furthermore, the rate of default on mortgage loans with high original loan-to-value ratios may be higher than for other mortgage loans.

 

Certain characteristics of the mortgage loans that may influence the rate of defaults or losses are described under “Risk Factors” and “Description of the Mortgage Pool.”

 

The inclusion of interest-only mortgage loans in the trust fund will generally, absent other considerations, result in longer weighted average lives of the offered certificates than would be the case if these mortgage loans provided for monthly payments of principal throughout their terms. If an investor purchases offered certificates at a discount, the yield may be reduced. In addition, a borrower may view the interest-only period as a disincentive to prepayment.

 

The yields on the offered certificates may be adversely affected by Net Prepayment Interest Shortfalls on the mortgage loans.

 

If the purchaser of an offered certificate offered at a discount from its initial principal amount calculates its anticipated yield to maturity (or early termination) based on an assumed rate of payment of principal that is faster than that actually experienced on the mortgage loans, the actual yield may be lower than that so calculated. Conversely, if the purchaser of an offered certificate offered at a premium calculates its anticipated yield based on an assumed rate of payment of principal that is slower than that actually experienced on the mortgage loans, the actual yield may be lower than that so calculated. For this purpose, prepayments of principal include not only voluntary prepayments made by the borrower, but also Liquidation Proceeds and repurchases of mortgage loans by an originator or the seller due to breaches of representations and warranties.

 

Subordination of the Subordinate Certificates

 

As described herein, certificates having a relatively higher priority of distribution will have a preferential right to receive payments of interest and principal. As a result, the yields of the subordinate

 

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certificates will be more sensitive, in varying degrees, to delinquencies and losses on the mortgage loans than the yields of more senior certificates.

 

Weighted Average Life

 

Weighted average life refers to the average amount of time that will elapse from the date of issuance of a security to the date of payment to the investor of each dollar paid in net reduction of principal of such security (assuming no losses). The weighted average lives of the offered certificates will be influenced by, among other things, the rate at which principal of the mortgage loans is paid, which may be in the form of scheduled amortization, prepayments or liquidations.

 

Prepayments on mortgage loans are commonly measured relative to a constant prepayment standard or model. The model used in this prospectus supplement for the mortgage loans is a Constant Prepayment Rate (or “CPR”). CPR assumes a constant rate of prepayment each month relative to the then outstanding balance of the mortgage loans for the life of such loans.

 

CPR does not purport to be either a historical description of the prepayment experience of the mortgage loans or a prediction of the anticipated rate of prepayment of any mortgage loans, including the mortgage loans to be owned by the issuing entity. The percentages of CPR in the tables below do not purport to be historical correlations of relative prepayment experience of the mortgage loans or predictions of the anticipated relative rate of prepayment of the mortgage loans. Variations in the prepayment experience and the principal balance of the mortgage loans that prepay may increase or decrease the percentages of initial Class Principal Amounts (and weighted average lives) shown in the following table. Such variations may occur even if the average prepayment experience of all such mortgage loans equals any of the specified percentages of CPR.

 

The tables below were prepared based on the following assumptions (collectively, the “Modeling Assumptions”): (1) the initial Class Principal Amounts are as set forth in the table on page S-1 and the initial Class Principal Amounts of the Class B-4 and Class B-5 Certificates are $1,640,000 and $3,444,218, respectively; (2) each monthly payment of principal and interest is timely received on the first day of each month commencing in April 2012; (3) principal prepayments are received in full on the last day of each month commencing in March 2012 and there are no Net Prepayment Interest Shortfalls; (4) there are no defaults or delinquencies on the mortgage loans; (5) distribution dates occur on the 25th day of each month commencing in April 2012 regardless of whether such day is a business day; (6) there are no purchases or substitutions of mortgage loans (except in the case of an optional termination of the issuing entity); (7) there is no optional termination of the issuing entity (except in the case of Weighted Average Life in Years (to Call)); (8) the certificates are issued on March 29, 2012; (9) the servicing fee rate and the master servicing fee rate for any mortgage loan is equal to the rate for such mortgage loan as shown below; (10) the Certificate Interest Rates are as set forth on page S-1; and (11) the mortgage loans are aggregated into assumed mortgage loans having the following weighted average characteristics:

 

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Assumed Characteristics of the Mortgage Loans

 

Loan
Number
  Cut-off Date
Principal
Balance
 ($)
  Original
Principal
Balance
 ($)
  Gross
Mortgage
Rate
(%)
  Servicing
Fee Rate
(%)
  Master
Servicing
Fee Rate
(%)
  Net
Mortgage
Rate (%)
  Original Term
to Maturity 
(months)
  Remaining
Term to
Maturity
(months)
  Original
IO Term
(months)
  Product Type
1   2,061,517.60   2,169,500.00   3.9319   0.2500   0.0275   3.6544   360   358   0   30 Year Fixed Rate
2   36,509,460.04   36,607,756.21   4.4362   0.2500   0.0275   4.1587   360   358   0   30 Year Fixed Rate
3   128,843,368.53   129,385,183.88   4.7797   0.2500   0.0275   4.5022   360   358   0   30 Year Fixed Rate
4   9,106,456.20   9,144,300.00   5.2216   0.2500   0.0275   4.9441   360   356   0   30 Year Fixed Rate
5   260,184.76   262,000.00   5.5927   0.2500   0.0275   5.3152   360   355   0   30 Year Fixed Rate
6   4,000,000.00   4,000,000.00   4.3000   0.2500   0.0275   4.0225   360   356   120   30 Year Fixed Rate, 3 Year Prepay Penalty, IO
7   1,488,564.03   1,500,000.00   4.7500   0.2500   0.0275   4.4725   360   354   0   30 Year Fixed Rate, 4 Year Prepay Penalty
8   1,975,000.00   2,000,000.00   5.1500   0.2500   0.0275   4.8725   360   357   120   30 Year Fixed Rate, IO
9   3,395,039.22   3,400,000.00   3.9294   0.2500   0.0275   3.6519   360   359   0   30 Year Fixed Rate, 5 Year Prepay Penalty
10   79,293,804.09   79,785,050.00   4.2924   0.2500   0.0275   4.0149   360   357   0   30 Year Fixed Rate, 5 Year Prepay Penalty
11   32,390,281.71   32,660,324.00   4.6895   0.2500   0.0275   4.4120   360   354   0   30 Year Fixed Rate, 5 Year Prepay Penalty
12   1,737,367.67   1,750,000.00   5.0500   0.2500   0.0275   4.7725   360   354   0   30 Year Fixed Rate, 5 Year Prepay Penalty
13   8,000,878.00   8,000,878.00   4.3798   0.2500   0.0275   4.1023   360   358   120   30 Year Fixed Rate, 5 Year Prepay Penalty, IO
14   18,873,296.28   18,881,700.00   4.8052   0.2500   0.0275   4.5277   360   354   120   30 Year Fixed Rate, 5 Year Prepay Penalty, IO

 

The actual characteristics and the performance of the mortgage loans will differ from the assumptions used in constructing the tables set forth below, which are hypothetical in nature and are provided only to give a general sense of how the principal cashflows might behave under varying prepayment scenarios. For example, it is not expected that the mortgage loans will prepay at a constant rate until maturity, that all of the mortgage loans will prepay at the same rate or that there will be no defaults or delinquencies on the mortgage loans. Moreover, the diverse remaining terms to maturity of the mortgage loans could produce slower or faster principal payments than indicated in the tables at the various percentages of CPR specified, even if the weighted average remaining term to maturity are as assumed. Any difference between such assumptions and the actual characteristics and performance of the mortgage loans, or the actual prepayment or loss experience, will cause the percentages of initial Class Principal Amounts outstanding over time and the weighted average lives of the offered certificates to differ (which difference could be material) from the corresponding information in the tables for each indicated percentage of CPR.

 

The mortgage loans are expected to have the approximate actual aggregate characteristics as of the cut-off date as set forth in Annex A attached to this prospectus supplement and incorporated by reference herein.

 

Subject to the foregoing discussion and assumptions, the following tables indicate the weighted average lives of the offered certificates and set forth the percentages of the initial Class Principal Amounts of the offered certificates that would be outstanding after each of the distribution dates shown at various percentages of CPR.

 

The weighted average life of a class of offered certificates is determined by (1) multiplying the net reduction, if any, of the applicable Class Principal Amount by the number of years from the date of issuance of the offered certificate to the related distribution date, (2) adding the results and (3) dividing the sum by the aggregate of the net reductions of Class Principal Amount described in (1) above.

 

Decrement Tables

 

The following tables indicate the percentages of the initial Class Principal Amounts of the classes of certificates that would be outstanding after each of the dates shown at various CPRs and the corresponding weighted average lives of such classes. The tables have been prepared on the basis of the Modeling Assumptions. Significant discrepancies exist between the characteristics of the actual mortgage loans which will conveyed to the trustee and characteristics of the mortgage loans assumed in preparing the tables herein. It is not likely that (i) all of the mortgage loans will prepay at the CPR specified in the tables

 

S-107
 

 

or at any CPR or (ii) all of the mortgage loans will prepay at the same rate. Moreover, the diverse remaining terms to maturity of the mortgage loans could produce slower or faster principal payments than indicated in the tables at the specified CPRs, even if the weighted average remaining term to maturity of the mortgage loans is consistent with the remaining terms to maturity of the mortgage loans specified in the Modeling Assumptions.

 

S-108
 

 

Percentage of Initial Class Principal Amount of the

 Class A-1 Certificates Outstanding

at the Following Percentages of CPR

 

    Class A-1 Certificates
Prepayment Assumption   0%   5%   15%   25%   35%   45%
Distribution Date                        
Initial Percentage   100   100   100   100   100   100
March 2013   99   93   83   72   61   51
March 2014   97   87   68   51   37   24
March 2015   95   81   56   36   21   10
March 2016   94   75   46   25   11   2
March 2017   92   70   37   16   4   0
March 2018   90   65   30   11   1   0
March 2019   88   60   24   7   0   0
March 2020   86   55   20   5   0   0
March 2021   84   51   16   3   0   0
March 2022   82   47   14   2   0   0
March 2023   79   44   11   2   0   0
March 2024   77   40   9   1   0   0
March 2025   74   37   7   1   0   0
March 2026   71   33   6   *   0   0
March 2027   68   30   5   0   0   0
March 2028   64   27   4   0   0   0
March 2029   61   25   3   0   0   0
March 2030   57   22   2   0   0   0
March 2031   54   20   1   0   0   0
March 2032   50   17   1   0   0   0
March 2033   45   15   *   0   0   0
March 2034   41   13   0   0   0   0
March 2035   37   11   0   0   0   0
March 2036   32   9   0   0   0   0
March 2037   27   7   0   0   0   0
March 2038   22   5   0   0   0   0
March 2039   16   3   0   0   0   0
March 2040   10   1   0   0   0   0
March 2041   4   0   0   0   0   0
March 2042   0   0   0   0   0   0
Weighted Average Life in Years (to Maturity)†   18.48   10.95   4.94   2.83   1.85   1.34
Weighted Average Life in Years (to Call) †**   18.41   10.71   4.65   2.69   1.82   1.33

 


*          Indicates a value between 0.0% and 0.5%.

†          The weighted average life of a certificate of any class is determined by (i) multiplying the assumed reduction, if any, in the Class Principal Amount on each distribution date by the number of years from the date of issuance of the certificate to the related distribution date, (ii) adding the results, and (iii) dividing the sum by the total principal paid.

**        Assuming the mortgage loans are purchased on the first date permitted under “Description of the Certificates—Optional Purchase of the Mortgage Loans.”

 

S-109
 

 

Percentage of Initial Class Principal Amount of the

 Class A-2 Certificates Outstanding

at the Following Percentages of CPR

 

    Class A-2 Certificates
Prepayment Assumption   0%   5%   15%   25%   35%   45%
Distribution Date                        
Initial Percentage   100   100   100   100   100   100
March 2013   98   92   78   65   52   38
March 2014   96   84   60   39   21   5
March 2015   94   76   45   20   1   0
March 2016   92   69   32   6   0   0
March 2017   90   62   21   0   0   0
March 2018   88   56   13   0   0   0
March 2019   85   50   6   0   0   0
March 2020   83   44   0   0   0   0
March 2021   80   39   0   0   0   0
March 2022   77   34   0   0   0   0
March 2023   74   30   0   0   0   0
March 2024   71   25   0   0   0   0
March 2025   67   21   0   0   0   0
March 2026   63   17   0   0   0   0
March 2027   60   13   0   0   0   0
March 2028   55   9   0   0   0   0
March 2029   51   6   0   0   0   0
March 2030   47   3   0   0   0   0
March 2031   42   0   0   0   0   0
March 2032   37   0   0   0   0   0
March 2033   32   0   0   0   0   0
March 2034   26   0   0   0   0   0
March 2035   21   0   0   0   0   0
March 2036   15   0   0   0   0   0
March 2037   9   0   0   0   0   0
March 2038   2   0   0   0   0   0
March 2039   0   0   0   0   0   0
March 2040   0   0   0   0   0   0
March 2041   0   0   0   0   0   0
March 2042   0   0   0   0   0   0
Weighted Average Life in Years (to Maturity)†   16.09   7.80   3.06   1.79   1.23   0.90
Weighted Average Life in Years (to Call) †**   16.09   7.80   3.06   1.79   1.23   0.90

 


†          The weighted average life of a certificate of any class is determined by (i) multiplying the assumed reduction, if any, in the Class Principal Amount on each distribution date by the number of years from the date of issuance of the certificate to the related distribution date, (ii) adding the results, and (iii) dividing the sum by the total principal paid.

**       Assuming the mortgage loans are purchased on the first date permitted under “Description of the Certificates—Optional Purchase of the Mortgage Loans.”

 

S-110
 

 

Percentage of Initial Class Principal Amount of the

 Class A-3 Certificates Outstanding

at the Following Percentages of CPR

 

    Class A-3 Certificates
Prepayment Assumption   0%   5%   15%   25%   35%   45%
Distribution Date                        
Initial Percentage.   100   100   100   100   100   100
March 2013   100   100   100   100   100   100
March 2014   100   100   100   100   100   100
March 2015   100   100   100   100   100   49
March 2016   100   100   100   100   54   10
March 2017   100   100   100   82   22   0
March 2018   100   100   100   55   6   0
March 2019   100   100   100   36   0   0
March 2020   100   100   100   24   0   0
March 2021   100   100   82   16   0   0
March 2022   100   100   68   12   0   0
March 2023   100   100   56   9   0   0
March 2024   100   100   46   6   0   0
March 2025   100   100   37   3   0   0
March 2026   100   100   31   *   0   0
March 2027   100   100   25   0   0   0
March 2028   100   100   19   0   0   0
March 2029   100   100   14   0   0   0
March 2030   100   100   10   0   0   0
March 2031   100   98   6   0   0   0
March 2032   100   86   4   0   0   0
March 2033   100   75   1   0   0   0
March 2034   100   64   0   0   0   0
March 2035   100   54   0   0   0   0
March 2036   100   43   0   0   0   0
March 2037   100   33   0   0   0   0
March 2038   100   24   0   0   0   0
March 2039   81   15   0   0   0   0
March 2040   50   7   0   0   0   0
March 2041   18   0   0   0   0   0
March 2042   0   0   0   0   0   0
Weighted Average Life in Years (to Maturity)†   28.02   23.53   12.50   6.97   4.32   3.11
Weighted Average Life in Years (to Call) †**   27.69   22.35   11.01   6.28   4.20   3.06

 


*          Indicates a value between 0.0% and 0.5%.

†          The weighted average life of a certificate of any class is determined by (i) multiplying the assumed reduction, if any, in the Class Principal Amount on each distribution date by the number of years from the date of issuance of the certificate to the related distribution date, (ii) adding the results, and (iii) dividing the sum by the total principal paid.

**      Assuming the mortgage loans are purchased on the first date permitted under “Description of the Certificates—Optional Purchase of the Mortgage Loans.”

 

S-111
 

 

Percentage of Initial Class Principal Amount of the

 Class B-1 Certificates Outstanding

at the Following Percentages of CPR

 

    Class B-1 Certificates
Prepayment Assumption   0%   5%   15%   25%   35%   45%
Distribution Date                        
Initial Percentage.   100   100   100   100   100   100
March 2013   98   98   98   98   98   98
March 2014   97   97   97   97   97   97
March 2015   95   95   95   95   95   95
March 2016   93   93   93   93   93   93
March 2017   91   91   91   91   91   59
March 2018   89   87   84   80   76   22
March 2019   86   83   75   68   54   2
March 2020   84   77   65   53   27   0
March 2021   82   71   53   37   9   0
March 2022   79   65   41   21   0   0
March 2023   76   58   30   9   0   0
March 2024   73   52   20   *   0   0
March 2025   69   46   13   0   0   0
March 2026   66   40   6   0   0   0
March 2027   62   35   1   0   0   0
March 2028   58   29   0   0   0   0
March 2029   54   24   0   0   0   0
March 2030   50   19   0   0   0   0
March 2031   46   14   0   0   0   0
March 2032   41   10   0   0   0   0
March 2033   36   6   0   0   0   0
March 2034   30   2   0   0   0   0
March 2035   24   0   0   0   0   0
March 2036   18   0   0   0   0   0
March 2037   12   0   0   0   0   0
March 2038   5   0   0   0   0   0
March 2039   0   0   0   0   0   0
March 2040   0   0   0   0   0   0
March 2041   0   0   0   0   0   0
March 2042   0   0   0   0   0   0
Weighted Average Life in Years (to Maturity)†   16.65   12.44   9.12   7.91   6.90   5.21
Weighted Average Life in Years (to Call) †**   16.65   12.44   8.91   6.74   4.92   3.70

 


*          Indicates a value between 0.0% and 0.5%.

†          The weighted average life of a certificate of any class is determined by (i) multiplying the assumed reduction, if any, in the Class Principal Amount on each distribution date by the number of years from the date of issuance of the certificate to the related distribution date, (ii) adding the results, and (iii) dividing the sum by the total principal paid.

**       Assuming the mortgage loans are purchased on the first date permitted under “Description of the Certificates—Optional Purchase of the Mortgage Loans.”

 

S-112
 

 

Percentage of Initial Class Principal Amount of the

 Class B-2 and Class B-3 Certificates Outstanding

at the Following Percentages of CPR

 

    Class B-2 and Class B-3 Certificates
Prepayment Assumption   0%   5%   15%   25%   35%   45%
Distribution Date                        
Initial Percentage.   100   100   100   100   100   100
March 2013   98   98   98   98   98   98
March 2014   97   97   97   97   97   97
March 2015   95   95   95   95   95   95
March 2016   93   93   93   93   93   93
March 2017   91   91   91   91   91   59
March 2018   89   87   84   80   76   22
March 2019   86   83   75   68   54   2
March 2020   84   77   65   53   27   0
March 2021   82   71   53   37   9   0
March 2022   79   65   41   21   0   0
March 2023   76   58   30   9   0   0
March 2024   73   52   20   *   0   0
March 2025   69   46   13   0   0   0
March 2026   66   40   6   0   0   0
March 2027   62   35   1   0   0   0
March 2028   58   29   0   0   0   0
March 2029   54   24   0   0   0   0
March 2030   50   19   0   0   0   0
March 2031   46   14   0   0   0   0
March 2032   41   10   0   0   0   0
March 2033   36   6   0   0   0   0
March 2034   30   2   0   0   0   0
March 2035   24   *   0   0   0   0
March 2036   18   *   0   0   0   0
March 2037   12   *   0   0   0   0
March 2038   5   *   0   0   0   0
March 2039   0   *   0   0   0   0
March 2040   0   *   0   0   0   0
March 2041   0   0   0   0   0   0
March 2042   0   0   0   0   0   0
Weighted Average Life in Years (to Maturity)†   16.65   12.45   9.12   7.91   6.90   5.21
Weighted Average Life in Years (to Call) †**   16.65   12.44   8.91   6.74   4.92   3.70

 


*          Indicates a value between 0.0% and 0.5%.

†          The weighted average life of a certificate of any class is determined by (i) multiplying the assumed reduction, if any, in the Class Principal Amount on each distribution date by the number of years from the date of issuance of the certificate to the related distribution date, (ii) adding the results, and (iii) dividing the sum by the total principal paid.

**       Assuming the mortgage loans are purchased on the first date permitted under “Description of the Certificates—Optional Purchase of the Mortgage Loans.”

 

S-113
 

 

Class A-IO Certificates Yield Considerations

 

The following table indicates the sensitivity of the pre-tax yields to maturity on the Class A-IO Certificates to various constant rates of prepayment on the mortgage loans by projecting the monthly aggregate payments on the Class A-IO Certificates and computing the corresponding pre-tax yields to maturity on a corporate bond equivalent basis, based on the Modeling Assumptions, including the assumptions regarding the characteristics and performance of the mortgage loans, which differ from their actual characteristics and performance and assuming the aggregate purchase prices, including accrued interest, if any, set forth below. Any differences between the assumptions and the actual characteristics and performance of the mortgage loans and of the Class A-IO Certificates may result in yields being different from those shown in the table. Discrepancies between assumed and actual characteristics and performance underscore the hypothetical nature of the tables, which are provided only to give a general sense of the sensitivity of yields in varying prepayment scenarios.

 

The yields to investors in the Class A-IO Certificates will be sensitive to the rate and timing of principal payments (including prepayments, liquidations, repurchases, indemnification payments and defaults) on the mortgage loans, which may fluctuate significantly from time to time. An investor should fully consider the associated risks, including the risk that a relatively fast rate of principal payments (including prepayments, liquidations, repurchases and defaults) on the mortgage loans will have a material negative effect on the yield to investors in the Class A-IO Certificates and could result in the failure of investors in such certificates to recoup their initial investment.

 

The following table was prepared on the basis of the modeling assumptions and demonstrate the sensitivity of the pre-tax yield on the Class A-IO Certificates to various constant rates of prepayment by projecting the aggregate payments of interest on such certificates and the corresponding pre-tax yields on a corporate bond equivalent (“CBE”) basis, assuming distributions on the mortgage loans are made as set forth in the pooling and servicing agreement.

 

PRE-TAX YIELD TO MATURITY OF THE CLASS A-IO CERTIFICATES AT THE FOLLOWING PERCENTAGES OF CPR

 

Price (%)   10% CPR   15% CPR   20% CPR   25% CPR   30% CPR   35% CPR   40% CPR   50% CPR
1.239   56.403%   48.674%   40.499%   31.719%   22.039%   11.248%   (0.303)%   (25.576)%
1.548   41.608%   34.212%   26.325%   17.723%   7.975%   (3.112)%   (14.784)%   (39.910)%
1.857   31.987%   24.806%   17.082%   8.533%   (1.415)%   (12.910)%   (24.761)%   (49.873)%
2.166   25.229%   18.194%   10.563%   2.004%   (8.193)%   (20.133)%   (32.174)%   (57.318)%
2.475   20.215%   13.282%   5.701%   (2.901)%   (13.358)%   (25.745)%   (37.969)%   (63.163)%
2.784   16.339%   9.480%   1.920%   (6.742)%   (17.452)%   (30.275)%   (42.669)%   (67.918)%
3.093   13.248%   6.439%   (1.119)%   (9.848)%   (20.798)%   (34.036)%   (46.588)%   (71.890)%
3.402   10.718%   3.944%   (3.626)%   (12.425)%   (23.596)%   (37.230)%   (49.926)%   (75.277)%
3.711   8.604%   1.852%   (5.738)%   (14.606)%   (25.983)%   (39.989)%   (52.817)%   (78.216)%

 

Based upon the above assumptions, at approximately 23.4% CPR (at an assumed purchase price of 2.475% of the Class Notional Amount, excluding accrued interest, but adding accrued interest to the price for purposes of calculating yield), the pre-tax yield to the Class A-IO Certificates will be less than approximately 0%. If the rate of prepayments on the mortgage loans were to exceed the applicable levels for as little as one month, while equaling such level for all other months, the Class A-IO Certificateholders would not fully recoup their initial investment.

 

S-114
 

 

The pre-tax yields set forth in the preceding table were calculated by determining the monthly discount rates which, when applied to the assumed streams of cash flows to be paid on the Class A-IO Certificates, would cause the discounted present value of such assumed stream of cash flows to the closing date to equal the assumed purchase prices (plus accrued interest), and converting such monthly rates to CBE rates

 

USE OF PROCEEDS

 

The depositor will use the net proceeds of the issuance of the certificates to purchase the mortgage loans from the seller. Expenses incurred by the depositor in connection with this offering, excluding any underwriting discount, are expected to be approximately $782,000 ($95,000 of which expenses were incurred in connection with the selection and acquisition of the mortgage loans and other assets of the issuing entity).

 

MATERIAL FEDERAL INCOME TAX CONSEQUENCES