424B5 1 b405883_424b5.txt PROSPECTUSES FILED PROSPECTUS SUPPLEMENT (To Prospectus dated February 22, 2005) $1,896,236,200 (APPROXIMATE) HARBORVIEW MORTGAGE LOAN TRUST 2005-2 MORTGAGE LOAN PASS-THROUGH CERTIFICATES, SERIES 2005-2
UNDERWRITING APPROXIMATE PRINCIPAL DISCOUNT AND PROCEEDS TO CLASS BALANCE PASS-THROUGH RATE PRICE TO PUBLIC COMMISSIONS DEPOSITOR(1) ----- ------- ----------------- --------------- ----------- ------------ CLASS 1-A $616,760,000 VARIABLE 100.00000% 0.25000% 99.75000% CLASS 2-A-1A $659,471,000 VARIABLE 100.00000% 0.25000% 99.75000% CLASS 2-A-1B $264,648,000 VARIABLE 100.00000% 0.25000% 99.75000% CLASS 2-A-1C $175,000,000 VARIABLE 100.00000% 0.25000% 99.75000% CLASS 2-A-2 $68,529,000 VARIABLE 100.00000% 0.25000% 99.75000% CLASS X NOTIONAL AMOUNT VARIABLE VARIABLE N/A N/A CLASS PO $100 N/A VARIABLE N/A N/A CLASS A-R $100 WEIGHTED AVERAGE VARIABLE N/A N/A CLASS B-1 $46,676,000 VARIABLE 100.00000% 0.25000% 99.75000% CLASS B-2 $36,952,000 VARIABLE 100.00000% 0.25000% 99.75000% CLASS B-3 $28,200,000 VARIABLE 100.00000% 0.25000% 99.75000%
---------- (1) Before deducting issuance expenses payable by the depositor estimated to be $800,000. GREENWICH CAPITAL ACCEPTANCE, INC. Depositor GREENWICH CAPITAL FINANCIAL PRODUCTS, INC. Seller COUNTRYWIDE HOME LOANS SERVICING LP Servicer -------------------------- CONSIDER CAREFULLY THE THE TRUST RISK FACTORS BEGINNING ON PAGE S-13 IN THIS o The trust will issue fifteen classes of PROSPECTUS SUPPLEMENT certificates, of which the eleven classes listed AND ON PAGE 6 IN THE above are offered by this prospectus supplement PROSPECTUS. and the accompanying prospectus. The certificates o The trust assets will consist primarily of represent obligations of adjustable rate residential mortgage loans. The the trust only and do mortgage loans will be segregated into two loan not represent an groups as described in this prospectus supplement. interest in or obligation of any other THE CERTIFICATES entity. o The certificates represent ownership interests in This prospectus the trust assets. supplement may be used to offer and sell the o The initial certificate principal balances or certificates only if certificate notional amount, as applicable, of the accompanied by the classes of the certificates may vary in the prospectus. aggregate by 10%. ------------------------- o Each class of offered certificates will bear interest at the applicable interest rate calculated as described in this prospectus supplement. o Each class of offered certificates will have the benefit of credit enhancement to the extent described in this prospectus supplement. NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION HAS APPROVED THESE SECURITIES OR DETERMINED THAT THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS IS ACCURATE OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. Each of Greenwich Capital Markets, Inc. and WaMu Capital Corp. (the "Underwriters") will purchase a portion of the certificates listed in the table above, other than the Class X, Class PO and Class A-R Certificates, from the depositor and will offer the certificates purchased by it only after such certificates have been issued, delivered to and accepted by the underwriters. Greenwich Capital Markets, Inc. will offer the Class X, Class PO and Class A-R Certificates from time to time in negotiated transactions or otherwise at varying prices to be determined at the time of sale. Proceeds to the depositor with respect to the offered certificates are expected to be approximately 103.21% of their initial aggregate principal balance plus accrued interest, before deducting issuance expenses payable by the depositor. See "Method of Distribution" in this prospectus supplement. RBS GREENWICH CAPITAL WAMU CAPITAL CORP. April 7, 2005 TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT PROSPECTUS Page Page ---- ---- Summary of Terms.................................S-3 Important Notice About Information Risk Factors....................................S-13 in This Prospectus and Each The Mortgage Loan Groups........................S-26 Accompanying Prospectus Supplement...............5 Additional Information..........................S-56 Risk Factors........................................6 The Seller and the Originator...................S-56 The Trust Fund.....................................16 The Servicer....................................S-62 Use of Proceeds....................................33 The Class 2-A-1C Certificate Insurer............S-67 The Depositors.....................................33 The Pooling and Servicing Agreement.............S-69 Loan Program.......................................34 Description of the Certificates.................S-77 Description of the Securities......................38 Yield, Prepayment and Maturity Considerations..S-103 Credit Enhancement.................................47 Material Federal Income Tax Consequences.......S-117 Yield and Prepayment Considerations................58 State Taxes....................................S-121 Operative Agreements...............................61 ERISA Considerations...........................S-121 Material Legal Aspects of the Loans................82 Legal Investment Considerations................S-124 Material Federal Income Tax Consequences..........106 Use of Proceeds................................S-125 State Tax Considerations..........................153 Method of Distribution.........................S-125 ERISA Considerations..............................153 Legal Matters..................................S-126 Legal Investment Considerations...................159 Ratings........................................S-127 Method of Distribution............................161 Glossary of Terms..............................S-129 Legal Matters.....................................162 Annex A: Global Clearance, Financial Information.............................162 Settlement and Tax Documentation Available Information.............................162 Procedures.....................................A-1 Ratings...........................................163 Annex B: Yield Maintenance Glossary of Terms.................................164 Agreement Table................................B-1
S-2 SUMMARY OF TERMS o THIS SUMMARY HIGHLIGHTS SELECTED INFORMATION FROM THIS DOCUMENT AND DOES NOT CONTAIN ALL OF THE INFORMATION THAT YOU NEED TO CONSIDER IN MAKING YOUR INVESTMENT DECISION. TO UNDERSTAND ALL OF THE TERMS OF THE OFFERING OF THE OFFERED CERTIFICATES, READ CAREFULLY THIS ENTIRE DOCUMENT AND THE ACCOMPANYING PROSPECTUS. o THIS SUMMARY PROVIDES AN OVERVIEW OF CERTAIN CALCULATIONS, CASH FLOW PRIORITIES AND OTHER INFORMATION TO AID YOUR UNDERSTANDING AND IS QUALIFIED BY THE FULL DESCRIPTION OF THESE CALCULATIONS, CASH FLOW PRIORITIES AND OTHER INFORMATION IN THIS PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS. SOME OF THE INFORMATION CONSISTS OF FORWARD-LOOKING STATEMENTS RELATING TO FUTURE ECONOMIC PERFORMANCE OR PROJECTIONS AND OTHER FINANCIAL ITEMS. FORWARD-LOOKING STATEMENTS ARE SUBJECT TO A VARIETY OF RISKS AND UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS TO DIFFER FROM THE PROJECTED RESULTS. THOSE RISKS AND UNCERTAINTIES INCLUDE, AMONG OTHERS, GENERAL ECONOMIC AND BUSINESS CONDITIONS, REGULATORY INITIATIVES AND COMPLIANCE WITH GOVERNMENTAL REGULATIONS, AND VARIOUS OTHER MATTERS, ALL OF WHICH ARE BEYOND OUR CONTROL. ACCORDINGLY, WHAT ACTUALLY HAPPENS MAY BE VERY DIFFERENT FROM WHAT WE PREDICT IN OUR FORWARD-LOOKING STATEMENTS. o WHENEVER WE REFER IN THIS PROSPECTUS SUPPLEMENT TO A PERCENTAGE OF SOME OR ALL OF THE MORTGAGE LOANS EXPECTED TO BE INCLUDED AS TRUST ASSETS OR IN A LOAN GROUP, THAT PERCENTAGE HAS BEEN CALCULATED ON THE BASIS OF THE TOTAL PRINCIPAL BALANCE OF THOSE MORTGAGE LOANS AS OF MARCH 1, 2005, UNLESS WE SPECIFY OTHERWISE. WE EXPLAIN IN THIS PROSPECTUS SUPPLEMENT UNDER "THE MORTGAGE LOAN GROUPS--GENERAL" HOW THE PRINCIPAL BALANCE OF A MORTGAGE LOAN IS CALCULATED. WHENEVER WE REFER IN THIS SUMMARY OF TERMS OR IN THE RISK FACTORS SECTION OF THIS PROSPECTUS SUPPLEMENT TO THE AGGREGATE PRINCIPAL BALANCE OF ANY MORTGAGE LOANS, WE MEAN THE TOTAL OF THEIR PRINCIPAL BALANCES, UNLESS WE SPECIFY OTHERWISE. OFFERED CERTIFICATES On the closing date, HarborView Mortgage Loan Trust 2005-2 will issue fifteen classes of certificates. Only the Class 1-A, Class 2-A-1A, Class 2-A-1B, Class 2-A-1C, Class 2-A-2, Class X, Class PO, Class A-R, Class B-1, Class B-2 and Class B-3 Certificates are being offered by this prospectus supplement and the accompanying prospectus. Except for the Class A-R Certificate, the offered certificates will be book-entry securities clearing through The Depository Trust Company in the U.S. or upon request through Clearstream, Luxembourg or Euroclear in Europe, in minimum denominations of $25,000, except for the Class X Certificates which will be in a minimum notional amount of $100,000. The Class A-R Certificate will be issued as a single certificate in fully registered, certificated form. ADDITIONAL CERTIFICATES In addition to the eleven classes of offered certificates, the trust will issue four other classes of certificates. These certificates will be designated the Class B-4, Class B-5, Class B-6 and Class Y Certificates and are not being offered by this prospectus S-3 supplement and the prospectus. Information about the Class B-4, Class B-5 and Class B-6 Certificates is being included because these classes provide credit enhancement for the offered certificates. The Class B-4, Class B-5 and Class B-6 Certificates will have original aggregate principal balances of approximately $27,228,000, $12,641,000 and $8,754,734, respectively, subject to a variance as described in this prospectus supplement. The Class Y Certificate will be issued without a principal balance or notional amount. See "Description of the Certificates-- General," "--Book-Entry Registration and Definitive Certificates," "--The Yield Maintenance Agreements" and "The Mortgage Loan Groups" in this prospectus supplement and "The Trust Fund--The Mortgage Loans--General" in the prospectus for additional information. CUT-OFF DATE March 1, 2005. CLOSING DATE On or about April 12, 2005. SELLER Greenwich Capital Financial Products, Inc. See "The Seller and the Originator" in this prospectus supplement for additional information. SERVICER Countrywide Home Loans Servicing, LP See "The Servicer" and "Servicing of Mortgage Loans" in this prospectus supplement for additional information. ORIGINATOR Countrywide Home Loans, Inc. See "The Seller and the Originator" in this prospectus supplement for additional information. DEPOSITOR Greenwich Capital Acceptance, Inc. TRUSTEE U.S. Bank National Association. See "The Pooling and Servicing Agreement--The Trustee" in this prospectus supplement for additional information. YIELD MAINTENANCE PROVIDER The Bank of New York. See "Description of the Certificates--The Yield Maintenance Provider" in this prospectus supplement for additional information. CLASS 2-A-1C CERTIFICATE INSURER Ambac Assurance Corporation. See "The Class 2-A-1C Certificate Insurer" in this prospectus supplement for additional information. MORTGAGE LOANS The assets of the trust will consist primarily of a pool of adjustable rate, first lien, residential mortgage loans that are divided into two loan groups, each having the characteristics described in this prospectus supplement. The mortgage loans will have an aggregate principal balance of approximately S-4 $1,944,859,934 as of the cut-off date, subject to a variance of plus or minus 10%. LOAN GROUPS o Group 1 Mortgage Loans A group of conventional first lien, adjustable rate mortgage loans that have original principal balances that conform to Fannie Mae and Freddie Mac guidelines and interest rates that generally have an initial fixed rate period of one, two or three months and thereafter adjust on a monthly basis. o Group 2 Mortgage Loans A group of conventional first lien, adjustable rate mortgage loans that have original principal balances that may or may not conform to Fannie Mae and Freddie Mac guidelines and interest rates that generally have an initial fixed rate period of one, two or three months and thereafter adjust on a monthly basis. As of March 1, 2005, approximately 87.41% of all the mortgage loans, and 87.14% and 87.56%, of the group 1 and group 2 mortgage loans, respectively, were still in their initial fixed rate period. DESIGNATIONS Each class of certificates or components will have different characteristics, some of which are reflected in the following general designations. o Offered Certificates Class 1-A, Class 2-A-1A, Class 2-A-1B, Class 2-A-1C, Class 2-A-2, Class X, Class PO, Class A-R, Class B-1, Class B-2 and Class B-3 Certificates. o LIBOR Certificates The Offered Certificates other than the Class X Certificates, Class PO Certificates and the Class A-R Certificates. o Senior Certificates Class 1-A, Class 2-A-1A, Class 2-A-1B, Class 2-A-1C, Class 2-A-2, Class X, Class PO and Class A-R Certificates. o Subordinate Certificates Class B-1, Class B-2, Class B-3, Class B-4, Class B-5 and Class B-6 Certificates. o Yield Maintained Certificates Class 2-A-1A, Class 2-A-1B, Class 2-A-1C, and Class 2-A-2 Certificates. o Book-Entry Certificates All classes of offered certificates other than the Class A-R Certificate. o Residual Certificate Class A-R Certificate. o Interest-Only Certificate Class X Certificate. o Principal-Only Certificate Class PO Certificates. o Principal-Only Components PO-1 and PO-2 Components. Payments of interest and principal on the Class 1-A Certificates will primarily be based on collections from the group 1 mortgage loans. Payments of interest and principal on the Class 2-A-1A, Class 2-A-1B, Class 2-A-1C and Class 2-A-2 Certificates will primarily be based on collections from the group 2 mortgage loans. Payments of interest and principal on the Class B-1, Class B-2, Class B-3, Class B-4, S-5 Class B-5 and Class B-6 Certificates will be based on the aggregate collections from the group 1 and group 2 mortgage loans. Payments of principal and interest on the Class A-R Certificate will primarily be based on collections from the group 1 mortgage loans as well as any remaining amounts available after distributions to all other certificates from the group 1 and group 2 mortgage loans as described in this prospectus supplement. Solely for purposes of determining distributions of principal and the allocation of losses realized on the mortgage loans, the Class PO Certificates will be comprised of two components: the PO-1 Component and the PO-2 Component. The Class PO Certificates will have a certificate principal balance (initially, equal to $100) that will increase in an amount equal to net deferred interest with respect to the related mortgage loans that is allocated to the Class X Certificates as described under "Description of the Certificates--Interest" in this prospectus supplement. Distributions of principal on the PO-1 Component will be based on collections from the group 1 mortgage loans. Distributions of principal on the PO-2 Component will be based on collections from the group 2 mortgage loans. The holders of the Class PO Certificates will be entitled to receive principal distributions on any distribution date to the extent of the amount of principal distributed with respect to the related components on such distribution date. The holder of a Class PO Certificate may not transfer any component separately. The Class X Certificate is an interest-only certificate that will not have a certificate principal balance but will accrue interest on its certificate notional amount equal to the aggregate principal balance of the mortgage loans (initially, equal to approximately $1,944,859,934). Distributions of interest on the Class X Certificate will be based on collections from the group 1 and group 2 mortgage loans. DISTRIBUTION DATE Beginning in April 2005, the trustee, will make distributions on the certificates on the 19th day of each month or if the 19th day is not a business day, on the next business day. INTEREST PAYMENTS ON THE CERTIFICATES General On each distribution date, to the extent funds are available from the related mortgage loan group or groups, each class of certificates, other than the Class PO Certificates, will be entitled to receive accrued and unpaid interest determined on the basis of the related outstanding certificate principal balance or certificate notional amount, as applicable, immediately prior to that distribution date, the applicable pass-through rate and interest accrual period, and, in the case of the LIBOR certificates and the Class B-4, Class B-5 and Class B-6 Certificates, any accrued and unpaid interest shortfall attributable solely to basis risk, but solely to the extent of funds available as described in this prospectus supplement; provided, however, that the amount of interest distributable on a distribution date with respect to any class of certificates shall be reduced by the amount, if any, of net deferred interest accrued on the related mortgage loans for the month before that distribution date and allocable to such class of certificates, as described under "Description of the Certificates--Interest" in this prospectus supplement. In the case of S-6 any class of certificates other than the Class X Certificates, any amount of net deferred interest allocable to such class of certificates will be added as principal to the outstanding certificate principal balance of such class of certificates. With respect to the Class X Certificates, any amount of net deferred interest allocable to the Class X Certificates will instead be added as principal to the outstanding component principal balances of the PO-1 and PO-2 Components of the Class PO Certificates based on the amount of net deferred interest attributable to the related loan group, as described under "Description of the Certificates--Interest" in this prospectus supplement. Net deferred interest shall equal the excess, if any, of deferred interest added to the principal balances of the related mortgage loans over the aggregate amount of principal prepayments in full and partial prepayments of principal received with respect to the related group of mortgage loans during the related prepayment period. Interest on the offered certificates (other than the Class A-R Certificates, Class PO Certificates and the Class X Certificates) will accrue on the basis of a 360-day year and the actual number of days elapsed in the related interest accrual period. Interest on the Class A-R Certificates and the Class X Certificates will accrue on the basis of a 360-day year composed of twelve 30-day months. The Class PO Certificates will not accrue interest. With respect to each distribution date, the interest accrual period for the Class A-R Certificates and the Class X Certificates will be the calendar month immediately preceding the month in which that distribution date occurs. With respect to each distribution date, the interest accrual period for the LIBOR certificates will be the period beginning on the prior distribution date (or the closing date, in the case of the first distribution date) and ending on the day immediately preceding such distribution date. Pass-Through Rates Class 1-A, Class 2-A-1A, Class 2-A-1B, Class 2-A-1C, Class 2-A-2 and Class A-R Certificates Interest on the Class 1-A Certificates for any distribution date will be calculated at an annual rate equal to the least of (i) one-month LIBOR plus a specified margin (which margin will increase after the optional termination date), (ii) a cap based on the weighted average of the net loan rates of the mortgage loans, adjusted for the related accrual period and (iii) a cap based on the weighted average of the net maximum loan rates of the mortgage loans, adjusted for the related accrual period. Interest on the Class 2-A-1A, Class 2-A-1B, Class 2-A-1C and Class 2-A-2 Certificates for any distribution date will be calculated at an annual rate equal to the least of (i) one-month LIBOR plus a specified margin (which margin will increase after the optional termination date), (ii) a cap based on weighted average of the net loan rates of the mortgage loans, adjusted for the related accrual period and (iii) 10.50% per annum. Interest on the Class A-R Certificates for any distribution date will be calculated at an annual rate equal to the weighted average of the net loan rates of the mortgage loans. Class X Certificates Interest on the Class X Certificates for any distribution date will equal the total amount of interest accrued on the certificate notional amount, equal to the aggregate principal balance of the mortgage loans as of the first S-7 day of the month prior to such distribution date, at the related pass-through rate for the corresponding interest accrual period. Interest on the Class X Certificate for any distribution date will be calculated at an annual rate equal to the excess, if any, of (a) the weighted average of the net mortgage rates on the mortgage loans over (b) a rate equal to the weighted average rate at which interest accrues for the related interest accrual period on the certificates (including the Class PO Certificates and other than the Class X Certificates) at the applicable pass-through rate (provided, however, that the margin on the Class 2-A-1C Certificates shall be increased for this purpose by the Class 2-A-1C insurance premium rate; provided, further, that the pass-through rate for any class of certificates the interest payments on which are computed using an actual/360 day-count convention will be adjusted for this purpose by multiplying that pass-through rate by the quotient of the actual number of days in the applicable accrual period divided by 30). Notwithstanding the foregoing, on each distribution date, accrued interest that would otherwise be distributable to the Class X Certificate (after giving effect to any reduction in respect of net deferred interest allocated to the Class X Certificate on such distribution date), based on the pass-through rate described above, may be reduced by the amount, if any, that is necessary to fund payment of any basis risk shortfalls to the holders of the 1-A, Class 2-A-1A, Class 2-A-1B, Class 2-A-1C Class 2-A-2 Certificates and the subordinate certificates, as described in this prospectus supplement. Class B-1, Class B-2 and Class B-3 Certificates Interest on the Class B-1, Class B-2 and Class B-3 Certificates for any distribution date will be calculated at an annual rate equal to the least of (i) LIBOR plus a specified margin (which margin will increase after the optional termination date), (ii) a cap based on the weighted average of the net loan rates of the mortgage loans, adjusted for the related accrual period, and (iii) a cap based on the weighted average of the net maximum loan rates of the mortgage loans, adjusted for the related accrual period. The net loan rate of each mortgage loan will be equal to the loan rate on each such mortgage loan less the sum of the rates at which the trustee fee, servicing fee and any lender paid mortgage insurance fee are calculated. The net maximum loan rate of each mortgage loan will be equal to the maximum loan rate on each such mortgage loan less the sum of the rates at which the trustee fee, the servicing fee and any lender paid mortgage insurance fee, are calculated. See "Description of the Certificates--Interest" and "--Pass-Through Rates" in this prospectus supplement. PRINCIPAL PAYMENTS ON THE CERTIFICATES Principal will be paid to holders of the offered certificates to the extent of funds available to make payments of principal, on each distribution date in the amounts described in this prospectus supplement under "Description of the Certificates--Principal." The Class X Certificate is an interest-only certificate and is not entitled to distributions of principal. S-8 PAYMENT PRIORITIES On each distribution date, the trustee will apply the amounts in respect of the mortgage loans in each group available for payment generally in the following order of priority: o interest on the related senior certificates; provided, however, that interest otherwise payable on the Class X Certificates (after giving effect to any reduction in respect of net deferred interest on the mortgage loans allocated to the Class X Certificates on such distribution date) on that distribution date will be deposited in the basis risk reserve fund, to the extent of the required basis risk reserve fund deposit for that date; o principal of the related senior certificates (other than the Class X Certificates) in the order and amounts described in this prospectus supplement; o from the basis risk reserve fund, to the 1-A, Class 2-A-1A, Class 2-A-1B, Class 2-A-1C, Class 2-A-2 Certificates and the subordinate certificates, any unpaid basis risk shortfall, as described in this prospectus supplement; o amounts due to the Class 2-A-1C certificate insurer under the insurance agreement; o interest on, and then principal of, each class of subordinate certificates in the order of their numerical class designations, beginning with the Class B-1 Certificates; and o any remaining available funds to the Class A-R Certificate. See "Description of the Certificates" in this prospectus supplement for additional information. LIMITED CROSS-COLLATERALIZATION In certain very limited circumstances relating to a loan group's experiencing either rapid prepayments or disproportionately high realized losses, principal and interest collected from the other loan groups may be applied to pay principal or interest, or both, to the senior certificates related to the loan group experiencing such conditions. See "Description of the Certificates--Principal--Limited Cross-Collateralization" in this prospectus supplement for additional information. ADVANCES The servicer is required to make advances to cover delinquent payments of principal and interest in respect of the mortgage loans unless it reasonably believes that the advances are not recoverable from future payments or other recoveries on the related mortgage loans. Advances are intended to maintain a regular flow of scheduled interest and principal payments on the certificates and are not intended to guarantee or insure against losses. The servicer is also required to make certain servicing-related advances. See "The Servicer--Advances" in this prospectus supplement for additional information. OPTIONAL TERMINATION OF THE TRUST The servicer may purchase from the trust all of the trust assets and retire all outstanding certificates when the aggregate stated principal balance of the mortgage loans and any real estate owned by the trust is 10% or less of the aggregate stated principal balance of the mortgage loans as of the cut-off date. S-9 If the servicer fails to exercise its optional termination right, the margin over the LIBOR component of the pass-through rate on the LIBOR certificates will increase as described under "Description of the Certificates--Interest--Pass-Through Rates" and "The Pooling and Servicing Agreement--Optional Termination of the Trust" in this prospectus supplement. See "The Pooling and Servicing Agreement--Optional Termination of the Trust" in this prospectus supplement for additional information. CREDIT ENHANCEMENT The senior certificates will have a prior right of payment over the subordinate certificates. Among the classes of subordinate certificates, the Class B-1 Certificates will have the highest payment priority and the Class B-6 Certificates will have the lowest payment priority. Subordination is designed to provide the holders of certificates with a higher payment priority with protection against losses realized when the remaining unpaid principal balance on a mortgage loan exceeds the amount of proceeds recovered upon the liquidation of that mortgage loan. This loss protection is accomplished by allocating the realized losses first, among the subordinate certificates, beginning with the subordinate certificates with the lowest payment priority, and second, to the related class or classes of senior certificates and principal-only components, as applicable; provided, that the Class 2-A-2 Certificates will bear the principal portion of all realized losses otherwise allocable to the Class 1-A Certificates for so long as the Class 2-A-2 Certificates are outstanding; provided further, that the Class 2-A-1B and Class 2-A-1C Certificates will bear the principal portion of all realized losses allocable to the Class 2-A-1A Certificates, pro rata based on certificate principal balance, for so long as the Class 2-A-1B and Class 2-A-1C Certificates are outstanding, as described in this prospectus supplement under, as described in this prospectus supplement under "Description of the Certificates--Allocation of Losses." In addition, until the distribution date in April 2015, the subordinate certificates will not receive any principal prepayments (net of deferred interest) from the mortgage loans unless the related senior certificates are paid down to zero or the credit enhancement provided by the subordinate certificates has doubled prior to that date and certain performance tests have been satisfied. After that time and subject to certain performance triggers, the subordinate certificates will receive increasing portions of principal prepayments (net of deferred interest) over time. See "Description of the Certificates--Principal," "--Allocation of Losses" and "--Subordination of the Subordinate Certificates" in this prospectus supplement. YIELD MAINTENANCE AGREEMENTS The trust will have the benefit of two yield maintenance agreements which will be entered into on the closing date. Payments received under the yield maintenance agreements with respect to a distribution date will be allocated among the holders of the related Yield Maintained Certificates as described in this prospectus supplement. These payments may mitigate against the effects of a mismatch between the weighted average net loan rate of certain of the mortgage loans, as specified herein, and one-month LIBOR used to determine the interest rates on the related certificates. See "Description of the Certificates--The Yield Maintenance Agreements" in this prospectus supplement. S-10 THE CLASS 2-A-1C CERTIFICATE INSURANCE POLICY Ambac Assurance Corporation, a Wisconsin-domiciled stock insurance corporation, will issue an insurance policy for the benefit of the Class 2-A-1C Certificates. The policy will unconditionally and irrevocably guarantee payment of (i) the outstanding principal balance of the Class 2-A-1C Certificates on their final maturity date and (ii) accrued and unpaid interest calculated at the certificate rate due on the Class 2-A-1C Certificates, subject to certain terms and conditions set forth in the Class 2-A-1C certificate insurance policy. The Class 2-A-1C certificate insurance policy will not provide credit enhancement for any class of certificates other than the Class 2-A-1C Certificates. On each distribution date, the trustee will calculate to what extent the funds available to make the distributions of principal and interest are insufficient to distribute the amounts due on the Class 2-A-1C Certificates. If an insufficiency exists and it is covered by the Class 2-A-1C certificate insurance policy, then the trustee will make a draw on the policy. If for any reason the Class 2-A-1C certificate insurer does not make the payments required under the Class 2-A-1C certificate insurance policy, the holders of the Class 2-A-1C certificates will rely solely on the group 2 mortgage loans for their distributions of interest and principal and certificateholders may suffer a loss. The Class 2-A-1C certificate insurance policy does not cover basis risk shortfalls or shortfalls in interest collections on the mortgage loans that are attributable to prepayment interest shortfalls, deferred interest or the application of the Servicemembers Civil Relief Act. See "The Class 2-A-1C Certificate Insurer" and "Description of the Certificates--The Class 2-A-1C Certificate Insurance Policy" in this prospectus supplement. RATINGS It is a condition to the issuance of the offered certificates that the certificates initially have the following ratings from Moody's Investors Service, Inc. and Standard & Poor's Ratings Services, a division of The McGraw-Hill Companies, Inc.: S&P CLASS MOODY'S RATING RATING ----- -------------- ------ 1-A Aaa AAA 2-A-1A Aaa AAA 2-A-1B Aaa AAA 2-A-1C Aaa AAA 2-A-2 Aaa AAA X Aaa AAA PO Aaa AAA A-R Aaa AAA B-1 Aa2 AA B-2 A2 A B-3 Baa2 BBB A rating is not a recommendation to buy, sell or hold securities and it may be lowered or withdrawn at any time by the assigning rating agency. The ratings do not address the likelihood that any basis risk shortfall will be repaid to the holders of the LIBOR certificates. See "Ratings" in this prospectus supplement for additional information. MATERIAL FEDERAL INCOME TAX CONSEQUENCES In the opinion of McKee Nelson LLP, for federal income tax purposes, the trust will S-11 comprise multiple "real estate mortgage investment conduits" or REMICs. An owner of an offered certificate (other than the Class A-R Certificate) will be treated as having purchased REMIC "regular interests" (exclusive of the right of any certificates to receive payments in respect of basis risk shortfalls). The Class A-R Certificate will represent the sole "residual interest" in each REMIC created under the pooling and servicing agreement. The offered certificates (other than the Class A-R Certificate) generally will be treated as newly originated debt instruments for federal income tax purposes. Beneficial owners of the offered certificates (other than the Class A-R Certificate) will be required to report income on the offered certificates in accordance with the accrual method of accounting. See "Material Federal Income Tax Consequences" in this prospectus supplement and in the prospectus for additional information. ERISA CONSIDERATIONS Subject to satisfaction of certain conditions, ERISA Plans generally may purchase the offered certificates other than the Class A-R Certificate. See "ERISA Considerations" in this prospectus supplement and in the prospectus. LEGAL INVESTMENT CONSIDERATIONS The senior certificates and the Class B-1 Certificates will be "mortgage related securities" for purposes of the Secondary Mortgage Market Enhancement Act of 1984, or SMMEA, as long as they are rated in one of the two highest rating categories by at least one nationally recognized statistical rating organization. The Class B-2 and Class B-3 Certificates will not be rated in one of the two highest rating categories by a nationally recognized statistical rating organization and, therefore, will not be "mortgage related securities" for purposes of SMMEA. See "Legal Investment Considerations" in this prospectus supplement and in the prospectus. LISTING The certificates are not listed, and no party to the transaction intends to list the certificates, on any exchange or to quote them in the automated quotation system of a registered securities organization. S-12 RISK FACTORS THE FOLLOWING INFORMATION, TOGETHER WITH THE INFORMATION SET FORTH UNDER "RISK FACTORS" IN THE PROSPECTUS WHICH YOU ALSO SHOULD CAREFULLY CONSIDER, IDENTIFIES THE PRINCIPAL RISKS ASSOCIATED WITH AN INVESTMENT IN THE CERTIFICATES. LOAN PREPAYMENTS MAY ADVERSELY AFFECT THE AVERAGE LIFE OF, AND RATE OF RETURN ON, YOUR CERTIFICATES........................ Borrowers may prepay their mortgage loans in whole or in part at any time; however, approximately 66.84% of all of the mortgage loans, and approximately 70.08% and 65.12% of the group 1 and group 2 mortgage loans, respectively, require the payment of a prepayment penalty in connection with any voluntary prepayment occurring during periods that range from three months to three years after origination. These penalties may discourage borrowers from prepaying their mortgage loans during the penalty period. All prepayment penalty payments received on the mortgage loans will be retained by the servicer and will not be available for distribution to holders of the certificates. We cannot predict the rate at which borrowers will repay their mortgage loans. A prepayment of a mortgage loan generally will result in a payment of principal on the offered certificates. o If you purchase your certificates at a discount and principal is repaid slower than you anticipate, then your yield may be lower than you anticipate. o If you purchase your certificates at a premium or if you purchase a Class X Certificate and principal on the mortgage loans is repaid faster than you anticipate, then your yield may be lower than you anticipate. o The rate of prepayments on the mortgage loans will be sensitive to prevailing interest rates. Generally, if prevailing interest rates decline significantly below the interest rates on the mortgage loans, the mortgage loans are more likely to prepay than if prevailing rates remain above the interest rates on the mortgage loans. Conversely, if prevailing interest rates rise significantly, prepayments on the mortgage loans are likely to decrease. o The originator or the seller, as applicable, is required to purchase from the trust the related mortgage loans in the event certain breaches of representations and warranties occur and are not cured, as described under "The Pooling and Servicing Agreement--Assignment of the Mortgage S-13 Loans" in this prospectus supplement. These purchases will have the same effect on the holders of the offered certificates as a prepayment in full of the related mortgage loans. o If the rate of default or the severity of losses on the mortgage loans is higher than you expect, then your yield may be lower than you expect. o Under the principal distribution priorities described in this prospectus supplement, if prepayments (net of deferred interest) in one or more loan groups reduce the certificate and/or component principal balances, as applicable, of the related senior certificates to zero, future distributions which would otherwise be payable to the subordinate certificates may be used to pay outstanding senior certificates or components in another loan group thereby reducing the amount distributable to the subordinate certificates and increasing the amount distributable to the senior certificates. If you purchase subordinate certificates and this occurs, your yield may be lower than you expect. o Prospective purchasers of the Class X Certificates should carefully consider the risk that a rapid rate of principal payments on the mortgage loans could result in the failure of such purchasers to recover their initial investments. See "Yield, Prepayment and Maturity Considerations" in this prospectus supplement for a description of factors that may influence the rate and timing of prepayments on the mortgage loans. THE YIELD ON YOUR CERTIFICATES MAY BE LIMITED BY INITIAL FIXED MORTGAGE INTEREST RATES ON SOME MORTGAGE LOANS AND MAXIMUM MORTGAGE INTEREST RATES............. For each mortgage loan, the mortgage interest rate will be fixed for the first one, two or three months of the term of the mortgage loan. As of March 1, 2005, some of the mortgage loans were still in their one-month, two-month or three-month fixed rate period. See "The Mortgage Loan Groups" in this prospectus supplement. In addition, each mortgage loan has a maximum mortgage interest rate. These factors may prevent the mortgage interest rate on a mortgage loan from increasing, despite prevailing market interest rates, and the yield on your certificates may be adversely affected. On the closing date, a deposit will be made to the basis risk reserve fund that may mitigate the effect of such net WAC caps. S-14 THE YIELD AND WEIGHTED AVERAGE MATURITY OF THE CERTIFICATES WILL BE SUBJECT TO ANY NEGATIVE AMORTIZATION ON THE MORTGAGE LOANS............... After an initial fixed rate period of one, two or three months after origination, the interest rates on the mortgage loans adjust monthly but their monthly payments and amortization schedules adjust annually and are subject to maximum interest rates and payment caps. After the end of the initial fixed rate period, the interest rates on some of the mortgage loans may be lower than the sum of the index applicable at origination and the related margin. During a period of rising interest rates, as well as prior to the annual adjustment to the monthly payment made by the borrower, the amount of interest accruing on the principal balance of the mortgage loans may exceed the amount of the scheduled monthly payment. As a result, a portion of the accrued interest on the mortgage loans may become deferred interest that will be added to their respective principal balances and will also bear interest at the applicable interest rates. In addition, the amount by which a monthly payment may be adjusted on an annual payment adjustment date is limited and may not be sufficient to amortize fully the unpaid principal balance of a mortgage loan over its remaining term to maturity. If interest rates on the mortgage loans adjust lower prior to an adjustment in the monthly payment, a larger portion of the monthly payment will be applied to the unpaid principal balance of the mortgage loan, which may cause the related classes of certificates to amortize faster. If the unpaid principal balance of a mortgage loan exceeds the original balance of the mortgage loan by the amount specified in the related mortgage note, the monthly payment due on that mortgage loan will be recast without regard to the related payment cap in order to provide for the outstanding balance of the mortgage loan to be paid in full in equal monthly installments at its maturity. In addition, on the fifth payment adjustment date of a mortgage loan, and every fifth payment adjustment date thereafter, the monthly payment due on that mortgage loan will be recast without regard to the related payment cap in order to provide for the outstanding balance of the mortgage loan to be paid in full in equal monthly installments at its maturity. These features may affect the rate at which principal on the mortgage loans is paid and may create a greater risk of default if the related borrowers are unable to pay the monthly payments on the related increased principal balances. Any deferral of interest on the mortgage loans will result in a reduction of the amount of interest available to be distributed as interest to the certificates. The reduction in interest S-15 collections will be offset, in part, by applying certain prepayments received on the mortgage loans to interest distributions on the certificates. The excess of any deferred interest on the mortgage loans over the prepayments received on the mortgage loans, or net deferred interest, will be allocated among the classes of certificates in an amount equal to the excess of the interest accrued on each such class at its applicable pass-through rate over the amount of interest that would have accrued if the applicable pass-through rate for each class had been equal to a pass-through rate adjusted for net deferred interest on the related mortgage loans as described under "Description of the Certificates--Interest" in this prospectus supplement. Accordingly, those classes of certificates that are entitled to higher amounts of accrued interest will receive higher allocations of net deferred interest. Any such allocation of net deferred interest could, as a result, affect the weighted average maturity of the affected class of certificates. The amount deducted from the interest distributable to the Class X Certificate will be added to the certificate principal balance of the Class PO Certificates by increasing the principal balance of the PO-1 and PO-2 components based on the amounts attributable to the related mortgage loans. IF CREDIT ENHANCEMENT IS INSUFFICIENT, YOU COULD EXPERIENCE LOSSES ON YOUR CERTIFICATES........................ Credit enhancement will be provided for the offered certificates, first, by the right of the holders of offered certificates to receive payments before the classes subordinate to them and, second, by the allocation of realized losses on the mortgage loans to the subordinated classes in reverse order of their numerical class designations. The Class 2-A-1C Certificates are insured by a certificate insurance policy issued by Ambac Assurance Corporation. None of the other classes of certificates are insured under such policy. The first form of credit enhancement uses collections on the mortgage loans otherwise payable to holders of subordinated classes to pay interest or principal due on more senior classes of the related loan group. Collections otherwise payable to subordinated classes represent the sole source of funds from which this type of credit enhancement is provided. The second form of credit enhancement provides that, except as described below, realized losses from any loan group are allocated: first, to the subordinate certificates in the reverse order of their priority of payment, beginning with the subordinate certificates with the lowest payment priority, until the S-16 principal amount of each such class has been reduced to zero, and second, to the class or classes of related senior certificates (other than the Class X Certificates) or components, pro rata based on the related certificate principal balance or component principal balance, until their respective principal amounts are reduced to zero, in addition to other losses allocated to that class of certificates, until the certificate principal balance thereof has been reduced to zero; provided, that realized losses allocated to the Class 1-A Certificates will be borne by the Class 2-A-2 Certificates in addition to other losses allocated to those classes of certificates; provided further, that realized losses allocated to the Class 2-A-1A Certificates will be borne by the Class 2-A-1B and Class 2-A-1C Certificates, pro rata based on certificate principal balance, in addition to other losses allocated to those classes of certificates, until the certificate principal balance thereof has been reduced to zero. Accordingly, if the aggregate principal balance of each subordinated class were to be reduced to zero, delinquencies and defaults on the mortgage loans in a loan group would reduce the amount of funds available for monthly distributions to holders of the related senior certificates. In addition, higher than expected losses on one group of mortgage loans will decrease the amount of credit support provided by the subordinate certificates to the senior certificates with respect to all other groups of mortgage loans. See "Description of the Certificates--Allocation of Losses" and "--Subordination of the Subordinate Certificates" in this prospectus supplement for additional information. LOAN PREPAYMENTS MAY RESULT IN SHORTFALLS IN INTEREST COLLECTIONS AND REDUCE THE YIELD ON YOUR CERTIFICATES........................ When a mortgage loan is prepaid in full or in part, the borrower is charged interest only up to the date on which the payment is made, rather than for an entire month. This may result in a shortfall in interest collections available for payment on the next distribution date. The servicer is generally required to cover the shortfall in interest collections attributable to prepayments in full and/or in part, as applicable, but only to the extent of the servicing fee. Any uncovered prepayment interest shortfall may adversely affect the yield on your investment. The Class 2-A-1C S-17 certificate insurance policy will not cover prepayment interest shortfalls allocated to the Class 2-A-1C Certificates. CHANGES IN MORTGAGE INDICES MAY REDUCE THE YIELD ON THE CLASS X CERTIFICATES........................ As described in this prospectus supplement, the Class X Certificates will accrue interest at a rate based, among other factors, on the weighted average of the net loan rates on all of the mortgage loans. The interest rates on the mortgage loans will be calculated on the basis of the related index plus the applicable margin, as described in this prospectus supplement. As a result, declines in the index on which the interest rates on the mortgage loans in either loan group are based, without a corresponding decline in the rates at which interest on the other classes of certificates is based, could result, over time, in lower yields on the these certificates. The yield on the Class X Certificates will be particularly sensitive to declines in the index at which the related mortgage loans accrue interest since the pass-through rate of the Class X Certificates could also be reduced. Furthermore, any increase in the indices in the related loan group on which the interest rates are based may result in prepayments on the mortgage loans, payments of principal on the related offered certificates then entitled to principal and a decrease in the notional amount of the Class X Certificate. In addition, prepayments on mortgage loans with higher interest rates will reduce the weighted average of the interest rates on the mortgage loans and, consequently, reduce the pass-through rate of the Class X Certificates. THE YIELD ON THE LIBOR CERTIFICATES AND THE CLASS X CERTIFICATES MAY BE AFFECTED BY CHANGES IN RATES................. No prediction can be made as to future levels of one-month LIBOR (the applicable index in determining the pass-through rate for the LIBOR Certificates), MTA (the applicable index in determining the loan rate for all the mortgage loans) or as to the timing of any changes therein, each of which will affect the yield of the LIBOR Certificates. The holders of LIBOR Certificates may not always receive interest at a rate equal to one-month LIBOR plus the related margin. With respect to the Class 2-A-1A, Class 2-A-1B, Class 2-A-1C and Class 2-A-2 Certificates, if one-month LIBOR plus the applicable margin is greater than either (i) the cap generally based on the weighted average of the net loan rates of the mortgage loans or (ii) 10.50% per annum, the pass-through rate of those certificates will be reduced to the lesser of S-18 the related net rate cap or 10.50% per annum. With respect to the Class 1-A, Class B-1, Class B-2 and Class B-3 Certificates, if one-month LIBOR plus the applicable margin is greater than either the cap generally based on the weighted average of the net loan rates of the mortgage loans or the cap based on the weighted average of the net maximum loan rates of the mortgage loans, the pass-through rate of those certificates will be reduced to the lesser of the related net rate cap or net maximum rate cap. Thus, the yield to investors in the LIBOR Certificates will be sensitive to fluctuations in the level of one-month LIBOR, and may be adversely affected by the application of the related net rate cap, the hard cap of 10.50% per annum or the related net maximum rate cap, as applicable. The prepayment of mortgage loans with relatively higher net loan rates may result in a lower weighted average net loan rate. Consequently, if on any distribution date the application of the related net rate cap results in an interest payment lower than one-month LIBOR plus the applicable margin on the LIBOR Certificates during the related interest accrual period, the value of such certificates may be temporarily or permanently reduced. To the extent that the related net rate cap limits the amount of interest paid on the LIBOR Certificates, the excess, if any, between one-month LIBOR plus the related margin (which will be an amount no greater than 10.50% per annum or the net maximum loan rate cap, as applicable, for each such class), over the applicable net rate cap, will create a shortfall that will carry forward, with interest thereon as described in this prospectus supplement. However, any such resulting shortfall will only be paid after any current interest for such distribution date has been paid to such certificates and only to the extent that there are amounts on deposit in the basis risk reserve fund funded from interest accrued on and otherwise distributable to the Class X Certificates on the related distribution date (which will reduce the yield on the Class X Certificates), and with respect to the Yield Maintained Certificates, amounts paid under the related yield maintenance agreement. Accordingly, these shortfalls may remain unpaid on the final distribution date. See "Description of the Certificates--Distributions of Interest" in this prospectus supplement. PREPAYMENTS WILL AFFECT THE YIELD ON THE CLASS X CERTIFICATES...................... The Class X Certificates receive only distributions of interest. The yield to maturity on the Class X Certificate will be extremely sensitive to the level of prepayments on the S-19 mortgage loans. Generally, the faster that the mortgage loans prepay, the less interest the Class X Certificates will receive. The yield to maturity on the Class X Certificates will be especially sensitive to the level of prepayments on the mortgage loans with higher interest rates. Interest accrues on the Class X Certificate at an annual pass-through rate equal to, for each distribution date, the excess, if any, of (a) the weighted average of the net mortgage rates on the mortgage loans over (b) a rate equal to the weighted average rate at which interest accrues for the related interest accrual period on the certificates (including the Class PO Certificates and other than the Class X Certificates) at the applicable pass-through rate (provided, however, that the margin on the Class 2-A-1C Certificates shall be increased for this purpose by the Class 2-A-1C insurance premium rate; provided, further, that the pass-through rate for any class of certificates the interest payments on which are computed using an actual/360 day-count convention will be adjusted for this purpose by multiplying that pass-through rate by the quotient of the actual number of days in the applicable accrual period divided by 30). If mortgage interest rates decline, the higher interest rate mortgage loans are more likely to be refinanced, and, therefore, prepayments in full on these mortgage loans are more likely to occur. Generally, the amount of prepayments will be distributed to the classes of certificates in the order of priority described herein. Such order will have the likely effect of reducing the certificate principal balance of classes with lower certificate rates relative to other classes. This will have the effect of raising the weighted average certificate rate and lowering the rate at which interest accrues on the Class X Certificates. If for any distribution date, the weighted average of the net loan rates for the mortgage loans is equal to the product calculated in clause (b) above, the Class X Certificates will receive no distributions of interest on that distribution date. An increase in prepayments on the mortgage loans will result in a reduced certificate notional amount and, consequently, a reduction in interest distributable to the Class X Certificates. In addition, if mortgage loans with higher mortgage rates prepay and such prepayments are allocated to classes of certificates with lower pass-through rates, the amount of interest distributable to the Class X Certificates will be reduced. You should fully consider the risks associated with an investment in the Class X Certificates. If the related mortgage loans prepay faster than expected or if the trust is terminated earlier than expected, you may not fully recover your initial S-20 investment. See "Yield, Prepayment and Maturity Considerations-Yield Considerations with Respect to the Class X Certificates" in this prospectus supplement for a table showing expected yields at different prepayment rates. DEFAULT RISK ON HIGH-BALANCE MORTGAGE LOANS ..................... As of the cut-off date, none of the group 1 mortgage loans and approximately 13.08% of the group 2 mortgage loans, which is approximately 8.56% of all of the mortgage loans, had principal balances greater than $1,000,000. You should consider the risk that the loss and delinquency experience on these high balance mortgage loans may have a disproportionate effect on the related group and the pool of mortgage loans as a whole. IF THE RECEIPT OF LIQUIDATION PROCEEDS IS DELAYED OR IF THE LIQUIDATION PROCEEDS ARE LESS THAN THE MORTGAGE LOAN BALANCE, YOU COULD SUFFER A LOSS ON YOUR CERTIFICATES........................ Substantial delays could be encountered in connection with the liquidation of delinquent mortgage loans. Further, liquidation expenses such as legal fees, real estate taxes and maintenance and preservation expenses may reduce the portion of liquidation proceeds payable to you. If a mortgaged property fails to provide adequate security for the related mortgage loan, you will incur a loss on your investment if the credit enhancement is insufficient to cover that deficiency. AN INVESTMENT IN THE CERTIFICATES MAY NOT BE APPROPRIATE FOR SOME INVESTORS........................... The offered certificates may not be an appropriate investment for investors who do not have sufficient resources or expertise to evaluate the particular characteristics of the offered certificates. This may be the case due, for example, to the following reasons. o The yield to maturity of offered certificates purchased at a price other than par will be sensitive to the uncertain rate and timing of principal prepayments on the mortgage loans. o The rate of principal distributions on and the weighted average lives of the offered certificates will be sensitive to the uncertain rate and timing of principal prepayments on the mortgage loans and the priority of principal distributions among the classes of certificates. Accordingly, the offered certificates may be an inappropriate investment if you require a distribution of a S-21 particular amount of principal on a specific date or an otherwise predictable stream of distributions. o You may not be able to reinvest distributions on an offered certificate at a rate at least as high as the pass-through rate applicable to your certificate, since distributions generally are expected to be greater during periods of relatively low interest rates. o Your investment in any of the offered certificates may be ended before you desire if the optional termination of the trust is exercised. GEOGRAPHIC CONCENTRATION OF THE MORTGAGE LOANS MAY ADVERSELY AFFECT YOUR CERTIFICATES................... Approximately 61.85% of all of the mortgage loans and approximately 45.56% and 70.45% of the mortgage loans in group 1 and group 2, respectively, are secured by properties in California. The rate of delinquencies, defaults and losses on the mortgage loans may be higher than if fewer of the mortgage loans were concentrated in those states because the following conditions in those states will have a disproportionate impact on the mortgage loans in general: o Weak economic conditions, which may or may not affect real property values, may affect the ability of borrowers to repay their loans on time. o Declines in the residential real estate market in those states may reduce the values of properties, which would result in an increase in the loan-to-value ratios. o Properties in those states, particularly California, may be more susceptible than homes located in other parts of the country to certain types of uninsurable hazards, such as earthquakes, as well as storms, floods, wildfires, mudslides and other natural disasters. Natural disasters affect regions of the United States from time to time, and may result in increased losses on mortgage loans in those regions, or in insurance payments that will constitute prepayments of those mortgage loans. Several hurricanes, which struck the southeastern United States during the months of August and September 2004, may have adversely affected any mortgaged properties located in that area. The related originator or, in some cases, the seller, will make a representation and warranty that no mortgaged property is subject to any material damage by waste, fire, earthquake, windstorm, flood or other casualty as of the closing date. We S-22 do not know how many mortgaged properties have been or may be affected by these hurricanes. No assurance can be given as to the effect of this event on the rate of delinquencies and losses on the mortgage loans secured by mortgaged properties that were or may be affected by these hurricanes. Any adverse impact as a result of this event may be borne by the holders of the offered certificates, particularly if the related originator or the seller, as applicable, fails to repurchase any mortgage loan that breaches this representation and warranty. IT MAY BE DIFFICULT TO RESELL YOUR CERTIFICATES............ There is currently no secondary market for the offered certificates and there can be no assurance that a secondary market for the offered certificates will develop. Consequently, you may not be able to sell your certificates readily or at prices that will enable you to realize your desired yield. The market values of the certificates are likely to fluctuate. Any of these fluctuations may be significant and could result in significant losses to you. The secondary markets for asset-backed securities have experienced periods of illiquidity and can be expected to do so in the future. Illiquidity can have a severely adverse effect on the prices of securities that are especially sensitive to prepayment, credit, or interest rate risk. TERRORIST ATTACKS AND RELATED MILITARY ACTION.............. The effects that terrorist attacks in the United States, possible future attacks or other incidents and related military action, or military action by U.S. forces in Iraq or other regions, may have on the performance of the mortgage loans or on the values of mortgaged properties cannot be determined at this time. Investors should consider the possible effects on delinquency, default and prepayment experience of the mortgage loans. Federal agencies and non-government lenders have and may continue to defer, reduce or forgive payments and delay foreclosure proceedings in respect of loans to borrowers affected in some way by recent and possible future events. In addition, activation of a substantial number of U.S. military reservists or members of the National Guard may significantly increase the proportion of mortgage loans whose interest rates are reduced by application of the Servicemembers Civil Relief Act or the "Relief Act." Interest payable to holders of the senior certificates and the subordinate certificates will be reduced on a pro rata basis by any reductions in the amount of interest collectible as a result of the application of the Relief Act. The servicer is not required to advance these shortfalls as delinquent payments, and such shortfalls are not covered by any form of credit enhancement on the certificates. In addition, certain persons not covered by the Relief Act may be eligible S-23 for similar loan payment relief under applicable state laws. The Class 2-A-1C certificate insurance policy will not cover any interest shortfalls on the Class 2-A-1C Certificates attributable to the application of the Relief Act. BANKRUPTCY OR INSOLVENCY MAY AFFECT THE TIMING AND AMOUNT OF DISTRIBUTIONS ON YOUR CERTIFICATES................... The transfer of the mortgage loans by the seller to the depositor will be characterized in the mortgage loan purchase agreement as a sale transaction. Nevertheless, in the event of a bankruptcy of the seller, the trustee in bankruptcy could attempt to recharacterize the sale of the mortgage loans to the depositor as a borrowing secured by a pledge of the mortgage loans. If the attempt to recharacterize the transfer of the mortgage loans were successful, a trustee in bankruptcy could elect to accelerate payment of the certificates and liquidate the mortgage loans, with the holders of the certificates entitled to no more than the outstanding certificate principal balances, if any, of the classes of certificates, together with interest thereon at the applicable pass-through rate to the date of payment. In the event of an acceleration of the certificates, the holders of the certificates would lose the right to future payments of interest, might suffer reinvestment losses in a lower interest rate environment and may fail to recover their initial investment. Regardless of whether an acceleration takes place, delays in payments on the certificates and possible reductions in the amount of those payments could occur. SIMULTANEOUS SECOND LIEN RISK........................... With respect to approximately 31.52% of all the mortgage loans, and approximately 25.85% and 34.51% of the group 1 and group 2 mortgage loans, respectively, at the time of origination of such first lien mortgage loan, the related originator also originated a second lien mortgage loan that will not be included in the trust. The weighted average loan-to-value ratio of such mortgage loans is approximately 77.89% with respect to those group 1 mortgage loans and approximately 73.72% with respect to those group 2 mortgage loans and the original weighted average combined loan-to-value ratio of such mortgage loans (including the simultaneous second lien) is approximately 88.29% with respect to those group 1 mortgage loans and approximately 84.96% with respect to those group 2 mortgage loans. With respect to those mortgage loans, foreclosure frequency may be increased relative to mortgage loans that were originated without a simultaneous second lien since borrowers have less equity in S-24 the mortgaged property. Investors should also note that any borrower may obtain secondary financing at any time subsequent to the date of origination of their mortgage loan from the related originator or from any other lender. There is a Glossary of Terms beginning on page S-129 where you will find definitions of the capitalized terms used in this prospectus supplement. You should read the Glossary of Terms carefully because it defines many concepts that are important to understanding the certificates. S-25 THE MORTGAGE LOAN GROUPS The information set forth in this section has been provided by the seller, and none of the depositor, the underwriters, the servicer or the trustee, or any of their affiliates makes any representation or warranty as to the accuracy or completeness of this information. GENERAL Statistical information in this section, unless otherwise specified, is based upon the aggregate principal balance of the mortgage loans as of the cut-off date. The assets held by HarborView Mortgage Loan Trust 2005-2 will consist primarily of two loan groups adjustable rate, first lien, residential mortgage loans. The mortgage loans have interest rates ("loan rates") that adjust based on MTA with original terms to maturity of not more than 30 years. As of the cut-off date, there are 5,301 mortgage loans with an aggregate principal balance of approximately $1,944,859,934. The mortgage loans are "adjustable rate mortgage loans" and generally have loan rates that adjust monthly depending on the terms of the particular mortgage note. The mortgage loans have been divided into two loan groups designated as the "group 1 mortgage loans," and "group 2 mortgage loans." We refer to each of the groups of mortgage loans as a "loan group." The principal balance of each mortgage loan as of the cut-off date reflects the application of scheduled payments of principal due on that mortgage loan on or prior to the cut-off date, whether or not received, and any amounts of deferred interest added to the unpaid principal balance of such mortgage loan as a result of negative amortization (as described below). Whenever reference is made herein to a percentage of some or all of the mortgage loans, that percentage is determined on the basis of the principal balances of such mortgage loans as of the cut-off date, unless otherwise specified. The aggregate principal balance of the mortgage loans set forth above is subject to a variance of plus or minus ten percent. Each of the mortgage loans in the trust is secured by a mortgage, deed of trust or other similar security instrument that creates a first lien on the related mortgaged property. We refer to these instruments as "mortgages" in this prospectus supplement. The mortgaged properties are one- to four-family dwelling units, individual condominium units and planned unit developments. Pursuant to a mortgage loan purchase agreement between the seller and the depositor, the depositor will purchase the mortgage loans from the seller. Under the pooling and servicing agreement, the depositor will cause the mortgage loans to be assigned to the trustee for the benefit of the certificateholders and the Class 2-A-1C Certificate Insurer. See "The Pooling and Servicing Agreement" in this prospectus supplement. The seller purchased each of the mortgage loans in the secondary market in the ordinary course of its business. All of the mortgage loans were originated by Countrywide Home Loans, Inc. ("Countrywide" or the "originator"). The mortgage loans were originated in accordance with the underwriting guidelines described under "The Seller and the Originator--Underwriting S-26 Standards" herein. All of the mortgage loans are being serviced by Countrywide Home Loans Servicing LP ("Countrywide Servicing"). See "The Servicer" herein. The mortgage loans were purchased by the seller from the originator pursuant to a mortgage loan purchase agreement (referred to herein as the "underlying purchase agreement"). Under a certain assignment and recognition agreement among the seller, the depositor and the originator, and a reconstituted servicing agreement among the seller and the servicer (and acknowledged by the trustee) (collectively referred to herein as the "reconstitution agreement"), the seller will assign all of its rights (other than certain servicing rights on some of the mortgage loans) with respect to the underlying purchase agreement or underlying servicing agreement, as applicable, including rights with respect to representations and warranties made by the originator, to the trustee. Subject to certain limitations set forth in the underlying purchase agreement and the reconstitution agreement, the originator will be obligated to repurchase any mortgage loan as to which there exists deficient documentation or an uncured breach of any such representation or warranty, if such deficiency or breach of any such representation or warranty materially and adversely affects the interests of the certificateholders in such mortgage loan. Under a separate mortgage loan purchase agreement, the seller will make certain representations and warranties to the depositor, which will in turn assign its rights under those representations and warranties to the trustee under the pooling and servicing agreement. Subject to certain limitations set forth in the pooling and servicing agreement, the seller will be obligated to repurchase, or substitute a similar loan for, any mortgage loan as to which there exists an uncured breach of any such representation or warranty, if the breach of such representation or warranty materially and adversely affects the certificateholders' or the Class 2-A-1C Certificate Insurer's interests in such mortgage loan. See "The Pooling and Servicing Agreement--Assignment of the Mortgage Loans" in this prospectus supplement. The depositor will make no representations or warranties with respect to the mortgage loans and will have no obligation to repurchase or substitute mortgage loans with deficient documentation or that are otherwise defective. The seller is selling the mortgage loans without recourse and will have no obligation with respect to the certificates in its capacity as seller other than the repurchase or substitution obligations described above. The originator will have no obligation with respect to the certificates in its capacity as originator other than the repurchase obligations described in this prospectus supplement. The Index. The index applicable to the determination of the loan rates for the mortgage loans generally will be a per annum rate equal to the twelve-month average yields on United States Treasury securities adjusted to a constant maturity of one year, as published by the Federal Reserve Board in Statistical Release H.15(519) (the "MTA" index). The MTA index is referred to herein as the "index." The index will be calculated as of the date specified in the related mortgage note. In the event that the index described above becomes unavailable or is otherwise unpublished, the servicer will select a comparable alternative index over which it has no direct control and which is readily verifiable, and which is permissible under the terms of the related mortgage and mortgage note. Loan Rate Adjustments. The loan rates for the mortgage loans are generally fixed for one, two or three months following their origination and then adjust monthly. As of the cut-off date, approximately 87.41% of all of the mortgage loans, and approximately 87.14% and 87.56% of the group 1 and group 2 mortgage loans, respectively, were still in their initial one-, two-, or three-month fixed rate period. These mortgage loans bear a weighted average fixed mortgage S-27 rate of approximately 1.192% per annum for all of the mortgage loans, and approximately 1.243% and 1.165% of the group 1 and group 2 mortgage loans, respectively. The loan rate for each mortgage loan will be adjusted to equal the sum, generally rounded to or rounded up to, as applicable, the nearest multiple of 0.010% of the index applicable to that loan and a fixed percentage amount known as the "gross margin" for that loan. The mortgage loans adjust according to the applicable index as discussed under "--The Index" above. No mortgage loan will have a loan rate that exceeds the maximum loan rate specified in the related mortgage note. Due to the application of the maximum loan rates, the loan rate on each mortgage loan that has such a maximum loan rate, as adjusted on any loan rate adjustment date, may be less than the sum of the applicable index and gross margin, rounded as described above. See "--The Index" above. Monthly Payment Adjustments. Monthly scheduled payments on the mortgage loans adjust annually on a date specified in the related mortgage note (each, a "Payment Adjustment Date"), subject to the conditions (the "Payment Caps") that (i) the amount of the monthly payment will not increase or decrease by an amount that is more than 7.500% of the monthly payment prior to the related Payment Adjustment Date, (ii) as of the fifth Payment Adjustment Date and on the same day every fifth Payment Adjustment Date thereafter, the monthly payment will be recast without regard to the limitation in clause (i) above and (iii) if the unpaid principal balance exceeds a percentage (either, 110% or 115%, depending on the mortgage loan) of the original principal balance due to deferred interest, the monthly payment will be recast without regard to the limitation in clause (i) to amortize fully the then unpaid principal balance of the mortgage loan over its remaining term to maturity. Since the loan rates on the mortgage loans adjust at a different time than the monthly payments thereon and the Payment Caps may limit the amount by which the monthly payments may adjust, the amount of a monthly payment may be more or less than the amount necessary to fully amortize the principal balance of the mortgage loans over its then remaining term at the applicable loan rate. Accordingly, the mortgage loans may be subject to reduced amortization (if the monthly payment due on a due date is sufficient to pay interest accrued during the related accrual period at the applicable loan rate but is not sufficient to reduce principal in accordance with a fully amortizing schedule); negative amortization (if interest accrued during the related accrual period at the applicable loan rate is greater than the entire monthly payment due on the related due date (such excess accrued interest, "deferred interest")); or accelerated amortization (if the monthly payment due on a due date is greater than the amount necessary to pay interest accrued during the related accrual period at the applicable loan rate and to reduce principal in accordance with a fully amortizing schedule). In the event a mortgage loan negatively amortizes, deferred interest, if any, is added to the principal balance of such mortgage loan and, if such deferred interest is not offset by subsequent accelerated amortization, it may result in a final lump sum payment at maturity greater than, and potentially substantially greater than, the monthly payment due on the immediately preceding due date. High Loan-to-Value Mortgage Loans. Approximately 2.20% of all of the mortgage loans, and approximately 4.48% and 1.00% of the group 1 and group 2 mortgage loans, respectively, have original loan-to-value ratios in excess of 80%. Such mortgage loans are covered by a primary mortgage guaranty insurance policy (which policy insures, generally, any portion of the unpaid principal balance of a mortgage loan in excess of 80% of the value of the related mortgaged property). No such primary mortgage guaranty insurance policy will be S-28 required to be maintained with respect to any such mortgage loan after the date on which the related loan-to-value ratio is 80% or less. For each mortgage loan and any date of determination, the loan-to-value ratio is calculated as a fraction, expressed as a percentage, the numerator of which is the principal balance of the mortgage loan on that date and the denominator of which is the value of the mortgaged property as determined at the origination of the related loan on the basis of the lesser of the sale price or appraised value with respect to a purchase mortgage loan or the appraised value with respect to a refinance mortgage loan. Prepayment Penalty Payments. Approximately 66.84% of all of the mortgage loans, and approximately 70.08% and 65.12% of the group 1 and group 2 mortgage loans, respectively, require the payment of a prepayment penalty in connection with a voluntary prepayment of principal. Generally, each such mortgage loan provides for payment of a prepayment penalty in connection with certain voluntary, full or partial prepayments made within the period of time specified in the related mortgage note, ranging from three months to three years from the date of origination of such mortgage loan. Certain mortgage loans that require the payment of a prepayment penalty, however, may provide for brief periods during the applicable period for prepayments to be made without incurring a prepayment penalty. The amount of the applicable prepayment penalty, to the extent permitted under applicable law, is as provided in the related mortgage note. Generally, such amount is equal to six months' interest on any amounts prepaid during any twelve-month period in excess of 20% of the original principal balance of the related mortgage loan or a specified percentage of the amounts prepaid. Any prepayment penalty payments received on the mortgage loans will be retained by the servicer and will be unavailable for distribution to holders of the certificates. S-29 AGGREGATE MORTGAGE LOAN STATISTICS The following statistical information, unless otherwise specified, is based upon the aggregate principal balance of the mortgage loans as of the cut-off date. General Characteristics. Substantially, all of the mortgage loans have original terms to stated maturity of 360 months. The weighted average remaining term to stated maturity of the mortgage loans was approximately 360 months as of the cut-off date. None of the mortgage loans had a first due date prior to October 2004 or after May 2005 or had a remaining term to stated maturity of less than 354 months or greater than 360 months as of the cut-off date. The latest stated maturity date of any mortgage loan occurs in April 2035. The average principal balance of the mortgage loans at origination was approximately $367,018. The average principal balance of the mortgage loans as of the cut-off date was approximately $366,885. No mortgage loan had a principal balance of less than approximately $30,730 or greater than approximately $3,000,000 as of the cut-off date. As of the cut-off date, no mortgage loan was 30 days or more delinquent in payment. The mortgage loans had annual loan rates of not less than 1.000% and not more than 6.000% and the weighted average annual loan rate was approximately 1.639%. As of the cut-off date, the mortgage loans had gross margins ranging from 1.000% to 4.525%, maximum loan rates ranging from 9.950% to 12.000% and minimum loan rates ranging from 1.000% to 4.525%. As of the cut-off date, the weighted average gross margin was approximately 2.854%, the weighted average maximum loan rate was approximately 9.952% and the weighted average minimum loan rate was approximately 2.854% for all of the mortgage loans. The latest next loan rate adjustment date following the cut-off date on any mortgage loan occurs in approximately four months and the weighted average next loan rate adjustment date following the cut-off date for all of the mortgage loans occurs in approximately two months. The latest next payment adjustment date following the cut-off date on any mortgage loan occurs in 14 months and the weighted average next payment adjustment date following the cut-off date for all of the mortgage loans occurs in approximately 13 months. As of origination, approximately 66.84% of the mortgage loans provide for payment by the mortgagor of a prepayment penalty in connection with certain full or partial prepayments of principal. The mortgage loans had the characteristics shown in the following tables. The sum in any column in the following tables may not equal the total indicated due to rounding. S-30 PRINCIPAL BALANCES OF THE MORTGAGE LOANS
% OF AGGREGATE PRINCIPAL BALANCE PRINCIPAL BALANCE AS NUMBER OF AS OF THE OF THE PRINCIPAL BALANCE ($) MORTGAGE LOANS CUT-OFF DATE CUT-OFF DATE ------------------------------------------ -------------- ------------------- -------------------- 30,730 - 50,000................... 17 $ 719,375.84 0.04% 50,001 - 100,000................... 185 15,589,984.36 0.80 100,001 - 150,000................... 453 57,653,925.10 2.96 150,001 - 200,000................... 642 113,434,707.67 5.83 200,001 - 250,000................... 645 146,010,233.70 7.51 250,001 - 300,000................... 597 164,671,825.59 8.47 300,001 - 350,000................... 533 173,687,540.56 8.93 350,001 - 400,000................... 544 205,405,589.37 10.56 400,001 - 450,000................... 366 156,032,012.19 8.02 450,001 - 500,000................... 319 151,792,592.66 7.80 500,001 - 550,000................... 200 104,876,003.23 5.39 550,001 - 600,000................... 187 107,627,254.32 5.53 600,001 - 650,000................... 176 111,703,587.36 5.74 650,001 - 700,000................... 66 44,792,333.41 2.30 700,001 - 750,000................... 54 39,294,994.77 2.02 750,001 - 800,000................... 40 31,071,969.96 1.60 800,001 - 850,000................... 30 25,042,818.64 1.29 850,001 - 900,000................... 40 35,113,267.26 1.81 900,001 - 950,000................... 33 30,483,095.67 1.57 950,001 - 1,000,000.................... 64 63,386,936.71 3.26 1,000,001 - 1,050,000.................... 5 5,182,132.19 0.27 1,050,001 - 1,100,000.................... 6 6,480,169.38 0.33 1,100,001 - 1,150,000.................... 8 9,003,000.00 0.46 1,150,001 - 1,200,000.................... 15 17,722,530.32 0.91 1,200,001 - 1,250,000.................... 7 8,565,500.00 0.44 1,250,001 - 1,300,000.................... 9 11,484,152.02 0.59 1,300,001 - 1,350,000.................... 3 4,008,721.76 0.21 1,350,001 - 1,400,000.................... 2 2,785,750.00 0.14 1,400,001 - 1,450,000.................... 5 7,138,309.46 0.37 1,450,001 - 1,500,000.................... 15 22,422,447.43 1.15 1,500,001 - 1,550,000.................... 1 1,522,000.00 0.08 1,550,001 - 1,600,000.................... 1 1,600,000.00 0.08 1,600,001 - 1,650,000.................... 4 6,506,732.46 0.33 1,650,001 - 1,700,000.................... 3 5,080,000.00 0.26 1,700,001 - 1,750,000.................... 1 1,750,000.00 0.09 1,750,001 - 1,800,000.................... 2 3,525,000.00 0.18 1,850,001 - 1,900,000.................... 2 3,730,000.00 0.19 1,900,001 - 1,950,000.................... 2 3,870,000.00 0.20 1,950,001 - 2,000,000.................... 8 15,985,940.94 0.82 2,050,001 - 2,100,000.................... 1 2,070,000.00 0.11 2,200,001 - 2,250,000.................... 1 2,250,000.00 0.12 2,250,001 - 2,300,000.................... 1 2,275,000.00 0.12 2,300,001 - 2,350,000.................... 1 2,310,000.00 0.12 2,400,001 - 2,450,000.................... 1 2,415,000.00 0.12 2,550,001 - 2,600,000.................... 1 2,600,000.00 0.13 2,700,001 - 2,750,000.................... 2 5,472,500.00 0.28 2,750,001 - 2,800,000.................... 1 2,800,000.00 0.14 2,900,001 - 2,950,000.................... 1 2,915,000.00 0.15 2,950,001 - 3,000,000.................... 1 3,000,000.00 0.15 ----- ----------------- ------ Total..................................... 5,301 $1,944,859,934.32 100.00% ===== ================= ======
The average principal balance of the mortgage loans was approximately $366,885 as of the cut-off date. S-31 ORIGINAL TERMS TO STATED MATURITY OF THE MORTGAGE LOANS
% OF AGGREGATE PRINCIPAL BALANCE PRINCIPAL BALANCE AS NUMBER OF AS OF THE OF THE ORIGINAL TERM (MONTHS) MORTGAGE LOANS CUT-OFF DATE CUT-OFF DATE ------------------------------------------ -------------- ------------------- -------------------- 360....................................... 5,301 $1,944,859,934.32 100.00% ----- ----------------- ------ Total..................................... 5,301 $1,944,859,934.32 100.00% ===== ================= ======
The weighted average original term to stated maturity of the mortgage loans was approximately 360 months as of the cut-off date. REMAINING TERMS TO STATED MATURITY OF THE MORTGAGE LOANS
% OF AGGREGATE PRINCIPAL BALANCE PRINCIPAL BALANCE AS NUMBER OF AS OF THE OF THE REMAINING TERM (MONTHS) MORTGAGE LOANS CUT-OFF DATE CUT-OFF DATE ------------------------------------------ -------------- ------------------- -------------------- 354 - 360................................. 5,301 $1,944,859,934.32 100.00% ----- ----------------- ------ Total..................................... 5,301 $1,944,859,934.32 100.00% ===== ================= ======
The weighted average remaining term to stated maturity of the mortgage loans was approximately 360 months as of the cut-off date. PROPERTY TYPE OF THE MORTGAGE LOANS
% OF AGGREGATE PRINCIPAL BALANCE PRINCIPAL BALANCE AS NUMBER OF AS OF THE OF THE PROPERTY TYPE MORTGAGE LOANS CUT-OFF DATE CUT-OFF DATE ------------------------------------------ -------------- ------------------- -------------------- Single Family............................. 3,146 $1,185,895,170.65 60.98% PUD....................................... 1,130 445,522,402.65 22.91 Condominium............................... 744 218,334,379.96 11.23 Two-Four Family........................... 281 95,107,981.07 4.89 ----- ----------------- ------ Total..................................... 5,301 $1,944,859,934.32 100.00% ===== ================= ======
STATED OCCUPANCY STATUS OF THE MORTGAGE LOANS*
% OF AGGREGATE PRINCIPAL BALANCE PRINCIPAL BALANCE AS NUMBER OF AS OF THE OF THE STATED OCCUPANCY STATUS MORTGAGE LOANS CUT-OFF DATE CUT-OFF DATE ------------------------------------------ -------------- ------------------- -------------------- Primary................................... 3,883 $1,556,253,340.63 80.02% Investor.................................. 1,174 302,731,017.40 15.57 Second Home............................... 244 85,875,576.29 4.42 ----- ----------------- ------ Total..................................... 5,301 $1,944,859,934.32 100.00% ===== ================= ======
--------------- *In the preceding table, "stated occupancy status" refers to the intended use of the mortgaged property as represented by the borrower when the related mortgage loan was originated. S-32 LOAN PURPOSE OF THE MORTGAGE LOANS
% OF AGGREGATE PRINCIPAL BALANCE PRINCIPAL BALANCE AS NUMBER OF AS OF THE OF THE PURPOSE MORTGAGE LOANS CUT-OFF DATE CUT-OFF DATE ------------------------------------------ -------------- ------------------- -------------------- Cash Out Refinance........................ 2,240 $ 810,674,411.88 41.68% Purchase.................................. 2,050 778,918,334.58 40.05 Rate/Term Refinance....................... 1,011 355,267,187.87 18.27 ----- ----------------- ------ Total..................................... 5,301 $1,944,859,934.32 100.00% ===== ================= ======
DOCUMENTATION PROGRAMS OF THE MORTGAGE LOANS
% OF AGGREGATE PRINCIPAL BALANCE PRINCIPAL BALANCE AS NUMBER OF AS OF THE OF THE DOCUMENTATION MORTGAGE LOANS CUT-OFF DATE CUT-OFF DATE ------------------------------------------ -------------- ------------------- -------------------- Reduced Documentation..................... 3,780 $1,491,633,300.45 76.70% Full Documentation........................ 975 306,342,503.75 15.75 Alternative Documentation................. 541 145,476,974.60 7.48 No Income/No Asset........................ 5 1,407,155.52 0.07 ----- ----------------- ------ Total..................................... 5,301 $1,944,859,934.32 100.00% ===== ================= ======
S-33 ORIGINAL LOAN-TO-VALUE RATIOS OF THE MORTGAGE LOANS
% OF AGGREGATE PRINCIPAL BALANCE PRINCIPAL BALANCE AS ORIGINAL LOAN-TO-VALUE NUMBER OF AS OF THE OF THE RATIO (%) MORTGAGE LOANS CUT-OFF DATE CUT-OFF DATE ------------------------------------------ -------------- ------------------- -------------------- <= 10.00....................... 1 $ 130,000.00 0.01% 10.01 - 15.00....................... 1 340,000.00 0.02 15.01 - 20.00....................... 2 178,787.91 0.01 20.01 - 25.00....................... 9 1,437,776.99 0.07 25.01 - 30.00....................... 4 1,138,803.27 0.06 30.01 - 35.00....................... 26 8,128,194.97 0.42 35.01 - 40.00....................... 36 9,700,129.83 0.50 40.01 - 45.00....................... 34 12,724,532.44 0.65 45.01 - 50.00....................... 79 33,729,931.47 1.73 50.01 - 55.00....................... 100 49,254,386.93 2.53 55.01 - 60.00....................... 168 85,014,534.50 4.37 60.01 - 65.00....................... 284 135,753,425.25 6.98 65.01 - 70.00....................... 505 212,312,197.20 10.92 70.01 - 75.00....................... 741 312,347,641.44 16.06 75.01 - 80.00....................... 3,132 1,039,837,860.76 53.47 80.01 - 85.00....................... 8 1,784,047.42 0.09 85.01 - 90.00....................... 65 15,491,856.79 0.80 90.01 - 95.00....................... 105 25,393,650.01 1.31 95.01 - 100.00........................ 1 162,177.15 0.01 ----- ----------------- ------ Total..................................... 5,301 $1,944,859,934.32 100.00% ===== ================= ======
The weighted average original loan-to-value ratio of the mortgage loans was approximately 73.76% as of the cut-off date. GEOGRAPHIC DISTRIBUTION OF THE MORTGAGE LOANS
% OF AGGREGATE PRINCIPAL BALANCE PRINCIPAL BALANCE AS NUMBER OF AS OF THE OF THE STATE MORTGAGE LOANS CUT-OFF DATE CUT-OFF DATE ------------------------------------------ -------------- ------------------- -------------------- California................................ 2,722 $1,202,872,944.62 61.85% Florida................................... 572 169,376,461.90 8.71 Nevada.................................... 335 92,148,145.52 4.74 All Others (46) + DC...................... 1,672 480,462,382.28 24.70 ----- ----------------- ------ Total..................................... 5,301 $1,944,859,934.32 100.00% ===== ================= ======
As of the cut-off date, the greatest five-digit ZIP Code geographic concentration of mortgage loans by principal balance was approximately 0.51% in the 92009 ZIP Code. S-34 LOAN RATES OF THE MORTGAGE LOANS
% OF AGGREGATE PRINCIPAL BALANCE PRINCIPAL BALANCE AS NUMBER OF AS OF THE OF THE LOAN RATE (%) MORTGAGE LOANS CUT-OFF DATE CUT-OFF DATE ------------------------------------------ -------------- ------------------- -------------------- 1.000 - 1.000............................. 3,091 $1,222,733,331.00 62.87% 1.001 - 1.500............................. 915 242,489,326.95 12.47 1.501 - 2.000............................. 398 178,272,458.39 9.17 2.001 - 2.500............................. 138 34,913,809.53 1.80 2.501 - 3.000............................. 34 13,465,980.00 0.69 3.001 - 3.500............................. 37 7,639,484.00 0.39 3.501 - 4.000............................. 6 3,456,798.65 0.18 4.001 - 4.500............................. 106 43,407,222.86 2.23 4.501 - 5.000............................. 442 159,134,647.83 8.18 5.001 - 5.500............................. 127 37,595,422.70 1.93 5.501 - 6.000............................. 7 1,751,452.41 0.09 ----- ----------------- ------ Total..................................... 5,301 $1,944,859,934.32 100.00% ===== ================= ======
The weighted average loan rate of the mortgage loans was approximately 1.639% as of the cut-off date. MAXIMUM LOAN RATES OF THE MORTGAGE LOANS
% OF AGGREGATE PRINCIPAL BALANCE PRINCIPAL BALANCE AS NUMBER OF AS OF THE OF THE MAXIMUM LOAN RATE (%) MORTGAGE LOANS CUT-OFF DATE CUT-OFF DATE ------------------------------------------ -------------- ------------------- -------------------- 9.950 - 10.000.......................... 5,274 $1,939,033,245.56 99.70% 10.001 - 10.500........................... 19 4,130,207.01 0.21 10.501 - 11.000........................... 6 1,397,881.75 0.07 11.001 - 11.500........................... 1 125,600.00 0.01 11.501 - 12.000........................... 1 173,000.00 0.01 ----- ----------------- ------ Total..................................... 5,301 $1,944,859,934.32 100.00% ===== ================= ======
The weighted average maximum loan rate of the mortgage loans was approximately 9.952% as of the cut-off date. S-35 MINIMUM LOAN RATES OF THE MORTGAGE LOANS
% OF AGGREGATE PRINCIPAL BALANCE PRINCIPAL BALANCE AS NUMBER OF AS OF THE OF THE MINIMUM LOAN RATE (%) MORTGAGE LOANS CUT-OFF DATE CUT-OFF DATE ------------------------------------------ -------------- ------------------- -------------------- 1.000 - 1.000......................... 1 $ 508,100.00 0.03% 1.001 - 1.500......................... 2 413,400.00 0.02 1.501 - 2.000......................... 67 30,850,123.65 1.59 2.001 - 2.500......................... 606 268,699,012.14 13.82 2.501 - 3.000......................... 2,644 1,009,353,635.95 51.90 3.001 - 3.500......................... 1,662 544,896,512.51 28.02 3.501 - 4.000......................... 291 84,106,574.79 4.32 4.001 - 4.500......................... 27 5,710,525.28 0.29 4.501 - 4.525......................... 1 322,050.00 0.02 ----- ----------------- ------ Total..................................... 5,301 $1,944,859,934.32 100.00% ===== ================= ======
The weighted average minimum loan rate of the mortgage loans was approximately 2.854% as of the cut-off date. GROSS MARGINS OF THE MORTGAGE LOANS
% OF AGGREGATE PRINCIPAL BALANCE PRINCIPAL BALANCE AS NUMBER OF AS OF THE OF THE GROSS MARGIN (%) MORTGAGE LOANS CUT-OFF DATE CUT-OFF DATE ------------------------------------------ -------------- ------------------- -------------------- 1.000 - 1.000......................... 1 $ 508,100.00 0.03% 1.001 - 1.500......................... 2 413,400.00 0.02 1.501 - 2.000......................... 67 30,850,123.65 1.59 2.001 - 2.500......................... 606 268,699,012.14 13.82 2.501 - 3.000......................... 2,644 1,009,353,635.95 51.90 3.001 - 3.500......................... 1,662 544,896,512.51 28.02 3.501 - 4.000......................... 292 84,376,564.79 4.34 4.001 - 4.500......................... 26 5,440,535.28 0.28 4.501 - 4.525......................... 1 322,050.00 0.02 Total..................................... 5,301 $1,944,859,934.32 100.00%
The weighted average gross margin of the mortgage loans was approximately 2.854% as of the cut-off date. INDICES OF THE MORTGAGE LOANS
% OF AGGREGATE PRINCIPAL BALANCE PRINCIPAL BALANCE AS NUMBER OF AS OF THE OF THE INDEX MORTGAGE LOANS CUT-OFF DATE CUT-OFF DATE ------------------------------------------ -------------- ------------------- -------------------- MTA....................................... 5,301 $1,944,859,934.32 100.00% ----- ----------------- ------ Total..................................... 5,301 $1,944,859,934.32 100.00% ===== ================= ======
For a description of each index referred to above, see "--The Index" above. S-36 RATE ADJUSTMENT FREQUENCIES OF THE MORTGAGE LOANS
% OF AGGREGATE PRINCIPAL BALANCE PRINCIPAL BALANCE AS NUMBER OF AS OF THE OF THE RATE ADJUSTMENT FREQUENCY MORTGAGE LOANS CUT-OFF DATE CUT-OFF DATE ------------------------------------------ -------------- ------------------- -------------------- Monthly................................... 5,301 $1,944,859,934.32 100.00% ----- ----------------- ------ Total..................................... 5,301 $1,944,859,934.32 100.00% ===== ================= ======
MONTHS TO NEXT LOAN RATE ADJUSTMENT DATE OF THE MORTGAGE LOANS
% OF AGGREGATE PRINCIPAL BALANCE PRINCIPAL BALANCE AS NUMBER OF AS OF THE OF THE MONTHS TO NEXT LOAN RATE ADJUSTMENT DATE MORTGAGE LOANS CUT-OFF DATE CUT-OFF DATE ------------------------------------------ -------------- ------------------- -------------------- 1......................................... 2,899 $1,079,705,696.18 55.52% 2......................................... 2,029 743,101,241.14 38.21 3......................................... 193 65,225,755.00 3.35 4......................................... 180 56,827,242.00 2.92 ----- ----------------- ------ Total..................................... 5,301 $1,944,859,934.32 100.00% ===== ================= ======
MONTHS TO NEXT PAYMENT ADJUSTMENT DATE OF THE MORTGAGE LOANS
% OF AGGREGATE PRINCIPAL BALANCE PRINCIPAL BALANCE AS NUMBER OF AS OF THE OF THE MONTHS TO NEXT PAYMENT ADJUSTMENT DATE MORTGAGE LOANS CUT-OFF DATE CUT-OFF DATE ------------------------------------------ -------------- ------------------- -------------------- 7......................................... 1 $ 135,010.92 0.01% 9......................................... 1 335,231.71 0.02 10........................................ 6 1,682,681.86 0.09 11........................................ 56 20,151,859.02 1.04 12........................................ 681 239,540,219.86 12.32 13........................................ 2,403 899,328,329.80 46.24 14........................................ 2,153 783,686,601.15 40.30 ----- ----------------- ------ Total..................................... 5,301 $1,944,859,934.32 100.00% ===== ================= ======
S-37 CREDIT SCORES OF THE MORTGAGE LOANS
% OF AGGREGATE PRINCIPAL BALANCE PRINCIPAL BALANCE AS NUMBER OF AS OF THE OF THE CREDIT SCORE MORTGAGE LOANS CUT-OFF DATE CUT-OFF DATE ------------------------------------------ -------------- ------------------- -------------------- N/A....................................... 3 $ 732,150.00 0.04% 581 - 600................................ 3 1,704,765.00 0.09 601 - 620................................ 45 15,402,186.10 0.79 621 - 640................................ 263 84,396,852.31 4.34 641 - 660................................ 473 154,113,685.23 7.92 661 - 680................................ 884 316,240,857.07 16.26 681 - 700................................ 863 326,481,197.67 16.79 701 - 720................................ 776 293,348,298.89 15.08 721 - 740................................ 635 242,268,935.83 12.46 741 - 760................................ 556 212,814,052.90 10.94 761 - 780................................ 461 177,579,711.68 9.13 781 - 800................................ 271 99,368,105.92 5.11 801 - 820................................ 63 18,695,335.73 0.96 821 - 839................................ 5 1,713,800.00 0.09 ----- ----------------- ------ Total..................................... 5,301 $1,944,859,934.32 100.00% ===== ================= ======
The weighted average credit score of the mortgage loans was approximately 709 as of the cut-off date. NEGATIVE AMORTIZATION LIMIT OF THE MORTGAGE LOANS
% OF AGGREGATE PRINCIPAL BALANCE PRINCIPAL BALANCE AS NUMBER OF AS OF THE OF THE NEGATIVE AMORTIZATION LIMIT (%) MORTGAGE LOANS CUT-OFF DATE CUT-OFF DATE ------------------------------------------ -------------- ------------------- -------------------- 110....................................... 47 $ 22,163,986.09 1.14% 115....................................... 5,254 1,922,695,948.23 98.86 ----- ----------------- ------ Total..................................... 5,301 $1,944,859,934.32 100.00% ===== ================= ======
S-38 GROUP 1 MORTGAGE LOAN STATISTICS The following statistical information, unless otherwise specified, is based upon the aggregate principal balance of the group 1 mortgage loans as of the cut-off date. General Characteristics. All of the group 1 mortgage loans have original terms to stated maturity of 360 months. The weighted average remaining term to stated maturity of the group 1 mortgage loans was approximately 360 months as of the cut-off date. None of the group 1 mortgage loans had a first due date prior to October 2004 or after May 2005 or had a remaining term to stated maturity of less than 354 months or greater than 360 months as of the cut-off date. The latest stated maturity date of any group 1 mortgage loan occurs in April 2035. Each group 1 mortgage loan has an original principal balance that conforms to Fannie Mae and Freddie Mac guidelines. The average principal balance of the group 1 mortgage loans at origination was approximately $228,191. The average principal balance of the group 1 mortgage loans as of the cut-off date was approximately $228,103. No group 1 mortgage loan had a principal balance of less than approximately $30,730 or greater than approximately $682,000 as of the cut-off date. The group 1 mortgage loans had annual loan rates of not less than 1.000% and not more than 6.000% and the weighted average annual loan rate was approximately 1.705%. As of the cut-off date, the group 1 mortgage loans had gross margins ranging from 1.400% to 4.525%. As of the cut-off date, the group 1 mortgage loans had minimum loan rates ranging from 1.400% to 4.525% and maximum loan rates ranging from 9.950% to 12.000%. As of the cut-off date, the weighted average gross margin was approximately 2.946%, the weighted average maximum loan rate was approximately 9.955% and the weighted average minimum loan rate was approximately 2.946% for all of the group 1 mortgage loans. The latest next loan rate adjustment date following the cut-off date on any group 1 mortgage loan occurs in approximately four months and the weighted average next loan rate adjustment date following the cut-off date for all of the group 1 mortgage loans occurs in approximately two months. The latest next payment adjustment date following the cut-off date on any group 1 mortgage loan occurs in 14 months and the weighted average next payment adjustment date following the cut-off date for the group 1 mortgage loans occurs in approximately 13 months. As of origination, approximately 70.08% of the group 1 mortgage loans provide for payment by the mortgagor of a prepayment penalty in connection with certain full or partial prepayments of principal. None of the group 1 initial mortgage loans originated after October 1, 2002 will be subject to prepayment penalty term in excess of three years. The group 1 mortgage loans had the characteristics shown in the following tables. The sum in any column in the following tables may not equal the total indicated due to rounding. S-39 PRINCIPAL BALANCES OF THE GROUP 1 MORTGAGE LOANS
% OF AGGREGATE NUMBER OF PRINCIPAL BALANCE PRINCIPAL BALANCE AS GROUP 1 MORTGAGE AS OF THE OF THE PRINCIPAL BALANCE ($) LOANS CUT-OFF DATE CUT-OFF DATE ------------------------------------------ -------------- ------------------- -------------------- 30,730 - 50,000...................... 17 $ 719,375.84 0.11% 50,001 - 100,000...................... 167 14,053,469.47 2.09 100,001 - 150,000...................... 413 52,729,624.25 7.84 150,001 - 200,000...................... 583 103,121,262.90 15.34 200,001 - 250,000...................... 585 132,564,965.58 19.72 250,001 - 300,000...................... 548 151,231,542.41 22.50 300,001 - 350,000...................... 488 159,005,509.96 23.65 350,001 - 400,000...................... 100 36,071,890.33 5.37 400,001 - 450,000...................... 19 8,096,622.83 1.20 450,001 - 500,000...................... 12 5,632,038.91 0.84 500,001 - 550,000...................... 3 1,523,880.00 0.23 550,001 - 600,000...................... 5 2,871,900.00 0.43 600,001 - 650,000...................... 3 1,906,534.79 0.28 650,001 - 682,000...................... 4 2,690,150.00 0.40 ----- --------------- ------ Total..................................... 2,947 $672,218,767.26 100.00% ===== =============== ======
The average principal balance of the group 1 mortgage loans was approximately $228,103 as of the cut-off date. ORIGINAL TERMS TO STATED MATURITY OF THE GROUP 1 MORTGAGE LOANS
% OF AGGREGATE PRINCIPAL BALANCE PRINCIPAL BALANCE AS NUMBER OF AS OF THE OF THE ORIGINAL TERM (MONTHS) GROUP 1 MORTGAGE LOANS CUT-OFF DATE CUT-OFF DATE ------------------------------------------ -------------- ------------------- -------------------- 360....................................... 2,947 $672,218,767.26 100.00% ----- --------------- ------ Total..................................... 2,947 $672,218,767.26 100.00% ===== =============== ======
The weighted average original term to stated maturity of the group 1 mortgage loans was approximately 360 months as of the cut-off date. REMAINING TERMS TO STATED MATURITY OF THE GROUP 1 MORTGAGE LOANS
% OF AGGREGATE PRINCIPAL BALANCE PRINCIPAL BALANCE AS NUMBER OF AS OF THE OF THE REMAINING TERM (MONTHS) GROUP 1 MORTGAGE LOANS CUT-OFF DATE CUT-OFF DATE ------------------------------------------ -------------- ------------------- -------------------- 354 - 360................................. 2,947 $672,218,767.26 100.00% ----- --------------- ------ Total..................................... 2,947 $672,218,767.26 100.00% ===== =============== ======
The weighted average remaining term to stated maturity of the group 1 mortgage loans was approximately 360 months as of the cut-off date. S-40 PROPERTY TYPE OF THE GROUP 1 MORTGAGE LOANS
% OF AGGREGATE PRINCIPAL BALANCE PRINCIPAL BALANCE AS NUMBER OF AS OF THE OF THE PROPERTY TYPE GROUP 1 MORTGAGE LOANS CUT-OFF DATE CUT-OFF DATE ------------------------------------------ -------------- ------------------- -------------------- Single Family............................. 1,639 $371,029,328.99 55.19% PUD....................................... 575 129,347,016.80 19.24 Condominium............................... 506 104,997,482.21 15.62 Two - Four Family......................... 227 66,844,939.27 9.94 ----- --------------- ------ Total..................................... 2,947 $672,218,767.26 100.00% ===== =============== ======
STATED OCCUPANCY STATUS OF THE GROUP 1 MORTGAGE LOANS*
% OF AGGREGATE PRINCIPAL BALANCE PRINCIPAL BALANCE AS NUMBER OF AS OF THE OF THE STATED OCCUPANCY STATUS GROUP 1 MORTGAGE LOANS CUT-OFF DATE CUT-OFF DATE ------------------------------------------ -------------- ------------------- -------------------- Primary................................... 1,894 $452,304,441.55 67.29% Investor.................................. 902 185,872,178.94 27.65 Second Home............................... 151 34,042,146.77 5.06 ----- --------------- ------ Total..................................... 2,947 $672,218,767.26 100.00% ===== =============== ======
----------------- *In the preceding table, "stated occupancy status" refers to the intended use of the mortgaged property as represented by the borrower when the related group 1 mortgage loan was originated. LOAN PURPOSE OF THE GROUP 1 MORTGAGE LOANS
% OF AGGREGATE NUMBER OF PRINCIPAL BALANCE PRINCIPAL BALANCE AS GROUP 1 MORTGAGE AS OF THE OF THE PURPOSE LOANS CUT-OFF DATE CUT-OFF DATE ------------------------------------------ -------------- ------------------- -------------------- Cash Out Refinance........................ 1,260 $297,826,169.42 44.30% Purchase.................................. 1,088 241,373,430.35 35.91 Rate/Term Refinance....................... 599 133,019,167.49 19.79 ----- --------------- ------ Total..................................... 2,947 $672,218,767.26 100.00% ===== =============== ======
S-41 DOCUMENTATION PROGRAMS OF THE GROUP 1 MORTGAGE LOANS
% OF AGGREGATE PRINCIPAL BALANCE PRINCIPAL BALANCE AS NUMBER OF AS OF THE OF THE DOCUMENTATION GROUP 1 MORTGAGE LOANS CUT-OFF DATE CUT-OFF DATE ------------------------------------------ -------------- ------------------- -------------------- Reduced Documentation..................... 1,893 $450,381,765.32 67.00% Full Documentation........................ 663 142,190,880.06 21.15 Alternative Documentation................. 387 78,678,966.37 11.70 No Income/No Asset........................ 4 967,155.52 0.14 ----- --------------- ------ Total..................................... 2,947 $672,218,767.26 100.00% ===== =============== ======
ORIGINAL LOAN-TO-VALUE RATIOS OF THE GROUP 1 MORTGAGE LOANS
% OF AGGREGATE NUMBER OF PRINCIPAL BALANCE PRINCIPAL BALANCE AS ORIGINAL LOAN-TO-VALUE GROUP 1 MORTGAGE AS OF THE OF THE RATIO (%) LOANS CUT-OFF DATE CUT-OFF DATE ------------------------------------------ -------------- ------------------- -------------------- <= 10.00......................... 1 $ 130,000.00 0.02% 10.01 - 15.00......................... 1 340,000.00 0.05 15.01 - 20.00......................... 2 178,787.91 0.03 20.01 - 25.00......................... 9 1,437,776.99 0.21 25.01 - 30.00......................... 2 238,803.27 0.04 30.01 - 35.00......................... 17 2,886,194.97 0.43 35.01 - 40.00......................... 29 5,475,129.83 0.81 40.01 - 45.00......................... 23 5,425,191.53 0.81 45.01 - 50.00......................... 50 11,852,171.42 1.76 50.01 - 55.00......................... 59 13,862,263.93 2.06 55.01 - 60.00......................... 88 21,186,541.63 3.15 60.01 - 65.00......................... 162 37,277,148.57 5.55 65.01 - 70.00......................... 268 63,375,753.25 9.43 70.01 - 75.00......................... 334 80,434,098.44 11.97 75.01 - 80.00......................... 1,765 398,035,928.14 59.21 80.01 - 85.00......................... 5 1,123,947.42 0.17 85.01 - 90.00......................... 46 9,599,371.79 1.43 90.01 - 95.00......................... 85 19,197,481.03 2.86 95.01 - 100.00.......................... 1 162,177.15 0.02 ----- --------------- ------ Total..................................... 2,947 $672,218,767.26 100.00% ===== =============== ======
The weighted average original loan-to-value ratio of the group 1 mortgage loans was approximately 74.68% as of the cut-off date. S-42 GEOGRAPHIC DISTRIBUTION OF THE GROUP 1 MORTGAGE LOANS
% OF AGGREGATE NUMBER OF PRINCIPAL BALANCE PRINCIPAL BALANCE AS GROUP 1 MORTGAGE AS OF THE OF THE STATE LOANS CUT-OFF DATE CUT-OFF DATE ------------------------------------------ -------------- ------------------- -------------------- California................................ 1,114 $306,279,310.85 45.56% Florida................................... 391 73,155,594.24 10.88 Nevada.................................... 247 53,335,564.65 7.93 Arizona................................... 134 26,506,572.87 3.94 Washington................................ 116 25,303,267.84 3.76 All Others (42) + DC...................... 945 187,638,456.82 27.91 ----- --------------- ------ Total..................................... 2,947 $672,218,767.26 100.00% ===== =============== ======
As of the cut-off date, the greatest five-digit ZIP Code geographic concentration of group 1 mortgage loans by principal balance was approximately 0.86% in the 89123 ZIP Code. LOAN RATES OF THE GROUP 1 MORTGAGE LOANS
% OF AGGREGATE PRINCIPAL BALANCE PRINCIPAL BALANCE AS NUMBER OF AS OF THE OF THE LOAN RATE (%) GROUP 1 MORTGAGE LOANS CUT-OFF DATE CUT-OFF DATE ------------------------------------------ -------------- ------------------- -------------------- 1.000 - 1.000............................. 1,496 $359,258,035.00 53.44% 1.001 - 1.500............................. 686 144,201,365.00 21.45 1.501 - 2.000............................. 216 49,459,625.08 7.36 2.001 - 2.500............................. 109 20,812,075.24 3.10 2.501 - 3.000............................. 21 4,643,685.00 0.69 3.001 - 3.500............................. 33 6,806,484.00 1.01 3.501 - 4.000............................. 3 724,740.31 0.11 4.001 - 4.500............................. 42 10,114,217.41 1.50 4.501 - 5.000............................. 247 56,320,960.01 8.38 5.001 - 5.500............................. 88 18,362,396.02 2.73 5.501 - 6.000............................. 6 1,515,184.20 0.23 ----- --------------- ------ Total..................................... 2,947 $672,218,767.26 100.00% ===== =============== ======
The weighted average loan rate of the group 1 mortgage loans was approximately 1.705% as of the cut-off date. S-43 MAXIMUM LOAN RATES OF THE GROUP 1 MORTGAGE LOANS
% OF AGGREGATE PRINCIPAL BALANCE PRINCIPAL BALANCE AS NUMBER OF AS OF THE OF THE MAXIMUM LOAN RATE (%) GROUP 1 MORTGAGE LOANS CUT-OFF DATE CUT-OFF DATE ------------------------------------------ -------------- ------------------- -------------------- 9.950 - 10.000.......................... 2,926 $667,491,651.73 99.30% 10.001 - 10.500........................... 13 3,030,633.78 0.45 10.501 - 11.000........................... 6 1,397,881.75 0.21 11.001 - 11.500........................... 1 125,600.00 0.02 11.501 - 12.000........................... 1 173,000.00 0.03 ----- --------------- ------ Total..................................... 2,947 $672,218,767.26 100.00% ===== =============== ======
The weighted average maximum loan rate of the group 1 mortgage loans was approximately 9.955% as of the cut-off date. MINIMUM LOAN RATES OF THE GROUP 1 MORTGAGE LOANS
% OF AGGREGATE PRINCIPAL BALANCE PRINCIPAL BALANCE AS NUMBER OF AS OF THE OF THE MINIMUM LOAN RATE (%) GROUP 1 MORTGAGE LOANS CUT-OFF DATE CUT-OFF DATE ------------------------------------------ -------------- ------------------- -------------------- 1.400 - 1.500........................... 1 $ 247,000.00 0.04% 1.501 - 2.000........................... 29 5,557,844.31 0.83 2.001 - 2.500........................... 264 61,197,574.53 9.10 2.501 - 3.000........................... 1,367 321,959,201.83 47.90 3.001 - 3.500........................... 1,051 232,099,522.38 34.53 3.501 - 4.000........................... 211 46,059,153.38 6.85 4.001 - 4.500........................... 23 4,776,420.83 0.71 4.501 - 4.525........................... 1 322,050.00 0.05 ----- --------------- ------ Total..................................... 2,947 $672,218,767.26 100.00% ===== =============== ======
The weighted average minimum loan rate of the group 1 mortgage loans was approximately 2.946% as of the cut-off date. S-44 GROSS MARGINS OF THE GROUP 1 MORTGAGE LOANS
% OF AGGREGATE PRINCIPAL BALANCE PRINCIPAL BALANCE AS NUMBER OF AS OF THE OF THE GROSS MARGIN (%) GROUP 1 MORTGAGE LOANS CUT-OFF DATE CUT-OFF DATE ------------------------------------------ -------------- ------------------- -------------------- 1.400 - 1.500........................... 1 $ 247,000.00 0.04% 1.501 - 2.000........................... 29 5,557,844.31 0.83 2.001 - 2.500........................... 264 61,197,574.53 9.10 2.501 - 3.000........................... 1,367 321,959,201.83 47.90 3.001 - 3.500........................... 1,051 232,099,522.38 34.53 3.501 - 4.000........................... 211 46,059,153.38 6.85 4.001 - 4.500........................... 23 4,776,420.83 0.71 4.501 - 4.525........................... 1 322,050.00 0.05 ----- --------------- ------ Total..................................... 2,947 $672,218,767.26 100.00% ===== =============== ======
The weighted average gross margin of the group 1 mortgage loans was approximately 2.946% as of the cut-off date. INDICES OF THE GROUP 1 MORTGAGE LOANS
% OF AGGREGATE NUMBER OF PRINCIPAL BALANCE PRINCIPAL BALANCE AS GROUP 1 MORTGAGE AS OF THE OF THE INDEX LOANS CUT-OFF DATE CUT-OFF DATE ------------------------------------------ -------------- ------------------- -------------------- MTA....................................... 2,947 $672,218,767.26 100.00% ----- --------------- ------ Total..................................... 2,947 $672,218,767.26 100.00% ===== =============== ======
For a description of each index referred to above, see "--The Index" above. RATE ADJUSTMENT FREQUENCIES OF THE GROUP 1 MORTGAGE LOANS
% OF AGGREGATE PRINCIPAL BALANCE PRINCIPAL BALANCE AS NUMBER OF AS OF THE OF THE RATE ADJUSTMENT FREQUENCY GROUP 1 MORTGAGE LOANS CUT-OFF DATE CUT-OFF DATE ------------------------------------------ -------------- ------------------- -------------------- Monthly................................... 2,947 $672,218,767.26 100.00% ----- --------------- ------ Total..................................... 2,947 $672,218,767.26 100.00% ===== =============== ======
S-45 MONTHS TO NEXT LOAN RATE ADJUSTMENT DATE OF THE GROUP 1 MORTGAGE LOANS
% OF AGGREGATE PRINCIPAL BALANCE PRINCIPAL BALANCE AS NUMBER OF AS OF THE OF THE MONTHS TO NEXT LOAN RATE ADJUSTMENT DATE GROUP 1 MORTGAGE LOANS CUT-OFF DATE CUT-OFF DATE ------------------------------------------ -------------- ------------------- -------------------- 1......................................... 1,588 $367,683,226.88 54.70% 2......................................... 1,130 255,944,633.38 38.07 3......................................... 118 26,414,266.00 3.93 4......................................... 111 22,176,641.00 3.30 ----- --------------- ------ Total..................................... 2,947 $672,218,767.26 100.00% ===== =============== ======
MONTHS TO NEXT PAYMENT ADJUSTMENT DATE OF THE GROUP 1 MORTGAGE LOANS
% OF AGGREGATE PRINCIPAL BALANCE PRINCIPAL BALANCE AS NUMBER OF AS OF THE OF THE MONTHS TO NEXT PAYMENT ADJUSTMENT DATE GROUP 1 MORTGAGE LOANS CUT-OFF DATE CUT-OFF DATE ------------------------------------------ -------------- ------------------- -------------------- 7......................................... 1 $ 135,010.92 0.02% 9......................................... 1 335,231.71 0.05 10........................................ 5 1,199,376.93 0.18 11........................................ 34 7,377,066.21 1.10 12........................................ 385 86,868,615.49 12.92 13........................................ 1,319 306,776,956.80 45.64 14........................................ 1,202 269,526,509.20 40.10 ----- --------------- ------ Total..................................... 2,947 $672,218,767.26 100.00% ===== =============== ======
S-46 CREDIT SCORES OF THE GROUP 1 MORTGAGE LOANS
% OF AGGREGATE PRINCIPAL BALANCE PRINCIPAL BALANCE AS NUMBER OF AS OF THE OF THE CREDIT SCORE GROUP 1 MORTGAGE LOANS CUT-OFF DATE CUT-OFF DATE ------------------------------------------ -------------- ------------------- -------------------- 620 - 620................................ 4 $ 804,300.00 0.12% 621 - 640................................ 165 37,401,608.05 5.56 641 - 660................................ 302 69,641,267.89 10.36 661 - 680................................ 481 111,515,709.40 16.59 681 - 700................................ 451 100,602,605.61 14.97 701 - 720................................ 426 99,457,895.48 14.80 721 - 740................................ 343 78,624,927.24 11.70 741 - 760................................ 307 68,779,869.34 10.23 761 - 780................................ 265 61,081,944.54 9.09 781 - 800................................ 159 35,265,645.30 5.25 801 - 820................................ 41 7,968,794.43 1.19 821 - 839................................ 3 1,074,200.00 0.16 ----- --------------- ------ Total..................................... 2,947 $672,218,767.26 100.00% ===== =============== ======
The weighted average credit score of the group 1 mortgage loans was approximately 707 as of the cut-off date. NEGATIVE AMORTIZATION LIMIT OF THE GROUP 1 MORTGAGE LOANS
% OF AGGREGATE NUMBER OF PRINCIPAL BALANCE PRINCIPAL BALANCE AS GROUP 1 MORTGAGE AS OF THE OF THE NEGATIVE AMORTIZATION LIMIT (%) LOANS CUT-OFF DATE CUT-OFF DATE ------------------------------------------ -------------- ------------------- -------------------- 110....................................... 18 $ 5,048,486.09 0.75% 115....................................... 2,929 667,170,281.17 99.25 ----- --------------- ------ Total..................................... 2,947 $672,218,767.26 100.00% ===== =============== ======
S-47 GROUP 2 MORTGAGE LOAN STATISTICS The following statistical information, unless otherwise specified, is based upon the aggregate principal balance of the group 2 mortgage loans as of the cut-off date. General Characteristics. All of the group 2 mortgage loans have original terms to stated maturity of 360 months. The weighted average remaining term to stated maturity of the group 2 mortgage loans was approximately 360 months as of the cut-off date. None of the group 2 mortgage loans had a first due date prior to January 2005 or after May 2005 or had a remaining term to stated maturity of less than 357 months or greater than 360 months as of the cut-off date. The latest stated maturity date of any group 2 mortgage loan occurs in April 2035. The average principal balance of the group 2 mortgage loans at origination was approximately $540,818. The average principal balance of the group 2 mortgage loans as of the cut-off date was approximately $540,629. No group 2 mortgage loan had a principal balance of less than approximately $50,400 or greater than approximately $3,000,000 as of the cut-off date. The group 2 mortgage loans had annual loan rates of not less than 1.000% and not more than 6.000% and the weighted average annual loan rate was approximately 1.604%. As of the cut-off date, the group 2 mortgage loans had gross margins ranging from 1.000% to 4.025%. As of the cut-off date, the group 2 mortgage loans had minimum loan rates ranging from 1.000% to 4.450% and had maximum loan rates ranging from 9.950% to 10.500%. As of the cut-off date, the weighted average gross margin was approximately 2.805%, the weighted average maximum loan rate was approximately 9.950% and the weighted average minimum loan rate was approximately 2.806% for all of the group 2 mortgage loans. The latest next loan rate adjustment date following the cut-off date on any group 2 mortgage loan occurs in approximately four months and the weighted average next loan rate adjustment date following the cut-off date for all of the group 2 mortgage loans occurs in approximately two months. The latest next payment adjustment date following the cut-off date on any group 2 mortgage loan occurs in 14 months and the weighted average next payment adjustment date following the cut-off date for the group 2 mortgage loans occurs in approximately 13 months. As of origination, approximately 65.12% of the group 2 mortgage loans provide for payment by the mortgagor of a prepayment penalty in connection with certain full or partial prepayments of principal. The group 2 mortgage loans had the characteristics shown in the following tables. The sum in any column in the following tables may not equal the total indicated due to rounding. S-48 PRINCIPAL BALANCES OF THE GROUP 2 MORTGAGE LOANS
% OF AGGREGATE NUMBER OF PRINCIPAL BALANCE PRINCIPAL BALANCE AS GROUP 2 MORTGAGE AS OF THE OF THE PRINCIPAL BALANCE ($) LOANS CUT-OFF DATE CUT-OFF DATE ------------------------------------------ -------------- ------------------- -------------------- 50,400 - 100,000................... 18 $ 1,536,514.89 0.12% 100,001 - 150,000................... 40 4,924,300.85 0.39 150,001 - 200,000................... 59 10,313,444.77 0.81 200,001 - 250,000................... 60 13,445,268.12 1.06 250,001 - 300,000................... 49 13,440,283.18 1.06 300,001 - 350,000................... 45 14,682,030.60 1.15 350,001 - 400,000................... 444 169,333,699.04 13.31 400,001 - 450,000................... 347 147,935,389.36 11.62 450,001 - 500,000................... 307 146,160,553.75 11.48 500,001 - 550,000................... 197 103,352,123.23 8.12 550,001 - 600,000................... 182 104,755,354.32 8.23 600,001 - 650,000................... 173 109,797,052.57 8.63 650,001 - 700,000................... 62 42,102,183.41 3.31 700,001 - 750,000................... 54 39,294,994.77 3.09 750,001 - 800,000................... 40 31,071,969.96 2.44 800,001 - 850,000................... 30 25,042,818.64 1.97 850,001 - 900,000................... 40 35,113,267.26 2.76 900,001 - 950,000................... 33 30,483,095.67 2.40 950,001 - 1,000,000................... 64 63,386,936.71 4.98 1,000,001 - 1,050,000................... 5 5,182,132.19 0.41 1,050,001 - 1,100,000................... 6 6,480,169.38 0.51 1,100,001 - 1,150,000................... 8 9,003,000.00 0.71 1,150,001 - 1,200,000................... 15 17,722,530.32 1.39 1,200,001 - 1,250,000................... 7 8,565,500.00 0.67 1,250,001 - 1,300,000................... 9 11,484,152.02 0.90 1,300,001 - 1,350,000................... 3 4,008,721.76 0.31 1,350,001 - 1,400,000................... 2 2,785,750.00 0.22 1,400,001 - 1,450,000................... 5 7,138,309.46 0.56 1,450,001 - 1,500,000................... 15 22,422,447.43 1.76 1,500,001 - 1,550,000................... 1 1,522,000.00 0.12 1,550,001 - 1,600,000................... 1 1,600,000.00 0.13 1,600,001 - 1,650,000................... 4 6,506,732.46 0.51 1,650,001 - 1,700,000................... 3 5,080,000.00 0.40 1,700,001 - 1,750,000................... 1 1,750,000.00 0.14 1,750,001 - 1,800,000................... 2 3,525,000.00 0.28 1,850,001 - 1,900,000................... 2 3,730,000.00 0.29 1,900,001 - 1,950,000................... 2 3,870,000.00 0.30 1,950,001 - 2,000,000................... 8 15,985,940.94 1.26 2,050,001 - 2,100,000................... 1 2,070,000.00 0.16 2,200,001 - 2,250,000................... 1 2,250,000.00 0.18 2,250,001 - 2,300,000................... 1 2,275,000.00 0.18 2,300,001 - 2,350,000................... 1 2,310,000.00 0.18 2,400,001 - 2,450,000................... 1 2,415,000.00 0.19 2,550,001 - 2,600,000................... 1 2,600,000.00 0.20 2,700,001 - 2,750,000................... 2 5,472,500.00 0.43 2,750,001 - 2,800,000................... 1 2,800,000.00 0.22 2,900,001 - 2,950,000................... 1 2,915,000.00 0.23 2,950,001 - 3,000,000................... 1 3,000,000.00 0.24 ----- ----------------- ------ Total.................................... 2,354 $1,272,641,167.06 100.00% ===== ================= ======
The average principal balance of the group 2 mortgage loans was approximately $540,629 as of the cut-off date. S-49 ORIGINAL TERMS TO STATED MATURITY OF THE GROUP 2 MORTGAGE LOANS
% OF AGGREGATE PRINCIPAL BALANCE PRINCIPAL BALANCE AS NUMBER OF AS OF THE OF THE ORIGINAL TERM (MONTHS) GROUP 2 MORTGAGE LOANS CUT-OFF DATE CUT-OFF DATE ------------------------------------------ -------------- ------------------- -------------------- 360....................................... 2,354 $1,272,641,167.06 100.00% ----- ----------------- ------ Total..................................... 2,354 $1,272,641,167.06 100.00% ===== ================= ======
The weighted average original term to stated maturity of the group 2 mortgage loans was approximately 360 months as of the cut-off date. REMAINING TERMS TO STATED MATURITY OF THE GROUP 2 MORTGAGE LOANS
% OF AGGREGATE PRINCIPAL BALANCE PRINCIPAL BALANCE AS NUMBER OF AS OF THE OF THE REMAINING TERM (MONTHS) GROUP 2 MORTGAGE LOANS CUT-OFF DATE CUT-OFF DATE ------------------------------------------ -------------- ------------------- -------------------- 357 - 360................................. 2,354 $1,272,641,167.06 100.00% ----- ----------------- ------ Total..................................... 2,354 $1,272,641,167.06 100.00% ===== ================= ======
The weighted average remaining term to stated maturity of the group 2 mortgage loans was approximately 360 months as of the cut-off date. PROPERTY TYPE OF THE GROUP 2 MORTGAGE LOANS
% OF AGGREGATE PRINCIPAL BALANCE PRINCIPAL BALANCE AS NUMBER OF AS OF THE OF THE PROPERTY TYPE GROUP 2 MORTGAGE LOANS CUT-OFF DATE CUT-OFF DATE ------------------------------------------ -------------- ------------------- -------------------- Single Family............................. 1,507 $ 814,865,841.66 64.03% PUD....................................... 555 316,175,385.85 24.84 Condominium............................... 238 113,336,897.75 8.91 Two - Four Family......................... 54 28,263,041.80 2.22 ----- ----------------- ------ Total..................................... 2,354 $1,272,641,167.06 100.00% ===== ================= ======
STATED OCCUPANCY STATUS OF THE GROUP 2 MORTGAGE LOANS*
% OF AGGREGATE PRINCIPAL BALANCE PRINCIPAL BALANCE AS NUMBER OF AS OF THE OF THE STATED OCCUPANCY STATUS GROUP 2 MORTGAGE LOANS CUT-OFF DATE CUT-OFF DATE ------------------------------------------ -------------- ------------------- -------------------- Primary................................... 1,989 $1,103,948,899.08 86.74% Investor.................................. 272 116,858,838.46 9.18 Second Home............................... 93 51,833,429.52 4.07 ----- ----------------- ------ Total..................................... 2,354 $1,272,641,167.06 100.00% ===== ================= ======
--------------- *In the preceding table, "stated occupancy status" refers to the intended use of the mortgaged property as represented by the borrower when the related group 2 mortgage loan was originated. S-50 LOAN PURPOSE OF THE GROUP 2 MORTGAGE LOANS
% OF AGGREGATE NUMBER OF PRINCIPAL BALANCE PRINCIPAL BALANCE AS GROUP 2 MORTGAGE AS OF THE OF THE PURPOSE LOANS CUT-OFF DATE CUT-OFF DATE ------------------------------------------ -------------- ------------------- -------------------- Purchase.................................. 962 $ 537,544,904.22 42.24% Cash Out Refinance........................ 980 512,848,242.46 40.30 Rate/Term Refinance....................... 412 222,248,020.38 17.46 ----- ----------------- ------ Total..................................... 2,354 $1,272,641,167.06 100.00% ===== ================= ======
DOCUMENTATION PROGRAMS OF THE GROUP 2 MORTGAGE LOANS
% OF AGGREGATE PRINCIPAL BALANCE PRINCIPAL BALANCE AS NUMBER OF AS OF THE OF THE DOCUMENTATION GROUP 2 MORTGAGE LOANS CUT-OFF DATE CUT-OFF DATE ------------------------------------------ -------------- ------------------- -------------------- Reduced Documentation..................... 1,887 $1,041,251,535.14 81.82% Full Documentation........................ 312 164,151,623.69 12.90 Alternative Documentation................. 154 66,798,008.23 5.25 No Income / No Asset...................... 1 440,000.00 0.03 ----- ----------------- ------ Total..................................... 2,354 $1,272,641,167.06 100.00% ===== ================= ======
ORIGINAL LOAN-TO-VALUE RATIOS OF THE GROUP 2 MORTGAGE LOANS
% OF AGGREGATE NUMBER OF PRINCIPAL BALANCE PRINCIPAL BALANCE AS ORIGINAL LOAN-TO-VALUE GROUP 2 MORTGAGE AS OF THE OF THE RATIO (%) LOANS CUT-OFF DATE CUT-OFF DATE ------------------------------------------ -------------- ------------------- -------------------- 25.64 - 30.00........................... 2 $ 900,000.00 0.07% 30.01 - 35.00........................... 9 5,242,000.00 0.41 35.01 - 40.00........................... 7 4,225,000.00 0.33 40.01 - 45.00........................... 11 7,299,340.91 0.57 45.01 - 50.00........................... 29 21,877,760.05 1.72 50.01 - 55.00........................... 41 35,392,123.00 2.78 55.01 - 60.00........................... 80 63,827,992.87 5.02 60.01 - 65.00........................... 122 98,476,276.68 7.74 65.01 - 70.00........................... 237 148,936,443.95 11.70 70.01 - 75.00........................... 407 231,913,543.00 18.22 75.01 - 80.00........................... 1,367 641,801,932.62 50.43 80.01 - 85.00........................... 3 660,100.00 0.05 85.01 - 90.00........................... 19 5,892,485.00 0.46 90.01 - 95.00........................... 20 6,196,168.98 0.49 ----- ----------------- ------ Total..................................... 2,354 $1,272,641,167.06 100.00% ===== ================= ======
The weighted average original loan-to-value ratio of the group 2 mortgage loans was approximately 73.27% as of the cut-off date. S-51 GEOGRAPHIC DISTRIBUTION OF THE GROUP 2 MORTGAGE LOANS
% OF AGGREGATE NUMBER OF PRINCIPAL BALANCE PRINCIPAL BALANCE AS GROUP 2 MORTGAGE AS OF THE OF THE STATE LOANS CUT-OFF DATE CUT-OFF DATE ------------------------------------------ -------------- ------------------- -------------------- California................................ 1,608 $ 896,593,633.77 70.45% Florida................................... 181 96,220,867.65 7.56 Nevada.................................... 88 38,812,580.87 3.05 All Others (38) + DC...................... 477 241,014,084.76 18.94 ----- ----------------- ------ Total..................................... 2,354 $1,272,641,167.06 100.00% ===== ================= ======
As of the cut-off date, the greatest five-digit ZIP Code geographic concentration of group 2 mortgage loans by principal balance was approximately 0.75% in the 92009 ZIP Code. LOAN RATES OF THE GROUP 2 MORTGAGE LOANS
% OF AGGREGATE PRINCIPAL BALANCE PRINCIPAL BALANCE AS NUMBER OF AS OF THE OF THE LOAN RATE (%) GROUP 2 MORTGAGE LOANS CUT-OFF DATE CUT-OFF DATE ------------------------------------------ -------------- ------------------- -------------------- 1.000 - 1.000............................. 1,595 $ 863,475,296.00 67.85% 1.001 - 1.500............................. 229 98,287,961.95 7.72 1.501 - 2.000............................. 182 128,812,833.31 10.12 2.001 - 2.500............................. 29 14,101,734.29 1.11 2.501 - 3.000............................. 13 8,822,295.00 0.69 3.001 - 3.500............................. 4 833,000.00 0.07 3.501 - 4.000............................. 3 2,732,058.34 0.21 4.001 - 4.500............................. 64 33,293,005.45 2.62 4.501 - 5.000............................. 195 102,813,687.83 8.08 5.001 - 5.500............................. 39 19,233,026.68 1.51 5.501 - 6.000............................. 1 236,268.21 0.02 ----- ----------------- ------ Total..................................... 2,354 $1,272,641,167.06 100.00% ===== ================= ======
The weighted average loan rate of the group 2 mortgage loans was approximately 1.604% as of the cut-off date. MAXIMUM LOAN RATES OF THE GROUP 2 MORTGAGE LOANS
% OF AGGREGATE PRINCIPAL BALANCE PRINCIPAL BALANCE AS NUMBER OF AS OF THE OF THE MAXIMUM LOAN RATE (%) GROUP 2 MORTGAGE LOANS CUT-OFF DATE CUT-OFF DATE ------------------------------------------ -------------- ------------------- -------------------- 9.950 - 10.000.......................... 2,348 $1,271,541,593.83 99.91% 10.001 - 10.500........................... 6 1,099,573.23 0.09 ----- ----------------- ------ Total..................................... 2,354 $1,272,641,167.06 100.00% ===== ================= ======
The weighted average maximum loan rate of the group 2 mortgage loans was approximately 9.950% as of the cut-off date. S-52 MINIMUM LOAN RATES OF THE GROUP 2 MORTGAGE LOANS
% OF AGGREGATE PRINCIPAL BALANCE PRINCIPAL BALANCE AS NUMBER OF AS OF THE OF THE MINIMUM LOAN RATE (%) GROUP 2 MORTGAGE LOANS CUT-OFF DATE CUT-OFF DATE ------------------------------------------ -------------- ------------------- -------------------- 1.000 - 1.000........................... 1 $ 508,100.00 0.04% 1.001 - 1.500........................... 1 166,400.00 0.01 1.501 - 2.000........................... 38 25,292,279.34 1.99 2.001 - 2.500........................... 342 207,501,437.61 16.30 2.501 - 3.000........................... 1,277 687,394,434.12 54.01 3.001 - 3.500........................... 611 312,796,990.13 24.58 3.501 - 4.000........................... 80 38,047,421.41 2.99 4.001 - 4.450........................... 4 934,104.45 0.07 ----- ----------------- ------ Total..................................... 2,354 $1,272,641,167.06 100.00% ===== ================= ======
The weighted average minimum loan rate of the group 2 mortgage loans was approximately 2.806% as of the cut-off date. GROSS MARGINS OF THE GROUP 2 MORTGAGE LOANS
% OF AGGREGATE PRINCIPAL BALANCE PRINCIPAL BALANCE AS NUMBER OF AS OF THE OF THE GROSS MARGIN (%) GROUP 2 MORTGAGE LOANS CUT-OFF DATE CUT-OFF DATE ------------------------------------------ -------------- ------------------- -------------------- 1.000 - 1.000........................... 1 $ 508,100.00 0.04% 1.001 - 1.500........................... 1 166,400.00 0.01 1.501 - 2.000........................... 38 25,292,279.34 1.99 2.001 - 2.500........................... 342 207,501,437.61 16.30 2.501 - 3.000........................... 1,277 687,394,434.12 54.01 3.001 - 3.500........................... 611 312,796,990.13 24.58 3.501 - 4.000........................... 81 38,317,411.41 3.01 4.001 - 4.025........................... 3 664,114.45 0.05 ----- ----------------- ------ Total..................................... 2,354 $1,272,641,167.06 100.00% ===== ================= ======
The weighted average gross margin of the group 2 mortgage loans was approximately 2.805% as of the cut-off date. INDICES OF THE GROUP 2 MORTGAGE LOANS
% OF AGGREGATE NUMBER OF PRINCIPAL BALANCE PRINCIPAL BALANCE AS GROUP 2 MORTGAGE AS OF THE OF THE INDEX LOANS CUT-OFF DATE CUT-OFF DATE ------------------------------------------ -------------- ------------------- -------------------- MTA....................................... 2,354 $1,272,641,167.06 100.00% ----- ----------------- ------ Total..................................... 2,354 $1,272,641,167.06 100.00% ===== ================= ======
For a description of each index referred to above, see "--The Index" above. S-53 RATE ADJUSTMENT FREQUENCIES OF THE GROUP 2 MORTGAGE LOANS
% OF AGGREGATE PRINCIPAL BALANCE PRINCIPAL BALANCE AS NUMBER OF AS OF THE OF THE RATE ADJUSTMENT FREQUENCY GROUP 2 MORTGAGE LOANS CUT-OFF DATE CUT-OFF DATE ------------------------------------------ -------------- ------------------- -------------------- Monthly................................... 2,354 $1,272,641,167.06 100.00% ----- ----------------- ------ Total..................................... 2,354 $1,272,641,167.06 100.00% ===== ================= ======
MONTHS TO NEXT LOAN RATE ADJUSTMENT DATE OF THE GROUP 2 MORTGAGE LOANS
% OF AGGREGATE PRINCIPAL BALANCE PRINCIPAL BALANCE AS NUMBER OF AS OF THE OF THE MONTHS TO NEXT LOAN RATE ADJUSTMENT DATE GROUP 2 MORTGAGE LOANS CUT-OFF DATE CUT-OFF DATE ------------------------------------------ -------------- ------------------- -------------------- 1......................................... 1,311 $ 712,022,469.30 55.95% 2......................................... 899 487,156,607.76 38.28 3......................................... 75 38,811,489.00 3.05 4......................................... 69 34,650,601.00 2.72 ----- ----------------- ------ Total..................................... 2,354 $1,272,641,167.06 100.00% ===== ================= ======
MONTHS TO NEXT PAYMENT ADJUSTMENT DATE OF THE GROUP 2 MORTGAGE LOANS
% OF AGGREGATE PRINCIPAL BALANCE PRINCIPAL BALANCE AS NUMBER OF AS OF THE OF THE MONTHS TO NEXT PAYMENT ADJUSTMENT DATE GROUP 2 MORTGAGE LOANS CUT-OFF DATE CUT-OFF DATE ------------------------------------------ -------------- ------------------- -------------------- 10........................................ 1 $ 483,304.93 0.04% 11........................................ 22 12,774,792.81 1.00 12........................................ 296 152,671,604.37 12.00 13........................................ 1,084 592,551,373.00 46.56 14........................................ 951 514,160,091.95 40.40 ----- ----------------- ------ Total..................................... 2,354 $1,272,641,167.06 100.00% ===== ================= ======
S-54 CREDIT SCORES OF THE GROUP 2 MORTGAGE LOANS
% OF AGGREGATE PRINCIPAL BALANCE PRINCIPAL BALANCE AS NUMBER OF AS OF THE OF THE CREDIT SCORE GROUP 2 MORTGAGE LOANS CUT-OFF DATE CUT-OFF DATE ------------------------------------------ -------------- ------------------- -------------------- N/A....................................... 3 $ 732,150.00 0.06% 581 - 600................................. 3 1,704,765.00 0.13 601 - 620................................. 41 14,597,886.10 1.15 621 - 640................................. 98 46,995,244.26 3.69 641 - 660................................. 171 84,472,417.35 6.64 661 - 680................................. 403 204,725,147.67 16.09 681 - 700................................. 412 225,878,592.06 17.75 701 - 720................................. 350 193,890,403.41 15.24 721 - 740................................. 292 163,644,008.59 12.86 741 - 760................................. 249 144,034,183.56 11.32 761 - 780................................. 196 116,497,767.14 9.15 781 - 800................................. 112 64,102,460.62 5.04 801 - 820................................. 22 10,726,541.30 0.84 821 - 831................................. 2 639,600.00 0.05 ----- ----------------- ------ Total..................................... 2,354 $1,272,641,167.06 100.00% ===== ================= ======
The weighted average credit score of the group 2 mortgage loans was approximately 710 as of the cut-off date. NEGATIVE AMORTIZATION LIMIT OF THE GROUP 2 MORTGAGE LOANS
% OF AGGREGATE NUMBER OF PRINCIPAL BALANCE PRINCIPAL BALANCE AS GROUP 2 MORTGAGE AS OF THE OF THE NEGATIVE AMORTIZATION LIMIT (%) LOANS CUT-OFF DATE CUT-OFF DATE ------------------------------------------ -------------- ------------------- -------------------- 110....................................... 29 $ 17,115,500.00 1.34% 115....................................... 2,325 1,255,525,667.06 98.66 ----- ----------------- ------ Total..................................... 2,354 $1,272,641,167.06 100.00% ===== ================= ======
S-55 ADDITIONAL INFORMATION The description in this prospectus supplement of the mortgage loans is based upon the mortgage pool as constituted at the close of business on the cut-off date, adjusted to reflect scheduled payments of principal due on those mortgage loans on or prior to the cut-off date and any amounts of deferred interest added to the principal balances of those mortgage loans due to negative amortization. The depositor will file a current report on Form 8-K, together with the pooling and servicing agreement and other material transaction documents, with the Securities and Exchange Commission after the initial issuance of the offered certificates. In the event that mortgage loans are removed from or added to the loan groups, such addition or removal, to the extent material, will be noted in the current report on Form 8-K. THE SELLER AND THE ORIGINATOR The seller, Greenwich Capital Financial Products, Inc., purchased all of the mortgage loans in the secondary market in the ordinary course of its business. The seller is a direct, wholly-owned subsidiary of Greenwich Capital Holdings, Inc. The seller is also an affiliate of the depositor and Greenwich Capital Markets, Inc., an underwriter. The originator has represented and warranted that each of the mortgage loans sold by that entity was underwritten in accordance with standards utilized by it during the period of origination for the mortgage loans. The underwriting criteria under which the mortgage loans were originated are described under "--Underwriting Standards" below. As described under "The Pooling and Servicing Agreement--Assignment of the Mortgage Loans" in this prospectus supplement, the seller and the originator, will make certain representations and warranties to the trustee regarding the mortgage loans. In the event of a breach that materially and adversely affects the certificateholders or the Class 2-A-1C Certificate Insurer, the seller or the originator, as applicable, will be obligated either to cure the breach or repurchase or replace each affected mortgage loan. THE ORIGINATOR The information set forth in this section contains a brief description of the underwriting guidelines used for mortgage loans originated by Countrywide. The following information has been provided by Countrywide, and none of the seller, the depositor, the trustee, the Class 2-A-1C Certificate Insurer or the underwriters makes any representations or warranties as to the accuracy or completeness of that information. S-56 Countrywide Home Loans, Inc. Countrywide, a New York corporation, is a direct wholly owned subsidiary of Countrywide Financial Corporation (formerly known as Countrywide Credit Industries, Inc.), a Delaware corporation. Countrywide is engaged primarily in the mortgage banking business, and as such, originates, purchases, sells and services (either directly or through subsidiaries) mortgage loans. Countrywide originates mortgage loans through a retail branch system and through mortgage loan brokers and correspondents nationwide. Loans originated, purchased, sold or serviced by Countrywide are principally first-lien, fixed or adjustable rate mortgage loans secured by single-family residences. The principal executive offices of Countrywide are located at 4500 Park Granada, Calabasas, California 91302. UNDERWRITING STANDARDS General. Underwriting standards are applied by or on behalf of a lender to evaluate a borrower's credit standing and repayment ability, and the value and adequacy of the related mortgaged property as collateral. In general, a prospective borrower applying for a loan is required to fill out a detailed application designed to provide the underwriting officer with pertinent credit information. As part of the description of the borrower's financial condition, the borrower generally is required to provide a current list of assets and liabilities and a statement of income and expense, as well as an authorization to apply for a credit report which summarizes the borrower's credit history with merchants and lenders and any record of bankruptcy. A lender may also originate mortgage loans pursuant to alternative sets of underwriting criteria under various documentation programs, including, but not limited to, stated documentation, reduced documentation, limited documentation, streamlined documentation, no documentation and no-ratio programs. Although the specific requirements of each lender's documentation programs may vary, these programs are generally designed to facilitate the loan approval process and generally require less documentation and verification than do traditional full documentation programs. Generally, under these programs, certain documentation requirements concerning income/employment and asset verification are reduced or excluded. When a mortgage loan is originated, the borrower's credit report is generally reviewed. Generally, each credit report provides a credit score for the borrower. The credit score, called a "FICO" score, is based upon the credit evaluation methodology developed by Fair, Isaac and Company, a consulting firm specializing in creating evaluation predictive models through a high number of variable components. FICO scores generally range from 350 to 850 and are available from three major credit bureaus: Experian (formerly TRW), Equifax and Trans Union. These scores estimate, on a relative basis, which loans are most likely to default in the future. Lower scores imply higher default risk relative to a higher score. FICO scores are empirically derived from historical credit bureau data and represent a numerical weighting of a borrower's credit characteristics over a two-year period. A FICO score is generated through the statistical analysis of a number of credit-related characteristics or variables. Common characteristics include number of credit lines (trade lines), payment history, past delinquencies, severity of delinquencies, current levels of indebtedness, types of credit and length of credit history. Attributes are specific values of each characteristic. A scorecard or model is created with weights or points assigned to each attribute. An individual loan applicant's credit score is derived by adding together the attribute weights for the applicant. S-57 Countrywide Underwriting Guidelines. As part of its evaluation of potential borrowers, Countrywide generally requires a description of income. If required by its underwriting guidelines, Countrywide obtains employment verification providing current and historical income information and/or a telephonic employment confirmation. Such employment verification may be obtained, either through analysis of the prospective borrower's recent pay stub and/or W-2 forms for the most recent two years, relevant portions of the most recent two years' tax returns, or from the prospective borrower's employer, wherein the employer reports the length of employment and current salary with that organization. Self-employed prospective borrowers generally are required to submit relevant portions of their federal tax returns for the past two years. In assessing a prospective borrower's creditworthiness, Countrywide may use FICO credit scores. FICO credit scores are statistical credit scores designed to assess a borrower's creditworthiness and likelihood to default on a consumer obligation over a two-year period based on a borrower's credit history. FICO credit scores were not developed to predict the likelihood of default on mortgage loans and, accordingly, may not be indicative of the ability of a mortgagor to repay its mortgage loan. FICO credit scores range from approximately 250 to approximately 900, with higher scores indicating an individual with a more favorable credit history compared to an individual with a lower score. Under Countrywide's underwriting guidelines, borrowers possessing higher FICO credit scores, which indicate a more favorable credit history and who give Countrywide the right to obtain the tax returns they filed for the preceding two years, may be eligible for Countrywide's processing program (the "preferred processing program"). Countrywide may waive some documentation requirements for mortgage loans originated under the preferred processing program. Periodically, the data used by Countrywide to complete the underwriting analysis may be obtained by a third party, particularly for mortgage loans originated through a loan correspondent or mortgage broker. In those instances, the initial determination as to whether a mortgage loan complies with Countrywide's underwriting guidelines may be made by an independent company hired to perform underwriting services on behalf of Countrywide, the loan correspondent or mortgage broker. In addition, Countrywide may acquire mortgage loans from approved correspondent lenders under a program pursuant to which Countrywide delegates to the correspondent the obligation to underwrite the mortgage loans to Countrywide's standards. Under these circumstances, the underwriting of a mortgage loan may not have been reviewed by Countrywide before acquisition of the mortgage loan and the correspondent represents that Countrywide's underwriting standards have been met. After purchasing mortgage loans under those circumstances, Countrywide conducts a quality control review of a sample of the mortgage loans. The number of loans reviewed in the quality control process varies based on a variety of factors, including Countrywide's prior experience with the correspondent lender and the results of the quality control review process itself. Countrywide's underwriting standards are applied by or on behalf of Countrywide to evaluate the prospective borrower's credit standing and repayment ability and the value and adequacy of the mortgaged property as collateral. Under those standards, a prospective borrower must generally demonstrate that the ratio of the borrower's monthly housing expenses (including principal and interest on the proposed mortgage loan and, as applicable, the related monthly portion of property taxes, hazard insurance and mortgage insurance) to the borrower's monthly gross income and the ratio of total monthly debt to the monthly gross income (the "debt-to-income" ratios) are within acceptable limits. If the prospective borrower has applied for S-58 an interest-only 6 Month LIBOR Loan, the interest component of the monthly mortgage expense is calculated based upon the initial interest rate plus 2%. If the prospective borrower has applied for a 3/1 Mortgage Loan and the Loan-to-Value Ratio is less than or equal to 75%, the interest component of the monthly mortgage expense is calculated based on the initial loan interest rate; if the Loan-to-Value Ratio exceeds 75%, the interest component of the monthly mortgage expense calculation is based on the initial loan interest rate plus 2%. If the prospective borrower has applied for a 5/1 Mortgage Loan, a 7/1 Mortgage Loan or a 10/1 Mortgage Loan, the interest component of the monthly mortgage expense is calculated based on the initial loan interest rate. If the prospective borrower has applied for a negative amortization loan, the interest component of the monthly housing expense calculation is based upon the greater of 4.25% or the initial interest rate on the mortgage loan. The maximum acceptable debt-to-income ratio, which is determined on a loan-by-loan basis varies depending on a number of underwriting criteria, including the Loan-to-Value Ratio, loan purpose, loan amount and credit history of the borrower. In addition to meeting the debt-to-income ratio guidelines, each prospective borrower is required to have sufficient cash resources to pay the down payment and closing costs. Exceptions to Countrywide's underwriting guidelines may be made if compensating factors are demonstrated by a prospective borrower. Additionally, Countrywide does permit its adjustable rate mortgage loans, hybrid adjustable rate mortgage loans and negative amortization mortgage loans to be assumed by a purchaser of the related mortgaged property, so long as the mortgage loan is in its adjustable rate period and the related purchaser meets Countrywide's underwriting standards that are then in effect. Countrywide may provide secondary financing to a mortgagor simultaneously with the origination of a first mortgage loan, subject to the following limitations: The loan-to-value ratio of the senior (i.e., first) lien may not exceed 80% and the combined loan-to-value ratio may not exceed 100%. Countrywide's underwriting guidelines do not prohibit or otherwise restrict a mortgagor from obtaining secondary financing from lenders other than Countrywide, whether at origination of the mortgage loan or thereafter. The nature of the information that a borrower is required to disclose and whether the information is verified depends, in part, on the documentation program used in the origination process. In general under the full documentation loan program (the "full documentation program"), each prospective borrower is required to complete an application which includes information with respect to the applicant's assets, liabilities, income, credit history, employment history and other personal information. Self-employed individuals are generally required to submit their two most recent federal income tax returns. Under the full documentation program, the underwriter verifies the information contained in the application relating to employment, income, assets and mortgages. A prospective borrower may be eligible for a loan approval process that limits or eliminates Countrywide's standard disclosure or verification requirements or both. Countrywide offers the following documentation programs as alternatives to its full documentation program: an alternative documentation loan program (the "alternative documentation program"), a reduced documentation loan program (the "reduced documentation program"), a CLUES plus documentation loan program (the "CLUES plus documentation program"), a streamlined documentation loan program (the "streamlined documentation program") a no income/ no asset documentation loan program (the "no income/ no asset documentation program") and a stated income/stated asset documentation loan program (the "stated income/stated asset documentation program"). S-59 For all mortgage loans originated or acquired by Countrywide, Countrywide obtains a credit report relating to the applicant from a credit reporting company. The credit report typically contains information relating to such matters as credit history with local and national merchants and lenders, installment debt payments and any record of defaults, bankruptcy, dispossession, suits or judgments. All adverse information in the credit report is required to be explained by the prospective borrower to the satisfaction of the lending officer. Generally, Countrywide obtains appraisals from independent appraisers or appraisal services for properties that are to secure mortgage loans, except with respect to selected borrowers that are refinancing an existing mortgage loan that was originated or acquired by Countrywide provided that, among other things, the mortgage loan has not been more than 30 days delinquent in payment during the previous twelve-month period. The appraisers inspect and appraise the proposed mortgaged property and verify that the property is in acceptable condition. Following each appraisal, the appraiser prepares a report which includes a market data analysis based on recent sales of comparable homes in the area and, when deemed appropriate, a replacement cost analysis based on the current cost of constructing a similar home. All appraisals are required to conform to Fannie Mae or Freddie Mac appraisal standards then in effect. Countrywide requires title insurance on all of its mortgage loans secured by first liens on real property. Countrywide also requires that fire and extended coverage casualty insurance be maintained on the mortgaged property in an amount at least equal to the principal balance of the related single-family mortgage loan or the replacement cost of the mortgaged property, whichever is less. Countrywide's underwriting guidelines for fixed-period adjustable rate mortgage loans generally allow loan-to-value ratios at origination of up to 95% for purchase money or rate and term refinance mortgage loans with original principal balances of up to $500,000, up to 90% for mortgage loans with original principal balances of up to $650,000, up to 80% for mortgage loans with original principal balances of up to $1,000,000, up to 65% for mortgage loans with original principal balances of up to $1,500,000, and up to 60% for mortgage loans with original principal balances of up to $2,000,000. Loans exceeding $650,000 are restricted to properties located in major metropolitan areas only. For cash-out refinance mortgage loans with original principal balances of up to $650,000, Countrywide's underwriting guidelines generally allow loan-to-value ratios at origination of up to 75%. The maximum "cash-out" amount permitted is $200,000 and is based in part on the original loan-to-value ratio of the related mortgage loan. As used in this prospectus supplement, a refinance mortgage loan is classified as a cash-out refinance mortgage loan by Countrywide if the borrower retains an amount equal to the lesser of 2% of the entire amount of the proceeds from the refinancing of the existing loan, or $2,000. Under its underwriting guidelines, Countrywide generally permits a debt-to-income ratio based on the borrower's monthly housing expenses of up to 33% and a debt-to-income ratio based on the borrower's total monthly debt of up to 38%. The nature of the information that a borrower is required to disclose and whether the information is verified depends, in part, on the documentation program used in the origination process. In general under the full documentation program, each prospective borrower is required to complete an application which includes information with respect to the applicant's assets, S-60 liabilities, income, credit history, employment history and other personal information. Self-employed individuals are generally required to submit their two most recent federal income tax returns. Under the full documentation program, the underwriter verifies the information contained in the application relating to employment, income, assets and mortgages. The alternative documentation program permits a borrower to provide W-2 forms instead of tax returns covering the most recent two years, permits bank statements in lieu of verification of deposits and permits alternative methods of employment verification. Under the reduced documentation program, some underwriting documentation concerning income and employment verification is waived. Countrywide obtains from a prospective borrower either a verification of deposit or bank statements for the two-month period immediately before the date of the mortgage loan application or verbal verification of employment. Since information relating to a prospective borrower's income and employment is not verified, the borrower's debt-to-income ratios are calculated based on the information provided by the borrower in the mortgage loan application. The maximum loan-to-value ratio, including secondary financing, ranges up to 70% maximum. The CLUES plus documentation program permits the verification of employment by alternative means, if necessary, including verbal verification of employment or reviewing paycheck stubs covering the pay period immediately prior to the date of the mortgage loan application. To verify the borrower's assets and the sufficiency of the borrower's funds for closing, Countrywide obtains deposit or bank account statements from each prospective borrower for the month immediately prior to the date of the mortgage loan application. Under the CLUES plus documentation program, the maximum loan-to-value ratio is 75% and property values may be based on appraisals comprising only interior and exterior inspections. Cash-out refinances and investor properties are not permitted under the CLUES plus documentation program. The streamlined documentation program is available for borrowers who are refinancing an existing mortgage loan that was originated or acquired by Countrywide provided that, among other things, the mortgage loan has not been more than 30 days delinquent in payment during the previous twelve-month period. Under the streamlined documentation program, appraisals are obtained only if the loan amount of the loan being refinanced had a loan-to-value ratio at the time of origination in excess of 80% or if the loan amount of the new loan being originated is greater than $650,000. In addition, under the streamlined documentation program, a credit report is obtained but only a limited credit review is conducted, no income or asset verification is required, and telephonic verification of employment is permitted. The maximum loan-to-value ratio under the streamlined documentation program ranges up to 95%. Under the no income/no asset documentation program, no documentation relating to a prospective borrower's income, employment or assets is required and therefore debt-to-income ratios are not calculated or included in the underwriting analysis, or if the documentation or calculations are included in a mortgage loan file, they are not taken into account for purposes of the underwriting analysis. This program is limited to borrowers with excellent credit histories. Under the no income/no asset documentation program, the maximum loan-to-value ratio, including secondary financing, ranges up to 95%. Under the stated income/stated asset documentation program, the mortgage loan application is reviewed to determine that the stated income is reasonable for the borrower's S-61 employment and that the stated assets are consistent with the borrower's income. The stated income/stated asset documentation program permits maximum loan-to-value ratios up to 90%. THE SERVICER The mortgage loans included in the trust will be serviced by Countrywide Servicing ("Countrywide Servicing" or the "servicer"). The servicer will have primary responsibility for servicing the mortgage loans including, but not limited to, all collection, advancing and loan-level reporting obligations, maintenance of escrow accounts, maintenance of insurance and enforcement of foreclosure and other proceedings with respect to the mortgage loans and the related mortgaged properties in accordance with the servicing provisions of the reconstitution agreement (such servicing provisions referred to therein as the servicing agreement). The trustee is a third-party beneficiary under the servicing agreement and can enforce the rights of the seller thereunder. Under the servicing agreement, the trustee has the right to terminate the servicer for certain events of default which indicate the servicer is not performing, or is unable to perform, its duties and obligations under the servicing agreement. The information set forth in the following paragraphs has been provided by Countrywide Servicing, as the servicer providing primary servicing for a substantial portion of the mortgage loans in the trust. None of the depositor, the seller, the underwriters, the Class 2-A-1C Certificate Insurer or the trustee makes any representations or warranties as to the accuracy or completeness of such information. COUNTRYWIDE HOME LOANS SERVICING LP The executive offices of Countrywide Servicing are located at 7105 Corporate Drive, Plano, Texas 75024. Countrywide Servicing is a Texas limited partnership directly owned by Countrywide GP, Inc. and Countrywide LP, Inc., each a Nevada corporation and a direct wholly owned subsidiary of Countrywide. Countrywide is a direct wholly owned subsidiary of Countrywide Financial Corporation (formerly known as Countrywide Credit Industries, Inc.), a Delaware corporation ("Countrywide Financial"). Countrywide GP, Inc. owns a 0.1% interest in Countrywide Servicing and is the general partner of Countrywide Servicing. Countrywide LP, Inc. owns a 99.9% interest in Countrywide Servicing and is a limited partner of Countrywide Servicing. Countrywide established Countrywide Servicing in February 2000 to service mortgage loans originated by Countrywide that would otherwise have been serviced by Countrywide. In January and February, 2001, Countrywide transferred to Countrywide Servicing all of its rights and obligations relating to mortgage loans serviced on behalf of Freddie Mac and Fannie Mae, respectively. In October 2001, Countrywide transferred to Countrywide Servicing all of its rights and obligations to the bulk of its non-agency loan servicing portfolio, including with respect to those mortgage loans formerly serviced by Countrywide. While Countrywide expects to continue to directly service a portion of its loan portfolio, it is expected that the servicing rights for most newly originated Countrywide product will be transferred to Countrywide Servicing upon sale or securitization of the related mortgage loans. Countrywide Servicing is engaged in the business of servicing mortgage loans and will not originate or acquire loans, an activity that will continue to be performed by Countrywide. In addition to acquiring mortgage servicing rights from Countrywide, it is expected that Countrywide Servicing will service S-62 mortgage loans for non-Countrywide affiliated parties as well as subservice mortgage loans on behalf of other master servicers. In connection with the establishment of Countrywide Servicing, certain employees of Countrywide became employees of Countrywide Servicing. Countrywide Servicing has engaged Countrywide as a subservicer to perform certain loan servicing activities on its behalf. Countrywide Servicing is an approved mortgage loan servicer for Fannie Mae, Freddie Mac, Ginnie Mae, HUD and VA and is licensed to service mortgage loans in each state where a license is required. Its loan servicing activities are guaranteed by Countrywide Financial and/or Countrywide when required by the owner of the mortgage loans. As of December 31, 2004, Countrywide Servicing had a net worth of approximately $11.9 billion. References in this section of this prospectus supplement to Countrywide should be read to include Countrywide and its consolidated subsidiaries, including Countrywide Servicing. Countrywide services substantially all of the mortgage loans it originates or acquires. In addition, Countrywide has purchased in bulk the rights to service mortgage loans originated by other lenders. Countrywide has in the past and may in the future sell to other mortgage bankers a portion of its portfolio of loan servicing rights. As of December 31, 2004, Countrywide provided servicing for approximately $838.322 billion aggregate principal amount of mortgage loans, substantially all of which are being serviced for unaffiliated persons. Foreclosure, Delinquency and Loss Experience. Historically, a variety of factors, including the appreciation of real estate values, have limited Countrywide's loss and delinquency experience on its portfolio of serviced mortgage loans. There can be no assurance that factors beyond the control of Countrywide, such as national or local economic conditions or downturns in the real estate markets of its lending areas, will not result in increased rates of delinquencies and foreclosure losses in the future. A general deterioration of the real estate market in regions where the mortgaged properties are located may result in increases in delinquencies of loans secured by real estate, slower absorption rates of real estate into the market and lower sales prices for real estate. A general weakening of the economy may result in decreases in the financial strength of borrowers and decreases in the value of collateral serving as security for loans. If the real estate market and economy were to decline, Countrywide may experience an increase in delinquencies on the loans it services and higher net losses on liquidated loans. The following table summarizes the delinquency, foreclosure and loss experience, respectively, on the dates indicated, of mortgage loans originated or acquired by Countrywide serviced or master serviced by Countrywide and securitized by certain affiliates of Countrywide in transactions that were registered with the Securities and Exchange Commission. The delinquency, foreclosure and loss percentages may be affected by the size and relative lack of seasoning in the servicing portfolio. The information should not be considered as a basis for assessing the likelihood, amount or severity of delinquency or losses on the mortgage loans and no assurances can be given that the foreclosure, delinquency and loss experience presented in the following table will be indicative of the actual experience on the mortgage loans. The columns in the following table may not total due to rounding. S-63
AT FEBRUARY 28 (29), AT DECEMBER 31, -------------------------- --------------------------------------------------------- 2000 2001 2001 2002 2003 2004 ------------ ------------ ------------ ---------- ---------- ------------ (DOLLAR AMOUNTS IN THOUSANDS, EXCEPT LOSSES ON LIQUIDATED MORTGAGE LOANS) Volume of Loans (1)...... $17,759,361 $21,250,550 $25,658,250 $33,455,108 $47,663,628 $ 72,859,061 Delinquent Mortgage Loans and Pending Foreclosures at Period End 30 - 59 days.......... 1.36% 1.61% 1.89% 2.11% 1.80% 2.08% 60 - 89 days.......... 0.22 0.28 0.39 0.53 0.43 0.58 90 days or more (excluding pending foreclosures)......... 0.16 0.14 0.23 0.35 0.31 0.65 Total of delinquencies... 1.75% 2.03% 2.50% 2.99% 2.53% 3.30% Foreclosure pending...... 0.16% 0.27% 0.31% 0.31% 0.31% 0.30% Total delinquencies and Foreclosures pending.. 1.91% 2.30% 2.82% 3.31% 2.84% 3.61% Losses on liquidated loans(2)................. $(3,076,240) $(2,988,604) $(5,677,141) $(10,788,657) $(16,159,208) $(24,758,566)
----------- (1) "Volume of loans" reflects both performing and delinquent mortgage loans in the servicing portfolio on the dates indicated. (2) "Losses on liquidated loans" reflect the losses accumulated during (i) the years ended on February 29, 2000 and February 28, 2001, (ii) the 10-month period ending on December 31, 2001, (iii) the years ended on December 31, 2002, December 31, 2003 and December 31, 2004, respectively. SERVICING OF THE MORTGAGE LOANS The servicer will use its reasonable efforts to ensure that all payments required under the terms and provisions of the mortgage loans are collected, and will follow collection procedures comparable to the collection procedures of prudent mortgage lenders servicing mortgage loans for their own account, to the extent such procedures are consistent with the servicing agreement. If the servicer fails to fulfill its obligations under the servicing agreement, the trustee has the right to terminate the servicer as described below under "--Servicer Default." Generally, the transfer of the servicing of the mortgage loans to one or more successor servicers at any time will be subject to the conditions set forth in the pooling and servicing agreement and the servicing agreement, which include, among other things, the requirements that any such successor servicer be qualified to service mortgage loans for Freddie Mac or Fannie Mae and, in many cases, that each rating agency confirm in writing that the transfer of servicing will not result in a qualification, withdrawal or downgrade of the then-current ratings of any of the certificates (without regard to the Class 2-A-1C certificate insurance policy). SERVICING COMPENSATION AND PAYMENT OF EXPENSES The servicer will be paid a monthly fee (a "servicing fee") with respect to each mortgage loan serviced by it calculated at a per annum rate (the "servicing fee rate") of the outstanding principal balance of each mortgage loan as of the first day of the related due period. The rate of the servicer is 0.375% per annum. The servicing fee is subject to reduction as described below under "--Prepayment Interest Shortfalls." The servicer will be entitled to reimbursement for certain expenses prior to distribution of any amounts to certificateholders. PREPAYMENT INTEREST SHORTFALLS When a borrower prepays a mortgage loan in full or in part between due dates for monthly payments, the borrower pays interest on the amount prepaid only from the last due date to the date of prepayment, with a resulting reduction in interest payable for the month during which the prepayment is made causing a "prepayment interest shortfall." Any prepayment S-64 interest shortfall with respect to a prepayment in full and/or in part, as applicable, of a mortgage loan is generally required to be paid by the servicer, generally limited to the extent that such amount does not exceed the total of its servicing fees on the related mortgage loans for the applicable distribution date. The Class 2-A-1C certificate insurance policy will not cover prepayment interest shortfalls on the Class 2-A-1C Certificates. ADVANCES The servicer will generally be obligated to make advances with respect to delinquent payments of principal of and interest on the mortgage loans (such delinquent interest reduced by the servicing fee), to the extent that such advances, in its reasonable judgment, are recoverable from future payments and collections, insurance payments or proceeds of liquidation of a mortgage loan. The trustee (in its capacity as successor servicer) will be obligated to make any such advances if the servicer requires to and fails to do so, to the extent provided in the pooling and servicing agreement. The servicer or the trustee, as applicable, will be entitled to recover any advances made by it with respect to a mortgage loan out of late payments thereon or out of related liquidation proceeds and insurance proceeds or, if those amounts are insufficient, from collections on other mortgage loans. Such reimbursements may result in Realized Losses. The purpose of making these advances is to maintain a regular cash flow to the certificateholders, rather than to guarantee or insure against losses. No party will be required to make any advances with respect to reductions in the amount of the scheduled monthly payments on mortgage loans due to reductions made by a bankruptcy court in the amount of a scheduled monthly payment owed by a borrower or a reduction of the applicable loan rate by application of the Relief Act. The Class 2-A-1C certificate insurance policy will not cover any interest shortfalls on the Class 2-A-1C Certificates attributable to application of the Relief Act. HAZARD INSURANCE To the extent not maintained by the related borrower, the servicer will maintain and keep, with respect to each mortgage loan (other than a loan secured by a cooperative or condominium unit), in full force and effect for each mortgaged property, a hazard insurance policy equal to at least the lesser of (i) the outstanding principal balance of the mortgage loan or (ii) either the maximum insurable value of the improvements securing such mortgage loan or, in some cases, the amount necessary to fully compensate for any damage or loss to improvements on a replacement cost basis, or equal to such other amount as calculated pursuant to a similar formulation as provided in the servicing agreement, and containing a standard mortgagee clause. Since the amount of hazard insurance to be maintained on the improvements securing the mortgage loans may decline as the principal balances owing thereon decrease, and since residential properties have historically appreciated in value over time, in the event of partial loss, hazard insurance proceeds may be insufficient to restore fully the damaged property. In general, the standard form of fire and extended coverage policy covers physical damage to or destruction of the improvements on the property by fire, lightning, explosion, smoke, windstorm and hail, riot, strike and civil commotion, subject to the conditions and exclusions particularized in each policy. Although the policies relating to the mortgage loans will S-65 be underwritten by different insurers and therefore will not contain identical terms and conditions, the basic terms thereof are dictated by state law. Such policies typically do not cover any physical damage resulting from the following: war, revolution, governmental actions, floods and other water-related causes, earth movement (including earthquakes, landslides and mud flows), nuclear reactions, wet or dry rot, vermin, rodents, insects or domestic animals, theft and, in certain cases, vandalism and malicious mischief. The foregoing list is merely indicative of certain kinds of uninsured risks and is not intended to be all-inclusive. Where the property securing a mortgage loan is located at the time of origination in a federally designated flood area, the servicer will cause with respect to such mortgage loan flood insurance to the extent available and in accordance with industry practices, or in some cases federally mandated requirements, to be maintained. Such flood insurance will be in an amount equal to the lesser of (i) the outstanding principal balance of the related mortgage loan and (ii) the minimum amount required under the terms of coverage to compensate for any damage or loss on a replacement cost basis or, in some cases, the full insurable value, or equal to such other amount as calculated pursuant to a similar formulation as provided in the servicing agreement, but not more than the maximum amount of such insurance available for the related mortgaged property under either the regular or emergency programs of the National Flood Insurance Program (assuming that the area in which such mortgaged property is located is participating in such program). The servicer, on behalf of the trust and certificateholders, will present claims to the insurer under any applicable hazard insurance policy. As set forth above, all collections under such policies that are not applied to the restoration or repair of the related mortgaged property or released to the borrower in accordance with normal servicing procedures are to be deposited in a designated account. In most cases, the servicer is required to deposit in a specified account the amount of any deductible under a blanket hazard insurance policy. REALIZATION UPON DEFAULTED MORTGAGE LOANS The servicer will take such action as they deem to be in the best interest of the trust with respect to defaulted mortgage loans and foreclose upon or otherwise comparably convert the ownership of properties securing defaulted mortgage loans as to which no satisfactory collection arrangements can be made. To the extent set forth in the servicing agreement, the servicer will service the property acquired by the trust through foreclosure or deed-in-lieu of foreclosure in accordance with procedures that the servicer employs and exercises in servicing and administering mortgage loans for its own account and which are in accordance with accepted mortgage servicing practices of prudent lending institutions and, in some cases, Fannie Mae guidelines. Since insurance proceeds cannot exceed deficiency claims and certain expenses incurred by the servicer, no insurance payments will result in a recovery to certificateholders which exceeds the principal balance of the defaulted mortgage loan together with accrued interest thereon less the related trust expense fees. COLLECTION OF TAXES, ASSESSMENTS AND SIMILAR ITEMS The servicer will, to the extent required by the related loan documents and the servicing agreement, maintain one or more escrow accounts for the collection of hazard insurance S-66 premiums and real estate taxes with respect to the mortgage loans, and will make advances with respect to delinquencies in required escrow payments by the related borrowers. INSURANCE COVERAGE The servicer is required to obtain and thereafter maintain in effect a bond, corporate guaranty or similar form of insurance coverage (which may provide blanket coverage), or any combination thereof, insuring against loss occasioned by the errors and omissions of their respective officers and employees. EVIDENCE AS TO COMPLIANCE The servicing agreement provides that each year during which the servicer services any of the mortgage loans, the servicer shall cause a firm of independent accountants to furnish a statement to the trustee and the Class 2-A-1C Certificate Insurer to the effect that such firm has examined certain documents and records relating to the servicing of mortgage loans similar to the mortgage loans serviced by the servicer and that, on the basis of such examination, such firm is of the opinion that the servicing has been conducted in accordance with the terms of the servicing agreement, except for (1) exceptions as the firm believes to be immaterial and (2) any other exceptions set forth in such statement. SERVICER DEFAULT If the servicer is in default in its obligations under the servicing agreement (and such default is not cured within any applicable grace period provided for in the servicing agreement), the trustee may, at its option, terminate the defaulting servicer and, in certain cases, subject to the appointment rights of the holder of servicing rights under the pooling and servicing agreement, either appoint a successor servicer in accordance with the servicing agreement or succeed to the responsibilities of the terminated servicer, pursuant to the servicing agreement and the pooling and servicing agreement. THE CLASS 2-A-1C CERTIFICATE INSURER The information set forth in the following paragraphs has been provided by Ambac Assurance Corporation (the "Class 2-A-1C Certificate Insurer"). Neither the Depositor nor any of its affiliates, nor any of the Trustee, the Seller, the Servicer, the Underwriter, the Purchaser or any of their respective affiliates, has made or will make any representation as to the accuracy or completeness of such information. The Class 2-A-1C Certificate Insurer is a Wisconsin-domiciled stock insurance corporation regulated by the Office of the Commissioner of Insurance of the State of Wisconsin and licensed to do business in 50 states, the District of Columbia, the Commonwealth of Puerto Rico, the Territory of Guam and the U.S. Virgin Islands. The Class 2-A-1C Certificate Insurer primarily insures newly-issued municipal and structured finance obligations. The Class 2-A-1C Certificate Insurer is a wholly-owned subsidiary of Ambac Financial Group, Inc. (formerly, AMBAC, Inc.), a 100% publicly-held company. Moody's Investors Service, Inc., Standard & Poor's Ratings Services, a division of The McGraw-Hill Companies, Inc. and Fitch Ratings have each assigned a triple-A financial strength rating to the Class 2-A-1C Certificate Insurer. S-67 The consolidated financial statements of the Class 2-A-1C Certificate Insurer and subsidiaries as of December 31, 2004 and December 31, 2003 and for each of the years in the three-year period ended December 31, 2004, prepared in accordance with U.S. generally accepted accounting principles, included in the Annual Report on Form 10-K of Ambac Financial Group, Inc. (which was filed with the Securities and Exchange Commission (the "Commission") on March 15, 2005; Commission File No. 1-10777) are hereby incorporated by reference into this Prospectus Supplement and shall be deemed to be a part hereof. Any statement contained in a document incorporated in this Prospectus Supplement by reference shall be modified or superseded for the purposes of this Prospectus Supplement to the extent that a statement contained in this Prospectus Supplement by reference also modifies or supersedes such statement. Any statement so modified or superseded shall not be deemed, except as so modified or superseded, to constitute a part of this Prospectus Supplement. All consolidated financial statements of the Class 2-A-1C Certificate Insurer and subsidiaries included in documents filed by Ambac Financial Group, Inc. with the Commission pursuant to Section 13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of 1934, as amended, subsequent to the date of this Prospectus Supplement and prior to the termination of the offering of the Class 2-A-1C Certificates will be deemed to be incorporated by reference into this Prospectus Supplement and to be a part hereof from the respective dates of filing such consolidated financial statements. The following table sets forth the capitalization of the Class 2-A-1C Certificate Insurer and subsidiaries as of December 31, 2002, December 31, 2003 and December 31, 2004 in conformity with U.S. generally accepted accounting principles. AMBAC ASSURANCE CORPORATION AND SUBSIDIARIES CONSOLIDATED CAPITALIZATION TABLE (DOLLARS IN MILLIONS)
December 31, December 31, December 31, 2002 2003 2004 ------------ ------------ ------------ Unearned premiums...................... $2,137 $2,553 $2,783 Long-term debt........................ - 189 1,074 Notes payable to affiliates............ 111 84 - Other liabilities...................... 1,865 2,008 2,192 ------ ------ ------ Total liabilities...................... 4,113 4,834 6,049 ------ ------ ------ Stockholder's equity Common stock........................ 82 82 82 Additional paid-in capital.......... 920 1,144 1,233 Accumulated other comprehensive income 231 243 238 Retained earnings................... 2,849 3,430 4,094 ------ ------ ------ Total stockholder's equity............. 4,082 4,899 5,647 ------ ------ ------ Total liabilities and stockholder's equity................................. $8,195 $9,733 $11,696 ====== ====== =======
S-68 For additional financial information concerning the Class 2-A-1C Certificate Insurer, see the audited consolidated financial statements of the Class 2-A-1C Certificate Insurer incorporated by reference herein. Copies of the consolidated financial statements of the Class 2-A-1C Certificate Insurer incorporated by reference and copies of the Class 2-A-1C Certificate Insurer's annual statement for the year ended December 31, 2004 prepared on the basis of accounting practices prescribed or permitted by the State of Wisconsin Office of the Commissioner of Insurance, are available without charge from the Class 2-A-1C Certificate Insurer. The address of the Class 2-A-1C Certificate Insurer's administrative offices and its telephone number are One State Street Plaza, 19th Floor, New York, New York 10004 and (212) 668-0340. The Class 2-A-1C Certificate Insurer makes no representation regarding the Certificates or the advisability of investing in the Certificates and makes no representation regarding, nor has it participated in the preparation of, this Prospectus Supplement other than the information supplied by the Class 2-A-1C Certificate Insurer and presented under the heading "THE CLASS 2-A-1C CERTIFICATE INSURER" in this Prospectus Supplement and in the consolidated financial statements incorporated in this Prospectus Supplement by reference. THE POOLING AND SERVICING AGREEMENT GENERAL The certificates will be issued pursuant to a pooling and servicing agreement dated as of March 1, 2005, among the depositor, the seller, and the trustee. The trust created under the pooling and servicing agreement will consist of: o all of the depositor's right, title and interest in the mortgage loans, including the related mortgage notes, mortgages and other related documents; o all payments on or collections in respect of the mortgage loans due after the cut-off date, together with any proceeds thereof; o any mortgaged properties acquired on behalf of certificateholders by foreclosure or by deed in lieu of foreclosure, and any revenues received from the foreclosed properties; o the rights of the trustee under all insurance policies required to be maintained pursuant to the pooling and servicing agreement; o the rights to enforce the representations and warranties made by the seller with respect to the mortgage loans under the mortgage loan purchase agreement; o the rights to enforce the representations and warranties made by the originator with respect to the mortgage loans under the underlying purchase agreement and the reconstitution agreement, if any; o the rights of the depositor under the servicing agreement (which acquired the rights of the seller pursuant to the mortgage loan purchase agreement); S-69 o the irrevocable and unconditional Class 2-A-1C certificate insurance policy (the "Class 2-A-1C Policy") for the benefit of the holders of the Class 2-A-1C Certificates, pursuant to which the Class 2-A-1C Certificate Insurer will guarantee certain payments to holders of the Class 2-A-1C Certificates as described in this prospectus supplement; and o the rights of the trustee under the yield maintenance agreements; and o certain other assets of the trust, including rights to amounts in the distribution account, the basis risk reserve fund and the yield maintenance account, as described herein. ASSIGNMENT OF THE MORTGAGE LOANS On the closing date, the depositor will transfer to the trust all of its right, title and interest in and to each of the mortgage loans, together with the related mortgage notes, mortgages and other related documents, including all scheduled payments with respect to each mortgage loan due after the cut-off date. Concurrently with the transfer, upon order of the depositor, the trustee will deliver the certificates to the depositor. Each mortgage loan transferred to the trust will be identified on the mortgage loan schedule prepared by the seller and delivered to the trustee pursuant to the pooling and servicing agreement. The mortgage loan schedule will include the principal balance of each mortgage loan as of the cut-off date, its loan rate and certain additional information. The pooling and servicing agreement will require that, upon certain conditions and within the time period specified in the pooling and servicing agreement the seller will deliver to the trustee (or a custodian, as the trustee's agent for that purpose) the mortgage notes evidencing the mortgage loans endorsed in blank or to the trustee on behalf of the certificateholders, together with the other related documents received by the seller from the originator pursuant to the terms of the underlying purchase agreement. In lieu of delivery of an original mortgage, if an original is not available or is lost, the seller may deliver a true and complete copy of the original together with a lost note affidavit. Within 90 days after the receipt by the trustee or its agent of the mortgage loans and related documents, the custodian on behalf of the trustee will review the mortgage loans and the related documents pursuant to the pooling and servicing agreement. Pursuant to the terms of the underlying purchase agreement, if any mortgage loan or related document is found to be defective in any material respect and the defect is not cured within 90 days following notification to the originator by the trustee (or a custodian, as the trustee's agent for that purpose), the originator will be obligated to repurchase the defective loan at a purchase price equal to its outstanding principal balance as of the date of purchase, plus all accrued and unpaid interest computed at the loan rate through the end of the calendar month in which the purchase is made. The purchase price will be deposited in the distribution account on or prior to the next determination date after the originator's obligation to purchase the defective loan arises. The obligation of the originator to repurchase for a defective mortgage loan is the sole remedy available to the trustee or the certificateholders regarding any defect in that mortgage loan and the related documents. S-70 Pursuant to the underlying purchase agreement and the reconstitution agreement, if any, the originator has made certain representations and warranties with respect to the mortgage loans either as of the closing date or as of the date such mortgage loans were sold to the seller (the "Original Sale Date"). On the closing date the seller will represent and warrant, among other things, that: (i) at the time of transfer, the seller has transferred or assigned all of its right, title and interest in each mortgage loan and the related documents, free of any lien; (ii) each mortgage loan, at the time of origination, complied in all material respects with applicable state and federal laws, including without limitation, all applicable predatory and abusive lending laws; (iii) none of the mortgage loans are "High Cost" as defined by the applicable predatory and abusive lending laws; and (iv) with respect to each mortgage loan and each representation and warranty made by the originator as of the Original Sale Date, to the seller's knowledge, as of the closing date, no event has occurred since the Original Sale Date that would render such representations and warranties to be untrue in any material respect. Upon discovery of a breach of any representation or warranty that materially and adversely affects the interests of the certificateholders in a mortgage loan and the related documents, the seller or the originator, as applicable, will have a period of 90 days after discovery or notice of the breach to effect a cure. With respect to the originator, if such breach is not cured within the 90-day period, the originator will be obligated to repurchase such mortgage loan under the same terms and conditions as set forth above for the purchase of defective loans as a result of deficient documentation. With respect to the seller, if such breach is not cured within the 90-day period, the seller will be obligated to either: o substitute for the defective loan an eligible substitute mortgage loan (provided that substitution is permitted only within two years of the closing date and may not be made unless an opinion of counsel is provided to the effect that the substitution will not disqualify any REMIC created under the pooling and servicing agreement or result in a prohibited transaction tax under the Internal Revenue Code), or o repurchase the defective loan at a purchase price equal to its outstanding principal balance as of the date of purchase, plus all accrued and unpaid interest computed at the loan rate through the end of the calendar month in which the purchase is made, plus the amount of any unreimbursed servicing-related advances, plus, in the event that the defective loan is repurchased by the seller due to a breach of the representations and warranties listed in clause (ii) or (iii) in the paragraph above in this prospectus supplement, any costs and damages incurred by the trust in connection with a violation of a predatory or abusive lending law with respect to such defective loan. The purchase price will be deposited in the distribution account on or prior to the next determination date after the seller's obligation to purchase the defective loan arises. The obligation of the seller to repurchase or substitute for a defective mortgage loan is the sole S-71 remedy available to the trustee or the certificateholders regarding any defect in that mortgage loan and the related documents. For a mortgage loan to be eligible to be substituted for a mortgage loan (the "affected loan"), the substituted loan must meet the following criteria on the date of the substitution: o the substituted loan has an outstanding principal balance (or in the case of a substitution of more than one mortgage loan for a single affected loan, an aggregate principal balance), not in excess of, and not more than 5% less than, the principal balance of the defective loan; o the substituted loan has a maximum loan rate and a gross margin not less than those of the affected loan and uses the same index as the affected loan; o the substituted loan has a remaining term to maturity not more than one year earlier and not later than the remaining term to maturity of the affected loan; o the substituted loan complies with each representation and warranty as to the mortgage loans set forth in the pooling and servicing agreement (which are deemed to be made with respect to the substituted loan as of the date of substitution); o the substituted loan has been underwritten or reunderwritten by the seller in accordance with the same underwriting criteria and guidelines as the affected loan; o the substituted loan is of the same or better credit quality as the affected loan; and o the substituted loan satisfies certain other conditions specified in the pooling and servicing agreement. In connection with the substitution of an eligible substitute mortgage loan, the seller will be required to deposit in the distribution account, on or prior to the next determination date after the seller's obligation to purchase or substitute the affected loan arises, a substitution adjustment amount equal to the excess of the principal balance of the affected loan over the principal balance of the eligible substitute mortgage loan. We can make no assurance that the seller or the originator will be able to fulfill its obligation to repurchase any of the mortgage loans when such obligation may arise. PAYMENTS ON MORTGAGE LOANS; DEPOSITS TO DISTRIBUTION ACCOUNT Distribution Account. The servicer will establish and maintain a separate distribution account for the benefit of the trustee, and the holders of the certificates. The distribution account must be a segregated account that is: o an account or accounts maintained with a federal or state chartered depository institution or trust company the short-term unsecured debt obligations of which (or, in the case of a depository institution or trust company that is the principal subsidiary of a holding company, the short-term unsecured debt obligations of that holding company) are rated in the highest short term rating category by each rating agency S-72 named in this prospectus supplement at the time any amounts are held on deposit in the account; or o an account or accounts the deposits in which are fully insured by the FDIC (to the limits established by the FDIC), or the uninsured deposits in which account are otherwise secured such that, as evidenced by an opinion of counsel delivered to the trustee and to each rating agency named in this prospectus supplement, the certificateholders will have a claim with respect to the funds in such account or a perfected first priority security interest against the collateral securing those funds that is superior to claims of any other depositors or creditors of the depository institution with which the certificate account is maintained; or o a trust account or accounts maintained with the trust department of a federal or state chartered depository institution, national banking association or trust company acting in its fiduciary capacity; or o otherwise acceptable to each rating agency named in this prospectus supplement without causing the reduction or withdrawal of its then current ratings of the certificates as evidenced by a letter from each rating agency to the trustee. Upon receipt by the servicer of amounts in respect of the mortgage loans (excluding amounts representing the servicing fee, reimbursement for advances and servicing-related advances, and insurance proceeds to be applied to the restoration or repair of a mortgaged property, or similar items), the servicer will deposit these amounts in the distribution account. Amounts deposited in the distribution account may accrue interest with the depository institution with which it is held, or may be invested in certain eligible investments specified in the pooling and servicing agreement maturing no later than one business day prior to (or, in respect of an eligible investment which is an obligation of the servicer, on) the related distribution date. SERVICING FEES AND OTHER COMPENSATION Trust expense fees are payable out of the interest payments on each mortgage loan. Trust expense fees accrue at an annual expense fee rate, referred to as the "trust expense fee rate," calculated on the principal balance of each mortgage loan. With respect to each mortgage loan, the "trust expense fee rate" will be equal to sum of the trustee fee rate, the custodial fee rate, the servicing fee rate and the rate at which any lender paid mortgage insurance policies are calculated. THE TRUSTEE U.S. Bank National Association will serve as trustee of the mortgage loans for the trust (referred to as the "trustee"). The trustee will be paid a monthly fee and trustee fee for its services rendered under the pooling and servicing agreement calculated at a per annum rate (the "trustee fee rate") of the outstanding principal balance of each mortgage balance of each mortgage loan as of the first day of the related due period. The trustee fee rate of the trustee is 0.0019% per annum. The trustee will also be entitled to be reimbursed by the trust fund for certain expenses and indemnified for certain costs and liabilities in connection with the performance of its duties under the pooling and servicing agreement. The Bank of New York will act as a custodian, on behalf of the trustee, of the mortgage files related to all of the mortgage loans. S-73 The trustee may resign at any time, in which event the depositor will be obligated to appoint a successor trustee. The depositor may also remove the trustee if the trustee ceases to be eligible to continue as such under the pooling and servicing agreement, if the trustee becomes incapable of acting, bankrupt, insolvent or if a receiver takes charge of the trustee or its property, or if the credit rating of the trustee falls below certain levels. Upon such resignation or removal of the trustee, the depositor will be entitled to appoint a successor trustee. The trustee may also be removed at any time by the holders of certificates evidencing ownership of not less than 51% of the trust. Any resignation or removal of the trustee and appointment of a successor trustee will not become effective until acceptance of the appointment by the successor trustee. VOTING RIGHTS With respect to any date of determination, 98% of the voting rights will be allocated to each class of certificates (other than the Class X and Class A-R Certificates), pro rata, based on a fraction, expressed as a percentage, the numerator of which is the certificate principal balance of that class and the denominator of which is the aggregate of the certificate principal balances of all classes then outstanding. The Class X and the Class A-R Certificates will each have 1% of the voting rights; provided, however, when none of the regular certificates is outstanding, all of the voting rights of the regular certificates will be allocated to the holder of the Class A-R Certificate. The voting rights allocated to a class of certificates will be allocated among all holders of that class, pro rata, based on a fraction the numerator of which is the certificate principal balance of each certificate of that class and the denominator of which is the certificate principal balance of that class. However, any certificate registered in the name of the servicer, the trustee or any of their respective affiliates will not be included in the calculation of voting rights as long as other certificates registered in the names of other entities remain outstanding. For so long as there does not exist a failure by the Class 2-A-1C Certificate Insurer to make a required payment under the Class 2-A-1C Policy (such event, a "Class 2-A-1C Certificate Insurer Default"), the Class 2-A-1C Certificate Insurer will have the right to exercise all rights of the holders of the Class 2-A-1C Certificates under the pooling and servicing agreement without any consent of such holders, and such holders may exercise such rights only with the prior written consent of the Class 2-A-1C Certificate Insurer except as provided in the pooling and servicing agreement. In addition, to the extent of unreimbursed payments under the Class 2-A-1C Policy, the Class 2-A-1C Certificate Insurer will be subrogated to the rights of the holders of the Class 2-A-1C Certificates to which such Insured Amounts were paid. In connection with each Insured Amount paid on a Class 2-A-1C Certificate, the trustee as attorney-in-fact for the holder thereof will be required to assign to the Class 2-A-1C Certificate Insurer the rights of such holder with respect to the Class 2-A-1C Certificates, as applicable, to the extent of such Insured Amount. AMENDMENT The pooling and servicing agreement may be amended by the depositor, the seller, and the trustee without the consent of the holders of the certificates, for any of the purposes set forth under "Operative Agreements--Amendment" in the prospectus. In addition, the pooling and servicing agreement may be amended by the depositor, the seller, and the trustee, with the consent of the holders of a majority in interest of each class of affected certificates, for the purpose of adding any provisions to, or changing in any manner or eliminating any of the S-74 provisions of the pooling and servicing agreement or of modifying in any manner the rights of the holders of any class of certificates. However, in no event, may any amendment: o reduce in any manner the amount of, or delay the timing of, distributions required to be made on any class of offered certificates without the consent of the holders of all the affected certificates; or o affect adversely in any material respect the interests of the holders of any class of offered certificates in a manner other than as described in the clause above, without the consent of the holders of that class evidencing percentage interests aggregating at least 662/3%; or o reduce the aforesaid percentages of the aggregate outstanding principal amounts of the offered certificates, the holders of which are required to consent to any such amendment, without the consent of the holders of all those certificates. Notwithstanding the foregoing, the Class 2-A-1C Certificate Insurer's written consent shall be required for any amendment that adversely affects in any respect the rights and interest of the Class 2-A-1C Certificate Insurer or of holders of the Class 2-A-1C Certificates (without regard to the Class 2-A-1C Policy). OPTIONAL TERMINATION OF THE TRUST On any distribution date on which the aggregate Stated Principal Balance of the mortgage loans is equal to or less than 10% of their aggregate Stated Principal Balance as of the cut-off date, the servicer will have the right to repurchase all of the mortgage loans and REO properties remaining in the trust. We refer to the date on which this option may be exercised as the "optional termination date" of the trust. In the event that the option is exercised, the repurchase will be made at a price generally equal to the outstanding principal balance of each mortgage loan and, with respect to REO property, the lesser of the appraised value of each REO property and the principal balance of the related mortgage loan plus accrued and unpaid interest at the related loan rate up to and including the first day of the month in which the termination price is paid, plus the amount of any unreimbursed servicing-related advances made by the servicer in respect of that mortgage loan and any unpaid Basis Risk Shortfall as described below under "Description of the Certificates--Interest--Basis Risk Shortfalls." Proceeds from the repurchase will be included in Available Funds and will be distributed to the holders of the certificates in accordance with the pooling and servicing agreement. No such purchase by the servicer will be permitted without the consent of the Class 2-A-1C Certificate Insurer if a draw on the Class 2-A-1C Policy will be made or if any amounts due to the Class 2-A-1C Certificate Insurer would remain unreimbursed on the final distribution date. Any repurchase of the mortgage loans and REO properties in accordance with the preceding paragraph will result in the early retirement of any outstanding certificates. EVENTS OF DEFAULT An event of default with respect to the servicer will consist, among other things, of: o any failure by the servicer to make an advance and any other failure by the servicer to deposit in the distribution account the required amounts or to remit to the trustee any S-75 payment which continues unremedied for one business day following written notice to the servicer; or o any failure by the servicer to observe or perform in any material respect any other of its covenants or agreements in the servicing agreement, which continues unremedied for 60 days after the date on which written notice of the failure is given to the servicer; or o insolvency, readjustment of debt, marshalling of assets and liabilities or similar proceedings, and certain actions by or on behalf of the servicer indicating its insolvency or inability to pay its obligations. RIGHTS UPON EVENT OF DEFAULT So long as an event of default under the servicing agreement remains unremedied, the trustee may (and, pursuant to the pooling and servicing agreement, if so directed by holders of certificates evidencing not less than 51% of the voting rights, shall) terminate all of the rights and obligations of the servicer in its capacity as servicer of the mortgage loans, as provided in the servicing agreement and the pooling and servicing agreement. If this occurs, the trustee will succeed to, or appoint a successor to succeed to, all of the responsibilities and duties of the servicer under the servicing agreement, including the obligation to make advances. No assurance can be given that termination of the rights and obligation of the servicer under the servicing agreement would not adversely affect the servicing of the mortgage loans, including the loss and delinquency experience of the mortgage loans. No certificateholder, solely by virtue of its status as a holder of a certificate, will have any right under the pooling and servicing agreement to institute any proceeding with respect to the termination of the servicer, unless the holder previously has given to the trustee written notice of the servicer's default and certificateholders having not less than 51% of the voting rights agree to the termination and have offered an indemnity reasonably acceptable to the trustee. S-76 DESCRIPTION OF THE CERTIFICATES GENERAL The certificates will be issued pursuant to the pooling and servicing agreement. Set forth below is a description of the material terms and provisions pursuant to which the offered certificates will be issued. The following description is subject to, and is qualified in its entirety by reference to, the actual provisions of the pooling and servicing agreement. When particular provisions or terms used in the pooling and servicing agreement are referred to, the provisions or terms are as specified in the pooling and servicing agreement. HarborView Mortgage Loan Trust 2005-2 will issue the following classes of senior certificates: o the Class 1-A Certificates, o the Class 2-A-1A Certificates o the Class 2-A-1B Certificates, o the Class 2-A-1C Certificates, o the Class 2-A-2 Certificates, o the Class X Certificates, o the Class PO Certificates, and o the Class A-R Certificate, in addition to the following classes of subordinate certificates: o the Class B-1 Certificates, o the Class B-2 Certificates, o the Class B-3 Certificates, o the Class B-4 Certificates, o the Class B-5 Certificates, and o the Class B-6 Certificates. Only the senior certificates and the Class B-1, Class B-2 and Class B-3 Certificates are offered by this prospectus supplement and the accompanying prospectus. In addition, the trust will also issue Class Y Certificates, which are not offered by this prospectus supplement. The classes of offered certificates will have the respective initial certificate principal balances or certificate notional amount set forth on the cover page. THE INITIAL CERTIFICATE PRINCIPAL BALANCES AND CERTIFICATE NOTIONAL AMOUNT OF THE CERTIFICATES MAY VARY IN THE S-77 AGGREGATE BY PLUS OR MINUS 10%. On any date subsequent to the closing date, the certificate principal balance of a class of certificates or components, as applicable, will be equal to its initial certificate or component principal balance, as increased by any amounts of net deferred interest allocated to such class or component as described under "--Interest" below, reduced by all amounts actually distributed as principal of that class or component, all Realized Losses applied in reduction of principal of that class or component on all prior distribution dates and any amounts allocated to any class of subordinate certificates in reduction of its certificate principal balance if the aggregate certificate and component principal balances of all classes of certificates following all distributions and the allocations of Realized Losses on that distribution date exceeds the Pool Balance as of the first day of the month of that Distribution Date, as described below under "--Allocation of Losses;" provided, however, that on any distribution date, the certificate principal balance or component principal balance of a class of certificates or principal-only component, respectively, to which Realized Losses have been allocated (including any such class of certificates or principal-only component for which the certificate principal balance or component principal balance has been reduced to zero) will be increased, up to the amount of Recoveries for such distribution date, as follows: (a) first, the certificate principal balance of each class of senior certificates or component principal balance of each principal-only component related to the loan group with respect to which each Recovery was collected will be increased, pro rata, up to the amount of Realized Losses previously allocated to reduce the certificate principal balance of each such class of certificates or component principal balance of such principal-only component and (b) second, the certificate principal balance of each class of subordinate certificates will be increased, in order of seniority, up to the amount of Realized Losses previously allocated to reduce the certificate principal balance of each such class of certificates and not previously reimbursed. Solely for purposes of determining distributions of principal and the allocation of losses realized on the mortgage loans, the Class PO Certificates will be comprised of two components: the PO-1 Component and the PO-2 Component. The PO-1 Component and the PO-2 Component will each have a component principal balance (initially equal to $50, respectively) that will increase in an amount equal to net deferred interest with respect to the related mortgage loans that is allocated to the Class X Certificates as described under "Interest" below, as reduced by all amounts actually distributed as principal of such component and all Realized Losses applied in reduction of principal of such component on all prior distribution dates. Distributions of principal on the PO-1 Component will be based on collections from the group 1 mortgage loans. Distributions of principal on the PO-2 Component will be based on collections from the group 2 mortgage loans. The holders of the Class PO Certificates will be entitled to receive principal distributions on any distribution date to the extent of the amount of principal distributed with respect to the related components on such distribution date. The holder of a Class PO Certificate may not transfer any component separately. The Class X Certificate is an interest-only certificate that will not have a certificate principal balance but will accrue interest on its certificate notional amount, calculated as described under "Interest--Calculation of Interest" below. The certificate notional amount of the Class X Certificates will equal the aggregate principal balance of the mortgage loans as of the first day of the month prior to such distribution date. Distributions of interest on the Class X Certificate will be based on collections from the group 1 and group 2 mortgage loans. The classes of offered certificates will have the respective pass-through rates described under "--Interest--Pass-Through Rates" below. S-78 The Class B-4, Class B-5 and Class B-6 Certificates are not offered by this prospectus supplement. The initial certificate principal balances of the Class B-4, Class B-5 and Class B-6 Certificates will be approximately $27,228,000, $12,641,000 and $8,754,734, respectively, subject to the ten percent variance described above. With respect to any distribution date, the pass-through rates for the Class B-4, Class B-5 and Class B-6 Certificates will be equal to the least of (i) LIBOR plus a specified margin (which margin will increase after the optional termination date), (ii) the net WAC cap for such distribution date and (iii) the net maximum rate cap for that distribution date. The offered certificates other than the Class A-R Certificate will be issued in book-entry form as described under "--Book-Entry Registration and Definitive Certificates" below. The offered certificates other than the Class X and Class A-R Certificates will be issued in minimum dollar denominations of $25,000 and integral multiples of $1 in excess thereof. The Class X Certificates will be issued in minimum notional amounts of $100,000 and integral multiples of $1 in excess thereof. The Class A-R Certificate will be issued as a single certificate in physical form. The assumed final maturity date for a class of certificates is the distribution date in the first month following the month of the latest scheduled maturity date of any mortgage loan, which for each class of the offered certificates is the distribution date in May 2035. Distributions on the offered certificates will be made by the trustee, on each distribution date, beginning in April 2005, to the persons or entities in whose names the offered certificates are registered at the close of business on the related record date. The record date for any distribution date with respect to the Class X and Class A-R Certificates, is the last business day of the month immediately preceding the month in which that distribution date occurs (or the closing date, in the case of the first distribution date). The record date for any distribution date with respect to the LIBOR Certificates is the last business day preceding that distribution date (or the closing date, in the case of the first distribution date), unless such Certificates are no longer book-entry certificates, in which case the record date is the last business day of the month immediately preceding the month in which that distribution date occurs. BOOK-ENTRY REGISTRATION AND DEFINITIVE CERTIFICATES The offered certificates (other than the Class A-R Certificate) initially will be book-entry certificates. Persons and entities that acquire beneficial ownership interests in the book-entry certificates will be deemed "certificate owners" and will hold their certificates through The Depository Trust Company ("DTC") in the United States, or, upon request, through Clearstream Banking, societe anonyme, or Euroclear in Europe, if they are participants of those systems, or indirectly through organizations which are participants in those systems. Each class of book-entry certificates will be issued in the form of one or more global certificates which equal the certificate principal balance or certificate notional amount, as applicable, of that class and will initially be registered in the name of Cede & Co., the nominee of DTC. Clearstream and Euroclear will hold omnibus positions on behalf of their participants through customers' securities accounts in Clearstream's and Euroclear's names on the books of their respective depositaries which in turn will hold such positions in customers' securities accounts in the depositaries' names on the books of DTC. Citibank, N.A. will act as depositary for Clearstream and JPMorgan Chase Bank will act as depositary for Euroclear. Investors may hold beneficial interests in the book-entry certificates in minimum denominations of $25,000. Except as described below, no beneficial owner of a book-entry certificate will be entitled to receive a S-79 definitive (i.e., physical) certificate. Unless and until definitive certificates are issued, it is anticipated that the only "certificateholder" of the offered certificates will be Cede & Co., as nominee of DTC. Beneficial owners of book-entry certificates will not be "Certificateholders" as that term is used in the pooling and servicing agreement. Beneficial owners of book-entry certificates are only permitted to exercise their rights indirectly through DTC participants. A certificate 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 that maintains the owner's account for such purpose. In turn, the financial intermediary's ownership of the book-entry certificate will be recorded on the records of DTC (or of a participant 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 participant, and on the records of Clearstream or Euroclear, as appropriate). Certificate owners will receive all distributions of principal of and interest on the book-entry certificates from the trustee, through DTC and DTC participants. So long as the book-entry certificates are outstanding (except under the circumstances described below), DTC's rules (consisting of all the rules, regulations and procedures creating and affecting DTC and its operations), require that DTC o make book-entry transfers among participants on whose behalf it acts with respect to the book-entry certificates, and o receive and transmit distributions of principal of, and interest on, the book-entry certificates. Participants and indirect participants with which certificate owners have accounts with respect to book-entry certificates are similarly required to make book-entry transfers and receive and transmit distributions on behalf of their respective certificate owners. Accordingly, although certificate owners will not possess certificates representing their respective interests in the book-entry certificates, DTC's rules provide a mechanism by which certificate owners will receive distributions and will be able to transfer their interests. Certificate owners will not receive or be entitled to receive certificates representing their respective interests in the offered certificates, except under the limited circumstances described below. Unless and until definitive certificates are issued, certificate owners who are not DTC participants may transfer ownership of book-entry certificates only through participants and indirect participants by instructing such participants and indirect participants to transfer the book-entry certificates, by book-entry transfer, through DTC for the account of the purchasers of the book-entry certificates, which account is maintained with their respective participants. Under DTC's rules and in accordance with DTC's normal procedures, transfers of ownership of book-entry 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. Because of time zone differences, credits of securities received in Clearstream or Euroclear as a result of a transaction with a DTC participant will be made during subsequent securities settlement processing and dated the business day following the DTC settlement date. These credits or any transactions in such securities settled during such processing will be S-80 reported to the relevant Euroclear or Clearstream participants on the business day following the DTC settlement date. Cash received in Clearstream or Euroclear as a result of sales of securities by or through a Clearstream participant or Euroclear participant to a DTC participant will be received with value on the DTC settlement date but will be available in the relevant Clearstream or Euroclear cash account only as of the business day following settlement in DTC. For information with respect to tax documentation procedures relating to the certificates, see "Material Federal Income Tax Consequences--REMIC Certificates--C. Regular Certificates--Non-U.S. Persons," "--Information Reporting and Backup Withholding" and "--New Withholding Regulations" in the prospectus. Transfers between participants will occur in accordance with DTC's rules. Transfers between Clearstream participants and Euroclear participants will occur in accordance with their respective rules and operating procedures. Cross-market transfers between persons or entities holding directly or indirectly through DTC, on the one hand, and directly or indirectly through Clearstream participants or Euroclear participants, on the other, will be effected in DTC in accordance with DTC's rules on behalf of the relevant European international clearing system by the relevant European depositary. However, these cross market transactions will require delivery of instructions to the relevant European international clearing system by the counterparty in that 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 European 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 participants and Euroclear Participants may not deliver instructions directly to the European depositaries. DTC is a New York-chartered limited purpose trust company, and 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 DTC's rules as in effect from time to time. Clearstream Banking, societe anonyme, 42 Avenue J.F. Kennedy, L-2967 Luxembourg, is a limited liability company incorporated under the laws of the Grand Duchy of Luxembourg. Clearstream is a subsidiary of Clearstream International, societe anonyme ("Clearstream International"), which was formed in January 2000 through the merger of Cedel International and Deutsche Boerse Clearing, a subsidiary of Deutsche Boerse AG. In July 2002, Deutsche Boerse AG acquired Cedel International and its 50 percent interest in Clearstream International. Clearstream is registered as a bank in Luxembourg, and as such is subject to regulation by the Banque Central du Luxembourg (Luxembourg Central Bank) and the Commission de Surveillance du Secteur Financier (Luxembourg Commission for the Supervision of the Financial Sector), which supervise Luxembourg banks. Clearstream holds securities for its participating organizations. Clearstream facilitates the clearance and settlement of securities transactions between Clearstream participants through electronic book-entry changes in accounts of Clearstream participants, eliminating the need for S-81 physical movement of certificates. Clearstream provides to Clearstream participants, among other things, services for safekeeping, administration, clearance and settlement of internationally traded securities and securities lending and borrowing. Clearstream interfaces with domestic markets in several countries. Clearstream 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 is also available to others, such as banks, brokers, dealers and trust companies that clear through or maintain a custodial relationship with a Clearstream participant, either directly or indirectly. Euroclear was created in 1968 to hold securities for its participants and to clear and settle transactions between Euroclear Participants through simultaneous electronic book-entry delivery against payment, eliminating the need for physical movement of certificates and eliminating any risk from lack of simultaneous transfers of securities and cash. Euroclear provides various other services, including securities lending and borrowing and interfaces with domestic markets in several countries. Euroclear is operated by Euroclear Bank S.A./NV (the "Euroclear Operator"), under contract with Euroclear Clearance System plc, a United Kingdom corporation (the "Cooperative"). All operations are conducted by the Euroclear Operator, and all Euroclear securities clearance accounts and Euroclear cash accounts are accounts with the Euroclear Operator not the Cooperative. The Cooperative establishes policy for Euroclear on behalf of Euroclear participants. Euroclear participants include banks (including central banks), securities brokers and dealers and other professional financial intermediaries and may include the underwriters. Indirect access to Euroclear is also available to other firms that clear through or maintain a custodial relationship with a Euroclear participant, either directly or indirectly. The Euroclear Operator has advised us that it is licensed by the Belgian Banking and Finance Commission to carry out banking activities on a global basis. As a Belgian bank, it is regulated and examined by the Belgian Banking Commission. Securities clearance accounts and cash accounts with the Euroclear operator are governed by the terms and conditions governing use of Euroclear. The related operating procedures of the Euroclear System and applicable Belgian law 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 only on behalf of Euroclear participants and has no record of or relationship with persons holding through Euroclear participants. Distributions on the book-entry certificates will be made on each distribution date by the trustee to DTC. DTC will be responsible for crediting the respective amounts to the accounts of the applicable DTC participants in accordance with DTC's normal procedures. Each DTC participant will be responsible for disbursing the payments to the beneficial owners of the book-entry certificates that it represents and to each financial intermediary for which it acts as agent. In turn, each 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, beneficial owners of the book-entry certificates may experience some delay in their receipt of payments, since such payments will be forwarded by the trustee to Cede & Co. Distributions with respect to certificates held through Clearstream or Euroclear will be credited to the cash accounts of Clearstream participants or Euroclear participants in accordance with the relevant system's rules and procedures, to the extent received S-82 by the relevant European depositary. Distributions will be subject to tax reporting in accordance with relevant United States tax laws and regulations. See "Material Federal Income Tax Consequences--REMIC Certificates--C. Regular Certificates-- Non-U.S. Persons" and "--Information Reporting and Backup Withholding" in the prospectus. Because DTC can only act on behalf of financial intermediaries, the ability of a beneficial owner to pledge book-entry certificates to persons or entities that do not participate in DTC, or otherwise take actions in respect of the book-entry certificates, may be limited due to the lack of physical certificates. In addition, issuance of certificates in book-entry form may reduce the liquidity of the 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 on the trust 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 DTC's rules, and to the financial intermediaries to whose DTC accounts the book-entry certificates of such beneficial owners are credited. DTC has advised the trustee 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 book-entry certificates. Clearstream 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 participant or Euroclear participant only in accordance with its relevant rules and procedures and subject to the ability of the relevant European 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 book-entry certificates. Definitive certificates will be issued to beneficial owners of book-entry certificates, or their nominees, rather than to DTC, only if o DTC or the depositor advises the trustee in writing that DTC is no longer willing, qualified or able to discharge properly its responsibilities as nominee and depository with respect to the book-entry certificates and the depositor or the trustee is unable to locate a qualified successor; or o the depositor, with the consent of the applicable DTC participants, elects, in writing, to terminate the book entry system through DTC; or o after the occurrence of an event of default under the pooling and servicing agreement, beneficial owners having percentage ownership interests aggregating not less than 51% of the book-entry certificates advise the trustee and DTC, through the financial intermediaries and the DTC participants in writing, that the continuation of the book-entry system through DTC (or a successor thereto) is no longer in the best interests of beneficial owners. Upon the occurrence of any of the events described in the immediately preceding paragraph, the trustee will use all reasonable efforts to notify the beneficial owners of the occurrence of the event and the availability through DTC of definitive certificates. Upon S-83 surrender by DTC of the global certificate or certificates representing the book-entry certificates and instructions for re-registration, the trustee will issue definitive certificates, and thereafter the trustee will recognize the holders of the definitive certificates as "Certificateholders" under the pooling and servicing agreement. The definitive certificates will be transferable and exchangeable at the offices of the trustee, as certificate registrar, from time to time for these purposes. The trustee, as certificate registrar, has initially designated the office of its agent located at DTC Transfer Services, 55 Water Street, Jeanette Park Entrance, New York, New York 10041 for such purposes. Although DTC, Clearstream and Euroclear have agreed to the foregoing procedures in order to facilitate transfers of book-entry certificates among participants of DTC, Clearstream and Euroclear, they are under no obligation to perform or continue to perform these procedures, which may be discontinued at any time. None of the depositor, the servicer, the underwriters, the seller, the Class 2-A-1C Certificate Insurer or the trustee will have any responsibility for any aspect of the records relating to, or payments made on account of, beneficial ownership interests of the book-entry certificates held by Cede & Co., as nominee for DTC, or for maintaining, supervising or reviewing any records relating to the beneficial ownership interests or transfer thereof. According to DTC, the foregoing information with respect to DTC has been provided for informational purposes only and is not intended to serve as a representation, warranty or contract modification of any kind. PRIORITY OF DISTRIBUTIONS ON THE CERTIFICATES As more fully described in this prospectus supplement, on each distribution date distribution of Available Funds will be made in the following order of priority: (a) with respect to the Available Funds from the related loan group or groups: first, current interest on the Class 1-A, Class 2-A-1A, Class 2-A-1B, Class 2-A-1C, Class 2-A-2, Class A-R and Class X Certificates, on a pro rata basis with respect to each class of certificates related to the same loan group; provided, however, that for the purpose of distributions to the Class X Certificates, only the portion of the certificate notional amount derived from the group 1 mortgage loans will be used to calculate distributions to the Class X Certificates from Available Funds for loan group 1 and only the portion of the certificate notional amount derived from the group 2 mortgage loans will be used to calculate distributions to the Class X Certificates from Available Funds for loan group 2; provided, further, that on each distribution date, to the extent of the Required Reserve Fund Deposit for such date, the amount of current interest that would otherwise be payable to the Class X Certificates (after giving effect to any reduction in respect of net deferred interest allocated to the Class X Certificate on such distribution date) will be deposited in the Basis Risk Reserve Fund and will not be distributed to such class; and S-84 second, principal of the related senior certificates (other than the Class X Certificates) and the related PO Components in the order and priority described under "--Principal--Senior Principal Distribution Amount" below; (b) first, from the Yield Maintenance Account, for distribution to the Yield Maintained Certificates, and second, from the Basis Risk Reserve Fund, for distribution to the Class 1-A, Class 2-A-1A, Class 2-A-1B, Class 2-A-1C and Class 2-A-2 Certificates and the subordinate certificates, any Basis Risk Shortfall remaining unpaid for such class and such date as described under "--Interest--Basis Risk Reserve Fund," "--The Yield Maintenance Agreements" below; and (c) with respect to all remaining Available Funds from all the loan groups: first, reimbursement amounts due to the Class 2-A-1C Certificate Insurer under the pooling and servicing agreement; second, current interest on, and then principal of, each class of subordinate certificates, in the order of their numerical class designations beginning with the Class B-1 Certificates, subject to certain limitations described under "--Principal" below; and third, the Class A-R Certificate. The priority of distributions described above will be subject to change if a loan group is subject to rapid prepayments or disproportionately high Realized Losses, as described under "--Principal--Limited Cross-Collateralization" below. INTEREST Calculation of Interest. On each distribution date, each class of certificates (other than the Class PO Certificates) will be entitled to receive, to the extent of funds available, an amount allocable to interest ("current interest") for the related interest accrual period equal to o interest at the applicable pass-through rate on the certificate principal balance, or certificate notional amount, as applicable, immediately prior to such distribution date, of that class plus o unpaid interest amounts consisting of the excess of all amounts calculated in accordance with the preceding bullet on all prior distribution dates over the amount actually distributed as interest on the prior distribution dates; provided, however, that for any distribution date, a portion of the current interest on any class of certificates will be reduced if the pass-through rate applicable to such class for the related accrual period exceeds the adjusted cap rate applicable to such class. The "adjusted cap rate" for the LIBOR Certificates and Class B-4, Class B-5 and Class B-6 Certificates (the "LIBOR adjusted cap rate") for any distribution date shall equal the related S-85 net WAC cap for that distribution date, computed for this purpose by first reducing the weighted average of the net loan rates of the mortgage loans by a per annum rate equal to (i) the product of (a) the net deferred interest, if any, on the mortgage loans for that distribution date and (b) 12, divided by (ii) the aggregate Stated Principal Balance of the mortgage loans as of the first day of the month before such distribution date (or, in the case of the first distribution date, as of the cut-off date). The "adjusted cap rate" for the Class X Certificate for any distribution date shall equal the pass-through rate for the Class X Certificate, computed for this purpose by (i) reducing the weighted average of the net mortgage rates by a per annum rate equal to the quotient of (a) the net deferred interest for such distribution date multiplied by 12, and (b) the aggregate Stated Principal Balance of the Mortgage Loans as of the first day of the month prior to such distribution date, and (ii) computing the weighted average of the pass-through rates of the certificates (other than the Class X Certificates) by substituting "LIBOR adjusted cap rate" for "net WAC cap" in the definition of pass-through rate for each of the Class A-R, Class 1-A, Class 2-A-1A, Class 2-A-1B, Class 2-A-1C, Class 2-A-2 and subordinate certificates. With respect to each mortgage loan and each related due date, "deferred interest" will be the excess, if any, of the amount of interest accrued on such mortgage loan from the preceding due date to such due date over the portion of the monthly payment allocated to interest for such due date. Such excess may occur because the mortgage rates of the mortgage loans adjust monthly, while the monthly payment adjusts generally no more frequently than annually, or as a result of the application of the Payment Caps, in either case, resulting in negative amortization. See "Description of the Mortgage Loans--General--Monthly Payment Adjustments" herein. With respect to each loan group and each related due date, "net deferred interest" will be the greater of (i) the excess, if any, of the aggregate of deferred interest for that due date over the aggregate amount of any principal prepayments in part or in full received during the related Prepayment Period with respect to such loan group and (ii) zero. For any distribution date, the net deferred interest on the loan group will be allocated among the related classes of certificates in an aggregate amount equal to the excess, if any, for each such class of (i) the current interest accrued at the pass-through rate for such class, over (ii) the amount that would have been calculated as current interest had the pass-through rate for such class equaled the applicable adjusted cap rate for such class and for such distribution date. On each distribution date, any amount of net deferred interest allocable to a class of certificates (other than the Class X Certificates) on such distribution date will be added as principal to the outstanding certificate principal balance of such class of certificates. With respect to the Class X Certificates and each distribution date, any amount of net deferred interest with respect to a loan group that is allocated to the Class X Certificates on such distribution date will be added as principal to the related outstanding component principal balance of the PO-1 and PO-2 Component, as applicable. As a result of the allocation of net deferred interest, a portion of the interest accrued on such certificates may be distributed to such certificates later than otherwise anticipated and in the case of the Class X Certificates, will be distributable in respect of the Class PO Certificates. The interest accrual period for each distribution date and the Class X and Class A-R Certificates will be the calendar month preceding the month of that distribution date. The interest accrual period for each distribution date and the LIBOR Certificates will be the period S-86 beginning on the immediately preceding distribution date (or the closing date, in the case of the first distribution date) and ending on the day immediately preceding such distribution date. The interest accrual period for each distribution date and the Class X and Class A-R Certificates will be determined on the basis of an assumed 360-day year consisting of twelve 30-day months. The interest accrual period for each other class of certificates (other than the Class PO Certificates) will be determined on the basis of an assumed 360-day year and the actual number of days elapsed in the related interest accrual period. The Class PO Certificates are principal-only certificates and will not accrue interest. The interest entitlement described above for each class of certificates for any distribution date will be reduced by the amount of net interest shortfall experienced by the related mortgage loans. See "--Net Interest Shortfall" below. The certificate notional amount of the Class X Certificates with respect to any distribution date will equal the aggregate principal balance of all of the mortgage loans as of any date of determination. The initial Class X certificate notional amount will be approximately $1,944,859,934. With respect to any distribution date, current interest for the Class X Certificates will equal the current interest distributed to the Class X Certificates on such distribution date. Pass-Through Rates. The pass-through rates of the certificates for any distribution date are calculated as described below. The net loan rate for each mortgage loan will be equal to the loan rate on such mortgage loan less the related trust expense fee rate. The "net WAC" for any distribution date is equal to the weighted average of the net loan rates of the mortgage loans as of the first day of the related Due Period (or, in the case of the first distribution date, as of the cut-off date), weighted on the basis of their related Stated Principal Balances as of the first day of the related Due Period. The "net WAC cap" for the LIBOR Certificates (other than the Class 2-A-1C Certificates) and Class B-4, Class B-5 and Class B-6 Certificates and any distribution date equals the product of (i) net WAC and (ii) a fraction, the numerator of which is 30 and the denominator of which is the actual number of days in the related interest accrual period for such certificates. The "net WAC cap" for the Class 2-A-1C Certificates and any distribution date equals the excess of (x) product of (i) net WAC and (ii) a fraction, the numerator of which is 30 and the denominator of which is the actual number of days in the related interest accrual period for such certificates over (y) the Class 2-A-1C insurance premium rate for that distribution date. The "net maximum rate cap" for the Class 1-A and Subordinate Certificates and any distribution date is equal to the product of (i) the weighted average of the net maximum loan rates of the mortgage loans as of the first day of the related Due Period (or, in the case of the first distribution date, as of the cut-off date), weighted on the basis of their related Stated Principal Balances as of the first day of the related Due Period and (ii) a fraction, the numerator of which is 30 and the denominator of which is the actual number of days in the related interest accrual period for such certificates. The "pass-through rate" of the Class 1-A Certificates on any distribution date will equal the least of (i) One-Month LIBOR plus 0.260% per annum (the "Certificate Margin"), (ii) the net WAC cap for that distribution date and (iii) the net maximum rate cap for that distribution date. S-87 As described under "The Pooling and Servicing Agreement--Optional Termination of the Trust," if the option to repurchase the mortgage loans is not exercised by the servicer on the optional termination date, then on all succeeding distribution dates, the Certificate Margin will be increased to 0.520% per annum. The "pass-through rate" of the Class A-R Certificates on any distribution date will equal to net WAC for that distribution date. The "pass-through rate" of the Class 2-A-1A Certificates on any distribution date will equal the least of (i) One-Month LIBOR plus 0.220% per annum (the "Certificate Margin"), (ii) the net WAC cap for that distribution date and (iii) 10.50% per annum. As described under "The Pooling and Servicing Agreement--Optional Termination of the Trust," if the option to repurchase the mortgage loans is not exercised by the servicer on the optional termination date, then on all succeeding distribution dates, the Certificate Margin will be increased to 0.440% per annum. The "pass-through rate" of the Class 2-A-1B Certificates on any distribution date will equal the least of (i) One-Month LIBOR plus 0.300% per annum (the "Certificate Margin"), (ii) the net WAC cap for that distribution date and (iii) 10.50% per annum. As described under "The Pooling and Servicing Agreement--Optional Termination of the Trust," if the option to repurchase the mortgage loans is not exercised by the servicer on the optional termination date, then on all succeeding distribution dates, the Certificate Margin will be increased to 0.600% per annum. The "pass-through rate" of the Class 2-A-1C Certificates on any distribution date will equal the least of (i) One-Month LIBOR plus 0.220% per annum (the "Certificate Margin"), (ii) the net WAC cap for that distribution date and (iii) 10.50% per annum. As described under "The Pooling and Servicing Agreement--Optional Termination of the Trust," if the option to repurchase the mortgage loans is not exercised by the servicer on the optional termination date, then on all succeeding distribution dates, the Certificate Margin will be increased to 0.440% per annum. The "pass-through rate" of the Class 2-A-2 Certificates on any distribution date will equal the least of (i) One-Month LIBOR plus 0.300% per annum (the "Certificate Margin"), (ii) the net WAC cap for that distribution date and (iii) 10.50% per annum. As described under "The Pooling and Servicing Agreement--Optional Termination of the Trust," if the option to repurchase the mortgage loans is not exercised by the servicer on the optional termination date, then on all succeeding distribution dates, the Certificate Margin will be increased to 0.600% per annum. The "pass-through rate" of the Class X Certificates on any distribution date will equal the excess, if any, of (a) the weighted average of the net mortgage rates on the mortgage loans over (b) a rate equal to the weighted average rate at which interest accrues for the related interest accrual period on the Certificates (including the Class PO Certificates and other than the Class X Certificates) at the applicable pass-through rate (provided, however, that the Certificate Margin on the Class 2-A-1C Certificates shall be increased for this purpose by the Class 2-A-1C insurance premium rate; provided, further, that the pass-through rate for any class of certificates the interest payments on which are computed using an actual/360 day-count convention will be adjusted for this purpose by multiplying that pass-through rate by the quotient of the actual number of days in the applicable accrual period and 30). S-88 Notwithstanding the foregoing, on each distribution date, the interest that would otherwise be distributable to the Class X Certificates, based on the pass-through rate described above (after giving effect to any reduction in respect of net deferred interest allocated to the Class X Certificates on such distribution date), may be reduced by the amount, if any, that is necessary to fund payment of any Basis Risk Shortfalls to the holders of the Class 1-A, Class 2-A-1A, Class 2-A-1B, Class 2-A-1C and Class 2-A-2 Certificates and the subordinate certificates. See "--Basis Risk Reserve Fund" below. The "pass-through rate" of the Class B-1 Certificates on any distribution date will equal the least of (i) One-Month LIBOR plus 0.470% per annum (the "Certificate Margin"), (ii) the net WAC cap for that distribution date and (iii) the net maximum rate cap for that distribution date. As described under "The Pooling and Servicing Agreement--Optional Termination of the Trust," if the option to repurchase the mortgage loans is not exercised by the servicer on the optional termination date, then on all succeeding distribution dates, the Certificate Margin will be increased to 0.705% per annum. The "pass-through rate" of the Class B-2 Certificates on any distribution date will equal the least of (i) One-Month LIBOR plus 0.700% per annum (the "Certificate Margin"), (ii) the net WAC cap for that distribution date and (iii) the net maximum rate cap for that distribution date. As described under "The Pooling and Servicing Agreement--Optional Termination of the Trust," if the option to repurchase the mortgage loans is not exercised by the servicer on the optional termination date, then on all succeeding distribution dates, the Certificate Margin will be increased to 1.050% per annum. The "pass-through rate" of the Class B-3 Certificates on any distribution date will equal the least of (i) One-Month LIBOR plus 1.600% per annum (the "Certificate Margin"), (ii) the net WAC cap for that distribution date and (iii) the net maximum rate cap for that distribution date. As described under "The Pooling and Servicing Agreement--Optional Termination of the Trust," if the option to repurchase the mortgage loans is not exercised by the servicer on the optional termination date, then on all succeeding distribution dates, the Certificate Margin will be increased to 2.400% per annum. The "pass-through rate" of the Class B-4, Class B-5 and Class B-6 Certificates on any distribution date will equal the least of (i) One-Month LIBOR plus 1.750% per annum (the "Certificate Margin"), (ii) the net WAC cap for that distribution date and (iii) the net maximum rate cap for that distribution date. As described under "The Pooling and Servicing Agreement--Optional Termination of the Trust," if the option to repurchase the mortgage loans is not exercised by the servicer on the optional termination date, then on all succeeding distribution dates, the Certificate Margin will be increased to 2.625% per annum. Net Interest Shortfall. The interest entitlement of each class of certificates on each distribution date as described under "--Calculation of Interest" above will be reduced by its share, as described below, of the amount of net interest shortfall experienced by (a) the related loan group, in the case of the senior certificates (other than the Class X Certificates) and (b) each loan group, in the case of the Class X Certificates and the subordinate certificates. For each distribution date and loan group, the "net interest shortfall" will be equal to the sum of o the amount, if any, by which the aggregate prepayment interest shortfall experienced by the mortgage loans in the related loan group during the preceding calendar month exceeds the compensating interest paid by the S-89 servicer for the related distribution date as described under "The Servicer--Prepayment Interest Shortfalls," plus o the amount by which the interest that would otherwise have been received on any related mortgage loan was reduced due to application of the Servicemembers Civil Relief Act, and similar state laws (the "Relief Act"). See "Material Legal Aspects of the Loans--Servicemembers Civil Relief Act" in the prospectus and "Description of the Certificates--Allocation of Losses" in this prospectus supplement. The net interest shortfall for a loan group on any distribution date will be allocated among all classes of the related senior certificates and all classes of the subordinate certificates based on (a) in the case of the senior certificates (other than the Class X Certificates), the amount of interest which the respective classes of certificates would otherwise be entitled to receive with respect to such loan group on that distribution date, (b) in the case of the Class X Certificates, the amount of interest the Class X Certificates would otherwise be entitled to receive from such loan group, based on the portion of its certificate notional balance attributable to such loan group and (c) in the case of the subordinate certificates, the amount of interest accrued on their Apportioned Principal Balances attributable to such loan group, in each case before taking into account any reduction in those amounts on such date due to (i) the net interest shortfall, (ii) any net deferred interest allocable to such class or component and (iii) with respect to the Class X Certificates, any Required Reserve Fund Deposit; provided, however, that on any distribution date after the Senior Termination Date for a loan group, net interest shortfalls for that loan group will be allocated to the classes of subordinate certificates based on the amount of interest each such class of subordinate certificates would otherwise be entitled to receive on that distribution date. If on any distribution date, Available Funds for a loan group in the distribution account applied in the order described under "--Priority of Distributions on the Certificates" above are not sufficient to make a full distribution of the interest entitlement on the certificates in that loan group, interest will be distributed on each related class of certificates of equal priority pro rata based on the amount of interest it would otherwise have been entitled to receive in the absence of the shortfall. Any unpaid interest amount will be carried forward and added to the amount that class of certificates will be entitled to receive on the next distribution date. A shortfall could occur, for example, if delinquencies or losses realized on the mortgage loans in a loan group were exceptionally high or were concentrated in a particular month. Any unpaid interest amount so carried forward will not bear interest. Basis Risk Shortfalls. For the Class 1-A, Class 2-A-1A, Class 2-A-1B, Class 2-A-1C, Class 2-A-2 Certificates and the subordinate certificates and any distribution date, the "Basis Risk Shortfalls" for such class will equal the sum of: (i) the excess, if any, of the amount of interest that such class would have been entitled to receive if the pass-through rate for such class were calculated without regard to clause (ii) in the definition thereof, over the actual amount of interest such class is entitled to receive for such distribution date; S-90 (ii) any excess described in clause (i) above remaining unpaid from prior distribution dates; and (iii) interest for the applicable interest accrual period on the amount described in clause (ii) above based on the applicable pass-through rate determined without regard to clause (ii) in the definition thereof. Basis Risk Reserve Fund. Pursuant to the terms of the pooling and servicing agreement, the trustee will establish an account on behalf of the Class X Certificates (the "Basis Risk Reserve Fund"), which will be held in trust by the trustee on behalf of the holders of the LIBOR Certificates and the Class B-4, Class B-5 and Class B-6 Certificates. The Basis Risk Reserve Fund will not be an asset of any REMIC. The Basis Risk Reserve Fund will be the sole source of payments to the holders of the Class 1-A Certificates and the subordinate certificates with respect to any Basis Risk Shortfalls on such certificates. On the closing date, the depositor will deposit in the Basis Risk Reserve Fund an amount that is intended to cover the amount of Basis Risk Shortfalls, if any, on the first and second Distribution Dates. On each distribution date, interest that would otherwise be distributable with respect to the Class X Certificates will be deposited instead in the Basis Risk Reserve Fund to the extent of the related "Required Reserve Fund Deposit" in the manner described below. With respect to the Class X Certificates and any distribution date, the "Required Reserve Fund Deposit" will be an amount equal to the lesser of (i) the current interest for the Class X Certificates for such distribution date (after giving effect to such certificate's share of any net deferred interest and after any reduction in current interest due to net interest shortfalls on such distribution date) and (ii) the amount required to bring the balance on deposit in the Basis Risk Reserve Fund up to an amount equal to the unpaid Basis Risk Shortfalls for such distribution date with respect to the LIBOR Certificates and the Class B-4, Class B-5 and Class B-6 Certificates and with respect to the Yield Maintained Certificates, after giving effect to distributions of payments made pursuant to the related yield maintenance agreement. On any distribution date for which a Basis Risk Shortfall exists with respect to the Yield Maintained Certificates, the trustee shall withdraw first from the Yield Maintenance Account and then from the Basis Risk Reserve Fund the amount of such Basis Risk Shortfall for distribution on such distribution date as described above under "--Priority of Distributions on the Certificates." If on any distribution date the amount on deposit in the Basis Risk Reserve Fund is not sufficient to make a full distribution of the Basis Risk Shortfall with respect to the LIBOR Certificates and the Class B-4, Class B-5 and Class B-6 Certificates remaining after application of funds available therefor in the Yield Maintenance Account with respect to the Yield Maintained Certificates, the trustee shall withdraw the entire amount on deposit in the Basis Risk Reserve Fund and distribute such amount first, to the to Class 1-A, Class 2-A-1A, Class 2-A-1B, Class 2-A-1C and Class 2-A-2 Certificates on a pro rata basis, and second, sequentially, to the Class B-1, Class B-2, Class B-3, Class B-4, Class B-5 and Class B-6 Certificates, in that order. Determination of One-Month LIBOR. On the second LIBOR Business Day (as defined below) preceding the commencement of each interest accrual period (each such date, a "LIBOR Determination Date"), the trustee will determine LIBOR based on the "Interest Settlement Rate" for U.S. dollar deposits of one-month maturity set by the British Bankers' Association (the "BBA") as of 11:00 a.m. (London time) on the LIBOR Determination Date ("LIBOR"). S-91 The BBA's Interest Settlement Rates are currently displayed on the Dow Jones Telerate Service page 3750 (such page, or such other page as may replace page 3750 on that service or such other service as may be nominated by the BBA as the information vendor for the purpose of displaying the BBA's Interest Settlement Rates for deposits in U.S. dollars, the "Designated Telerate Page"). Such Interest Settlement Rates are also currently available on Reuters Monitor Money Rates Service page "LIBOR01" and Bloomberg L.P. page "BBAM." The BBA's Interest Settlement Rates currently are rounded to five decimal places. A "LIBOR Business Day" is any day on which banks in London and New York are open for conducting transactions in foreign currency and exchange. With respect to any LIBOR Determination Date, if the BBA's Interest Settlement Rate does not appear on the Designated Telerate Page as of 11:00 a.m. (London time) on such date, or if the Designated Telerate Page is not available on such date, the trustee will obtain such rate from the Reuters or Bloomberg page. If such rate is not published for such LIBOR Determination Date, LIBOR for such date will be the most recently published Interest Settlement Rate. In the event that the BBA no longer sets an Interest Settlement Rate, the rate for such date will be determined on the basis of the rates at which one-month U.S. dollar deposits are offered by the Reference Banks (as defined below) at approximately 11:00 a.m. (London time) on such date to prime banks in London interbank market. In such event, the trustee will request the principal London office of each of the Reference Banks to provide a quotation of its rate. If at least two such quotations are provided, the rate for that date will be the arithmetic mean of the quotations (rounded upwards if necessary to the nearest whole multiple of 1/16%). If fewer than two quotations are provided as requested, the rate for that date will be the arithmetic mean of the rates quoted by major banks in New York City, selected by the trustee (after consultation with the Depositor), at approximately 11:00 a.m. (New York City time) on such date for one-month U.S. dollar loans to leading European banks. For this purpose, a "Reference Bank" shall be a leading bank engaged in transactions in Eurodollar deposits in the international Eurocurrency market which does not control, nor is controlled by, or under common control with, the trustee and which has an established place of business in London. Until all of the LIBOR Certificates are paid in full, the trustee will at all times retain at least four Reference Banks for the purpose of determining LIBOR with respect to each LIBOR Determination Date. The trustee initially will designate the Reference Banks (after consultation with the Depositor). If any such Reference Bank should be unwilling or unable to act as such or if the trustee should terminate its appointment as Reference Bank, the trustee will promptly appoint or cause to be appointed another Reference Bank (after consultation with the Depositor). The trustee will have no liability or responsibility to any person for (i) the selection of any Reference Bank for purposes of determining LIBOR or (ii) any inability to retain at least four Reference Banks which is caused by circumstances beyond its reasonable control. The establishment of LIBOR on each LIBOR Determination Date by the trustee and the trustee calculation of the pass-through rate applicable to the Class 1-A, Class 2-A-1A, Class 2-A-1B, Class 2-A-1C, Class 2-A-2, Class B-1, Class B-2, Class B-3, Class B-4, Class B-5 and Class B-6 Certificates for the related interest accrual period will (in the absence of manifest error) be final and binding. LIBOR for the first distribution date will be determined two business days prior to the closing date. S-92 THE YIELD MAINTENANCE AGREEMENTS On the Closing Date, the trustee, on behalf of the trust, will enter into two yield maintenance agreements with the yield maintenance provider. The trustee will establish an account (the "Yield Maintenance Account"), which will be an asset of the trust. The trustee will deposit into the yield maintenance account amounts received by it pursuant to the yield maintenance agreements. The yield maintenance agreements will be related to (i) the Class 2-A-1A, Class 2-A-1B and Class 2-A-2 Certificates and (ii) the Class 2-A-1C Certificates. Each of the Class 2-A-1A, Class 2-A-1B, Class 2-A-1C and Class 2-A-2 Certificates will be entitled to payments only from the yield maintenance agreement related to such class of certificates. On each distribution date, payments under the related yield maintenance agreement for each of the Yield Maintained Certificates will be made based on an amount equal to the product of (i) the excess, if any, of (x) LIBOR, subject to a maximum of 10.50%, over (y) the applicable Strike Rate (as defined below), (ii) the lesser of (a) the related Yield Maintenance Notional Balance (as defined below) and (b) the aggregate balance of the related certificates on the first day of the related accrual period and (iii) a fraction, the numerator of which is the actual number days in the related interest accrual period and the denominator of which is 360. The aggregate of all payments made on a distribution date pursuant to the yield maintenance agreements is referred to in this prospectus supplement as a "Yield Maintenance Payment." With respect to each distribution date on which a Yield Maintenance Payment is received under a yield maintenance agreement, the trustee will pay to the related Certificateholders, up to the amount of current interest that each such class would have been entitled to receive had the applicable note interest rate been calculated at a rate equal to One-Month LIBOR plus the applicable margin for the related accrual period, to the extent not paid out of the Available Funds for such Payment Date. Any funds from the Yield Maintenance Payment remaining in the Yield Maintenance Account after payment of current interest to the Yield Maintained Certificates, as calculated in the preceding sentence, will be distributed to the Class X Certificates. The "Yield Maintenance Notional Balance" and the "Strike Rate" with respect to the yield maintenance agreements for each applicable distribution date are set forth on Schedule A to this prospectus supplement. Each yield maintenance agreement is effective with respect to the distribution date in May 2005 and ends on the distribution date in October 2015. After the Distribution Date in October 2015, each Yield Maintenance Notional Balance will be equal to zero, and the yield maintenance agreements will be terminated. The Trust will issue the Class Y Certificates, which will not have a certificate principal balance. On any distribution date, the Class Y Certificates will only be entitled to payments of excess amounts received by the trust pursuant to the yield maintenance agreements on that distribution date. Such excess shall be the result of the excess, if any, of the Yield Maintenance Notional Balance over the aggregate balance of the related certificates on the first day of the related accrual period, as set forth in the pooling and servicing agreement. The holders of the offered certificates will have no rights to such excess. THE YIELD MAINTENANCE PROVIDER The Bank of New York (the "Yield Maintenance Provider") was founded in New York in 1784 by Alexander Hamilton and is the nation's oldest bank. It is the principal subsidiary of The Bank of New York Company, Inc., one of the largest bank holding companies in the United S-93 States. The senior debt of the Yield Maintenance Provider is rated "Aa2" by Moody's, "AA-" by S&P and "AA-" by Fitch. PRINCIPAL General. All payments and other amounts received in respect of principal of the mortgage loans in each loan group will be allocated between the related senior certificates (or, with respect to the Class PO Certificates, the PO-1 and PO-2 Components) and the subordinate certificates. Principal Distribution Amount. On each distribution date, the Principal Distribution Amount with respect to each loan group, to the extent of Available Funds remaining after distributions in respect of interest, will be applied as principal to the related class or classes of senior certificates (or, with respect to the Class PO Certificates, the PO-1 and PO-2 Components) and to the subordinate certificates in respect of the related Subordinate Component. Senior Principal Distribution Amount. On each distribution date, the Principal Distribution Amount, up to the Senior Principal Distribution Amount for each loan group, will be distributed as principal to the related class or classes of senior certificates or, with respect to the Class PO Certificates, the PO-1 and PO-2 Components, in the following priority: first, concurrently, (a) from the Senior Principal Distribution Amount for the group 1 mortgage loans, sequentially, first, to the Class A-R Certificates, second, to the Class 1-A Certificates, and third, to the PO-1 Component, in that order, until their respective certificate principal balances or component principal balances, as applicable, are reduced to zero; (b) from the Senior Principal Distribution Amount for the group 2 mortgage loans, sequentially, first, concurrently, to the Class 2-A-1A, Class 2-A-1B, Class 2-A-1C and Class 2-A-2 Certificates, pro rata based on their certificate principal balances immediately prior to such distribution date and second, to the PO-2 Component, in that order, until their respective certificate principal balances or component principal balances, as applicable, are reduced to zero; second, (c) reimbursement amounts due to the Class 2-A-1C Certificate Insurer under the pooling and servicing agreement. With respect to any distribution date, principal distributed on the Class PO Certificates will equal the principal distributed on the PO-1 and PO-2 Components on such distribution date. The amount of principal available for distributions to the senior certificates or, with respect to the Class PO Certificates, the PO-1 and PO-2 Components, for a loan group may be increased if such loan group is experiencing rapid prepayments or disproportionately high Realized Losses, as described under "--Limited Cross-Collateralization" below. S-94 On any distribution date after a Senior Termination Date has occurred with respect to a loan group, the Senior Principal Distribution Amount for the remaining senior certificates, or, with respect to the Class PO Certificates, the related PO Components, will be calculated pursuant to the above formula based on all of the mortgage loans, as opposed to the mortgage loans in the related loan group only. See "-- Subordination of the Subordinate Certificates" below. If on any distribution date the allocation to the class or classes of senior certificates or, with respect to the Class PO Certificates, the PO-1 and PO-2 Components, then entitled to distributions of scheduled principal and full and partial principal prepayments (net of deferred interest) and other amounts in the percentages required above would reduce the outstanding certificate principal balance or component principal balance of the class(es) or principal-only component(s) below zero, the distribution to such class(es) or principal-only component(s) of the related Senior Prepayment Percentage and related Senior Percentage of those amounts for that distribution date will be limited to the amounts necessary to reduce the related certificate principal balance(s) or component principal balance(s) to zero. Subordinate Principal Distribution Amount. Except as provided in the next paragraph, each class of subordinate certificates will be entitled to receive on each distribution date its pro rata share of the Subordinate Principal Distribution Amount (based on its respective certificate principal balance) for all loan groups, in each case to the extent of the amount available from Available Funds for distribution of principal on that class, as described under "--Priority of Distributions on the Certificates" above. Distributions of principal of the subordinate certificates will be made on each distribution date to the classes of subordinate certificates in the order of their numerical class designations, beginning with the Class B-1 Certificates, until each such class has received its respective pro rata share for that distribution date. The amount of principal available for distribution to the subordinate certificates may be reduced if a loan group experiences rapid prepayments or disproportionately high Realized Losses, as described under "--Limited Cross-Collateralization" below. Under the definition of Subordinate Principal Distribution Amount, the subordinate certificates will only be entitled to receive the Subordinate Percentage or the Subordinate Prepayment Percentage of any Principal Distribution Amount for the related distribution date. Until the distribution date in April 2015, the Subordinate Prepayment Percentage for any loan group will generally equal zero unless the related senior certificates and principal-only components are paid down to zero or the credit enhancement provided by the subordinate certificates has doubled since the closing date and certain performance tests have been satisfied. With respect to each class of subordinate certificates, if on any distribution date the Applicable Credit Support Percentage is less than the Original Applicable Credit Support Percentage, no distribution of principal prepayments (net of deferred interest) will be made to any such classes and the amount otherwise distributable to those classes in respect of principal prepayments (net of deferred interest) will be allocated among the remaining classes of subordinate certificates, pro rata, based upon their respective certificate principal balances. S-95 The approximate Original Applicable Credit Support Percentages for the subordinate certificates on the date of issuance of the certificates are expected to be as follows: Class B-1.....................8.25% Class B-2.....................5.85% Class B-3.....................3.95% Class B-4.....................2.50% Class B-5.....................1.10% Class B-6.....................0.45% Limited Cross-Collateralization. Cross-Collateralization Due to Rapid Prepayments in a Loan Group. The priority of distributions of principal prepayments (net of deferred interest) will change in the case where a loan group or loan groups are experiencing rapid prepayments provided all the following conditions are met: o the aggregate certificate principal balance of the senior certificates and principal-only component related to a loan group or loan groups have been reduced to zero; o the distribution date is prior to the Senior Credit Support Depletion Date; and o either (i) the Aggregate Subordinate Percentage on that date is less than 200% of the Aggregate Subordinate Percentage as of the closing date or (ii) the outstanding principal balance of all mortgage loans delinquent 60 days or more (including mortgage loans in foreclosure and REO property), averaged over the last six months, as a percentage of the aggregate certificate principal balance of the subordinate certificates, is greater than or equal to 50%. When all of these three conditions are satisfied, all principal prepayments (net of deferred interest) received or advanced with respect to the mortgage loans in a loan group relating to the senior certificates and principal-only components which have been paid in full will be applied as a distribution of principal to the remaining outstanding senior certificates related to other loan groups (pro rata based on their certificate principal balances) rather than applied as a principal distribution to the subordinate certificates. Such principal prepayments (net of deferred interest) would be distributed in the same priority as those senior certificates and principal-only components would receive other distributions of principal. Cross-Collateralization Due to Disproportionate Realized Losses in a Loan Group. If, on any distribution date, the aggregate certificate principal balance of the senior certificates and principal-only component related to a loan group is greater than the aggregate principal balance of the mortgage loans in such loan group (such senior certificates and principal-only component related to such loan group, the "undercollateralized group" and the senior certificates and principal-only component related to the other loan group, the "overcollateralized group"), then the priority of distributions described in this prospectus supplement will be altered as follows: The Available Funds for the overcollateralized group, to the extent remaining following distributions of interest and/or principal to the related senior certificates and components relating to such loan group, will be paid in the following priority: S-96 o first, up to an amount necessary to equal, for the undercollateralized group, the sum of the accrued interest amount and the principal deficiency amount for such undercollateralized group will be distributed to the senior certificates and components related to such undercollateralized group first in payment of accrued but unpaid interest, if any, and then as principal in the same order and priority as they would receive other distributions of principal; and o second, any remaining amount will be distributed pursuant to paragraph (c) under "--Priority of Distributions on the Certificates" in this prospectus supplement. On each distribution date, for purposes of determining cross-collateralization payments due to disproportionate Realized Losses, the "accrued interest amount" for an undercollateralized group will equal one month's interest on the applicable principal deficiency amount at the related net WAC cap, plus any shortfall of interest on the senior certificates of such undercollateralized group from prior distribution dates. On each distribution date, the "principal deficiency amount" for an undercollateralized group will equal the excess of the aggregate certificate principal amount of the senior certificates and principal-only component related to that undercollateralized group over the aggregate principal balance of the mortgage loans in that loan group. ALLOCATION OF LOSSES On each distribution date, the principal portion of all Realized Losses with respect to the mortgage loans in any loan group will be allocated first to the classes of subordinate certificates, in the reverse order of their numerical class designations (beginning with the class of subordinate certificates then outstanding with the highest numerical class designation), in each case until the certificate principal balances of the respective classes of subordinate certificates have been reduced to zero, and then to the related class or classes of senior certificates on a pro rata basis, until their respective certificate principal balances or component principal balances have been reduced to zero; provided, however, the Class 2-A-2 Certificates will bear the principal portion of all Realized Losses allocable to the Class 1-A Certificates for so long as the Class 2-A-2 Certificates are outstanding; and provided, further the Class 2-A-1B and Class 2-A-1C Certificates will bear the principal portion of all Realized Losses allocable to the Class 2-A-1A Certificates, pro rata based on certificate principal balance, for so long as the Class 2-A-1B and Class 2-A-1C Certificates are outstanding. If on any distribution date the aggregate of the certificate principal balances of all classes of certificates following all distributions and allocations of net deferred interest and the allocation of Realized Losses on that distribution date exceeds the Pool Balance as of the first day of the month of that distribution date, the certificate principal balance of the class of subordinate certificates then outstanding with the highest numerical class designation will be reduced by the amount of the excess. On each distribution date and with respect to any mortgage loan group, the interest portion of Realized Losses will reduce the amount available for distribution on the related distribution date to the class of subordinate certificates with the highest numerical class designation which is outstanding on that date and, when the subordinate certificates are reduced to zero, to the related classes of senior certificates, pro rata. S-97 SUBORDINATION OF THE SUBORDINATE CERTIFICATES The rights of the holders of the subordinate certificates to receive distributions 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 the distributions 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. Realized Losses will be allocated to the class of subordinate certificates then outstanding with the highest numerical class designation. THE CLASS 2-A-1C POLICY The Class 2-A-1C Certificate Insurer will issue a certificate guaranty insurance policy (the "Class 2-A-1C Policy") for the benefit of the holders of the Class 2-A-1C Certificates. The Class 2-A-1C Certificate Insurer, in consideration of the payment of a premium and subject to the terms of the Class 2-A-1C Policy, unconditionally guarantees the payment of Insured Amounts to the trustee on behalf of the holders of the Class 2-A-1C Certificates. The Class 2-A-1C Certificate Insurer will pay Insured Amounts which are Due for Payment to the trustee on the later of (1) the Distribution Date the Insured Amount is distributable to the holders of the Class 2-A-1C Certificates under the pooling and servicing agreement, and (2) the second business day following the business day the Class 2-A-1C Certificate Insurer shall have received telephonic or telecopy notice, subsequently confirmed in writing the original of which is sent by registered or certified mail, from the trustee, specifying that an Insured Amount is due in accordance with the terms of the Class 2-A-1C Policy; provided that, if such notice is received after 12:00 noon, New York City time, on such Business Day, it shall be deemed to be received on the following Business Day. If any such notice is not in proper form or is otherwise insufficient for the purpose of making a claim under the Class 2-A-1C Policy, it shall be deemed not to have been received for purposes of this paragraph, and the Class 2-A-1C Certificate Insurer shall promptly so advise the trustee and the trustee may submit an amended or corrected notice. The Class 2-A-1C Certificate Insurer's obligation under the Class 2-A-1C Policy will be discharged to the extent that funds are received by the trustee for payment to the holders of the Class 2-A-1C Certificates whether or not those funds are properly paid by the trustee. Payments of Insured Amounts will be made only at the time set forth in the Class 2-A-1C Policy, and no accelerated payments of Insured Amounts will be made regardless of any acceleration of the Class 2-A-1C Certificates, unless the acceleration is at the sole option of the Class 2-A-1C Certificate Insurer. For purposes of the Class 2-A-1C Policy, a holder does not and may not include any of the trustee, the seller, the depositor or the servicer. The Class 2-A-1C Policy will not cover Basis Risk Shortfalls, deferred interest, net deferred interest or net interest shortfalls allocated to the Class 2-A-1C Certificates, nor does the Class 2-A-1C Policy guarantee to the holders of the Class 2-A-1C Certificates any particular rate of principal payment. In addition, the Class 2-A-1C Policy does not cover shortfalls, if any, attributable to the liability of the trust, any REMIC, the trustee or any holder of a Class 2-A-1C Certificate for withholding taxes, if any, (including interest and penalties in respect of any S-98 liability for withholding taxes) nor any risk other than Nonpayment, including the failure of the trustee to make any payment required under the pooling and servicing agreement to the holders of the Class 2-A-1C Certificates. The Class 2-A-1C Policy will not cover any reduction in the amount of current interest payable to the holders of the Class 2-A-1C Certificates on any Distribution Date due to the pass-through rate for the Class 2-A-1C Certificates exceeding the adjusted cap rate for the Class 2-A-1C Certificates on such Distribution Date. No person other than the trustee shall be entitled to present the Notice. The Class 2-A-1C Certificate Insurer will be subrogated to the rights of each holder of the Class 2-A-1C Certificates to the extent of any payment by the Class 2-A-1C Certificate Insurer under the Class 2-A-1C Policy. The Class 2-A-1C Certificate Insurer agrees that if it shall be subrogated to the rights of the holders of the Class 2-A-1C Certificates, no recovery of such payment will occur unless the full amount of such holders' allocable distributions for such Distribution Date can be made. In so doing, the Class 2-A-1C Certificate Insurer does not waive its rights to seek full payment of all Reimbursement Amounts owed to it under the pooling and servicing agreement. The Class 2-A-1C Policy and the obligations of the Class 2-A-1C Certificate Insurer thereunder will terminate without any action on the part of the Class 2-A-1C Certificate Insurer or any other person on the date that is one year and one day following the earlier to occur of (i) the date on which all amounts required to be paid on the Class 2-A-1C Certificates have been paid in full and (ii) the Final Distribution Date. Upon termination of the Class 2-A-1C Policy, the trustee will forthwith deliver the original of the Class 2-A-1C Policy to the Class 2-A-1C Certificate Insurer. Pursuant to the Class 2-A-1C Policy, the Class 2-A-1C Certificate Insurer will pay any Preference Amount when due to be paid pursuant to the Order (as defined below), but in any event no earlier than the third business day following receipt by the Class 2-A-1C Certificate Insurer of (i) a certified copy of a final, non-appealable order of a court or other body exercising jurisdiction in such insolvency proceeding to the effect that the trustee or holder of a Class 2-A-1C Certificate, as applicable, is required to return such Preference Amount paid during the term of the Class 2-A-1C Policy because such payments were avoided as a preferential transfer or otherwise rescinded or required to be restored by the trustee or holder of a Class 2-A-1C Certificate (the "Order"), (ii) a notice by or on behalf of the trustee or holder of a Class 2-A-1C Certificate that the Order has been entered and is not subject to any stay, (iii) an assignment, in form and substance satisfactory to the Class 2-A-1C Certificate Insurer, duly executed and delivered by the trustee or holder of a Class 2-A-1C Certificate, irrevocably assigning to the Class 2-A-1C Certificate Insurer all rights and claims of the trustee or such holder relating to or arising under the pooling and servicing agreement against the Trust Fund or otherwise with respect to such Preference Amount and (iv) a notice (in the form provided in the Class 2-A-1C Policy) appropriately completed and executed by the trustee; provided, that if such documents are received after 12:00 noon, New York City time on such business day, they will be deemed to be received the following business day; provided further, that the Class 2-A-1C Certificate Insurer shall not be obligated to make any payment in respect of any Preference Amount representing a payment of principal on the Class 2-A-1C Certificates prior to the time the Class 2-A-1C Certificate Insurer would have been required to make a payment in respect of such principal pursuant to the Class 2-A-1C Policy. Such payment shall be disbursed to the receiver, conservator, debtor-in-possession or trustee in bankruptcy named in the Order, and not to the S-99 trustee or to the holders of the Class 2-A-1C Certificates directly, unless a holder of a Class 2-A-1C Certificate has made a payment of the Preference Amount to the court or such receiver, conservator, debtor-in-possession or trustee in bankruptcy named in the Order, in which case the Class 2-A-1C Certificate Insurer will pay to the trustee on behalf of such holder, subject to the delivery of (a) the items referred to in clauses (i), (ii), (iii) and (iv) above to the Class 2-A-1C Certificate Insurer and (b) evidence satisfactory to the Class 2-A-1C Certificate Insurer that payment has been made to such court or receiver, conservator, debtor-in-possession or trustee in bankruptcy named in the Order. As used in the Class 2-A-1C Policy, the following terms shall have the following meanings: "Business Day": Any day other than a Saturday, a Sunday or a day on which banking or savings and loan institutions in the State of California, the State of New York, the State of Minnesota or the cities in which the Corporate Trust Office of the Trustee is located, are authorized or obligated by law or executive order to be closed. "Deficiency Amount" shall mean (a) for any Distribution Date prior to the Final Distribution Date, the sum of (1) the excess, if any, of the current interest on the Class 2-A-1C Certificates, net of any net interest shortfalls, Basis Risk Shortfalls or deferred interest over the amount of Available Funds available to pay the current interest on the Class 2-A-1C Certificates on such Distribution Date and (2) the amount, if any, of any Realized Losses allocable to the Class 2-A-1C Certificates on such Distribution Date and (b) for the Final Distribution Date, the sum of (x) the amount set forth in clause (a)(1) above and (y) the outstanding Certificate Principal Balance of the Class 2-A-1C Certificates, after giving effect to all payments of principal on the Class 2-A-1C Certificates on such Final Distribution Date, other than pursuant to a claim on the Policy on that Distribution Date. "Distribution Date": The 19th day of any month, or if such 19th day is not a Business Day, the Business Day immediately following such 19th day, commencing in April 2005. "Due for Payment" shall mean with respect to an Insured Amount, the Distribution Date on which Insured Amounts are due and payable pursuant to the terms of the pooling and servicing agreement. "Final Distribution Date" shall mean the Distribution Date occurring in May 2035. "Insured Amounts" shall mean, with respect to any Distribution Date, the Deficiency Amount for such Distribution Date. "Insured Payments" shall mean, with respect to any Distribution Date, the aggregate amount actually paid by the Class 2-A-1C Certificate Insurer to the trustee in respect of (i) Insured Amounts for a Distribution Date and (ii) Preference Amounts for any given Business Day. "Late Payment Rate" shall mean for any Distribution Date, the lesser of (i) the greater of (a) the rate of interest, as it is publicly announced by Citibank, N.A. at its principal office in New York, New York as its prime rate (any change in such prime rate of interest to be effective on the date such change is announced by Citibank, N.A.) plus 2% and (b) the then applicable highest rate of interest on the Class 2-A-1C Certificates and (ii) the maximum rate permissible under S-100 applicable usury or similar laws limiting interest rates. The Late Payment Rate shall be computed on the basis of the actual number of days elapsed over a year of 360 days. "Nonpayment" shall mean, with respect to any Distribution Date, an Insured Amount is Due for Payment but has not been paid pursuant to the pooling and servicing agreement. "Preference Amount" means any amount payable on the Class 2-A-1C Certificates, which would have been covered under the terms of the Class 2-A-1C Policy as an Insured Amount, which has been deemed a preferential transfer and theretofore recovered from its holder pursuant to the United States Bankruptcy Code in accordance with a final, nonappealable order of a court of competent jurisdiction. "Reimbursement Amount" shall mean, as to any Distribution Date, (i) all Insured Payments paid by the Class 2-A-1C Certificate Insurer, but for which the Class 2-A-1C Certificate Insurer has not been reimbursed prior to such Distribution Date, plus (ii) interest accrued on such Insured Payments not previously repaid calculated at the Late Payment Rate, from the date such Insured Payments were made. Capitalized terms used herein as defined terms and not otherwise defined herein shall have the meaning assigned to them in the pooling and servicing agreement, without regard to any amendment or modification thereof, unless such amendment or modification has been approved in writing by the Class 2-A-1C Certificate Insurer. The Class 2-A-1C Policy is not cancelable. The premium on the Class 2-A-1C Policy is not refundable for any reason including payment, or provision being made for payment, prior to maturity of the Class 2-A-1C Certificates. The Class 2-A-1C Policy is issued under and shall be construed under, the laws of the State of New York, without giving effect to the conflict of laws principles thereof. THE INSURANCE PROVIDED BY THE CLASS 2-A-1C POLICY IS NOT COVERED BY THE PROPERTY/CASUALTY INSURANCE SECURITY FUND SPECIFIED IN ARTICLE 76 OF THE NEW YORK INSURANCE LAW. In the absence of payments under the Class 2-A-1C Policy, holders of the Class 2-A-1C Certificates will directly bear the credit risks associated with their certificates. REPORTS TO CERTIFICATEHOLDERS On each distribution date, the trustee will make available to each holder of a certificate, the Class 2-A-1C Certificate Insurer and each rating agency a statement (based on information received from the servicer) generally setting forth, among other things: o the amount of the distributions, separately identified, with respect to each class of certificates; o the amount of the distributions set forth in the first clause above allocable to principal, separately identifying the aggregate amount of any principal prepayments, net principal prepayments or other unscheduled recoveries of principal included in that amount; S-101 o the amount of the distributions set forth in the first clause above allocable to interest and how it was calculated; o the amount of any unpaid interest shortfall amount or Basis Risk Shortfalls (if applicable) with respect to each class of certificates; o for each loan group, the amount of deferred interest and net deferred interest for such loan group; o the certificate principal balance or certificate notional amount, as applicable, of each class of certificates after giving effect to the distribution of principal on that distribution date; o the principal balance of each loan group, the Pool Balance and the each net WAC cap; o the Yield Maintenance Payments, if any, under the yield maintenance agreements; o the Senior Percentage for the senior certificates and principal-only components related to each loan group, and Subordinate Percentage for the following distribution date; o the Senior Prepayment Percentage for the senior certificates and principal-only components related to each loan group, and Subordinate Prepayment Percentage for the following distribution date; o the amount of the servicing fee paid to or retained by the servicer; o the amount of advances for the related Due Period; o the number and aggregate principal balance of mortgage loans, in the aggregate and for each loan group, that were (A) delinquent (1) 30 to 59 days, (2) 60 to 89 days and (3) 90 or more days, (B) in foreclosure and (C) in bankruptcy as of the close of business on the last day of the calendar month preceding that distribution date; o the rolling six-month delinquency rate for that distribution date; o the total number and principal balance of any REO properties in each loan group as of the close of business on the last day of the preceding Due Period; o the aggregate amount of Realized Losses for each loan group incurred during the preceding calendar month; o the cumulative amount of Realized Losses for each loan group; o the Realized Losses, if any, allocated to each class of certificates or, with respect to the Class PO Certificates, the principal-only components, on that distribution date; and S-102 o the pass-through rate for each class of certificates for that distribution date. The trustee will make that statement available each month, to any interested party, via the trustee's website. The trustee's internet website will initially be located at "https://trustinvestorreporting.usbank.com." Assistance in using the website can be obtained by calling the trustee's customer service desk at 1-800-934-6802. Parties that are unable to use the above distribution options are entitled to have a paper copy mailed to them via first class mail by calling the customer service desk and indicating such. The trustee's will have the right to change the way such reports are distributed in order to make such distribution more convenient and/or more accessible to the above parties, and the trustee's will provide timely and adequate notification to all above parties regarding any such changes. In addition, upon written request within a reasonable period of time after the end of each calendar year, the trustee's, pursuant to the pooling and servicing agreement, will prepare and deliver to each holder of a certificate of record during the previous calendar year a statement containing aggregate payment information necessary to enable holders of the certificates to prepare their tax returns. These statements will not have been examined and reported upon by an independent public accountant. YIELD, PREPAYMENT AND MATURITY CONSIDERATIONS GENERAL The effective yields to the holders of the Class X, Class PO and Class A-R Certificates will be lower than the yields otherwise produced by the applicable rate at which interest is passed through to those holders and the purchase price of the certificates because monthly distributions will not be payable to those holders until generally the 19th day of the month following the month in which interest accrues on the mortgage loans, without any additional distribution of interest or earnings on the distributions in respect of the delay. Delinquencies on the mortgage loans which are not advanced by the servicer, or the trustee as successor servicer, as the case may be, because amounts, if advanced, would be nonrecoverable, will adversely affect the yield on the senior certificates and the subordinate certificates. Because of the priority of distributions, shortfalls resulting from delinquencies not so advanced will be borne first by the subordinate certificates in the reverse order of their numerical class designations, and then by the related senior certificates. If, as a result of these shortfalls, the aggregate of the certificate and component principal balances of all classes of certificates following all distributions and the allocation of Realized Losses on a distribution date exceeds the Pool Balance as of the first day of the month of that distribution date, the certificate principal balance of the class of subordinate certificates then outstanding with the highest numerical class designation will be reduced by the amount of the excess. Net interest shortfalls will adversely affect the yields on the related senior certificates and the subordinate certificates. All Realized Losses initially will be borne by the subordinate certificates, in the reverse order of their numerical class designations. As a result, the yields on the offered certificates will depend on the rate and timing of Realized Losses on the mortgage loans. S-103 PREPAYMENT CONSIDERATIONS AND RISKS The rate of principal payments on the offered certificates, the aggregate amount of distributions on the offered certificates and the yields to maturity of the offered certificates will be related to the rate and timing of payments of principal on the mortgage loans generally in the related loan group, in the case of the senior certificates or, with respect to the Class PO Certificates, the principal-only components, and in each loan group, in the case of the subordinate certificates. The rate of principal payments on the mortgage loans will in turn be affected by the amortization schedules of the mortgage loans, including for this purpose prepayments resulting from refinancing, liquidations of the mortgage loans due to defaults, casualties, condemnations and repurchases due to breaches of certain representations and warranties and purchases by the originator or seller, as applicable. The mortgage loans may be prepaid by the mortgagors at any time; however, approximately 66.84% of all of the mortgage loans, and approximately 70.08% and 65.12% of the group 1 and group 2 mortgage loans, respectively, require the payment of a prepayment penalty in connection with any voluntary prepayment occurring during periods that range from three months to three years after origination. All prepayment penalty payments received on the mortgage loans will be retained by the servicer. The mortgage loans are subject to the "due-on-sale" provisions included therein. See "The Mortgage Loan Groups" in this prospectus supplement. The negative amortization of the mortgage loans may affect the yield on the related classes of certificates. As a result of the negative amortization of the mortgage loans, the outstanding principal balance of a mortgage loan in any loan group will increase by the amount of interest that is deferred as described in this prospectus supplement under "The Mortgage Loan Groups--General." During periods in which the outstanding principal balance of a mortgage loan is increasing due to the addition of deferred interest thereto, such increasing principal balance of that mortgage loan may approach or exceed the value of the related mortgage property, thus increasing the likelihood of defaults as well as the amount of any loss experienced with respect to any such mortgage loan that is required to be liquidated. Furthermore, each mortgage loan provides for the payment of any remaining unamortized principal balance of such mortgage loan (due to the addition of deferred interest, if any, to the principal balance of such mortgage loan) in a single payment at the maturity of the mortgage loan. Because the mortgagors may be required to make a larger single payment upon maturity, it is possible that the default risk associated with the mortgage loans is greater than that associated with fully amortizing mortgage loans. In addition, since the loan rates on the mortgage loans adjust, after their initial fixed rate periods, at a different time than the monthly payments thereon and the Payment Caps may limit the amount by which the monthly payments may adjust, the amount of a monthly payment may be more or less than the amount necessary to fully amortize the principal balance of the mortgage loans over its then remaining term at the applicable loan rate. Accordingly, the mortgage loans may be subject to reduced amortization (if the monthly payment due on a due date is sufficient to pay interest accrued during the related accrual period at the applicable loan rate but is not sufficient to reduce principal in accordance with a fully amortizing schedule); or accelerated amortization (if the monthly payment due on a due date is greater than the amount necessary to pay interest accrued during the related accrual period at the applicable loan rate and to reduce principal in accordance with a fully amortizing schedule). In the event the loan rate on a mortgage loan is increased, deferred interest is added to the principal balance of such mortgage loan and, if such deferred interest is not offset by subsequent accelerated amortization, it may S-104 result in a final lump sum payment at maturity greater than, and potentially substantially greater than, the monthly payment due on the immediately preceding due date. Net Principal Prepayments, liquidations and purchases of the mortgage loans, including any purchase of a defaulted mortgage loan and any optional repurchase of the remaining mortgage loans in connection with the termination of the trust, in each case as described in this prospectus supplement, will result in distributions on the offered certificates of principal amounts which would otherwise be distributed over the remaining terms of the mortgage loans. Since the rate of payment of principal on the mortgage loans will depend on future events and a variety of other factors, no assurance can be given as to that rate or the rate of principal prepayments. The extent to which the yield to maturity of a class of offered certificates may vary from the anticipated yield will depend upon the degree to which that offered certificate is purchased at a discount or premium, and the degree to which the timing of payments thereon is sensitive to prepayments, liquidations and purchases of the related mortgage loans. Further, an investor should consider the risk that, in the case of any offered certificates purchased at a discount, a slower than anticipated rate of principal payments, including prepayments, on the related mortgage loans could result in an actual yield to that investor that is lower than the anticipated yield and, in the case of the Class X Certificates and any offered certificates purchased at a premium, a faster than anticipated rate of principal payments on the related mortgage loans could result in an actual yield to that investor that is lower than the anticipated yield. The application of principal prepayments to payments of deferred interest will have the effect of slowing the rate at which principal prepayments are distributed to the related certificates and will further reduce the yield in the case of certificates purchased at a discount and will correspondingly reduce the reduction in yield in the case of certificates purchased at a premium. The rate of principal payments, including prepayments, on pools of mortgage loans may vary significantly over time and may be influenced by a variety of economic, geographic, social and other factors. These factors include changes in mortgagors' housing needs, job transfers, unemployment, mortgagors' net equity in the mortgaged properties and servicing decisions, as well as the characteristics of the mortgage loans as described under "The Mortgage Loan Groups" in this prospectus supplement. If prevailing interest rates were to fall significantly below the loan rates on the mortgage loans, the mortgage loans could be subject to higher prepayment rates than if prevailing interest rates were to remain at or above the loan rates on the mortgage loans because the mortgagors may seek to "lock in" a lower interest rate. Conversely, if prevailing interest rates were to rise significantly, the rate of prepayments on the mortgage loans would generally be expected to decrease. The existence of maximum rate limitations on the mortgage loans also may affect the likelihood of prepayments in either a rising or falling interest rate environment. No assurances can be given as to the rate of prepayments on the mortgage loans in stable or changing interest rate environments. Approximately 66.84% of all of the mortgage loans, and approximately 70.08% and 65.12% of the group 1 and group 2 mortgage loans, respectively, provide for payment by the borrower of a prepayment premium during the first three months to three years after the date of origination. These prepayment penalty payments may have the effect of reducing the amount or the likelihood of prepayments on the mortgage loans with prepayment penalty premiums during the applicable penalty period. The amount of any prepayment penalty payments received on the mortgage loans will be retained by the servicer and will not be available to make distributions on the certificates. S-105 The rate of prepayment may affect the pass-through rates on the offered certificates. Prepayments of mortgage loans of a loan group with net loan rates in excess of the then-current net WAC of the mortgage loans may reduce the pass-through rate on the related certificates. Mortgage loans with higher loan rates may prepay at faster rates than mortgage loans with relatively lower loan rates in response to a given change in market interest rates. Any such disproportionate rate of prepayments may adversely affect the pass-through rate on the related certificates. In addition, differences in the rates of prepayments or of Realized Losses as among the loan groups may adversely affect the pass-through rate on the subordinate certificates by reducing the weighting factor used to determine that pass-through rate. Due to the different types of mortgage loans comprising each loan group, such different experience is likely to occur. As described under "Description of the Certificates--Principal" in this prospectus supplement, the applicable Senior Prepayment Percentage of all Net Principal Prepayments on the related mortgage loans will be distributed to the related class or classes of senior certificates or principal-only components, in the case of the Class PO Certificates, then entitled to receive principal distributions. This may result in all or a disproportionate percentage of Net Principal Prepayments being distributed to holders of senior certificates (or principal-only components, in the case of the Class PO Certificates) and none or less than their pro rata share of Net Principal Prepayments being distributed to holders of the subordinate certificates during the periods of time described in the definition of the "Senior Prepayment Percentage" in this prospectus supplement. In addition, since the step down in each Senior Prepayment Percentage is dependent on the performance of the entire mortgage pool rather than a particular loan group, the poor performance of one loan group may prevent the subordinate certificates from receiving distributions of Net Principal Prepayments from any of the other loan groups. The timing of changes in the rate of prepayments on the mortgage loans may significantly affect an investor's actual yield to maturity, even if the average rate of principal payments is consistent with an investor's expectation. In general, the earlier a prepayment of principal on the mortgage loans occurs (that is distributed as principal on the related class or classes of certificates), the greater the effect on an investor's yield to maturity. The effect on an investor's yield as a result of principal payments (that are distributed as principal on the related class or classes of certificates) occurring at a rate higher or lower than the rate anticipated by the investor during the period immediately following the issuance of the offered certificates may not be offset by a subsequent like decrease or increase in the rate of principal payments. In addition, generally, the amount of prepayments will be distributed to the classes of certificates in the order of priority described herein. Such order will have the likely effect of reducing the certificate principal balance of classes with lower certificate rates relative to other classes. This will have the effect of raising the weighted average certificate rate and lowering the rate at which interest accrues on the Class X Certificates. THE SUBORDINATE CERTIFICATES The weighted average lives of, and the yields to maturity on, the subordinate certificates, in increasing order of their numerical class designations, will be progressively more sensitive to the rate and timing of borrower defaults and the severity of ensuing losses on the mortgage loans. If the actual rate and severity of losses on the mortgage loans are higher than those assumed by a holder of a subordinate certificate, the actual yield to maturity of that certificate may be lower than the yield expected by the holder based on that assumption. The timing of losses on the mortgage loans will also affect an investor's actual yield to maturity, even if the rate of defaults and severity of losses over the life of the mortgage pool are consistent with an investor's S-106 expectations. In general, the earlier a loss occurs, the greater the effect on an investor's yield to maturity. Realized Losses on the mortgage loans will reduce the certificate principal balances of the applicable class of subordinate certificates to the extent of any losses allocated to them (as described under "Description of the Certificates--Allocation of Losses"), without the receipt of cash attributable to that reduction. In addition, shortfalls in cash available for distributions on the subordinate certificates will result in a reduction in the certificate principal balance of the class of subordinate certificates then outstanding with the highest numerical class designation if and to the extent that the aggregate of the certificate principal balances of all classes of certificates, following all distributions and the allocation of Realized Losses on a distribution date, exceeds the Pool Balance as of the first day of the month of that distribution date. As a result of these reductions, less interest will accrue on that class of subordinate certificates than otherwise would be the case. The yields to maturity of the subordinate certificates will also be affected by payments made to senior certificates (as described under "Description of the Certificates--Principal--Limited Cross-Collateralization") and the disproportionate allocation of Net Principal Prepayments to the senior certificates, net interest shortfalls and other cash shortfalls in Available Funds. If on any distribution date the Applicable Credit Support Percentage for any class of subordinate certificates (other than the Class B-1 Certificates) is less than its Original Applicable Credit Support Percentage, all Net Principal Prepayments available for distribution on the subordinate certificates will be allocated solely to all other classes of subordinate certificates with lower numerical class designations, thereby accelerating the amortization of those classes relative to the classes of subordinate certificates not receiving distributions of Net Principal Prepayments on that distribution date, and reducing the weighted average lives of the classes of subordinate certificates receiving distributions. Accelerating the amortization of the classes of subordinate certificates with lower numerical designations relative to the other classes of subordinate certificates is intended to preserve the availability of the subordination provided by those other classes. WEIGHTED AVERAGE LIVES The projected weighted average life of each class of offered certificates is the average amount of time that will elapse from the closing date, until each dollar of principal is scheduled to be repaid to the investors in that class. Because it is expected that there will be prepayments and defaults on the mortgage loans, the actual weighted average lives of the classes of offered certificates are expected to vary substantially from the weighted average remaining terms to stated maturity of the mortgage loans as set forth under "The Mortgage Loan Groups" in this prospectus supplement. In general, the weighted average lives of the offered certificates will be shortened if the level of prepayments of principal of the mortgage loans increases which is not offset by amounts of deferred interest, including any optional repurchase of remaining mortgage loans in connection with the termination of the trust. However, the weighted average lives of the offered certificates will depend upon a variety of other factors, including the timing of changes in the rate of principal payments, the timing and amount of deferred interest experienced by the mortgage loans in the related group and the priority sequence of distributions of principal of the classes of certificates. The interaction of the foregoing factors may have different effects on various classes of offered certificates and the effects on any class may vary at different times during the life of that S-107 class. Accordingly, no assurance can be given as to the weighted average life of any class of offered certificates. Further, to the extent that the prices of the offered certificates represent discounts or premiums to their respective original certificate principal balances or certificate notional amounts, variability in the weighted average lives of the classes of offered certificates will result in variability in the related yields to maturity. The assumed final maturity date for each class of offered certificates is as set forth under "Description of the Certificates--General" in this prospectus supplement. The assumed final maturity date for each class of offered certificates is the distribution date in the first month following the month of the latest maturity date of any mortgage loan. The weighted average life of each class of offered certificates is likely to be shorter than would be the case if payments actually made on the mortgage loans conformed to the foregoing assumptions, and the final distribution date with respect to the offered certificates could occur significantly earlier than the related assumed final maturity date because prepayments are likely to occur and because there may be a termination of the trust as provided in this prospectus supplement. STRUCTURING ASSUMPTIONS Prepayments of mortgage loans are commonly measured relative to a prepayment standard or model. The model used with respect to the mortgage loans assumes a constant prepayment rate or "CPR." This is not a historical description of prepayment experience or a prediction of the anticipated rate of prepayment of any pool of mortgage loans, including the mortgage loans. The tables on pages S-113 through S-115 were prepared on the basis of the assumptions in the following paragraph and the tables set forth below. There are certain differences between the loan characteristics included in those assumptions and the characteristics of the actual mortgage loans. Any such discrepancy may have an effect upon the percentages of original certificate principal balances outstanding and weighted average lives of the offered certificates set forth in the tables on pages S-113 through S-115. In addition, since the actual mortgage loans in the trust will have characteristics that differ from those assumed in preparing the tables set forth below, the distributions of principal of the classes of offered certificates may be made earlier or later than indicated in the tables. The percentages and weighted average lives in the tables on pages S-113 through S-115 were determined based on the assumptions listed below. o Each loan group consists of mortgage loans which have the characteristics set forth in the table below. o Distributions on the certificates are received, in cash, on the 19th day of each month, commencing in April 2005. o The mortgage loans prepay at the related constant percentages of CPR as set forth in the table of prepayment scenarios below. o No defaults or delinquencies occur in the payment by borrowers of principal and interest on the mortgage loans and no net interest shortfalls are incurred. S-108 o No mortgage loan is purchased by the seller from the trust pursuant to any obligation or option under the pooling and servicing agreement (other than an optional termination as described below). o Scheduled monthly payments on the mortgage loans are received on the first day of each month commencing in March 2005 and are computed prior to giving effect to any prepayments, which are computed after giving effect to scheduled payments received on the following day, received in the prior month. o Prepayments representing payment in full of individual mortgage loans are received on the last day of each month commencing in February 2005 and include 30 days' interest. o The scheduled monthly payment for each mortgage loan is calculated based on its principal balance, loan rate and remaining term to maturity such that the mortgage loan will amortize in amounts sufficient to repay the remaining principal balance of the mortgage loan by its remaining term to maturity and on the fifth payment adjustment date of a mortgage loan, and every fifth payment adjustment date thereafter, the monthly payment due on that mortgage loan will be recast without regard to the related payment cap in order to provide for the outstanding balance of the mortgage loan to be paid in full in equal monthly installments at its maturity, if necessary. o Interest accrues on each certificate at the related pass-through rate described under "Description of the Certificates--Interest--Pass-Through Rates" in this prospectus supplement. o The initial certificate principal balance of each class of certificates is as set forth on the cover or as described in this prospectus supplement. o MTA is 2.345% and One-Month LIBOR is 2.890%. o No optional termination of the trust will occur, except that this assumption does not apply to the calculation of weighted average lives to the optional termination. o The rate at which the Class 2-A-1C Certificate Insurer fee is calculated is the per annum rate set forth in the premium fee letter. o The certificates are purchased on April 12, 2005. o There were sufficient funds on deposit in the Basis Risk Reserve Fund to cover Basis Risk Shortfalls in the absence of the Yield Maintenance Agreements. S-109 ASSUMED MORTGAGE LOAN CHARACTERISTICS GROUP 1 MORTGAGE LOANS
MONTHS MONTHS TO TRUST RATE TO NEXT PAYMENT NEXT CURRENT GROSS EXPENSE ADJUSTMENT RATE ADJUSTMENT PAYMENT ASSUMED MORTGAGE MORTGAGE FEE FREQUENCY ADJUSTMENT FREQUENCY ADJUSTMENT LOAN NUMBER CURRENT BALANCE ($) RATE (%) RATE (%) INDEX (MONTHS) DATE (MONTHS) DATE ----------------- ------------------- ------------- ---------- ----- ---------- ---------- ---------- ---------- 1 42,015,981.00 1.22961 0.40126 MTA 1 2 12 14 2 10,062,821.54 4.94026 0.38500 MTA 1 1 12 12 3 3,009,004.52 4.72575 0.38500 MTA 1 1 12 11 4 803,389.65 5.02207 0.38500 MTA 1 1 12 9 5 47,509,816.00 1.39118 0.40151 MTA 1 2 12 13 6 15,155,951.40 4.02174 0.39234 MTA 1 1 12 12 7 161,244.82 5.12500 0.38500 MTA 1 1 12 12 8 2,919,002.08 4.49369 0.38500 MTA 1 1 12 11 9 534,739.07 4.53173 0.38500 MTA 1 1 12 9 10 21,529,290.00 1.24634 0.40354 MTA 1 1 12 13 11 7,561,751.53 4.63036 0.38500 MTA 1 1 12 12 12 77,460,273.00 1.25874 0.40032 MTA 1 1 12 13 13 29,725,546.78 4.52896 0.38500 MTA 1 1 12 12 14 58,861,717.00 1.26314 0.39045 MTA 1 2 12 14 15 318,483.17 5.00000 0.38500 MTA 1 1 12 12 16 43,643,433.80 1.11285 0.39828 MTA 1 2 12 14 17 6,114,531.20 4.90218 0.38500 MTA 1 1 12 12 18 35,724,624.00 1.17060 0.38500 MTA 1 2 12 14 19 40,528,868.00 1.37311 0.39501 MTA 1 2 12 14 20 2,212,205.92 4.73998 0.38500 MTA 1 1 12 12 21 402,591.17 5.05448 0.38500 MTA 1 1 12 11 22 331,490.84 4.62500 0.38500 MTA 1 1 12 10 23 33,068,579.00 1.20308 0.39413 MTA 1 1 12 13 24 645,607.79 4.62426 0.38500 MTA 1 1 12 12 25 18,591,099.00 1.19827 0.41466 MTA 1 1 12 13 26 8,818,044.32 4.59871 0.38968 MTA 1 1 12 12 27 29,136,981.00 1.31860 0.39692 MTA 1 2 12 14 28 499,402.35 3.64275 0.83926 MTA 1 1 12 12 29 224,382.22 4.62500 0.38500 MTA 1 1 12 11 30 44,774,696.00 1.15716 0.39827 MTA 1 2 12 14 31 299,285.08 4.62500 0.38500 MTA 1 1 12 12 32 177,157.11 4.87500 0.38500 MTA 1 1 12 11 33 83,458,108.20 1.15514 0.40137 MTA 1 2 12 14 34 2,488,152.17 4.79692 0.38500 MTA 1 1 12 12 35 242,915.91 1.75000 0.38500 MTA 1 1 12 11 36 2,115,670.93 3.67451 0.38500 MTA 1 1 12 12 37 689,916.49 5.33068 0.62242 MTA 1 1 12 12 38 402,013.20 4.62500 0.38500 MTA 1 1 12 11
CURRENT PRINCIPAL ORIGINAL REMAINING NEGATIVE INTEREST GROSS TERM TO TERM TO AMORTIZATION AND ASSUMED MORTGAGE MARGIN MAXIMUM MINIMUM MATURITY MATURITY PAYMENT LIMIT PAYMENT LOAN NUMBER (%) RATE (%) RATE (%) (MONTHS) (MONTHS) CAP (%) (%) ($)* ---------------- ------- ---------- --------- -------- --------- -------- ------------ ----------- 1 3.06074 9.96263 3.06074 360 360 7.5 115.00000 139,623.28 2 3.05709 9.95000 3.05709 360 359 7.5 115.00000 33,147.37 3 3.13675 9.95000 3.13675 360 358 7.5 115.00000 10,617.97 4 2.98824 9.95000 2.98824 360 356 7.5 115.00000 2,601.49 5 3.03168 9.95608 3.03168 360 360 7.5 114.89150 161,708.98 6 2.77181 9.96738 2.77181 360 359 7.5 114.76831 51,196.27 7 3.05000 9.95000 3.05000 360 359 7.5 115.00000 519.87 8 2.71464 10.01120 2.71464 360 358 7.5 114.27336 9,679.09 9 2.51942 9.95000 2.51942 360 356 7.5 115.00000 1,723.99 10 2.93720 9.95000 2.93720 360 360 7.5 115.00000 71,794.07 11 2.81789 9.95000 2.81789 360 359 7.5 115.00000 25,302.67 12 2.97950 9.95223 2.97950 360 360 7.5 115.00000 258,714.46 13 2.78450 9.95818 2.78450 360 359 7.5 115.00000 98,241.03 14 2.92800 9.96420 2.92800 360 360 7.5 114.92431 196,710.78 15 3.02500 9.95000 3.02500 360 359 7.5 115.00000 1,082.58 16 2.99730 9.95000 2.99730 360 360 7.5 115.00000 142,725.93 17 2.85743 9.96420 2.85743 360 359 7.5 115.00000 19,931.92 18 2.82007 9.95000 2.82007 360 360 7.5 115.00000 117,802.15 19 3.07556 9.95000 3.07556 360 360 7.5 114.83140 137,584.94 20 2.73022 9.95000 2.73022 360 359 7.5 114.71139 7,290.11 21 3.03590 9.95000 3.03590 360 358 7.5 115.00000 1,422.89 22 2.65000 9.95000 2.65000 360 357 7.5 115.00000 1,067.84 23 2.85501 9.95000 2.85501 360 360 7.5 115.00000 109,550.32 24 2.64926 9.95000 2.64926 360 359 7.5 115.00000 2,081.50 25 2.97255 9.95000 2.97255 360 360 7.5 115.00000 61,581.45 26 2.85368 9.95000 2.85381 360 359 7.5 115.00000 28,986.42 27 2.96698 9.96598 2.96698 360 360 7.5 114.91322 98,149.60 28 3.01456 9.95000 3.01456 360 359 7.5 115.00000 1,879.17 29 2.65000 9.95000 2.65000 360 358 7.5 115.00000 723.05 30 2.80547 9.95000 2.80547 360 360 7.5 115.00000 147,368.79 31 2.65000 9.95000 2.65000 360 359 7.5 115.00000 964.92 32 2.90000 9.95000 2.90000 360 358 7.5 115.00000 570.75 33 3.01129 9.95000 3.01129 360 360 7.5 115.00000 274,661.27 34 2.77622 9.95000 2.77622 360 359 7.5 115.00000 8,143.51 35 3.00000 9.95000 3.00000 360 358 7.5 115.00000 871.67 36 2.71487 9.95000 2.71487 360 359 7.5 115.00000 7,263.41 37 3.26156 9.95000 3.26156 360 359 7.5 115.00000 2,397.39 38 2.65000 9.95000 2.65000 360 358 7.5 115.00000 1,295.57
* THE MINIMUM PRINCIPAL AND INTEREST PAYMENT WILL RESET ON EACH PAYMENT ADJUSTMENT DATE. S-110 GROUP 2 MORTGAGE LOANS
MONTHS MONTHS TO TRUST RATE TO NEXT PAYMENT NEXT CURRENT GROSS EXPENSE ADJUSTMENT RATE ADJUSTMENT PAYMENT ASSUMED MORTGAGE MORTGAGE FEE FREQUENCY ADJUSTMENT FREQUENCY ADJUSTMENT LOAN NUMBER CURRENT BALANCE ($) RATE (%) RATE (%) INDEX (MONTHS) DATE (MONTHS) DATE ----------------- ------------------- ------------- ---------- ----- ---------- ---------- ---------- ---------- 1 69,025,675.00 1.09873 0.38638 MTA 1 2 12 14 2 16,712,948.87 4.82107 0.38500 MTA 1 1 12 12 3 3,078,800.73 5.05816 0.38500 MTA 1 1 12 11 4 127,472,562.00 1.22214 0.38593 MTA 1 1 12 13 5 29,757,840.31 4.13870 0.38500 MTA 1 1 12 12 6 6,988,550.23 4.57930 0.38500 MTA 1 1 12 11 7 483,304.93 4.62500 0.38500 MTA 1 1 12 10 8 30,226,500.00 1.05392 0.38500 MTA 1 1 12 13 9 15,206,674.74 4.64392 0.38500 MTA 1 1 12 12 10 137,277,603.00 1.06670 0.38500 MTA 1 1 12 13 11 54,212,076.85 4.53313 0.38500 MTA 1 1 12 12 12 137,314,329.95 1.24088 0.38663 MTA 1 2 12 14 13 414,011.02 4.50000 0.38500 MTA 1 1 12 12 14 111,619,235.00 1.19258 0.39081 MTA 1 2 12 14 15 11,658,577.73 4.74616 0.38500 MTA 1 1 12 12 16 399,381.34 5.12500 0.38500 MTA 1 1 12 11 17 63,709,094.00 1.08362 0.38862 MTA 1 2 12 14 18 1,944,286.37 4.52210 0.38500 MTA 1 1 12 12 19 80,670,182.00 1.29530 0.38500 MTA 1 2 12 14 20 1,622,623.95 4.56836 0.38500 MTA 1 1 12 12 21 64,791,425.00 1.10797 0.38500 MTA 1 1 12 13 22 1,423,599.37 4.56771 0.38500 MTA 1 1 12 12 23 24,712,701.00 1.22769 0.38500 MTA 1 1 12 13 24 10,870,649.07 4.82514 0.38500 MTA 1 1 12 12 25 53,873,070.00 1.24193 0.38500 MTA 1 2 12 14 26 1,188,209.03 4.75956 0.38500 MTA 1 1 12 12 27 103,632,459.00 1.10341 0.38804 MTA 1 2 12 14 28 377,498.25 4.75000 0.38500 MTA 1 1 12 12 29 102,386,629.00 1.11522 0.38810 MTA 1 2 12 14 30 3,540,838.23 4.81611 0.38500 MTA 1 1 12 12 31 1,745,829.64 4.56071 0.38500 MTA 1 1 12 12 32 1,995,940.94 4.37500 0.38500 MTA 1 1 12 12 33 2,308,060.51 4.62500 0.38500 MTA 1 1 12 11
CURRENT PRINCIPAL ORIGINAL REMAINING NEGATIVE INTEREST GROSS TERM TO TERM TO AMORTIZATION AND ASSUMED MORTGAGE MARGIN MAXIMUM MINIMUM MATURITY MATURITY PAYMENT LIMIT PAYMENT LOAN NUMBER (%) RATE (%) RATE (%) (MONTHS) (MONTHS) CAP (%) (%) ($)* ---------------- ------- ---------- --------- -------- --------- -------- ------------ ----------- 1 2.93756 9.95000 2.93756 360 360 7.5 115.00000 225,252.43 2 2.93863 9.95000 2.93863 360 359 7.5 115.00000 54,284.72 3 3.00342 9.95000 3.00342 360 358 7.5 115.00000 9,922.60 4 2.82048 9.95212 2.82048 360 360 7.5 114.73763 423,515.40 5 2.68523 9.95000 2.68523 360 359 7.5 115.00000 98,554.20 6 2.58954 9.95000 2.58954 360 358 7.5 115.00000 22,525.23 7 2.65000 9.95000 2.65000 360 357 7.5 115.00000 1,556.74 8 2.67083 9.95000 2.67083 360 360 7.5 115.00000 97,988.73 9 2.66892 9.95000 2.66892 360 359 7.5 115.00000 49,032.20 10 2.70339 9.95000 2.70339 360 360 7.5 115.00000 445,873.70 11 2.64651 9.95000 2.64651 360 359 7.5 115.00000 176,432.87 12 2.83925 9.95035 2.83925 360 360 7.5 114.81954 457,438.41 13 2.50000 9.95000 2.50000 360 359 7.5 115.00000 1,334.81 14 2.98862 9.95000 2.99074 360 360 7.5 115.00000 369,357.22 15 2.72405 9.96177 2.72405 360 359 7.5 115.00000 37,622.16 16 3.05000 9.95000 3.05000 360 358 7.5 115.00000 1,286.56 17 2.71835 9.95000 2.71835 360 360 7.5 115.00000 207,458.61 18 2.54710 9.95000 2.54710 360 359 7.5 115.00000 6,275.19 19 2.86109 9.95000 2.86109 360 360 7.5 114.87257 270,921.64 20 2.57070 9.95000 2.57070 360 359 7.5 115.00000 5,231.46 21 2.67997 9.95000 2.67997 360 360 7.5 115.00000 211,731.69 22 2.59271 9.95000 2.59271 360 359 7.5 115.00000 4,589.80 23 2.99160 9.95000 2.99160 360 360 7.5 115.00000 82,209.62 24 2.79049 9.95000 2.79049 360 359 7.5 115.00000 35,203.14 25 2.91966 9.95000 2.91966 360 360 7.5 114.68310 179,467.29 26 2.73073 9.95000 2.73073 360 359 7.5 115.00000 3,840.38 27 2.67589 9.95000 2.67589 360 360 7.5 115.00000 338,450.38 28 2.77500 9.95000 2.77500 360 359 7.5 115.00000 1,217.08 29 2.91284 9.95000 2.91284 360 360 7.5 115.00000 334,961.37 30 2.78298 9.95000 2.78298 360 359 7.5 115.00000 11,418.04 31 2.58571 9.95000 2.58571 360 359 7.5 115.00000 5,628.69 32 2.40000 9.95000 2.40000 360 359 7.5 115.00000 7,392.39 33 2.60724 9.95000 2.60724 360 358 7.5 115.00000 7,439.53
* THE MINIMUM PRINCIPAL AND INTEREST PAYMENT WILL RESET ON EACH PAYMENT ADJUSTMENT DATE. S-111 There will be discrepancies between the characteristics of the actual mortgage loans and the characteristics assumed in preparing the tables. Any such discrepancy may have an effect upon the percentages of the original certificate principal balance outstanding (rounded to the nearest whole percentage) and the weighted average lives of the certificates set forth in the table. In addition, to the extent that the actual mortgage loans have characteristics that differ from those assumed in preparing the tables set forth below, the certificates may mature earlier or later than indicated by the table. Based on the foregoing assumptions, the following tables indicate the projected weighted average lives of each class of offered certificates and set forth the percentages of the initial certificate principal balance of each class that would be outstanding after each of the distribution dates shown, at various constant prepayment percentages. Neither the prepayment model used in this prospectus supplement nor any other prepayment model or assumption purports to be an historical description of prepayment experience or a prediction of the anticipated rate of prepayment of any pool of mortgage loans, including the mortgage loans included in the trust. Variations in the prepayment experience and the balance of the mortgage loans that prepay may increase or decrease the percentages of initial certificate principal balances and the weighted average lives shown in the following tables. Those variations may occur even if the average prepayment experience of all the mortgage loans equals any of the specified percentages of CPR. For purposes of calculating the tables on pages S-113 through S-115 and the tables under "--Yield Considerations with Respect to the Class X Certificates," the following prepayment scenarios have been used: The weighted average life of any class of certificates is determined by: o multiplying the assumed net reduction, if any, in the principal amount of that class of certificates on each distribution date by the number of years from the date of issuance of the certificates to the related distribution date, o summing the results, and o dividing the sum by the aggregate amount of the assumed net reductions in the principal amount of that class. S-112 PERCENT OF ORIGINAL CERTIFICATE PRINCIPAL BALANCE OUTSTANDING*
CLASS 1-A --------------------------------------------------------- PREPAYMENT SCENARIO --------------------------------------------------------- DISTRIBUTION DATE 10% 15% 20% 30% 40% ----------------- ---- ---- ---- ---- ---- Initial Percentage............... 100% 100% 100% 100% 100% March 19, 2006................... 90 84 79 68 57 March 19, 2007................... 81 71 62 45 32 March 19, 2008................... 73 60 48 31 18 March 19, 2009................... 65 50 38 22 11 March 19, 2010................... 58 42 31 15 7 March 19, 2011................... 50 35 24 10 4 March 19, 2012................... 43 29 19 7 2 March 19, 2013................... 38 24 15 5 1 March 19, 2014................... 33 20 12 3 1 March 19, 2015................... 29 16 9 2 0 March 19, 2016................... 25 14 7 2 0 March 19, 2017................... 22 11 5 1 0 March 19, 2018................... 19 9 4 1 0 March 19, 2019................... 17 8 3 0 0 March 19, 2020................... 14 6 2 0 0 March 19, 2021................... 12 5 2 0 0 March 19, 2022................... 11 4 1 0 0 March 19, 2023................... 9 3 1 0 0 March 19, 2024................... 8 3 1 0 0 March 19, 2025................... 6 2 1 0 0 March 19, 2026................... 5 2 0 0 0 March 19, 2027................... 4 1 0 0 0 March 19, 2028................... 4 1 0 0 0 March 19, 2029................... 3 1 0 0 0 March 19, 2030................... 2 1 0 0 0 March 19, 2031................... 2 0 0 0 0 March 19, 2032................... 1 0 0 0 0 March 19, 2033................... 1 0 0 0 0 March 19, 2034................... 0 0 0 0 0 March 19, 2035................... 0 0 0 0 0 Weighted Average Life Years to Maturity............. 7.72 5.47 4.12 2.58 1.77 Years to Optional Termination............ 7.31 5.07 3.78 2.35 1.62
*Rounded to the nearest whole percentage. S-113 PERCENT OF ORIGINAL CERTIFICATE PRINCIPAL BALANCE OUTSTANDING*
CLASS 2-A-1A, CLASS 2-A-1B, CLASS 2-A-1C AND CLASS 2-A-2 --------------------------------------------------------- PREPAYMENT SCENARIO --------------------------------------------------------- DISTRIBUTION DATE 10% 15% 20% 30% 40% ----------------- ---- ---- ---- ---- ---- Initial Percentage............... 100% 100% 100% 100% 100% March 19, 2006................... 90 84 79 68 57 March 19, 2007................... 81 71 62 45 32 March 19, 2008................... 72 60 48 31 18 March 19, 2009................... 65 50 38 22 11 March 19, 2010................... 57 41 31 15 7 March 19, 2011................... 50 35 24 10 4 March 19, 2012................... 43 29 19 7 2 March 19, 2013................... 38 24 15 5 1 March 19, 2014................... 33 20 11 3 1 March 19, 2015................... 29 16 9 2 0 March 19, 2016................... 25 13 7 2 0 March 19, 2017................... 22 11 5 1 0 March 19, 2018................... 19 9 4 1 0 March 19, 2019................... 17 7 3 0 0 March 19, 2020................... 14 6 2 0 0 March 19, 2021................... 12 5 2 0 0 March 19, 2022................... 11 4 1 0 0 March 19, 2023................... 9 3 1 0 0 March 19, 2024................... 8 3 1 0 0 March 19, 2025................... 6 2 1 0 0 March 19, 2026................... 5 2 0 0 0 March 19, 2027................... 4 1 0 0 0 March 19, 2028................... 3 1 0 0 0 March 19, 2029................... 3 1 0 0 0 March 19, 2030................... 2 1 0 0 0 March 19, 2031................... 2 0 0 0 0 March 19, 2032................... 1 0 0 0 0 March 19, 2033................... 1 0 0 0 0 March 19, 2034................... 0 0 0 0 0 March 19, 2035................... 0 0 0 0 0 Weighted Average Life Years to Maturity............. 7.68 5.45 4.11 2.58 1.77 Years to Optional Termination............ 7.27 5.05 3.77 2.35 1.61
*Rounded to the nearest whole percentage. S-114 PERCENT OF ORIGINAL CERTIFICATE PRINCIPAL BALANCE OUTSTANDING*
CLASS B-1, CLASS B-2 AND CLASS B-3 --------------------------------------------------------- PREPAYMENT SCENARIO --------------------------------------------------------- DISTRIBUTION DATE 10% 15% 20% 30% 40% ----------------- ---- ---- ---- ---- ---- Initial Percentage............... 100% 100% 100% 100% 100% March 19, 2006................... 100 100 100 100 100 March 19, 2007................... 100 100 100 100 86 March 19, 2008................... 100 100 100 85 67 March 19, 2009................... 100 100 85 60 41 March 19, 2010................... 100 92 68 42 24 March 19, 2011................... 98 77 53 29 14 March 19, 2012................... 95 64 42 20 8 March 19, 2013................... 83 53 32 13 5 March 19, 2014................... 73 44 25 9 3 March 19, 2015................... 64 36 20 6 2 March 19, 2016................... 56 30 15 4 1 March 19, 2017................... 49 25 12 3 1 March 19, 2018................... 42 20 9 2 0 March 19, 2019................... 37 17 7 1 0 March 19, 2020................... 32 13 5 1 0 March 19, 2021................... 27 11 4 1 0 March 19, 2022................... 23 9 3 0 0 March 19, 2023................... 20 7 2 0 0 March 19, 2024................... 17 6 2 0 0 March 19, 2025................... 14 4 1 0 0 March 19, 2026................... 12 3 1 0 0 March 19, 2027................... 9 3 1 0 0 March 19, 2028................... 8 2 1 0 0 March 19, 2029................... 6 2 0 0 0 March 19, 2030................... 5 1 0 0 0 March 19, 2031................... 3 1 0 0 0 March 19, 2032................... 2 1 0 0 0 March 19, 2033................... 1 0 0 0 0 March 19, 2034................... 1 0 0 0 0 March 19, 2035................... 0 0 0 0 0 Weighted Average Life Years to Maturity............. 13.21 9.66 7.36 5.22 4.00 Years to Optional Termination............ 12.31 8.77 6.61 4.59 3.41
*Rounded to the nearest whole percentage. S-115 YIELD CONSIDERATIONS WITH RESPECT TO THE CLASS X CERTIFICATES The Class X Certificates will receive only distributions of interest. The yield to maturity on the Class X Certificates will be extremely sensitive to the level of prepayments on the related mortgage loans. The faster that the related mortgage loans prepay, the less interest the Class X Certificates will receive. Furthermore, if the mortgage loans having higher rates prepay more rapidly than those having lower rates, the net WAC on the mortgage loans will decline, and thus, the rate at which interest accrues on the Class X Certificates is also likely to decline. In addition, to the extent amounts otherwise distributable to the Class X Certificates are applied to pay Basis Risk Shortfalls, the yield on the Class X Certificates will be reduced. Prospective investors should fully consider the risks associated with an investment in the Class X Certificates, including the possibility that if the rate of prepayments on the mortgage loans is faster than expected or an optional termination of the Trust occurs earlier than expected, investors may not fully recover their initial investments. To illustrate the significance of different rates of prepayment on the distributions on the Class X Certificates, the table below indicates the approximate pre tax yields to maturity for the Class X Certificates (on a corporate bond equivalent basis) under the different prepayment scenarios indicated. Any differences between the assumptions and the actual characteristics and performance of the mortgage loans and of the certificates may result in a yield to maturity being different from those shown in the table. Discrepancies between assumed and actual characteristics and performances underscore the hypothetical nature of the table, which is provided only to give a general sense of the sensitivity of the yield to maturity in varying prepayment scenarios. In addition, it is highly unlikely that the mortgage loans will prepay at a constant level of the CPR until maturity or that all of the mortgage loans will prepay at the same rate. The timing of changes to the rate of prepayments may significantly affect the actual yield to maturity to an investor, even if the average rate of prepayments is consistent with an investor's expectation. In general, the earlier a payment of principal on the mortgage loans, the greater the effect on an investor's yield to maturity. As a result, the effect on an investor's yield to maturity of prepayments occurring at a rate higher (or lower) than the rate anticipated by the investor during the period immediately following the issuance of the certificates will not be equally offset by a later like reduction (or increase) in the rate of prepayments. The following sensitivity table for the Class X Certificates is based on distributions to the Class X Certificates and the Structuring Assumptions and assumes further that the Class X Certificates are purchased at the price set forth in the table plus accrued interest on the notional amount from the cut-off date. There can be no assurance that the mortgage loans will have the assumed characteristics or will prepay at any of the rates shown below, that the purchase price of the Class X Certificates will be as assumed or that the pre tax yield to maturity will correspond to any of the pre tax yields shown in the table below. The actual price to be paid on the Class X Certificates has not been determined and will depend on the characteristics of the mortgage pool as ultimately constituted. In addition to any other factors an investor may consider material, each investor must make its own decision as to the appropriate prepayment assumptions to be used in deciding whether or not to purchase a class of offered certificates. S-116 PRE-TAX YIELD TO MATURITY OF THE CLASS X CERTIFICATES AT AN ASSUMED PURCHASE PRICE OF 3.8750% OF THE CLASS X CERTIFICATES PLUS ACCRUED INTEREST FROM THE CUT-OFF DATE PREPAYMENT SCENARIO 10% 15% 20% 30% 40% -------------------------------------------------------------------------------- 28.7% 21.9% 15.0% 0.1% (16.2)% Based on a constant prepayment rate of approximately 30.1% of the CPR, with respect to the mortgage loans, the assumed purchase price above, plus accrued interest from the cut-off date, and the assumptions described above, the pre-tax yield to maturity of the Class X Certificates would be approximately 0%. If the actual prepayment rate were to exceed the rate assumed above, even for one month, while equaling that rate for all other months, an investor in the Class X Certificates would not fully recover the initial purchase price of the certificates. MATERIAL FEDERAL INCOME TAX CONSEQUENCES GENERAL The pooling and servicing agreement provides that a specified portion of the trust will constitute multiple "real estate mortgage investment conduits" or REMICs. An election will be made to treat each REMIC created by the pooling and servicing agreement as a REMIC for federal income tax purposes. Assuming compliance with the pooling and servicing agreement, in the opinion of McKee Nelson LLP o each REMIC created pursuant to the pooling and servicing agreement will be characterized as a REMIC within the meaning of section 860D of the Internal Revenue Code of 1986, as amended; o each class of offered certificates (other than the Class A-R Certificate) will represent beneficial ownership of regular interests issued by a REMIC for federal income tax purposes; and o the Class A-R Certificate will represent beneficial ownership of the residual interest in each REMIC. TAXATION OF REGULAR INTERESTS Interest on a REMIC regular interest must be included in income by a certificateholder under the accrual method of accounting, regardless of the certificateholder's regular method of accounting. In addition, the Class X Certificates and the Class PO Certificates will be, and certain other classes of offered certificates may be issued with original issue discount ("OID"). See "Material Federal Income Tax Considerations--REMIC Certificates--C. Regular Certificates--Original Issue Discount and Premium" in the prospectus. The prepayment assumption that will be used in determining the accrual of any OID, market discount or bond premium will be 20% CPR for each mortgage loan group. No representation is made that the mortgage loans will prepay at that rate or at any other rate. OID must be included in income as it S-117 accrues on a constant yield method, regardless of whether the certificateholder receives currently the cash attributable to OID. THE BASIS RISK RESERVE FUND AND THE YIELD MAINTENANCE ACCOUNT The Basis Risk Reserve Fund and the Yield Maintenance Account shall be treated as outside reserve funds, within the meaning of Treasury Regulation Section 1.860G-2(h), beneficially owned by the beneficial owners of the Class X Certificates. TAX TREATMENT OF THE LIBOR CERTIFICATES For federal income tax information reporting purposes, a beneficial owner of a LIBOR Certificate (a "Component Certificate") will be treated (i) as holding an undivided interest in a REMIC regular interest corresponding to that certificate and (ii) as having entered into a limited recourse interest rate cap contract written by the beneficial holders of the Class X Certificates in favor of the beneficial owners of such Component Certificate (the "Cap Contract"). The REMIC regular interest corresponding to the Component Certificate will be entitled to receive interest and principal payments at the times and in the amounts equal to those made on the Component Certificate to which it corresponds, except that the interest payments will be determined without regard to any payments made from the Basis Risk Reserve Fund or the Yield Maintenance Account. Any payment on a Component Certificate that is made from the Basis Risk Reserve Fund or the Yield Maintenance Account will be deemed to have been paid pursuant to the Cap Contract. Consequently, each beneficial owner of a Component Certificate will be required to report income accruing with respect to the REMIC regular interest component as discussed under "Material Federal Income Tax Consequences - REMIC Certificates--C. Regular Certificates" in the prospectus. In addition, each beneficial owner of a Component Certificate will be required to report net income with respect to the Cap Contract component and will be permitted to recognize a net deduction with respect to the Cap Contract component, subject to the discussion under "--The Cap Contract Components" below. Prospective investors should consult their own tax advisors regarding the consequences to them in light of their own particular circumstances of taxing separately the two components constituting each Component Certificate. Allocations. A beneficial owner of a Component Certificate must allocate its purchase price for the certificate between its components--the REMIC regular interest component and the Cap Contract component. For information reporting purposes the Cap Contract components will be treated as having nominal value. Each Cap Contract is difficult to value, and the Internal Revenue Service ("IRS") could assert that the value of a Cap Contract component as of the closing date is greater than the value used for information reporting purposes. Prospective investors should consider the tax consequences to them if the IRS were to assert a different value for the Cap Contract components. Upon the sale, exchange, or other disposition of a Component Certificate, the beneficial owner of the certificate must allocate the amount realized between the components of the certificate based on the relative fair market values of those components at the time of sale and must treat the sale, exchange or other disposition as a sale, exchange or disposition of the REMIC regular interest component and the Cap Contract component. Assuming that the Component Certificate is held as a "capital asset" within the meaning of section 1221 of the Code, gain or loss on the disposition of an interest in the Cap Contract component should be S-118 capital gain or loss. For a discussion of the material federal income tax consequences to a beneficial owner upon disposition of a REMIC regular interest, see "Material Federal Income Tax Consequences --REMIC Certificates--C. Regular Certificates" in the prospectus. The Cap Contract Component. The portion of the overall purchase price of a Component Certificate attributable to the Cap Contract component must be amortized over the life of such certificate, taking into account the declining balance of the related REMIC regular interest component. Treasury regulations concerning notional principal contracts provide alternative methods for amortizing the purchase price of an interest rate cap contract. Under one method--the level yield constant interest method--the price paid for an interest rate cap is amortized over the life of the cap as though it were the principal amount of a loan bearing interest at a reasonable rate. Prospective investors are urged to consult their tax advisors concerning the methods that can be employed to amortize the portion of the purchase price paid for the Cap Contract component of an offered certificate. Any payments made to a beneficial owner of a Component Certificate from a Basis Risk Reserve Fund will be treated as periodic payments on an interest rate cap contract. To the extent the sum of such periodic payments for any year exceeds that year's amortized cost of the Cap Contract component, such excess represents net income for that year. Conversely, to the extent that the amount of that year's amortized cost exceeds the sum of the period payments, such excess shall represent a net deduction for that year. Although not clear, net income or a net deduction should be treated as ordinary income or as an ordinary deduction. TAX TREATMENT OF THE CLASS X CERTIFICATES The Class X Certificates represent the beneficial ownership of a REMIC regular interest, ownership of the Basis Risk Reserve Fund and the Yield Maintenance Account (including earnings thereon whether or not distributed), and an obligation under the Cap Contract components to make payments in respect of the Component Certificates. The obligation to make payments will be accounted for as an interest rate cap contract for which the Class X Certificateholders receive a nominal premium. Any premium the Class X Certificateholder is considered to receive for undertaking such obligation should be amortized and taken into income in accordance with the treasury regulations addressing the treatment of notional principal contracts, see "--the Cap Contract Component." Deposits made to the Basis Risk Reserve Fund will be treated as distributions to the Class X Certificateholders. Payments from the Basis Risk Reserve Fund will be treated as payments by the Class X Certificateholders pursuant to the Cap Contract. Any amounts paid under the yield maintenance agreements (other than amounts paid to the Class Y Certificateholders) shall be treated as having been paid to the Class X Certificateholder. Any amounts distributed from the Yield Maintenance Account to the holders of the Component Certificates shall be treated as having been paid by the Class X Certificateholder pursuant to the terms of the Cap Component of the Component Certificates. Because the Class X Certificates represent an obligation to make Basis Risk Shortfall payments separate from a REMIC regular interest, such Certificates should not be acquired by an entity intending to qualify as a REMIC as such obligation could prevent the entity from so qualifying. Investors should consult with their own tax advisors regarding the consequences of owning the Class X Certificates. S-119 LIMITATIONS ON DEDUCTIONS WITH RESPECT TO CAP CONTRACTS A beneficial owner's ability to recognize a net deduction with respect to the Cap Contract may be limited in the case of (i) estates and trusts and (ii) individuals owning an interest in such component directly or through a "pass-through entity" (other than in connection with such individual's trade or business). Pass-through entities include partnerships, S corporations, grantor trusts and non-publicly offered regulated investment companies, but do not include estates, nongrantor trusts, cooperatives, real estate investment trusts and publicly offered regulated investment companies. Further, such a beneficial owner will not be able to recognize a net deduction with respect to the Cap Contract in computing the beneficial owner's alternative minimum tax liability. TAX TREATMENT OF OFFERED CERTIFICATES FOR CERTAIN PURPOSES Each of the offered certificates (other than the portion of the Component Certificates representing the right to receive payments from the Basis Risk Reserve Fund or Yield Maintenance Account) will constitute: o a "real estate asset" within the meaning of section 856(c)(4)(A) of the Code for a real estate investment trust; o except in the case of the Class A-R Certificate, an "obligation . . . principally secured by an interest in real property" within the meaning of section 860G(a)(3) Code if held by a REMIC; or o an asset described in section 7701(a)(19)(C)(xi) of the Code if held by a domestic building and loan association. THE RESIDUAL CERTIFICATE The holder of the Class A-R Certificate must include the taxable income of each REMIC in its federal taxable income. The resulting tax liability of such holder may exceed cash distributions to such holder during certain periods. All or a portion of the taxable income from the Class A-R Certificate recognized by a holder may be treated as "excess inclusion" income, which, with limited exceptions, is subject to U.S. federal income tax. The purchaser of the Class A-R Certificate should consider carefully the tax consequences of an investment in residual certificates as discussed in the Prospectus and should consult its own tax advisors with respect to those consequences. See "Material Federal Income Tax Consequences--REMIC Certificates--D. Residual Certificates" in the prospectus. Specifically, prospective holders of the Class A-R Certificate should consult their tax advisors regarding whether, at the time of acquisition, the Class A-R Certificate will be treated as a "non-economic" residual interest, a "non-significant value" residual interest and a "tax avoidance potential" residential interest. See "Certain Federal Income Tax Consequences--REMIC Certificates--J. Tax-Related Restrictions on Transfer of Residual Certificates--Non-economic Residual Certificates" in the prospectus. Additionally, for information regarding prohibited transactions and treatment of Realized Losses, see "Material Federal Income Tax S-120 Consequences--REMIC Certificates--E. Prohibited Transactions and Other Taxes" and "--REMIC Certificates--C. Regular Certificates--Treatment of Realized Losses" in the prospectus. REPORTABLE TRANSACTIONS Pursuant to recently enacted legislation, a penalty in the amount of $10,000 in the case of a natural person and $50,000 in any other case is imposed on any taxpayer that fails to file timely an information return with the IRS with respect to a "reportable transaction" (as defined in Section 6011 of the Code). The rules defining "reportable transactions" are complex. In general, they include transactions that result in certain losses that exceed threshold amounts and transactions that result in certain differences between the taxpayer's tax treatment of an item and book treatment of that same item. Prospective investors are advised to consult their own tax advisers regarding any possible disclosure obligations in light of their particular circumstances. STATE TAXES The depositor makes no representations regarding the tax consequences of the purchase, ownership or disposition of the offered certificates under the tax laws of any state. Investors considering an investment in the offered certificates should consult their own tax advisors regarding those tax consequences. All investors should consult their own tax advisors regarding the federal, state, local or foreign income tax consequences of the purchase, ownership and disposition of the offered certificates. ERISA CONSIDERATIONS ERISA and the Internal Revenue Code impose requirements on certain employee benefit plans-- and on certain other retirement plans and arrangements, including individual retirement accounts and annuities, educational savings accounts, Keogh plans and collective investment funds and separate accounts in which plans, accounts or arrangements are invested-- and on persons who are fiduciaries with respect to these types of plans and arrangements. In this prospectus supplement we refer to these types of plans and arrangements as "Plans." ERISA prohibits "parties in interest" with respect to a Plan from engaging in certain transactions involving the Plan and its assets unless a statutory, regulatory or administrative exemption applies to the transaction. Section 4975 of the Code imposes certain excise taxes on prohibited transactions involving plans described under that section; ERISA authorizes the imposition of civil penalties for prohibited transactions involving plans not covered under Section 4975 of the Code. Any Plan fiduciary which proposes to cause a Plan to acquire any of the offered certificates should consult with its counsel with respect to the potential consequences under ERISA and the Code of the Plan's acquisition and ownership of such Certificates. See "ERISA Considerations" in the prospectus. Certain employee benefit plans, including governmental plans and certain church plans, are not subject to ERISA's requirements. Accordingly, assets of those plans may be invested in the offered certificates without regard to the ERISA considerations described in this prospectus supplement and in the prospectus, subject to the provisions of other applicable federal and state S-121 law. Any such plan which is qualified and exempt from taxation under Sections 401(a) and 501(a) of the Code may nonetheless be subject to the prohibited transaction rules set forth in Section 503 of the Code. Investments by Plans that are subject to ERISA are subject to ERISA's general fiduciary requirements, including the requirement of investment prudence and diversification and the requirement that a Plan's investments be made in accordance with the documents governing the Plan. A fiduciary which decides to invest the assets of a Plan in the offered certificates should consider, among other factors, the extreme sensitivity of the investments to the rate of principal payments (including prepayments) on the underlying mortgage loans. The U.S. Department of Labor has granted to Greenwich Capital Markets, Inc. Prohibited Transaction Exemption ("PTE") 90-59, as amended by PTE 2002-41, which exempts from the application of the prohibited transaction rules transactions relating to o the acquisition, holding and sale by Plans of certain securities representing an undivided interest in certain asset-backed pass-through entities, such as the trust, holding assets such as the mortgage loans, with respect to which Greenwich Capital Markets, Inc. or any of its affiliates is the sole underwriter or the manager or co-manager of the underwriting syndicate, and o the servicing, operation and management of such asset-backed pass-through entities, provided that the general conditions and certain other requirements set forth in the exemption are satisfied. Each of the conditions listed below must be satisfied for the exemption to apply. o The acquisition of the certificates by a Plan is on terms (including the price for the certificates) that are at least as favorable to the Plan as they would be in an arm's length transaction with an unrelated party. o The certificates acquired by the Plan have received a rating at the time of such acquisition that is one of the four highest generic rating categories. o The trustee must not be an affiliate of any other member of the "restricted group" (defined below in the second following paragraph), other than the underwriters. o The sum of all payments made to and retained by the underwriters in connection with the distribution of the certificates represents not more than reasonable compensation for underwriting the certificates; the sum of all payments made to and retained by the seller pursuant to the assignment of the trust assets to the trust represents not more than the fair market value of such loans; the sum of all payments made to and retained by the servicer represents not more than reasonable compensation for the servicer's services under the S-122 agreement pursuant to which the loans are pooled and reimbursements of such person's reasonable expenses in connection therewith. o The Plan investing in the certificates is an "accredited investor" as defined in Rule 501(a)(1) of Regulation D of the SEC under the Securities Act of 1933. o The mortgage loans held in the trust must be of the type that have been included in other investment pools. o Certificates evidencing interests in such other investment pools must have been rated in one of the four highest generic rating categories by a rating agency for at least one year prior to the Plan's acquisition of certificates. o Certificates evidencing interests in such other investment pools must have been purchased by investors other than Plans for at least one year prior to any Plan's acquisition of certificates. Moreover, the exemption provides relief from certain self-dealing/conflict of interest prohibited transactions that may occur when the Plan fiduciary causes a Plan to acquire certificates in a trust holding receivables as to which the fiduciary (or its affiliate) is an obligor provided, among other requirements, that o in the case of an acquisition in connection with the initial issuance of certificates, at least 50% of each class of certificates in which Plans have invested and at least 50% of the aggregate interests in the trust is acquired by persons independent of the restricted group; o such fiduciary (or its affiliate) is an obligor with respect to not more than 5% of the fair market value of the obligations contained in the trust; o the Plan's investment in certificates of any class does not exceed 25% of all of the certificates of that class outstanding at the time of the acquisition; and o immediately after the acquisition, no more than 25% of the assets of any Plan with respect to which such person is a fiduciary are invested in certificates representing an interest in one or more issuers containing assets sold or serviced by the same entity. This relief does not apply to Plans sponsored by members of the "restricted group" consisting of the depositor, the servicer, the trustee, the Class 2-A-1C Certificate Insurer, any indemnitor or any obligor with respect to mortgage loans included in the trust constituting more than 5% of the aggregate unamortized principal balance of the trust assets, or any affiliate of these parties. It is expected that the exemption will apply to the acquisition and holding by Plans of the offered certificates (other than the Class A-R Certificate) and that all conditions of the exemption other than those within the control of the investors will be met. Each fiduciary of a Plan should S-123 satisfy itself that the exemption will apply to the acquisition and holding by such Plan of the offered certificates. THE RATING OF A CERTIFICATE MAY CHANGE. IF A CLASS OF CERTIFICATES NO LONGER HAS A RATING OF AT LEAST BBB- (OR ITS EQUIVALENT), CERTIFICATES OF THAT CLASS WILL NO LONGER BE ELIGIBLE FOR RELIEF UNDER THE EXEMPTION (ALTHOUGH A PLAN THAT HAD PURCHASED THE CERTIFICATE WHEN IT HAD AN INVESTMENT-GRADE RATING WOULD NOT BE REQUIRED BY THE EXEMPTION TO DISPOSE OF IT). IN ADDITION, BECAUSE THE CHARACTERISTICS OF THE CLASS A-R CERTIFICATE MAY NOT MEET THE REQUIREMENTS OF THE EXEMPTION DISCUSSED ABOVE OR ANY OTHER ISSUED EXEMPTION UNDER ERISA INCLUDING PROHIBITED TRANSACTION CLASS EXEMPTION ("PTCE") 83-1 DISCUSSED UNDER "ERISA CONSIDERATIONS" IN THE PROSPECTUS, THE PURCHASE AND HOLDING OF THE CLASS A-R CERTIFICATE BY A PLAN MAY RESULT IN PROHIBITED TRANSACTIONS OR THE IMPOSITION OF EXCISE TAXES OR CIVIL PENALTIES. CONSEQUENTLY, THE INITIAL ACQUISITION AND SUBSEQUENT TRANSFERS OF THE CLASS A-R CERTIFICATE AND ANY CERTIFICATES RELATED BELOW INVESTMENT GRADE (COLLECTIVELY "ERISA-RESTRICTED OFFERED CERTIFICATES") WILL NOT BE REGISTERED BY THE TRUSTEE, AS CERTIFICATE REGISTRAR, UNLESS THE CERTIFICATE REGISTRAR RECEIVES: o A REPRESENTATION FROM THE ACQUIROR OR TRANSFEREE OF THE ERISA-RESTRICTED OFFERED CERTIFICATE TO THE EFFECT THAT THE TRANSFEREE IS NOT A PLAN OR A PERSON ACTING FOR, OR ON BEHALF OF, ANY SUCH PLAN OR USING THE ASSETS OF SUCH PLAN OR ARRANGEMENT TO EFFECT SUCH TRANSFER, OR o IF THE PURCHASER IS AN INSURANCE COMPANY, A REPRESENTATION THAT THE PURCHASER IS AN INSURANCE COMPANY WHICH IS PURCHASING THE ERISA-RESTRICTED OFFERED CERTIFICATE WITH FUNDS CONTAINED IN AN "INSURANCE COMPANY GENERAL ACCOUNT" (AS SUCH TERM IS DEFINED IN SECTION V(E) OF PTCE 95-60) AND THAT THE PURCHASE AND HOLDING OF THE ERISA-RESTRICTED OFFERED CERTIFICATE ARE COVERED UNDER SECTIONS I AND III OF PTCE 95-60, OR o IN THE CASE OF THE CLASS A-R CERTIFICATE, AN OPINION OF COUNSEL PURSUANT TO THE POOLING AND SERVICING AGREEMENT TO THE EFFECT THAT THE PURCHASE AND HOLDING OF THE CLASS A-R CERTIFICATE WILL NOT RESULT IN A NON-EXEMPT PROHIBITED TRANSACTION UNDER SECTION 406 OF ERISA OR SECTION 4975 OF THE CODE AND WILL NOT SUBJECT THE CERTIFICATE REGISTRAR, THE SERVICER, THE TRUSTEE OR THE DEPOSITOR TO ANY OBLIGATION IN ADDITION TO THOSE UNDERTAKEN UNDER THE POOLING AND SERVICING AGREEMENT. Those acquiring or transferees of interests in ERISA-Restricted Offered Certificates will be deemed to have made the representations set forth in the first two items above. LEGAL INVESTMENT CONSIDERATIONS The senior certificates and the Class B-1 Certificates will constitute "mortgage related securities" for purposes of the Secondary Mortgage Market Enhancement Act of 1984 ("SMMEA") so long as they are rated in one of the two highest rating categories by at least one nationally recognized statistical rating organization and, as such, are legal investments for certain entities to the extent provided for in SMMEA. S-124 There may be restrictions on the ability of certain investors, including depository institutions, either to purchase the offered certificates or to purchase offered certificates representing more than a specified percentage of the investor's assets. Investors should consult their own legal advisors in determining whether and to what extent the offered certificates constitute legal investments for those investors. See "Legal Investment Considerations" in the prospectus. USE OF PROCEEDS The net proceeds from the sale of the offered certificates will be applied by the depositor, or an affiliate thereof, toward the purchase of the mortgage loans from the seller. The mortgage loans will be acquired by the depositor from the seller in a privately negotiated transaction. METHOD OF DISTRIBUTION Subject to the terms and conditions set forth in the underwriting agreement among the depositor, Greenwich Capital Markets, Inc., which is an affiliate of the depositor and the seller, and WaMu Capital Corp. the depositor has agreed to sell to each of the underwriters, and each underwriter has agreed to purchase from the depositor, the offered certificates in the amounts listed in the following table. Class of Certificates Greenwich Capital Markets, Inc. WaMu Capital Corp. ------------ ------------------------------- ------------------ Class 1-A $616,760,000 -- Class 2-A-1A $593,523,900 $65,947,100 Class 2-A-1B $238,183,200 $26,464,800 Class 2-A-1C $157,500,000 $17,500,000 Class 2-A-2 $61,676,100 $6,852,900 Class X $1,944,859,934* -- Class PO $100 -- Class A-R $100 -- Class B-1 $42,008,400 $4,667,600 Class B-2 $33,256,800 $3,695,200 Class B-3 $25,380,000 $2,820,000 *Approximate Initial Notional Amount Proceeds to the depositor with respect to the offered certificates are expected to be approximately 103.21% of their initial aggregate principal balance plus accrued interest, before deducting issuance expenses payable by the depositor. Distribution of the Class X, Class PO and Class A-R Certificates will be made by Greenwich Capital Markets, Inc. from time to time in negotiated transactions or otherwise at S-125 varying prices to be determined at the time of sale. Greenwich Capital Markets, Inc. may effect those transactions by selling the Class X, Class PO and Class A-R Certificates to or through dealers and those dealers may receive from such underwriter, for which they act as agent, compensation in the form of underwriting discounts, concessions or commissions. Greenwich Capital Markets, Inc. and any dealers that participate with Greenwich Capital Markets, Inc. in the distribution of the Class X, Class PO and Class A-R Certificates may be deemed to be an underwriter, and any discounts, commissions or concessions received by them, and any profits on resale of the Class X, Class PO and Class A-R Certificates purchased by them, may be deemed to be underwriting discounts and commissions under the Securities Act of 1933. The depositor has been advised that the underwriters propose to initially offer the Class 1-A, Class 2-A-1A, Class 2-A-1B, Class 2-A-1C, Class 2-A-2, Class B-1, Class B-2 and Class B-3 Certificates (the "fixed-price certificates") to certain dealers at the prices set forth on the cover page of this prospectus supplement minus a selling concession not to exceed 0.150%, and that the underwriters may allow, and such dealers may reallow, a reallowance discount not to exceed 0.075%. After the initial public offering, the public offering prices, the selling concessions and the reallowance discounts may be changed. The depositor has been advised by each underwriter that it intends to make a market in the offered certificates purchased by it but has no obligation to do so. There can be no assurance that a secondary market for the offered certificates will develop or, if it does develop, that it will continue. Until the distribution of the fixed-price certificates is completed, rules of the Securities and Exchange Commission may limit the ability of the underwriters and certain selling group members to bid for and purchase the fixed-price certificates. As an exception to the rules, the underwriters are permitted to engage in certain transactions that stabilize the price of the offered certificates. Such transactions consist of bids or purchases for the purpose of pegging, fixing or maintaining the price of the fixed-price certificates. In general, purchases of a security for the purpose of stabilization or to reduce a short position could cause the price of the security to be higher than it might be in the absence of such purchases. Neither the depositor nor any of the underwriters makes any representation or prediction as to the direction or magnitude of any effect that the transactions described above may have on the prices of the offered certificates. In addition, neither the depositor nor any of the underwriters makes any representation that the underwriters will engage in such transactions or that such transactions, once commenced, will not be discontinued without notice. The depositor has agreed to indemnify each underwriter against, or make contributions to each underwriter with respect to, certain liabilities, including liabilities under the Securities Act of 1933. EXPERTS The consolidated financial statements of Ambac Assurance Corporation and subsidiaries as of December 31, 2004 and 2003, and for each of the years in the three-year period ended S-126 December 31, 2004, are incorporated by reference in this prospectus supplement, in the prospectus and in the registration statement in reliance upon the report of KPMG LLP, independent registered public accounting firm, incorporated by reference in this prospectus supplement, in the prospectus and in the registration statement upon the authority of that firm as experts in accounting and auditing. The report of KPMG LLP refers to changes, in 2003, in Ambac Assurance Corporation's methods of accounting for variable interest entities and stock-based compensation. LEGAL MATTERS Certain legal matters in connection with the issuance of the offered certificates will be passed upon by McKee Nelson LLP, New York, New York, as counsel for the depositor and for the underwriters. Certain federal income tax consequences with respect to the certificates will be passed upon for the trust by McKee Nelson LLP, New York, New York. RATINGS It is a condition to the issuance of the offered certificates that the senior certificates be rated "Aaa" by Moody's Investors Service, Inc. ("Moody's") and "AAA" by Standard & Poor's Ratings Services, a division of The McGraw-Hill Companies, Inc. ("S&P," and together with Moody's, the "rating agencies" or each a "rating agency"). It is a condition to the issuance of the Class B-1 Certificates that they be rated at least "Aa2" by Moody's and "AA" by S&P. It is a condition to the issuance of the Class B-2 Certificates that they be rated at least "A2" by Moody's and "A" by S&P. It is a condition to the issuance of the Class B-3 Certificates that they be rated at least "Baa2" by Moody's and "BBB" by S&P. The ratings assigned by each rating agency named above address the likelihood of the receipt of all distributions on the mortgage loans by the related certificateholders under the agreement pursuant to which the certificates are issued. The ratings of each rating agency take into consideration the credit quality of the related mortgage pool, including any credit support providers, structural and legal aspects associated with the certificates, and the extent to which the payment stream on that mortgage pool is adequate to make payments required by the certificates. However, ratings of the certificates do not constitute a statement regarding frequency of prepayments on the related mortgage loans. The ratings do not address the possibility that, as a result of principal prepayments, holders of the offered certificates may receive a lower than anticipated yield, and such ratings do not address the ability of the seller to repurchase certain mortgage loans for which the interest rate or terms have converted. The ratings assigned to the offered certificates should be evaluated independently from similar ratings on other types of securities. A rating is not a recommendation to buy, sell or hold securities and may be subject to revision or withdrawal at any time by such rating agency. The ratings do not address the likelihood that any Basis Risk Shortfalls will be repaid to holders of the Class 1-A, Class 2-A-1A, Class 2-A-1B, Class 2-A-1C, Class 2-A-2, Class B-1, Class B-2 and Class B-3 Certificates. S-127 The depositor has not engaged any rating agency other than Moody's and S&P to provide ratings on the offered certificates. However, there can be no assurance as to whether any other rating agency will rate the offered certificates or, if it does, what ratings would be assigned by that rating agency. Any rating on the offered certificates by another rating agency, if assigned at all, may be lower than the ratings assigned to the offered certificates by Moody's and S&P. S-128 GLOSSARY OF TERMS Aggregate Subordinate Percentage. For any distribution date, the percentage equivalent of a fraction the numerator of which is the aggregate certificate principal balance of the subordinate certificates immediately prior to that date and the denominator of which is the Pool Balance for that date. Applicable Credit Support Percentage. 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 of subordinate certificates having higher numerical class designations than that class. Apportioned Principal Balance. For any distribution date, any loan group and for any class of subordinate certificates, an amount equal to the certificate principal balance of that class immediately prior to that distribution date multiplied by a fraction, the numerator of which is the related Subordinate Component for that date and the denominator of which is the sum of the Subordinate Components (in the aggregate) for that date. Available Funds. For any distribution date and any loan group, an amount equal to: (A) the sum of the following with respect to each mortgage loan in that loan group: o all scheduled installments of interest and principal due on the due date in the month in which that distribution date occurs and in each case received prior to the related Determination Date, together with any advances in respect of the mortgage loan; o all net proceeds of any insurance policies with respect to the mortgage loan, to the extent those 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, if the mortgage is a defaulted mortgage loan, all net liquidation proceeds with respect to the mortgage loan; o any amounts received with respect to foreclosed properties for that distribution date; o any amount of compensating interest received in respect of the mortgage loan for that distribution date; o all partial or full prepayments of the mortgage loan, received during the related Prepayment Period for that distribution date and all Recoveries, if any, for that distribution date; and o if the loan is defective and is repurchased by the seller, or if the mortgage loan is repurchased by the seller pursuant to any applicable option to repurchase, amounts received during the related Prepayment Period as payment of the purchase price or substitution adjustment amount for the mortgage loan; S-129 reduced by (B) the aggregate of the sum of the following with respect to each mortgage loan in that loan group: o amounts in reimbursement for advances previously made in respect of the mortgage loan and other amounts as to which the servicer, the custodians and the trustee are entitled to be reimbursed pursuant to the pooling and servicing agreement; o the trust expense fees for such distribution date; and o with respect to the group 2 mortgage loans, only, the premium payable on such distribution date to the Class 2-A-1C Certificate Insurer. Class Subordination Percentage. For any distribution date and each class of subordinate certificates, a fraction (expressed as a percentage) the numerator of which is the certificate principal balance of that class immediately before that date and the denominator of which is the aggregate certificate principal balance of all classes of certificates immediately before that date. Determination Date. For any distribution date and each mortgage loan, the date set forth in the servicing agreement on which the servicer determines the amount to be remitted to the trustee. Due Period. For any distribution date, the period commencing on the second day of the month preceding the month in which that distribution date occurs and ending on the first day of the month in which that distribution date occurs. Net Principal Prepayments. The excess, if any, of principal prepayments over deferred interest on the related mortgage loans during the related collection period. Original Applicable Credit Support Percentage. For each class of subordinate certificates, the Applicable Credit Support Percentage for that class on the date of issuance of the certificates. Pool Balance. For any distribution date, the aggregate of the Stated Principal Balances of the mortgage loans as of the due date in the month preceding the month of that distribution date. Prepayment Period. For any distribution date, the calendar month preceding the month in which that distribution date occurs. Principal Distribution Amount. For any distribution date and loan group, the sum of the following for each such mortgage loan in that loan group: o each scheduled payment of principal collected or advanced (before taking into account any deficient valuations or debt service reductions) on the mortgage loan by the servicer in the related Due Period; S-130 o if the mortgage loan is repurchased, the principal portion of the related purchase price, for the loan, deposited in the distribution account during the related Prepayment Period; o the principal portion of any related substitution adjustment amount for the mortgage loan deposited in the distribution account during the related Prepayment Period; o if the mortgage loan is not yet a liquidated mortgage loan, the principal portion of all insurance proceeds for the mortgage loan received during the related Prepayment Period; o if the mortgage loan is a liquidated mortgage loan, the principal portion of all net liquidation proceeds for the mortgage loan received during the related Prepayment Period, other than Recoveries; and o the principal portion of all partial and full principal prepayments of the mortgage loan received during the related Prepayment Period (net of deferred interest) and all Recoveries, if any, for that distribution date. Realized Loss: With respect to any liquidated mortgage loan, the amount of loss realized equal to the portion of the principal balance remaining unpaid after application of all net liquidation proceeds in respect of such liquidated mortgage loan. Recovery. With respect to any distribution date and mortgage loan that became a liquidated mortgage loan in a month preceding the month of that distribution date, an amount received in respect of such liquidated mortgage loan during the prior calendar month which has previously been allocated as a Realized Loss to a class or classes of certificates or principal-only component, net of reimbursable expenses. Senior Credit Support Depletion Date. The date on which the aggregate certificate principal balance of the subordinate certificates has been reduced to zero. Senior Percentage. For each distribution date and each loan group, the percentage equivalent of a fraction the numerator of which is the aggregate of the certificate principal balance of the class or classes of senior certificates and principal-only component relating to the loan group immediately prior to that date and the denominator of which is the Stated Principal Balance of all mortgage loans in the related loan group as of the due date in the month immediately preceding the month of that distribution date; provided, however, that on any distribution date after a Senior Termination Date has occurred with respect to a loan group, the Senior Percentage for such loan group will be equal to 0%; and, provided, further, that on any distribution date after a Senior Termination Date has occurred for a loan group, the Senior Percentage of the remaining senior certificates and principal-only component is the percentage equivalent of a fraction, the numerator of which is the aggregate of the certificate principal balances of the remaining class or classes of senior certificates and principal-only components immediately prior to such date and the denominator of which is the aggregate of the certificate principal balances of all classes of certificates and principal-only components, immediately prior to such date. S-131 Senior Prepayment Percentage. For each loan group and any distribution date occurring before April 2015, 100%. Thereafter, each Senior Prepayment Percentage will be subject to gradual reduction as described in the following paragraphs. This disproportionate allocation of unscheduled payments of principal (net of deferred interest) will have the effect of accelerating the amortization of the senior certificates while, in the absence of Realized Losses, increasing the interest in the principal balance of the mortgage loans evidenced by the subordinate certificates. Increasing the interest of the subordinate certificates relative to that of the senior certificates is intended to preserve the availability of the subordination provided by the subordinate certificates. For each loan group and any distribution date occurring on or after the distribution date in April 2015, the related Senior Prepayment Percentage will be as follows: o for any distribution date in the first year thereafter, the related Senior Percentage plus 70% of the related Subordinate Percentage for that date; o for any distribution date in the second year thereafter, the related Senior Percentage plus 60% of the related Subordinate Percentage for that date; o for any distribution date in the third year thereafter, the related Senior Percentage plus 40% of the related Subordinate Percentage for that date; o for any distribution date in the fourth year thereafter, the related Senior Percentage plus 20% of the related Subordinate Percentage for that date; and o for any distribution date thereafter, the related Senior Percentage for that date. Notwithstanding the preceding paragraphs, no decrease in the Senior Prepayment Percentage for any loan group will occur unless the Step Down Test is satisfied on such distribution date. However, if, on any distribution date occurring on or after the distribution date in April 2015, the Senior Percentage for such loan group exceeds the initial Senior Percentage for such loan group, the related Senior Prepayment Percentage for that date will once again equal 100%. Notwithstanding the preceding paragraphs, if on any distribution date, the Two Times Test is satisfied, the Senior Prepayment Percentage for each loan group will equal (a) prior to the distribution date in April 2008, the related Senior Percentage plus 50% of the related Subordinate Percentage and (b) on or after the distribution date in April 2008, the related Senior Percentage for that date. Senior Principal Distribution Amount. For any distribution date and each loan group, will equal the sum of: o the related Senior Percentage of all amounts for that date described in the first four bullets of the definition of "Principal Distribution Amount" with respect to that loan group; plus S-132 o for each mortgage loan in the related loan group that became a liquidated mortgage loan during the related Prepayment Period, the lesser of: (a) the related Senior Percentage of the Stated Principal Balance of that mortgage loan, and (b) (x) the related Senior Prepayment Percentage of the amount of the net liquidation proceeds allocable to principal received on that mortgage loan; plus o the related Senior Prepayment Percentage of the amounts for that distribution date described in the sixth bullet of the definition of "Principal Distribution Amount." Senior Termination Date. For any loan group the date on which the aggregate principal balance of the related class or classes of senior certificates and the related principal-only component is reduced to zero. Stated Principal Balance. For any mortgage loan and due date, the unpaid principal balance of the mortgage loan as of the due date, as specified in its amortization schedule at the time (before any adjustment to the amortization schedule for any moratorium or similar waiver or grace period), after giving effect to any previous partial prepayments, net liquidation proceeds received, the payment of principal due on that due date irrespective of any delinquency in payment by the related borrower and any deferred interest added to the principal balance of that mortgage loan pursuant to the terms of the related mortgage note on or prior to that due date. Step Down Test. As to any distribution date, the application of both of the following conditions (which conditions may or may not be satisfied): first, the outstanding principal balance of all mortgage loans delinquent 60 days or more (including mortgage loans in foreclosure and REO property), averaged over the preceding six month period, as a percentage of the aggregate certificate principal balance of the subordinate certificates, does not equal or exceed 50%, and second, cumulative Realized Losses on all of the mortgage loans do not exceed: o for any distribution date on or after the tenth anniversary of the first distribution date, 30% of the aggregate certificate principal balance of the subordinate certificates as of the closing date, o for any distribution date on or after the eleventh anniversary of the first distribution date, 35% of the aggregate certificate principal balance of the subordinate certificates as of the closing date, S-133 o for any distribution date on or after the twelfth anniversary of the first distribution date, 40% of the aggregate certificate principal balance of the subordinate certificates as of the closing date, o for any distribution date on or after the thirteenth anniversary of the first distribution date, 45% of the aggregate certificate principal balance of the subordinate certificates as of the closing date, and o for any distribution date on or after the fourteenth anniversary of the first distribution date, 50% of the aggregate certificate principal balance of the subordinate certificates as of the closing date. Subordinate Component. For any distribution date and with respect to any loan group is the aggregate Stated Principal Balances of the mortgage loans in the related loan group, as of the first day of the month preceding the month in which such distribution date occurs, minus the aggregate certificate principal balance of the related senior certificates and principal-only component immediately prior to such distribution date. Subordinate Percentage. For each loan group and any distribution date will be equal to the difference between 100% and the related Senior Percentage for such loan group on such distribution date; provided, however, that on any distribution date after a Senior Termination Date has occurred with respect to a loan group, the Subordinate Percentage will represent the entire interest of the subordinate certificates in the mortgage loans and will be equal to the difference between 100% and the related Senior Percentage for such distribution date. Subordinate Prepayment Percentage. For any distribution date and each loan group, the difference between 100% and the related Senior Prepayment Percentage for that date. Subordinate Principal Distribution Amount. For any distribution date and each loan group will equal the sum of the following amounts: o the related Subordinate Percentage of all amounts for that date described in the first four bullets in the definition of "Principal Distribution Amount," o for each mortgage loan in the related loan group that became a liquidated mortgage loan during the related Prepayment Period, the portion of the net liquidation proceeds allocable to principal received on the loan, after application of the amounts pursuant to the second bullet in the definition of "Senior Principal Distribution Amount" up to the related Subordinate Percentage of the Stated Principal Balance of the mortgage loan, and o the related Subordinate Prepayment Percentage of the amounts for that distribution date described in the sixth bullet in the definition of "Principal Distribution Amount." On any distribution date after a Senior Termination Date has occurred with respect to a loan group, the Subordinate Principal Distribution Amount will not be calculated by loan group S-134 but will equal the amount calculated pursuant to the formula set forth above based on the Subordinate Percentage or Subordinate Prepayment Percentage, as applicable, for the subordinate certificates for such distribution date with respect to all of the mortgage loans as opposed to the mortgage loans in the related loan group only. Two Times Test. On any distribution date, the satisfaction of all of the following conditions: o the Aggregate Subordinate Percentage is at least two times the Aggregate Subordinate Percentage as of the closing date, o the condition described in clause first of the definition of "Step Down Test" is satisfied, and o on or after the distribution date in April 2008, cumulative Realized Losses do not exceed 30% of the aggregate certificate principal balance of the subordinate certificates as of the closing date, or prior to the distribution date in April 2008, cumulative Realized Losses do not exceed 20% of the aggregate certificate principal balance of the subordinate certificates as of the closing date. S-135 ANNEX A: GLOBAL CLEARANCE, SETTLEMENT AND TAX DOCUMENTATION PROCEDURES Except in certain limited circumstances, the globally offered HarborView Mortgage Loan Trust 2005-2, Mortgage Loan Pass-Through Certificates, Series 2005-2 (the "Global Securities") will be available only in book-entry form. Investors in the Global Securities may hold such Global Securities through any of DTC, Clearstream Luxembourg or Euroclear. The Global Securities will be tradeable as home market instruments in both the European and U.S. domestic markets. Initial settlement and all secondary trades will settle in same-day funds. Secondary market trading between investors holding Global Securities through Clearstream Luxembourg and Euroclear will be conducted in the ordinary way in accordance with their normal rules and operating procedures and in accordance with conventional eurobond practice (i.e., seven calendar day settlement). Secondary market trading between investors holding Global Securities through DTC will be conducted according to the rules and procedures applicable to U.S. corporate debt obligations and prior mortgage loan asset backed certificates issues. Secondary cross-market trading between Clearstream Luxembourg or Euroclear and DTC Participants holding Certificates will be effected on a delivery-against-payment basis through the respective Depositaries of Clearstream Luxembourg and Euroclear (in such capacity) and as DTC Participants. A holder that is not a United States person (as described below) of Global Securities will be subject to U.S. withholding taxes unless such holders meet certain requirements and deliver appropriate U.S. tax documents to the securities clearing organizations or their participants. INITIAL SETTLEMENT All Global Securities will be held in book-entry form by DTC in the name of Cede & Co. as nominee of DTC. Investors' interests in the Global Securities will be represented through financial institutions acting on their behalf as direct and indirect Participants in DTC. As a result, Clearstream Luxembourg and Euroclear will hold positions on behalf of their participants through their respective Relevant Depositaries, which in turn will hold such positions in accounts as DTC Participants. Investors electing to hold their Global Securities through DTC will follow the settlement practices applicable to prior mortgage loan asset backed certificates issues. Investor securities custody accounts will be credited with their holdings against payment in same-day funds on the settlement date. Investors electing to hold their Global Securities through Clearstream Luxembourg or Euroclear accounts will follow the settlement procedures applicable to conventional eurobonds, except that there will be no temporary global security and no "lock-up" or restricted period. Global Securities will be credited to the securities custody accounts on the settlement date against payment in same-day funds. A-1 SECONDARY MARKET TRADING Since the purchaser determines the place of delivery, it is important to establish at the time of the trade where both the purchaser's and seller's accounts are located to ensure that settlement can be made on the desired value date. TRADING BETWEEN DTC PARTICIPANTS. Secondary market trading between DTC Participants will be settled using the procedures applicable to prior mortgage loan asset backed certificates issues in same-day funds. TRADING BETWEEN CLEARSTREAM LUXEMBOURG AND/OR EUROCLEAR PARTICIPANTS. Secondary market trading between Clearstream Luxembourg Participants or Euroclear Participants will be settled using the procedures applicable to conventional eurobonds in same-day funds. TRADING BETWEEN DTC SELLER AND CLEARSTREAM LUXEMBOURG OR EUROCLEAR PURCHASER. When Global Securities are to be transferred from the account of a DTC Participant to the account of a Clearstream Luxembourg Participant or a Euroclear Participant, the purchaser will send instructions to Clearstream Luxembourg or Euroclear through a Clearstream Luxembourg Participant or Euroclear Participant at least one business day prior to settlement. Clearstream Luxembourg or Euroclear will instruct the respective Relevant Depositary, as the case may be, to receive the Global Securities against payment. Payment will include interest accrued on the Global Securities from and including the last coupon payment date to and excluding the settlement date, on the basis of either the actual number of days in such accrual period and a year assumed to consist of 360 days or a 360-day year of twelve 30-day months as applicable to the related class of Global Securities. For transactions settling on the 31st of the month, payment will include interest accrued to and excluding the first day of the following month. Payment will then be made by the respective Relevant Depositary of the DTC Participant's account against delivery of the Global Securities. After settlement has been completed, the Global Securities will be credited to the respective clearing system and by the clearing system, in accordance with its usual procedures, to the Clearstream Luxembourg Participant's or Euroclear Participant's account. The securities credit will appear the next day (European time) and the cash debt will be back-valued to, and the interest on the Global Securities will accrue from, the value date (which would be the preceding day when settlement occurred in New York). If settlement is not completed on the intended value date (i.e., the trade fails), the Clearstream Luxembourg or Euroclear cash debt will be valued instead as of the actual settlement date. Clearstream Luxembourg Participants and Euroclear Participants will need to make available to the respective clearing systems the funds necessary to process same-day funds settlement. The most direct means of doing so is to preposition funds for settlement, either from cash on hand or existing lines of credit, as they would for any settlement occurring within Clearstream Luxembourg or Euroclear. Under this approach, they may take on credit exposure to Clearstream Luxembourg or Euroclear until the Global Securities are credited to their accounts one day later. As an alternative, if Clearstream Luxembourg or Euroclear has extended a line of credit to them, Clearstream Luxembourg Participants or Euroclear Participants can elect not to preposition funds and allow that credit line to be drawn upon the finance settlement. Under this procedure, Clearstream Luxembourg Participants or Euroclear Participants purchasing Global Securities would incur overdraft charges for one day, assuming they cleared the overdraft when A-2 the Global Securities were credited to their accounts. However, interest on the Global Securities would accrue from the value date. Therefore, in many cases the investment income on the Global Securities earned during that one-day period may substantially reduce or offset the amount of such overdraft charges, although this result will depend on each Clearstream Luxembourg Participant's or Euroclear Participant's particular cost of funds. Since the settlement is taking place during New York business hours, DTC Participants can employ their usual procedures for sending Global Securities to the respective European Depositary for the benefit of Clearstream Luxembourg Participants or Euroclear Participants. The sale proceeds will be available to the DTC seller on the settlement date. Thus, to the DTC Participants a cross-market transaction will settle no differently than a trade between two DTC Participants. TRADING BETWEEN CLEARSTREAM LUXEMBOURG OR EUROCLEAR SELLER AND DTC PURCHASER. Due to time zone differences in their favor, Clearstream Luxembourg Participants and Euroclear Participants may employ their customary procedures for transactions in which Global Securities are to be transferred by the respective clearing system, through the respective Relevant Depositary, to a DTC Participant. The seller will send instructions to Clearstream Luxembourg or Euroclear through a Clearstream Luxembourg Participant or Euroclear Participant at least one business day prior to settlement. In these cases Clearstream Luxembourg or Euroclear will instruct the respective Relevant Depositary, as appropriate, to deliver the Global Securities to the DTC Participant's account against payment. Payment will include interest accrued on the Global Securities from and including the last coupon payment to and excluding the settlement date on the basis of either the actual number of days in such accrual period and a year assumed to consist of 360 days or a 360-day year of twelve 30-day months as applicable to the related class of Global Securities. For transactions settling on the 31st of the month, payment will include interest accrued to and excluding the first day of the following month. The payment will then be reflected in the account of the Clearstream Luxembourg Participant or Euroclear Participant the following day, and receipt of the cash proceeds in the Clearstream Luxembourg Participant's or Euroclear Participant's account would be back-valued to the value date (which would be the preceding day, when settlement occurred in New York). Should the Clearstream Luxembourg Participant or Euroclear Participant have a line of credit with its respective clearing system and elect to be in debt in anticipation of receipt of the sale proceeds in its account, the back-valuation will extinguish any overdraft incurred over that one day period. If settlement is not completed on the intended value date (i.e., the trade fails), receipt of the cash proceeds in the Clearstream Luxembourg Participant's or Euroclear Participant's account would instead be valued as of the actual settlement date. Finally, day traders that use Clearstream Luxembourg or Euroclear and that purchase Global Securities from DTC Participants for delivery to Clearstream Luxembourg Participants or Euroclear Participants should note that these trades would automatically fail on the sale side unless affirmative action were taken. At least three techniques should be readily available to eliminate this potential problem: (a) borrowing through Clearstream Luxembourg or Euroclear for one day (until the purchase side of the day trade is reflected in their Clearstream Luxembourg or Euroclear accounts) in accordance with the clearing system's customary procedures; A-3 (b) borrowing the Global Securities in the U.S. from a DTC Participant no later than one day prior to the settlement, which would give the Global Securities sufficient time to be reflected in their Clearstream Luxembourg or Euroclear account in order to settle the sale side of the trade; or (c) staggering the value dates for the buy and sell sides of the trade so that the value date for the purchase from the DTC Participant is at least one day prior to the value date for the sale to the Clearstream Luxembourg or Euroclear Participant. CERTAIN U.S. FEDERAL INCOME TAX DOCUMENTATION REQUIREMENTS A holder that is not a "United States person" within the meaning of Section 7701(a)(30) of the Internal Revenue Code of 1986 holding a book-entry certificate through Clearstream, Euroclear or DTC may be subject to U.S. withholding tax at a rate of 30% unless such holder provides certain documentation to the trustee or to the U.S. entity required to withhold tax (the "U.S. withholding agent") establishing an exemption from withholding. A holder that is not a United States person may be subject to 30% withholding unless: I. the trustee or the U.S. withholding agent receives a statement-- (a) from the holder on Internal Revenue Service ("IRS") Form W-8BEN (or any successor form) that-- (i) is signed by the holder under penalties of perjury, (ii) certifies that such owner is not a United States person, and (iii) provides the name and address of the holder, or (b) from a securities clearing organization, a bank or other financial institution that holds customers' securities in the ordinary course of its trade or business that - (i) is signed under penalties of perjury by an authorized representative of the financial institution, (ii) states that the financial institution has received an IRS Form W-8BEN (or any successor form) from the holder or that another financial institution acting on behalf of the holder has received such IRS Form W-8BEN (or any successor form), (iii) provides the name and address of the holder, and (iv) attaches the IRS Form W-8BEN (or any successor form) provided by the holder; II. the holder claims an exemption or reduced rate based on a treaty and provides a properly executed IRS Form W-8BEN (or any successor form) to the trustee or the U.S. withholding agent; A-4 III. the holder claims an exemption stating that the income is effectively connected to a U.S. trade or business and provides a properly executed IRS Form W-8ECI (or any successor form) to the trustee or the U.S. withholding agent; or IV. the holder is a "nonwithholding partnership" and provides a properly executed IRS Form W-8IMY (or any successor form) with all necessary attachments to the trustee or the U.S. withholding agent. Certain pass-through entities that have entered into agreements with the Internal Revenue Service (for example "qualified intermediaries") may be subject to different documentation requirements; it is recommended that such holders consult with their tax advisors when purchasing the Certificates. A holder holding book-entry certificates through Clearstream or Euroclear provides the forms and statements referred to above by submitting them to the person through which he holds an interest in the book-entry certificates, which is the clearing agency, in the case of persons holding directly on the books of the clearing agency. Under certain circumstances a Form W-8BEN, if furnished with a taxpayer identification number, ("TIN"), will remain in effect until the status of the beneficial owner changes, or a change in circumstances makes any information on the form incorrect. A Form W-8BEN, if furnished without a TIN, and a Form W-8ECI will remain in effect for a period starting on the date the form is signed and ending on the last day of the third succeeding calendar year, unless a change in circumstances makes any information on the form incorrect. In addition, all holders holding book-entry certificates through Clearstream, Euroclear or DTC may be subject to backup withholding at a rate of up to 31% unless the holder: I. provides a properly executed IRS Form W-8BEN, Form W-8ECI or Form W-8IMY (or any successor forms) if that person is not a United States person; II. provides a properly executed IRS Form W-9 (or any substitute form) if that person is a United States person; or III. is a corporation, within the meaning of Section 7701(a) of the Internal Revenue Code of 1986, or otherwise establishes that it is a recipient exempt from United States backup withholding. This summary does not deal with all aspects of federal income tax withholding or backup withholding that may be relevant to investors that are not "United States persons" within the meaning of Section 7701(a)(30) of the Internal Revenue Code. Such investors are advised to consult their own tax advisors for specific tax advice concerning their holding and disposing of the book-entry certificates. The term "United States person" means (1) a citizen or resident of the United States, (2) a corporation or partnership organized in or under the laws of the United States or any state or the District of Columbia (other than a partnership that is not treated as a United States person under any applicable Treasury regulations), (3) an estate the income of which is includible in gross income for United States tax purposes, regardless of its source, (4) a trust if a court within the United States is able to exercise primary supervision over the administration of the trust and one or more United States persons have authority to control all substantial decisions of the trust, and (5) to the extent provided in regulations, certain trusts in existence on August 20, 1996 that are treated as United States persons prior to such date and that elect to continue to be treated as United States persons. A-5 ANNEX B: YIELD MAINTENANCE AGREEMENT TABLES Class 2-A-1A, Class 2-A-1B and Class 2-A-2 Certificates ANNEX B: YIELD MAINTENANCE AGREEMENT TABLES Class 2-A-1A, Class 2-A-1B and Class 2-A-2 Certificates
DISTRIBUTION DATE YIELD MAINTENANCE NOTIONAL BALANCE ($) STRIKE RATE (%) ----------------- -------------------------------------- --------------- May 2005 970,822,601.85 4.395878 June 2005 952,295,686.57 9.253227 July 2005 938,222,068.01 9.561668 August 2005 924,355,182.64 9.253227 September 2005 910,691,762.18 9.253227 October 2005 897,228,593.02 9.561668 November 2005 883,962,515.20 9.253227 December 2005 870,890,421.59 9.561668 January 2006 858,009,256.87 9.253228 February 2006 845,315,934.29 9.253228 March 2006 832,805,444.77 10.244645 April 2006 820,451,679.53 9.253228 May 2006 808,214,762.91 9.561669 June 2006 796,039,704.04 9.253228 July 2006 784,044,174.30 9.561669 August 2006 772,225,326.66 9.253228 September 2006 760,580,361.78 9.253228 October 2006 749,106,527.22 9.561669 November 2006 737,801,116.61 9.253229 December 2006 726,661,468.85 9.561670 January 2007 715,684,967.31 9.253229 February 2007 704,868,968.23 9.253229 March 2007 694,209,174.48 10.244646 April 2007 683,683,143.14 9.253229 May 2007 673,256,591.64 9.561670 June 2007 662,882,238.19 9.253229 July 2007 652,661,290.48 9.561670 August 2007 642,591,310.23 9.253230 September 2007 632,247,657.51 9.253226 October 2007 620,790,562.04 9.561664 November 2007 608,172,325.62 9.253225 December 2007 594,980,253.90 9.561666 January 2008 582,036,755.06 9.253225 February 2008 569,337,218.57 9.253225 March 2008 556,877,119.39 9.891378 April 2008 544,652,016.36 9.253225 May 2008 532,657,550.69 9.561666 June 2008 520,889,444.39 9.253225 July 2008 509,343,498.83 9.561666 August 2008 498,015,593.24 9.253225 September 2008 486,901,683.26 9.253225 October 2008 475,997,799.57 9.561666 November 2008 465,300,046.49 9.253225 December 2008 454,804,600.61 9.561666 January 2009 444,507,709.43 9.253225 February 2009 436,028,066.95 9.253225
B-1
DISTRIBUTION DATE YIELD MAINTENANCE NOTIONAL BALANCE ($) STRIKE RATE (%) ----------------- -------------------------------------- --------------- March 2009 427,707,634.10 10.244642 April 2009 419,543,447.01 9.253225 May 2009 411,532,596.67 9.561666 June 2009 403,672,228.04 9.253225 July 2009 395,959,538.94 9.561666 August 2009 388,391,779.15 9.253225 September 2009 380,966,249.43 9.253225 October 2009 373,680,300.55 9.561666 November 2009 366,531,332.37 9.253225 December 2009 359,516,792.99 9.561666 January 2010 352,634,177.77 9.253225 February 2010 345,881,028.54 9.253225 March 2010 339,254,932.68 10.244642 April 2010 332,753,522.31 9.253225 May 2010 326,374,473.45 9.561666 June 2010 320,115,505.21 9.253225 July 2010 313,974,379.00 9.561666 August 2010 307,948,897.74 9.253225 September 2010 302,036,905.09 9.253225 October 2010 296,236,284.72 9.561666 November 2010 290,544,959.53 9.253225 December 2010 284,960,890.97 9.561666 January 2011 279,482,078.28 9.253225 February 2011 274,106,557.81 9.253225 March 2011 268,832,402.40 10.244642 April 2011 263,657,720.56 9.253225 May 2011 258,580,655.94 9.561666 June 2011 253,599,386.63 9.253225 July 2011 248,712,124.53 9.561666 August 2011 243,917,114.72 9.253225 September 2011 239,212,634.83 9.253225 October 2011 234,596,994.48 9.561666 November 2011 230,068,534.65 9.253225 December 2011 225,625,627.12 9.561666 January 2012 221,266,673.89 9.253225 February 2012 216,990,106.64 9.253225 March 2012 212,794,386.14 9.891378 April 2012 208,678,001.76 9.253225 May 2012 204,639,470.91 9.561666 June 2012 200,677,338.52 9.253225 July 2012 196,790,176.57 9.561666 August 2012 192,976,583.52 9.253225 September 2012 189,235,183.90 9.253225 October 2012 185,564,627.76 9.561666 November 2012 181,963,590.23 9.253225 December 2012 178,430,771.06 9.561665 January 2013 174,964,894.16 9.253225 February 2013 171,564,707.11 9.253225 March 2013 168,228,980.82 10.244642 April 2013 164,956,509.00 9.253225 May 2013 161,746,107.78 9.561665 June 2013 158,596,615.28 9.253225
B-2
DISTRIBUTION DATE YIELD MAINTENANCE NOTIONAL BALANCE ($) STRIKE RATE (%) ----------------- -------------------------------------- --------------- July 2013 155,506,891.26 9.561665 August 2013 152,475,816.61 9.253225 September 2013 149,502,293.08 9.253225 October 2013 146,585,242.80 9.561665 November 2013 143,723,607.96 9.253225 December 2013 140,916,350.39 9.561665 January 2014 138,162,451.25 9.253225 February 2014 135,460,910.64 9.253225 March 2014 132,810,747.25 10.244642 April 2014 130,210,998.02 9.253225 May 2014 127,660,717.80 9.561665 June 2014 125,158,979.04 9.253225 July 2014 122,704,871.41 9.561665 August 2014 120,297,501.56 9.253225 September 2014 117,935,992.73 9.253225 October 2014 115,619,484.47 9.561665 November 2014 113,347,132.37 9.253225 December 2014 111,118,107.72 9.561665 January 2015 108,931,597.23 9.253225 February 2015 106,786,802.75 9.253225 March 2015 104,682,940.99 10.244641 April 2015 102,619,243.24 9.253225 May 2015 100,594,955.11 9.561665 June 2015 98,609,336.26 9.253224 July 2015 96,661,660.12 9.561665 August 2015 94,751,213.64 9.253224 September 2015 92,877,297.11 9.253224 October 2015 91,039,223.78 9.561665 November 2015 and thereafter 0.00 0.000000
B-3 Class 2-A-1C Certificates
DISTRIBUTION DATE YIELD MAINTENANCE NOTIONAL BALANCE ($) STRIKE RATE (%) ----------------- -------------------------------------- --------------- May 2005 171,152,266.79 4.305878 June 2005 167,886,043.34 9.163227 July 2005 165,404,918.86 9.471668 August 2005 162,960,240.65 9.163227 September 2005 160,551,432.52 9.163227 October 2005 158,177,927.90 9.471668 November 2005 155,839,169.74 9.163227 December 2005 153,534,610.23 9.471668 January 2006 151,263,710.75 9.163228 February 2006 149,025,927.12 9.163228 March 2006 146,820,376.24 10.154645 April 2006 144,642,455.25 9.163228 May 2006 142,485,134.22 9.471669 June 2006 140,338,718.47 9.163228 July 2006 138,223,953.01 9.471669 August 2006 136,140,335.92 9.163228 September 2006 134,087,373.68 9.163228 October 2006 132,064,581.06 9.471669 November 2006 130,071,480.93 9.163229 December 2006 128,107,604.15 9.471670 January 2007 126,172,489.42 9.163229 February 2007 124,265,670.65 9.163229 March 2007 122,386,390.28 10.154646 April 2007 120,530,691.70 9.163229 May 2007 118,692,531.02 9.471670 June 2007 116,863,572.67 9.163229 July 2007 115,061,659.15 9.471670 August 2007 113,286,360.61 9.163230 September 2007 111,462,814.68 9.163226 October 2007 109,442,973.09 9.471664 November 2007 107,218,426.86 9.163225 December 2007 104,892,715.68 9.471666 January 2008 102,610,826.93 9.163225 February 2008 100,371,947.81 9.163225 March 2008 98,175,280.55 9.801378 April 2008 96,020,042.21 9.163225 May 2008 93,905,464.34 9.471666 June 2008 91,830,792.76 9.163225 July 2008 89,795,287.25 9.471666 August 2008 87,798,221.34 9.163225 September 2008 85,838,882.03 9.163225 October 2008 83,916,569.55 9.471666 November 2008 82,030,597.09 9.163225 December 2008 80,180,290.60 9.471666 January 2009 78,364,988.54 9.163225 February 2009 76,870,060.40 9.163225 March 2009 75,403,200.30 10.154642 April 2009 73,963,885.71 9.163225 May 2009 72,551,603.81 9.471666 June 2009 71,165,851.24 9.163225
B-4
DISTRIBUTION DATE YIELD MAINTENANCE NOTIONAL BALANCE ($) STRIKE RATE (%) ----------------- -------------------------------------- --------------- July 2009 69,806,134.01 9.471666 August 2009 68,471,967.26 9.163225 September 2009 67,162,875.11 9.163225 October 2009 65,878,390.52 9.471666 November 2009 64,618,055.11 9.163225 December 2009 63,381,418.96 9.471666 January 2010 62,168,040.54 9.163225 February 2010 60,977,486.47 9.163225 March 2010 59,809,331.42 10.154642 April 2010 58,663,157.94 9.163225 May 2010 57,538,556.32 9.471666 June 2010 56,435,124.45 9.163225 July 2010 55,352,467.67 9.471666 August 2010 54,290,198.64 9.163225 September 2010 53,247,937.23 9.163225 October 2010 52,225,310.31 9.471666 November 2010 51,221,951.71 9.163225 December 2010 50,237,502.03 9.471666 January 2011 49,271,608.56 9.163225 February 2011 48,323,925.12 9.163225 March 2011 47,394,111.93 10.154642 April 2011 46,481,835.55 9.163225 May 2011 45,586,768.71 9.471666 June 2011 44,708,590.22 9.163225 July 2011 43,846,984.83 9.471666 August 2011 43,001,643.16 9.163225 September 2011 42,172,261.56 9.163225 October 2011 41,358,542.04 9.471666 November 2011 40,560,192.10 9.163225 December 2011 39,776,924.70 9.471666 January 2012 39,008,458.12 9.163225 February 2012 38,254,515.86 9.163225 March 2012 37,514,826.58 9.801378 April 2012 36,789,123.95 9.163225 May 2012 36,077,146.59 9.471666 June 2012 35,378,637.99 9.163225 July 2012 34,693,346.38 9.471666 August 2012 34,021,024.69 9.163225 September 2012 33,361,430.42 9.163225 October 2012 32,714,325.58 9.471666 November 2012 32,079,476.60 9.163225 December 2012 31,456,654.26 9.471665 January 2013 30,845,633.57 9.163225 February 2013 30,246,193.76 9.163225 March 2013 29,658,118.13 10.154642 April 2013 29,081,194.01 9.163225 May 2013 28,515,212.70 9.471665 June 2013 27,959,969.37 9.163225 July 2013 27,415,262.98 9.471665 August 2013 26,880,896.26 9.163225 September 2013 26,356,675.57 9.163225 October 2013 25,842,410.90 9.471665
B-5
DISTRIBUTION DATE YIELD MAINTENANCE NOTIONAL BALANCE ($) STRIKE RATE (%) ----------------- -------------------------------------- --------------- November 2013 25,337,915.75 9.163225 December 2013 24,843,007.11 9.471665 January 2014 24,357,505.35 9.163225 February 2014 23,881,234.20 9.163225 March 2014 23,414,020.65 10.154642 April 2014 22,955,694.92 9.163225 May 2014 22,506,090.39 9.471665 June 2014 22,065,043.53 9.163225 July 2014 21,632,393.86 9.471665 August 2014 21,207,983.87 9.163225 September 2014 20,791,659.00 9.163225 October 2014 20,383,267.57 9.471665 November 2014 19,982,660.69 9.163225 December 2014 19,589,692.27 9.471665 January 2015 19,204,218.93 9.163225 February 2015 18,826,099.97 9.163225 March 2015 18,455,197.28 10.154641 April 2015 18,091,375.36 9.163225 May 2015 17,734,501.20 9.471665 June 2015 17,384,444.28 9.163224 July 2015 17,041,076.51 9.471665 August 2015 16,704,272.20 9.163224 September 2015 16,373,907.96 9.163224 October 2015 16,049,862.75 9.471665 November 2015 and thereafter 0.00 0.000000
B-6 xxxxxxxx PROSPECTUS MORTGAGE-BACKED/ASSET-BACKED SECURITIES (ISSUABLE IN SERIES) GREENWICH CAPITAL ACCEPTANCE, INC. OR FINANCIAL ASSET SECURITIES CORP. DEPOSITOR THE SECURITIES Each issue of securities will have its own series designation and will evidence either the ownership of assets in the related trust or debt obligations secured by trust assets. o Each series of securities will consist of one or more classes. o Each class of securities will represent the entitlement to a specified portion of interest payments and a specified portion of principal payments on the trust assets. o A series may include classes of securities that are senior in right of payment to other classes. Classes of securities may be entitled to receive principal, interest or both prior to other classes or before or after specified events. o No market will exist for the securities of any series before they are issued. In addition, even after the securities of a series have been issued and sold, there can be no assurance that a resale market for them will develop. THE TRUST AND ITS ASSETS As specified in the related prospectus supplement, the assets of a trust will include one or more of the following: o mortgage loans secured generally by senior liens on one- to four-family residential properties, o closed-end and/or revolving home equity loans generally secured by junior liens on one- to four-family residential properties, o mortgage loans secured by senior liens on multifamily residential properties, o conditional sales contracts, installment sales agreements or loan agreements secured by manufactured housing, o home improvement installment sales contracts and loan agreements that are either unsecured or secured generally by junior liens on one- to four-family residential properties or by purchase money security interests in the related home improvements, o mortgage pass-through securities issued or guaranteed by Ginnie Mae, Fannie Mae or Freddie Mac, or o private label mortgage-backed or asset-backed securities. OFFERS OF THE SECURITIES Offers of the securities may be made through one or more different methods. All securities will be distributed by, or sold through underwriters managed by, Greenwich Capital Markets, Inc. CONSIDER CAREFULLY THE RISK FACTORS BEGINNING ON PAGE 6 OF THIS PROSPECTUS. The securities represent obligations of the trust only and do not represent an interest in or obligation of the applicable depositor, seller, master servicer or any of their affiliates. This prospectus may be used to offer and sell the securities only if accompanied by a prospectus supplement. NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION HAS APPROVED THESE SECURITIES OR DETERMINED THAT THIS PROSPECTUS IS ACCURATE OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. February 22, 2005 TABLE OF CONTENTS Page ---- Important Notice About Information in This Prospectus and Each Accompanying Prospectus Supplement ..........................................5 Risk Factors .................................................................6 The Trust Fund ..............................................................16 The Mortgage Loans--General ...............................................17 Single Family Loans .......................................................21 Home Equity Loans .........................................................22 Multifamily Loans .........................................................22 Manufactured Housing Contracts ............................................23 Home Improvement Contracts ................................................24 Agency Securities .........................................................24 Private Label Securities ..................................................30 Incorporation of Certain Information by Reference .........................33 Use of Proceeds .............................................................33 The Depositors ..............................................................33 Loan Program ................................................................34 Underwriting Standards ....................................................34 Qualifications of Sellers .................................................35 Representations by Sellers; Repurchases or Substitutions ..................36 Description of the Securities ...............................................38 General ...................................................................39 Distributions on Securities ...............................................41 Advances ..................................................................44 Reports to Securityholders ................................................46 Credit Enhancement ..........................................................47 General ...................................................................47 Subordination .............................................................48 Pool Insurance Policies ...................................................49 FHA Insurance; VA Guarantees ..............................................51 Special Hazard Insurance Policies .........................................53 Bankruptcy Bonds ..........................................................55 FHA Insurance on Multifamily Loans ........................................55 Reserve Accounts ..........................................................56 Cross Support .............................................................57 Other Insurance, Surety Bonds, Guaranties, Letters of Credit and Similar Instruments or Agreements .............................57 Financial Instruments .....................................................57 Yield and Prepayment Considerations .........................................58 Operative Agreements ........................................................61 Assignment of Trust Fund Assets ...........................................62 2 Payments on Loans; Deposits to Security Account ...........................64 Pre-Funding Account .......................................................66 Sub-Servicing of Loans ....................................................67 Collection Procedures .....................................................68 Hazard Insurance ..........................................................70 Realization upon Defaulted Mortgage Loans .................................72 Servicing and Other Compensation and Payment of Expenses ..................74 Evidence as to Compliance .................................................75 Certain Matters Regarding the Master Servicer and the Depositors ..........76 Events of Default; Rights upon Event of Default ...........................77 Amendment .................................................................80 Termination; Optional Termination; Calls ..................................81 The Trustee ...............................................................82 Material Legal Aspects of the Loans .........................................82 General ...................................................................82 Foreclosure ...............................................................86 Repossession of Manufactured Homes ........................................88 Rights of Redemption ......................................................90 Equitable Limitations on Remedies .........................................90 Anti-Deficiency Legislation and Other Limitations on Lenders ..............91 Homeownership Act and Similar State Laws ..................................92 Due-on-Sale Clauses .......................................................94 Prepayment Charges; Late Fees .............................................94 Applicability of Usury Laws ...............................................95 Servicemembers Civil Relief Act ...........................................96 Environmental Risks .......................................................96 The Home Improvement Contracts ............................................98 Installment Contracts .....................................................99 Junior Mortgages; Rights of Senior Mortgagees ............................100 The Title I Program ......................................................101 Material Federal Income Tax Consequences ...................................106 General ..................................................................106 Taxation of Debt Securities ..............................................107 Non-REMIC Certificates ...................................................115 REMIC Certificates .......................................................128 State Tax Considerations ...................................................153 ERISA Considerations .......................................................153 Insurance Company General Accounts .......................................155 Prohibited Transaction Class Exemption 83-1 ..............................155 Underwriter Exemption ....................................................156 Legal Investment Considerations ............................................159 Method of Distribution .....................................................161 Legal Matters ..............................................................162 Financial Information ......................................................162 Available Information ......................................................162 3 Ratings ....................................................................163 Glossary of Terms ..........................................................164 4 IMPORTANT NOTICE ABOUT INFORMATION IN THIS PROSPECTUS AND EACH ACCOMPANYING PROSPECTUS SUPPLEMENT Information about each series of securities is contained in two separate documents: o this prospectus, which provides general information, some of which may not apply to a particular series; and o the accompanying prospectus supplement for a particular series, which describes the specific terms of the securities of that series. Although the accompanying prospectus supplement for a particular series of securities cannot contradict the information contained in this prospectus, insofar as the prospectus supplement contains specific information about the series that differs from the more general information contained in this prospectus, you should rely on the information in the prospectus supplement. You should rely only on the information contained in this prospectus and the accompanying prospectus supplement. We have not authorized anyone to provide you with information that is different from that contained in this prospectus and the accompanying prospectus supplement. We include cross-references in this prospectus and each accompanying prospectus supplement to captions in these materials where you can find further related discussions. There is a Glossary of Terms beginning on page 163 where you will find definitions of certain capitalized terms used in this prospectus. The preceding Table of Contents and the Table of Contents included in each accompanying prospectus supplement provide the pages on which these captions are located. ---------- If you require additional information, the mailing address of the depositor's principal executive offices is either Greenwich Capital Acceptance, Inc. or Financial Acceptance Securities Corp., at 600 Steamboat Road, Greenwich, Connecticut 06830 and the telephone number is (203) 625-2700. For other means of acquiring additional information about us or a series of securities, see "The Trust Fund -- Incorporation of Certain Information by Reference" on page 33 of this prospectus. ---------- 5 RISK FACTORS YOU SHOULD CAREFULLY CONSIDER THE FOLLOWING INFORMATION, TOGETHER WITH THE INFORMATION SET FORTH UNDER "RISK FACTORS" IN THE RELATED PROSPECTUS SUPPLEMENT, SINCE IT IDENTIFIES THE PRINCIPAL RISK FACTORS ASSOCIATED WITH AN INVESTMENT IN THE SECURITIES. PRINCIPAL PREPAYMENTS ON THE LOANS MAY ADVERSELY AFFECT THE AVERAGE LIFE OF, AND RATE OF RETURN ON, YOUR SECURITIES ..... You may be unable to reinvest the principal payments on your securities at a rate of return at least equal to the rate on your securities. The timing of principal payments on the securities of a series will be affected by a number of factors, including the following: o the extent of prepayments on the loans in the trust or, if the trust is comprised of underlying securities, on the loans backing the underlying securities; o how payments of principal are allocated among the classes of securities of the series as specified in the related prospectus supplement; o if any party has an option to terminate the related trust early or to call your securities, the effect of the exercise of the option; o the rate and timing of defaults and losses on the assets in the related trust; and o repurchases of assets in the related trust as a result of material breaches of representations and warranties made by the depositor or master servicer. The rate of prepayment of the loans included in, or underlying the assets held in, each trust may affect the average life of the securities. ONLY THE ASSETS OF THE RELATED TRUST ARE AVAILABLE TO PAY YOUR SECURITIES ......... Unless the applicable prospectus supplement provides otherwise, the securities of each series will be payable solely from the assets of the related trust, including any applicable credit enhancement, and will not have a claim against the assets of any other trust. If the assets of the related trust are not sufficient, you may suffer a loss on your securities. Moreover, at the times specified in the related prospectus 6 supplement, assets of the trust may be released to the applicable depositor, master servicer, any servicer, credit enhancement provider or other specified person, if all payments then due on the securities have been made and adequate provision for future payments on the remaining securities has been made. Once released, these assets will no longer be available to make payments on your securities There will be no recourse against the depositor, the master servicer, any servicer or any of their affiliates if a required distribution on the securities is not made. The securities will not represent an interest in, or an obligation of, the depositor, the master servicer, any servicer or any of their affiliates. The depositor's obligations are limited to its representations and warranties concerning the trust assets. Because the depositor has no significant assets, if it is required to repurchase trust assets due to the breach of a representation or warranty, the depositor's source of funds for the repurchase would be limited to: o moneys obtained from enforcing any similar obligation of the seller or originator of the asset, or o funds from a reserve account or other credit enhancement established to pay for asset repurchases. CREDIT ENHANCEMENT MAY NOT BE ADEQUATE TO PREVENT LOSSES ON YOUR SECURITIES ................ Credit enhancement is intended to reduce the effect of delinquent payments or loan losses on those classes of securities that have the benefit of the credit enhancement. Nevertheless, the amount of any credit enhancement is subject to the limits described in the related prospectus supplement. Moreover, the amount of credit enhancement may decline or be depleted under certain circumstances before the securities are paid in full. As a result, securityholders may suffer losses. In addition, credit enhancement may not cover all potential sources of risk of loss, such as fraud or negligence by a loan originator or other parties. THE INTEREST ACCRUAL PERIOD MAY REDUCE THE EFFECTIVE YIELD ON YOUR SECURITIES ............. Interest payable on the securities on any distribution date will include all interest accrued during the related interest accrual period. The interest accrual period for the securities 7 of each series will be specified in the applicable prospectus supplement. If the interest accrual period ends two or more days before the related distribution date, your effective yield will be less than it would be if the interest accrual period ended the day before the distribution date. As a result, your effective yield at par would be less than the indicated coupon rate. ECONOMIC, LEGAL AND OTHER FACTORS COULD REDUCE THE AMOUNT AND DELAY THE TIMING OF RECOVERIES ON DEFAULTED LOANS .......................... The following factors, among others, could adversely affect property values in such a way that the outstanding balance of the related loans would equal or exceed those values: o an overall decline in the residential real estate markets where the properties are located, o failure of borrowers to maintain their properties adequately, and o natural disasters that are not necessarily covered by hazard insurance, such as earthquakes and floods. If property values decline, actual rates of delinquencies, foreclosures and losses on the loans could be higher than those currently experienced by the mortgage lending industry in general. Even if you assume that the mortgaged properties provide adequate security for the loans, substantial delays could occur before defaulted loans are liquidated and the proceeds forwarded to investors. Property foreclosure actions are regulated by state statutes and rules and are subject to many of the delays and expenses that characterize other types of lawsuits if defenses or counterclaims are made. As a result, foreclosure actions can sometimes take several years to complete. Moreover, some states prohibit a mortgage lender from obtaining a judgment against the borrower for amounts not covered by property proceeds if the property is sold outside of a judicial proceeding. As a result, if a borrower defaults, these restrictions may impede the servicer's ability to dispose of the borrower's property and obtain sufficient proceeds to repay the loan in full. In addition, the servicer is entitled to deduct from liquidation proceeds all the expenses 8 it reasonably incurs in trying to recover on the defaulted loan, including legal fees and costs, real estate taxes, and property preservation and maintenance expenses. State laws generally regulate interest rates and other loan charges, require certain disclosures, and often require licensing of loan originators and servicers. In addition, most states have other laws and public policies for the protection of consumers that prohibit unfair and deceptive practices in the origination, servicing and collection of loans. Depending on the provisions of the particular law or policy and the specific facts and circumstances involved, violations may limit the ability of the servicer to collect interest or principal on the loans. Also, the borrower may be entitled to a refund of amounts previously paid and the servicer may be subject to damage claims and administrative sanctions. LOANS SECURED BY JUNIOR LIENS ARE SUBJECT TO ADDITIONAL RISKS .......................... If a loan is in a junior lien position, a decline in property values could extinguish the value of the junior lien loan before having any effect on the related senior lien loan or loans. In general, the expenses of liquidating defaulted loans do not vary directly with the unpaid amount. So, assuming that a servicer would take the same steps to recover a defaulted loan with a small unpaid balance as it would a loan with a large unpaid balance, the net amount realized after paying liquidation expenses would be a smaller percentage of the balance of the small loan than of the large loan. Since the mortgages securing home equity loans typically will be in a junior lien position, the proceeds from any liquidation will be applied first to the claims of the related senior mortgageholders, including foreclosure costs. In addition, a junior mortgage lender may only foreclose subject to any related senior mortgage. As a result, the junior mortgage lender generally must either pay each related senior mortgage lender in full at or before the foreclosure sale or agree to make the regular payments on each senior mortgage. Since the trust will not have any source of funds to satisfy any senior mortgages or to continue making payments on them, the trust's ability as a practical matter to foreclose on any junior lien will be limited. 9 LOANS TO LOWER CREDIT QUALITY BORROWERS ARE MORE LIKELY TO EXPERIENCE LATE PAYMENTS AND DEFAULTS AND INCREASE YOUR RISK OF LOSS ................... Trust assets may have been made to lower credit quality borrowers who fall into one of two categories: o customers with moderate income, limited assets and other income characteristics that cause difficulty in borrowing from banks and other traditional lenders; or o customers with a history of irregular employment, previous bankruptcy filings, repossession of property, charged-off loans or garnishment of wages. The average interest rate charged on loans made to these types of borrowers is generally higher than that charged by lenders that typically impose more stringent credit requirements. There is a greater likelihood of late payments on loans made to these types of borrowers than on loans to borrowers with a higher credit quality. In particular, payments from borrowers with a lower credit quality are more likely to be sensitive to changes in the economic climate in the areas in which they reside. As much as 20% (by principal balance) of the trust assets for any particular series of securities may be contractually delinquent as of the related cut-off date. FAILURE TO PERFECT SECURITY INTERESTS IN MANUFACTURED HOMES MAY RESULT IN LOSSES ON YOUR SECURITIES ............. Each manufactured housing conditional sales contract or installment loan agreement that is included in a trust fund will be secured by a security interest in the related manufactured home. The steps necessary to perfect the security interest in a manufactured home will vary from state-to-state. If, as a result of clerical error or otherwise, the master servicer fails to take the appropriate steps to perfect the security interest in a manufactured home that secures a conditional sales contract or installment loan agreement included in the trust, the trustee may not have a first priority security interest in that manufactured home. Moreover, the master servicer will not amend the certificate of title to a manufactured home to name the trustee as lienholder, note the trustee's interest on the certificate of title or deliver the certificate of title to the trustee. As a result, in some states 10 the assignment of the security interest in the manufactured home to the trustee may not be perfected or may not be effective against creditors of the master servicer or a bankruptcy trustee in the event of a bankruptcy of the master servicer. In addition, courts in many states have held that manufactured homes may, in certain circumstances, become subject to real estate title and recording laws. As a result, the security interest in each manufactured home could be rendered subordinate to the interests of other parties claiming an interest in that manufactured home under applicable state real estate law. The failure to properly perfect a valid, first priority security interest in a manufactured home that secures a conditional sales contract or installment loan agreement included in the trust could lead to losses that, to the extent not covered by any credit enhancement, could adversely affect the yield to maturity of the related securities. MULTIFAMILY LOANS GENERALLY ARE RISKIER THAN SINGLE FAMILY LOANS .......................... Loans that are secured by first liens on rental apartment buildings or projects containing five or more residential units, together with loans that are secured by first liens on mixed-use properties, shall not in the aggregate constitute 10% or more of any pool by principal balance. Multifamily loans are generally considered riskier than single-family loans for the following reasons: o Multifamily loans typically are much larger in amount, which increases the risk represented by the default of a single borrower. o Repayment of a multifamily loan usually depends upon successful management of the related mortgaged property. o Changing economic conditions in particular markets can affect the supply and demand of rental units and the rents that those markets will bear. o Government regulations, including rental control laws, may adversely affect future income from mortgaged properties that are subject to those regulations. 11 In addition, because individual multifamily loans often are relatively large in amount, principal prepayments resulting from defaults, casualties, condemnations or breaches of representations and warranties may adversely affect your yield. LOANS WITH BALLOON PAYMENTS MAY INCREASE YOUR RISK OF LOSS ........................... Certain loans may not be fully amortizing and may require a substantial principal payment (a "balloon" payment) at their stated maturity. Loans of this type involve greater risk than fully amortizing loans since the borrower must generally be able to refinance the loan or sell the related property prior to the loan's maturity date. The borrower's ability to do so will depend on such factors as the level of available mortgage rates at the time of sale or refinancing, the relative strength of the local housing market, the borrower's equity in the property, the borrower's general financial condition and tax laws. IF AMOUNTS IN ANY PRE-FUNDING ACCOUNT ARE NOT USED TO PURCHASE TRUST ASSETS, YOU WILL RECEIVE A PREPAYMENT ON THE RELATED SECURITIES ...... The related prospectus supplement may provide that the depositor transfer a specified amount into a pre-funding account on the date the securities are issued. In this case, the transferred funds may be used only to acquire additional assets for the trust during a set period after the issuance. Any amounts remaining in the account at the end of the period will be distributed as a prepayment of principal to the holders of the related securities. The resulting prepayment could adversely affect the yield on those securities. VIOLATIONS OF APPLICABLE FEDERAL LAWS MAY REDUCE OR DELAY MORTGAGE LOAN COLLECTIONS .................... The loans may also be subject to federal laws relating to the origination and underwriting. These laws o require certain disclosures to the borrowers regarding the terms of the loans; o prohibit discrimination on the basis of age, race, color, sex, religion, marital status, national origin, receipt of public assistance or the exercise of any right under the consumer credit protection act, in the extension of credit; 12 o regulate the use and reporting of information related to the borrower's credit experience; and o require additional application disclosures, limit changes that may be made to the loan documents without the borrower's consent and restrict a lender's ability to declare a default or to suspend or reduce a borrower's credit limit to certain enumerated events. Loans may also be subject to federal laws that impose additional disclosure requirements on creditors for non-purchase money loans with high interest rates or high up-front fees and charges. These laws can impose specific statutory liabilities upon creditors that fail to comply and may affect the enforceability of the related loans. In addition, any assignee of the creditor (including the trust) would generally be subject to all claims and defenses that the borrower could assert against the creditor, including the right to rescind the loan. Loans relating to home improvement contracts may be subject to federal laws that protect the borrower from defective or incomplete work by a contractor. These laws permit the borrower to withhold payment if the work does not meet the quality and durability standards agreed to between the borrower and the contractor. These laws have the effect of subjecting any assignee of the seller (including the trust) to all claims and defenses which the borrower in a sale transaction could assert against the seller of defective goods. If certain provisions of these federal laws are violated, the master servicer may be unable to collect all or part of the principal or interest on the loans. The trust also could be subject to damages and administrative enforcement. PROCEEDS OF LIQUIDATED LOANS GENERALLY ARE PAID FIRST TO PROVIDERS OF TRUST SERVICES .... There is no assurance that the value of the trust assets for any series of securities at any time will equal or exceed the principal amount of the outstanding securities of that series. If trust assets have to be sold because of an event of default or otherwise, providers of services to the trust (including the trustee, the master servicer and the credit enhancer, if any) generally will be entitled to receive the proceeds of the sale to the extent of their unpaid fees and other amounts due them before any proceeds are paid to investors. As a result, the 13 proceeds of such a sale may be insufficient to pay the full amount of interest and principal of the related securities. MORTGAGED PROPERTIES MAY BE SUBJECT TO ENVIRONMENTAL RISKS THAT COULD RESULT IN LOSSES .... Federal, state and local laws and regulations impose a wide range of requirements on activities that may affect the environment, health and safety. In certain circumstances, these laws and regulations impose obligations on owners or operators of residential properties such as those that secure the loans included in a trust. Failure to comply with these laws and regulations can result in fines and penalties that could be assessed against the trust as owner of the related property. In some states, a lien on the property due to contamination has priority over the lien of an existing mortgage. Further, a mortgage lender may be held liable as an "owner" or "operator" for costs associated with the release of petroleum from an underground storage tank under certain circumstances. If the trust is considered the owner or operator of a property, it will suffer losses as a result of any liability imposed for environmental hazards on the property. YOU MAY HAVE DIFFICULTY SELLING YOUR SECURITIES OR OBTAINING YOUR DESIRED PRICE ... No market will exist for the securities before they are issued. In addition, there can be no assurance that a secondary market will develop following the issuance and sale of the securities. Even if a secondary market does develop, you may not be able to sell your securities when you wish to or at the price you want. RATINGS OF THE SECURITIES DO NOT ADDRESS ALL INVESTMENT RISKS AND MUST BE VIEWED WITH CAUTION ................... Any class of securities issued under this prospectus and the accompanying prospectus supplement will be rated in one of the four highest generic rating categories of a nationally recognized rating agency. A rating is based on the adequacy of the value of the trust assets and any credit enhancement for that class and reflects the rating agency's assessment of how likely it is that holders of the class of securities will receive the payments to which they are entitled. A rating does not constitute an assessment of how likely it is that principal prepayments on the loans will be made, the degree to which the rate of prepayments might differ from that originally anticipated or the likelihood of early, optional 14 termination of the securities. You must not view a rating as a recommendation to purchase, hold or sell securities because it does not address the market price or suitability of the securities for any particular investor. There is no assurance that any rating will remain in effect for any given period of time or that the rating agency will not lower or withdraw it entirely in the future. The rating agency could lower or withdraw its rating due to: o any decrease in the adequacy of the value of the trust assets or any related credit enhancement, o an adverse change in the financial or other condition of a credit enhancement provider, or o a change in the rating of the credit enhancement provider's long-term debt. BOOK-ENTRY REGISTRATION MAY LIMIT YOUR ABILITY TO SELL SECURITIES AND DELAY YOUR RECEIPT OF PAYMENTS ............ Limit on Liquidity of Securities. Securities issued in book-entry form may have only limited liquidity in the resale market, since investors may be unwilling to purchase securities for which they cannot obtain physical instruments. Limit on Ability to Transfer or Pledge. Transactions in book-entry securities can be effected only through The Depository Trust Company, its participating organizations, its indirect participants and certain banks. As a result, your ability to transfer or pledge securities issued in book-entry form may be limited. Delays in Distributions. You may experience some delay in the receipt of distributions on book-entry securities since the distributions will be forwarded by the trustee to DTC for DTC to credit the accounts of its participants. In turn, these participants will thereafter credit the distributions to your account either directly or indirectly through indirect participants. There is a Glossary of Terms beginning on page 163 of this prospectus where you will find definitions of the capitalized terms used in this prospectus. 15 THE TRUST FUND The trust fund for each series of certificates will be held by the trustee named in the related prospectus supplement for the benefit of the related securityholders. Each trust fund will consist of one or more pools of the following asset types: o Single Family Loans, o Home Equity Loans, o Multifamily Loans, o Manufactured Housing Contracts, o Home Improvement Contracts, o Agency Securities or o Private Label Securities, in each case as specified in the related prospectus supplement, as well as payments relating to the assets and other accounts, obligations or agreements, as specified in the related prospectus supplement. Whenever the terms "pool," "certificates" and "notes" are used in this prospectus, these terms are intended to apply, unless the context indicates otherwise, to a discrete asset pool and the certificates representing undivided interests in, or the notes secured by the assets of, a particular trust fund consisting primarily of the loans in that pool. Similarly, the term "pass-through rate" refers to the pass-through rate borne by the certificates of a particular series, the term "interest rate" refers to the coupon borne by notes of a particular series and the term "trust fund" refers to the related trust fund. Unless the context indicates otherwise, the term "loan" includes Single Family Loans, Home Equity Loans, Multifamily Loans, Manufactured Housing Contracts and Home Improvement Contracts. Unless the context indicates otherwise, the term "underlying loan" refers to the Single Family Loans, Home Equity Loans, Multifamily Loans, Manufactured Housing Contracts or Home Improvement Contracts backing or securing Agency Securities or Private Label Securities. The securities will be entitled to payment from the assets of the related trust fund or other assets pledged for the benefit of the securityholders as specified in the related prospectus supplement. The securities will not be entitled to payments from the assets of any other trust fund established by the depositor. The loans, Agency Securities and Private Label Securities will be acquired by the applicable depositor, either directly or through affiliates, from sellers and conveyed by that depositor to the trustee named in the related prospectus supplement for the benefit of the holders of the securities of the related series. Sellers may have originated or purchased the assets. Loans 16 acquired by the applicable depositor will have been originated principally in accordance with the general underwriting criteria specified in this prospectus under the heading "Loan Program--Underwriting Standards" and as more specifically provided in a related prospectus supplement. Because the securities issued by a trust will be secured by assets transferred to that trust by one of the depositors you should construe all references in this prospectus to the "depositor" as referring to the applicable depositor that transfers assets to your trust under the applicable operative documents. The master servicer named in the related prospectus supplement will service the trust fund assets, either directly or through sub-servicers, under a servicing agreement for the related series of securities. If the securities are certificates, the servicing agreement will be in the form of a pooling and servicing agreement among the depositor, the master servicer and the trustee. If the securities are notes, the servicing agreement generally will be between the trustee and the master servicer. The following sections contain a brief description of the assets expected to be included in the trust funds. If specific information respecting the assets is not known at the time the related series of securities initially is offered, more general information of the nature described below will be provided in the related prospectus supplement, and specific information will be set forth in a report on Form 8-K to be filed with the SEC within 15 days after the initial issuance of the securities. A copy of the operative agreements with respect to the related series of securities will be attached to the Form 8-K and will be available for inspection at the corporate trust office of the trustee specified in the related prospectus supplement. A schedule of the assets relating to the series will be attached to the related servicing agreement delivered to the trustee upon issuance of the securities. THE MORTGAGE LOANS--GENERAL The loans in each trust fund are secured by the related mortgaged properties. Except in the case of Multifamily Loans, the related mortgaged properties generally consist of detached or semi-detached one- to four-family dwellings, town houses, rowhouses, individual units in condominiums, individual units in planned unit developments and certain other dwelling units. In addition, if the related prospectus supplement so provides, the mortgaged properties may include mixed-use properties. Mixed-use properties consist of structures principally containing residential units but also including other space used for retail, professional and other commercial uses. Loans that are secured by multifamily and mixed-use properties shall not in the aggregate constitute 10% or more of any pool by principal balance. The mortgaged properties may include vacation and second homes, investment properties and leasehold interests as specified in the related prospectus supplement. The mortgaged properties may be located in any one of the fifty states, the District of Columbia, Guam, Puerto Rico or any other territory of the United States. If a loan has a loan-to-value ratio or principal balance in excess of a particular benchmark, it may be covered in whole or in part by a primary mortgage insurance policy. If the loans in a pool are covered by this type of policy, the related prospectus supplement will describe the existence, extent and duration of the coverage. 17 Unless otherwise specified in the related prospectus supplement, all of the loans in a pool will have monthly payments due on the first day of each month. The payment terms of the mortgage loans to be included in a trust fund will be described in the related prospectus supplement and may include one or more of the following features or other features described in the related prospectus supplement: o Interest may be payable at - a fixed rate, - a rate that adjusts from time to time in relation to an index that will be specified in the related prospectus supplement, - a rate that is fixed for a period of time or under certain circumstances and is followed by an adjustable rate, - a rate that otherwise varies from time to time, or - a rate that is convertible from an adjustable rate to a fixed rate. Changes to an adjustable rate may be subject to periodic limitations, maximum rates, minimum rates or a combination of these limitations. Accrued interest may be deferred and added to the principal of a loan for the periods and under the circumstances specified in the related prospectus supplement. A mortgage loan may provide for the payment of interest at a rate lower than the specified interest rate borne by the loan for a period of time or for the life of the loan, and the amount of any difference may be contributed from funds supplied by the seller of the related mortgaged property or another source. o Principal may be - payable on a level debt service basis to fully amortize the loan over its term, - calculated on the basis of an assumed amortization schedule that is significantly longer than the original term to maturity or on an interest rate that is different from the loan rate, or - nonamortizing during all or a portion of the original term. Payment of all or a substantial portion of the principal may be due on maturity in the form of a "balloon" payment. Principal may include interest that has been deferred and added to the principal balance of the loan. o Monthly payments of principal and interest may - be fixed for the life of the loan, - increase over a specified period of time, or 18 - change from period to period. Loans may include limits on periodic increases or decreases in the amount of monthly payments and may include maximum or minimum amounts of monthly payments. o Prepayments of principal may be subject to a prepayment fee, which may be fixed for the life of the loan or may decline over time, and may be prohibited for the life of the loan or during any lockout periods. Some loans may permit prepayments after expiration of the applicable lockout period and may require the payment of a prepayment fee in connection with any subsequent prepayment. Other loans may permit prepayments without payment of a fee unless the prepayment occurs during specified time periods. The loans may include "due-on-sale" clauses which permit the lender to demand payment of the entire loan in connection with the sale or certain transfers of the related mortgaged property. Other loans may be assumable by persons meeting the then applicable underwriting standards of the related seller. Each prospectus supplement will contain information, as of the date of the prospectus supplement and to the extent then specifically known to the depositor, with respect to the loans contained in the related pool, including o the aggregate outstanding principal balance and the average outstanding principal balance of the loans as of the applicable cut-off date, o the type of mortgaged property securing each loan, o the original terms to maturity of the loans, o the largest principal balance and the smallest principal balance of the loans, o the earliest origination date and latest maturity date of the loans, o the aggregate principal balance of loans having loan-to-value ratios at origination exceeding 80%, o the loan rates or fixed percentage rates (APRs) or range of loan rates or APRs borne by the loans, and o the geographical location of the related mortgaged properties on a state-by-state basis. If specific information respecting the loans is not known to the depositor at the time the related securities are initially offered, more general information of the nature described in the immediately preceding sentence will be provided in the related prospectus supplement, and specific information will be set forth in the Form 8-K to be filed with the SEC within 15 days after issuance. The loan-to-value ratio of a loan at any given time is the ratio, expressed as a percentage, of the then outstanding principal balance of the loan to the collateral value of the related mortgaged property. Unless otherwise specified in the related prospectus supplement, the 19 collateral value of a mortgaged property, other than with respect to loans used to refinance an existing loan, is the lesser of (a) the appraised value determined in an appraisal obtained by the originator at origination of the loan and (b) the sales price for the property. In the case of refinance loans, the collateral value of the related mortgaged property is the appraised value of the property determined in an appraisal obtained at the time of refinancing. Unless otherwise specified in the related prospectus supplement, for purposes of calculating the loan-to-value ratio of a Manufactured Housing Contract relating to a new manufactured home, the collateral value is no greater than the sum of o a fixed percentage of the list price of the unit actually billed by the manufacturer to the dealer, net of freight to the dealer site but including any accessories identified in the invoice (i.e., the "manufacturer invoice price"), o the actual cost of any accessories depending on the size of the unit, and o the cost of state and local taxes, filing fees and up to three years' prepaid hazard insurance premiums. Unless otherwise specified in the related prospectus supplement, the collateral value of a used manufactured home is the least of the sales price, appraised value, and National Automobile Dealers' Association book value plus prepaid taxes and hazard insurance premiums. The appraised value of a manufactured home is based upon the age and condition of the manufactured housing unit and the quality and condition of the mobile home park in which it is situated, if applicable. The loan-to-value ratio of a Home Improvement Contract will be computed in the manner described in the related prospectus supplement. No assurance can be given that values of the mortgaged properties have remained or will remain at their levels on the dates of origination of the related loans. If the residential real estate market should experience an overall decline in property values such that the outstanding principal balances of the loans in a particular pool, and any secondary financing on the mortgaged properties, become equal to or greater than the value of the mortgaged properties, the actual rates of delinquencies, foreclosures and losses could be higher than those now generally experienced in the mortgage lending industry. In addition, adverse economic conditions and other factors which may or may not affect real property values may affect the timely payment by borrowers of scheduled payments of principal and interest on the loans and, accordingly, the actual rates of delinquencies, foreclosures and losses with respect to any pool. In the case of Multifamily Loans, these other factors could include o excessive building resulting in an oversupply of rental housing stock, o a decrease in employment reducing the demand for rental units in an area, o federal, state or local regulations and controls affecting rents, prices of goods and energy, 20 o environmental restrictions, o increasing labor and material costs, and o the relative attractiveness to tenants of the mortgaged properties. To the extent that losses are not covered by subordination provisions or alternative arrangements, losses will be borne, at least in part, by the securityholders of the securities of the related series. Unless otherwise specified in the related prospectus supplement, the only obligations of the depositor with respect to a series of certificates will be to obtain certain representations and warranties from the related seller and to assign to the trustee for that series of certificates the depositor's rights with respect to those representations and warranties. See "Operative Agreements--Assignment of Trust Fund Assets" in this prospectus. The obligations of the master servicer with respect to the mortgage loans will consist principally of: o its contractual servicing obligations under the related servicing agreement, including its obligation to enforce the obligations of the sub-servicers or sellers, or both, as more fully described in this prospectus under the headings "Mortgage Loan Program--Representations by Sellers; Repurchases" and "Operative Agreements--Sub-Servicing by Sellers" and "--Assignment of Trust Fund Assets"; and o its obligation to make certain cash advances in the event of delinquencies in payments with respect to the mortgage loans in the amounts described in this prospectus under the heading "Description of the Certificates--Advances". The obligations of the master servicer to make advances may be subject to limitations, to the extent provided in this prospectus and in the related prospectus supplement. SINGLE FAMILY LOANS Unless otherwise specified in the related prospectus supplement, Single Family Loans will consist of loans or participations or other beneficial interests in loans secured by mortgages or deeds of trust that create first liens on one- to four-family residential properties. If specified in the related prospectus supplement, Single Family Loans may include cooperative loans secured by security interests in shares issued by private, non-profit, cooperative housing corporations and in the related proprietary leases or occupancy agreements granting exclusive rights to occupy specific dwelling units in the cooperatives' buildings. If specified in the related prospectus supplement, the assets of the related trust fund may include mortgage participation certificates evidencing interests in Single Family Loans. Single Family Loans may be conventional loans (loans that are not insured or guaranteed by any governmental agency), loans insured by the Federal Housing Administration (FHA) or partially guaranteed by the Veterans Administration (VA), as specified in the related prospectus supplement. Unless otherwise specified in the related prospectus supplement, Single Family Loans will have individual principal balances at origination of not less than $25,000 and not more than $1,000,000, and original terms to stated maturity of from ten to 40 years. 21 If specified in the related prospectus supplement, the mortgaged properties securing Single Family Loans may include five- to eight-family residential properties and small mixed-use properties. In the case of leasehold interests, the term of the leasehold will exceed the scheduled maturity of the related mortgage loan by at least five years, unless otherwise specified in the related prospectus supplement. HOME EQUITY LOANS Unless otherwise specified in the related prospectus supplement, Home Equity Loans will consist of closed-end and/or revolving home equity loans generally secured by junior liens on one- to four-family residential properties. As more fully described in the related prospectus supplement, interest on each revolving credit line loan, excluding introductory rates offered from time to time during promotional periods, is computed and payable monthly on the average daily outstanding principal balance of the loan. Principal amounts on a revolving credit line loan may be drawn down (up to the maximum amount specified in the related prospectus supplement) or repaid from time to time, but may be subject to a minimum periodic payment. Except to the extent provided in the related prospectus supplement, the trust fund will not include any amounts borrowed under a revolving credit line loan after the cut-off date. The full amount of a closed-end loan is advanced at the inception of the loan and generally is repayable in equal (or substantially equal) installments in an amount necessary to fully amortize such loan at its stated maturity. Except to the extent provided in the related prospectus supplement, the original terms to stated maturity of closed-end loans will not exceed 360 months. Under certain circumstances, under either a revolving credit line loan or a closed-end loan, a borrower may choose an interest only payment option, in which event the borrower is obligated to pay only the amount of interest which accrued on the loan during the billing cycle. An interest only payment option may be available for a specified period before the borrower must begin paying at least the minimum monthly payment of a specified percentage of the average outstanding balance of the loan. MULTIFAMILY LOANS Multifamily Loans will consist of loans or participations or other beneficial interests in loans secured by mortgages that create first liens on rental apartment buildings or projects containing five or more residential units. If specified in the related prospectus supplement, the mortgage assets of a trust fund may include mortgage participation certificates evidencing interests in Multifamily Loans. Multifamily Loans may be conventional loans or FHA-insured loans, as specified in the related prospectus supplement. Unless otherwise specified in the related prospectus supplement, all Multifamily Loans will have original terms to stated maturity of not more than 40 years. Multifamily Loans shall not constitute 10% or more of any pool by principal balance. Mortgaged properties securing Multifamily Loans may include high-rise, mid-rise and garden apartments. Multifamily Loans may be secured by apartment buildings owned by cooperatives. A cooperative owns all the apartment units in its building and all common areas and is owned by tenant-stockholders who, through ownership of stock, shares or membership 22 certificates in the corporation, receive proprietary leases or occupancy agreements which confer exclusive rights to occupy specific apartments or units. Generally, a tenant-stockholder of a cooperative must make a monthly payment to the cooperative representing such tenant-stockholder's pro rata share of the cooperative's payments for the cooperative's mortgage loan, real property taxes, maintenance expenses and other capital or ordinary expenses. Those payments are in addition to any payments of principal and interest the tenant-stockholder must make on any loans to the tenant-stockholder secured by his shares in the cooperative. The cooperative will be directly responsible for building management and, in most cases, payment of real estate taxes and hazard and liability insurance. A cooperative's ability to meet debt service obligations on a Multifamily Loan, as well as all other operating expenses, will be dependent in large part on the receipt of maintenance payments from the tenant-stockholders, as well as any rental income from units or commercial areas the cooperative might control. Unanticipated expenditures may in some cases have to be paid by special assessments on the tenant-stockholders. MANUFACTURED HOUSING CONTRACTS Manufactured Housing Contracts will consist of manufactured housing conditional sales contracts and installment sales or loan agreements, each secured by a manufactured home. Manufactured Housing Contracts may be conventional, insured by the FHA or partially guaranteed by the VA, as specified in the related prospectus supplement. Unless otherwise specified in the related prospectus supplement, each Manufactured Housing Contract will be fully amortizing and will bear interest at a fixed percentage rate or APR. Unless otherwise specified in the related prospectus supplement, Manufactured Housing Contracts will all have individual principal balances at origination of not less than $10,000 and not more than $1,000,000 and original terms to stated maturity of from five to 30 years. When we use the term "manufactured home" in this prospectus, we mean, as stated in 42 U.S.C. Section 5402(6), "a structure, transportable in one or more sections which, in the traveling mode, is eight body feet or more in width or forty body feet or more in length or, when erected on site, is three hundred twenty or more square feet, and which is built on a permanent chassis and designed to be used as a dwelling with or without a permanent foundation when connected to the required utilities, and includes the plumbing, heating, air conditioning, and electrical systems contained therein; except that such term shall include any structure which meets all the requirements of this paragraph except the size requirements and with respect to which the manufacturer voluntarily files a certification required by the Secretary of Housing and Urban Development and complies with the standards established under this chapter." Each prospectus supplement will specify for the Manufactured Housing Contracts contained in the related trust fund, among other things, the dates of origination of the Manufactured Housing Contracts, the APRs on the Manufactured Housing Contracts, the loan-to-value ratios of the Manufactured Housing Contracts, the minimum and maximum outstanding principal balances as of the cut-off date and the average outstanding principal balance, the outstanding principal balances of the Manufactured Housing Contracts included in the related trust fund, and the original maturities of the Manufactured Housing Contracts and the last maturity date of any Manufactured Housing Contract. 23 HOME IMPROVEMENT CONTRACTS Home Improvement Contracts are originated by home improvement contractors, thrifts or commercial mortgage bankers in the ordinary course of business. As specified in the related prospectus supplement, the Home Improvement Contracts will either be unsecured or secured by mortgages or deeds of trust generally creating a junior lien on the related mortgaged properties, or secured by purchase money security interests in the financed home improvements. Unless otherwise specified in the related prospectus supplement, the Home Improvement Contracts will be fully amortizing and may have fixed interest rates or adjustable interest rates and may provide for other payment characteristics as described in the related prospectus supplement. Unless otherwise specified in the related prospectus supplement, the home improvements securing the Home Improvement Contracts will include, but are not limited to, replacement windows, house siding, new roofs, swimming pools, satellite dishes, kitchen and bathroom remodeling goods and solar heating panels. AGENCY SECURITIES Government National Mortgage Association or Ginnie Mae. The Government National Mortgage Association (Ginnie Mae) is a wholly-owned corporate instrumentality of the United States within the Department of Housing and Urban Development. Section 306(g) of Title II of the National Housing Act of 1934, as amended, authorizes Ginnie Mae to guarantee the timely payment of the principal of and interest on certificates which represent an interest in a pool of FHA loans, which are mortgage loans insured by the FHA under the National Housing Act or under Title V of the Housing Act of 1949, or VA loans, which are mortgage loans partially guaranteed by the VA under the Servicemen's Readjustment Act of 1944, as amended, or Chapter 37 of Title 38 of the United States Code. Section 306(g) of the National Housing Act provides that "the full faith and credit of the United States is pledged to the payment of all amounts which may be required to be paid under any guaranty under this subsection." In order to meet its obligations under any such guarantee, Ginnie Mae may, under Section 306(d) of the National Housing Act, borrow from the United States Treasury in an unlimited amount which is at any time sufficient to enable Ginnie Mae to perform its obligations under its guarantee. Ginnie Mae Certificates. Each Ginnie Mae Certificate held in a trust fund will be a "fully modified pass-through" mortgage-backed certificate issued and serviced by a Ginnie Mae issuer that is a mortgage banking company or other financial concern approved by Ginnie Mae or approved by Fannie Mae as a seller-servicer of FHA loans and/or VA loans. The Ginnie Mae Certificates may be either Ginnie Mae I Certificates issued under the Ginnie Mae I program or Ginnie Mae II Certificates issued under the Ginnie Mae II program. The mortgage loans underlying the Ginnie Mae Certificates will consist of FHA loans and/or VA loans. Each such mortgage loan is secured by a one- to four-family or multifamily residential property. Ginnie Mae will approve the issuance of each Ginnie Mae Certificate in accordance with a guaranty agreement between Ginnie Mae and the Ginnie Mae issuer. Pursuant to its guaranty agreement, a Ginnie Mae issuer will be required to advance its own funds in order to make timely payments of all amounts due on each Ginnie Mae Certificate, even if the payments received by the Ginnie 24 Mae issuer on the underlying FHA loans or VA loans are less than the amounts due on the related Ginnie Mae Certificate. The full and timely payment of principal of and interest on each Ginnie Mae Certificate will be guaranteed by Ginnie Mae, which obligation is backed by the full faith and credit of the United States. Each Ginnie Mae Certificate will have an original maturity of not more than 30 years, but may have original maturities of substantially less than 30 years. Each Ginnie Mae Certificate will be based on and backed by a pool of FHA loans or VA loans secured by one- to four-family residential properties and will provide for the payment by or on behalf of the Ginnie Mae issuer to the registered holder of the Ginnie Mae Certificate scheduled monthly payments of principal and interest equal to the registered holder's proportionate interest in the aggregate amount of the monthly principal and interest payment on each FHA Loan or VA Loan underlying the Ginnie Mae Certificate, less the applicable servicing and guarantee fee which together equal the difference between the interest on the FHA Loan or VA Loan and the pass-through rate on the Ginnie Mae Certificate. In addition, each payment will include proportionate pass-through payments of any prepayments of principal on the FHA loans or VA loans underlying the Ginnie Mae Certificate and liquidation proceeds in the event of a foreclosure or other disposition of any such FHA loans or VA loans. If a Ginnie Mae issuer is unable to make the payments on a Ginnie Mae Certificate as they become due, it must promptly notify Ginnie Mae and request Ginnie Mae to make the payments. Upon notification and request, Ginnie Mae will make payments directly to the registered holder of the Ginnie Mae Certificate. In the event no payment is made by a Ginnie Mae issuer and the Ginnie Mae issuer fails to notify and request Ginnie Mae to make the payment, the holder of the Ginnie Mae Certificate will have recourse only against Ginnie Mae to obtain payment. The trustee or its nominee, as registered holder of the Ginnie Mae Certificates held in a trust fund, will have the right to proceed directly against Ginnie Mae under the terms of the guaranty agreements relating to those Ginnie Mae Certificates for any amounts that are not paid when due. All mortgage loans underlying a particular Ginnie Mae I Certificate must have the same interest rate (except for pools of mortgage loans secured by manufactured homes) over the term of the loan. The interest rate on a Ginnie Mae I Certificate will equal the interest rate on the mortgage loans included in the pool of mortgage loans underlying the Ginnie Mae I Certificate, less one-half percentage point per annum of the unpaid principal balance of the mortgage loans. Mortgage loans underlying a particular Ginnie Mae II Certificate may have per annum interest rates that vary from one another by up to one percentage point. The interest rate on each Ginnie Mae II Certificate will be between one-half percentage point and one and one-half percentage points lower than the highest interest rate on the mortgage loans included in the pool of mortgage loans underlying the Ginnie Mae II Certificate (except for pools of mortgage loans secured by manufactured homes). Regular monthly installment payments on each Ginnie Mae Certificate held in a trust fund will be comprised of interest due as specified on the Ginnie Mae Certificate plus the scheduled principal payments on the FHA loans or VA loans underlying the Ginnie Mae Certificate due on the first day of the month in which the scheduled monthly installments on the 25 Ginnie Mae Certificate are due. Regular monthly installments on each Ginnie Mae Certificate are required to be paid to the trustee as registered holder by the 15th day of each month in the case of a Ginnie Mae I Certificate, and are required to be mailed to the trustee by the 20th day of each month in the case of a Ginnie Mae II Certificate. Any principal prepayments on any FHA loans or VA loans underlying a Ginnie Mae Certificate held in a trust fund or any other early recovery of principal on such loan will be passed through to the trustee as the registered holder of the Ginnie Mae Certificate. Ginnie Mae Certificates may be backed by graduated payment mortgage loans or by "buydown" mortgage loans for which funds will have been provided (and deposited into escrow accounts) for application to the payment of a portion of the borrowers' monthly payments during the early years of such mortgage loans. Payments due the registered holders of Ginnie Mae Certificates backed by pools containing "buydown" mortgage loans will be computed in the same manner as payments derived from other Ginnie Mae Certificates and will include amounts to be collected from both the borrower and the related escrow account. The graduated payment mortgage loans will provide for graduated interest payments that, during the early years of such mortgage loans, will be less than the amount of stated interest on such mortgage loans. The interest not so paid will be added to the principal of the graduated payment mortgage loans and, together with interest thereon, will be paid in subsequent years. The obligations of Ginnie Mae and of a Ginnie Mae Issuer will be the same irrespective of whether the Ginnie Mae Certificates are backed by graduated payment mortgage loans or "buydown" mortgage loans. No statistics comparable to the FHA's prepayment experience on level payment, non-"buydown" mortgage loans are available in respect of graduated payment or "buydown" mortgages. Ginnie Mae Certificates related to a series of certificates may be held in book-entry form. If specified in a prospectus supplement, Ginnie Mae Certificates may be backed by multifamily mortgage loans having the characteristics specified in the prospectus supplement. Federal Home Loan Mortgage Corporation or Freddie Mac. The Federal Home Loan Mortgage Corporation (Freddie Mac) is a shareholder-owned, government sponsored enterprise created pursuant to Title III of the Emergency Home Finance Act of 1970, as amended. Freddie Mac was established primarily for the purpose of increasing the availability of mortgage credit for the financing of urgently needed housing. It seeks to provide an enhanced degree of liquidity for residential mortgage investments primarily by assisting in the development of secondary markets for conventional mortgages. The principal activity of Freddie Mac currently consists of the purchase of first lien conventional mortgage loans, or participation interests in the mortgage loans, and the sale of the mortgage loans or participations so purchased in the form of mortgage securities, primarily Freddie Mac Certificates. Freddie Mac is confined to purchasing, so far as practicable, mortgage loans that it deems to be of such quality, type and class as to meet generally the purchase standards imposed by private institutional mortgage investors. Freddie Mac Certificates. Each Freddie Mac Certificate represents an undivided interest in a pool of mortgage loans that may consist of first lien conventional loans, FHA loans or VA loans. Freddie Mac Certificates are sold under the terms of a mortgage participation certificate agreement. A Freddie Mac Certificate may be issued under either Freddie Mac's Cash Program or its Guarantor Program. 26 Mortgage loans underlying the Freddie Mac Certificates held by a trust fund will consist of mortgage loans with original terms to maturity of from ten to 40 years. Each such mortgage loan must meet the applicable standards set forth in the legislation that established Freddie Mac. The pool of loans backing a Freddie Mac Certificate may include whole loans, participation interests in whole loans and undivided interests in whole loans and/or participations comprising another Freddie Mac pool. Under the Guarantor Program, however, the pool of loans backing a Freddie Mac Certificate may include only whole loans or participation interests in whole loans. Freddie Mac guarantees to each registered holder of a Freddie Mac Certificate the timely payment of interest on the underlying mortgage loans to the extent of the applicable certificate rate on the registered holder's pro rata share of the unpaid principal balance outstanding on the underlying mortgage loans represented by that Freddie Mac Certificate, whether or not received. Freddie Mac also guarantees to each registered holder of a Freddie Mac Certificate that the holder will collect all principal on the underlying mortgage loans, without any offset or deduction, to the extent of such holder's pro rata share thereof, but does not, except if and to the extent specified in the related prospectus supplement for a series of certificates, guarantee the timely payment of scheduled principal. Under Freddie Mac's Gold PC Program, Freddie Mac guarantees the timely payment of principal based on the difference between the pool factor, published in the month preceding the month of distribution, and the pool factor published in such month of distribution. Pursuant to its guarantees, Freddie Mac indemnifies holders of Freddie Mac Certificates against any diminution in principal by reason of charges for property repairs, maintenance and foreclosure. Freddie Mac may remit the amount due on account of its guaranty of collection of principal at any time after default on an underlying mortgage loan, but not later than (i) 30 days following foreclosure sale, (ii) 30 days following payment of the claim by any mortgage insurer or (iii) 30 days following the expiration of any right of redemption, whichever occurs later, but in any event no later than one year after demand has been made upon the mortgagor for accelerated payment of principal. In taking actions regarding the collection of principal after default on the mortgage loans underlying Freddie Mac Certificates, including the timing of demand for acceleration, Freddie Mac reserves the right to exercise its judgment with respect to the mortgage loans in the same manner as for mortgage loans which it has purchased but not sold. The length of time necessary for Freddie Mac to determine that a mortgage loan should be accelerated varies with the particular circumstances of each mortgagor, and Freddie Mac has not adopted standards which require that the demand be made within any specified period. Freddie Mac Certificates are not guaranteed by the United States or by any Federal Home Loan Bank and do not constitute debts or obligations of the United States or any Federal Home Loan Bank. The obligations of Freddie Mac under its guarantee are obligations solely of Freddie Mac and are not backed by, or entitled to, the full faith and credit of the United States. If Freddie Mac were unable to satisfy such obligations, distributions to holders of Freddie Mac Certificates would consist solely of payments and other recoveries on the underlying mortgage loans and, accordingly, monthly distributions to holders of Freddie Mac Certificates would be affected by delinquent payments and defaults on such mortgage loans. Registered holders of Freddie Mac Certificates are entitled to receive their monthly pro rata share of all principal payments on the underlying mortgage loans received by Freddie Mac, including any scheduled principal payments, full and partial repayments of principal and 27 principal received by Freddie Mac by virtue of condemnation, insurance, liquidation or foreclosure, and repurchases of the mortgage loans by Freddie Mac or the seller thereof. Freddie Mac is required to remit each registered Freddie Mac Certificateholder's pro rata share of principal payments on the underlying mortgage loans, interest at the Freddie Mac pass-through rate and any other sums such as prepayment fees, within 60 days of the date on which those payments are deemed to have been received by Freddie Mac. Under Freddie Mac's Cash Program, there is no limitation on the amount by which interest rates on the mortgage loans underlying a Freddie Mac Certificate may exceed the pass-through rate on the Freddie Mac Certificate. Under this program, Freddie Mac purchases groups of whole mortgage loans from sellers at specified percentages of their unpaid principal balances, adjusted for accrued or prepaid interest, which, when applied to the interest rate of the mortgage loans and participations purchased, results in the yield (expressed as a percentage) required by Freddie Mac. The required yield, which includes a minimum servicing fee retained by the servicer, is calculated using the outstanding principal balance. The range of interest rates on the mortgage loans and participations in a particular Freddie Mac pool under the Cash Program will vary since mortgage loans and participations are purchased and assigned to a Freddie Mac pool based upon their yield to Freddie Mac rather than on the interest rate on the underlying mortgage loans. Under Freddie Mac's Guarantor Program, the pass-through rate on a Freddie Mac Certificate is established based upon the lowest interest rate on the underlying mortgage loans, minus a minimum servicing fee and the amount of Freddie Mac's management and guaranty income as agreed upon between the related seller and Freddie Mac. Freddie Mac Certificates duly presented for registration of ownership on or before the last business day of a month are registered effective as of the first day of the month. The first remittance to a registered holder of a Freddie Mac Certificate will be distributed so as to be received normally by the 15th day of the second month following the month in which the purchaser becomes a registered holder of the Freddie Mac Certificates. Thereafter, such remittance will be distributed monthly to the registered holder so as to be received normally by the 15th day of each month. The Federal Reserve Bank of New York maintains book-entry accounts with respect to Freddie Mac Certificates sold by Freddie Mac, and makes payments of principal and interest each month to the registered Freddie Mac Certificateholders in accordance with the holders' instructions. Federal National Mortgage Association or Fannie Mae. The Federal National Mortgage Association (Fannie Mae) is a federally chartered and privately owned corporation organized and existing under the Federal National Mortgage Association Charter Act, as amended. Fannie Mae was originally established in 1938 as a United States government agency to provide supplemental liquidity to the mortgage market and was transformed into a stockholder-owned and privately-managed corporation by legislation enacted in 1968. Fannie Mae provides funds to the mortgage market primarily by purchasing mortgage loans from lenders, thereby replenishing their funds for additional lending. Fannie Mae acquires funds to purchase mortgage loans from many capital market investors that may not ordinarily invest in mortgages, thereby expanding the total amount of funds available for housing. Operating nationwide, Fannie Mae helps to redistribute mortgage funds from capital-surplus to capital-short areas. 28 Fannie Mae Certificates. Fannie Mae Certificates are Guaranteed Mortgage Pass-Through Certificates representing fractional undivided interests in a pool of mortgage loans formed by Fannie Mae. Each mortgage loan must meet the applicable standards of the Fannie Mae purchase program. Mortgage loans comprising a pool are either provided by Fannie Mae from its own portfolio or purchased pursuant to the criteria of the Fannie Mae purchase program. Mortgage loans underlying Fannie Mae Certificates held by a trust fund will consist of conventional mortgage loans, FHA loans or VA loans. Original maturities of substantially all of the conventional, level payment mortgage loans underlying a Fannie Mae Certificate are expected to be from eight to 15 years or from 20 to 40 years. The original maturities of sub-stantially all of the fixed rate level payment FHA loans or VA loans are expected to be 30 years. Mortgage loans underlying a Fannie Mae Certificate may have annual interest rates that vary by as much as two percentage points from one another. The rate of interest payable on a Fannie Mae Certificate is equal to the lowest interest rate of any mortgage loan in the related pool, less a specified minimum annual percentage representing servicing compensation and Fannie Mae's guaranty fee. Under a regular servicing option pursuant to which the mortgagee or each other servicer assumes the entire risk of foreclosure losses, the annual interest rates on the mortgage loans underlying a Fannie Mae Certificate will be between 25 basis points and 250 basis points greater than is its annual pass-through rate. Under a special servicing option pursuant to which Fannie Mae assumes the entire risk for foreclosure losses, the annual interest rates on the mortgage loans underlying a Fannie Mae Certificate will generally be between 30 basis points and 255 basis points greater than the annual Fannie Mae Certificate pass-through rate. If specified in the related prospectus supplement, Fannie Mae Certificates may be backed by adjustable rate mortgages. Fannie Mae guarantees to each registered holder of a Fannie Mae Certificate that it will distribute amounts representing the holder's proportionate share of scheduled principal and interest payments at the applicable pass-through rate provided for by the Fannie Mae Certificate on the underlying mortgage loans, whether or not received, and the holder's proportionate share of the full principal amount of any foreclosed or other finally liquidated mortgage loan, whether or not such principal amount is actually recovered. The obligations of Fannie Mae under its guarantees are obligations solely of Fannie Mae and are not backed by, or entitled to, the full faith and credit of the United States. Although the Secretary of the Treasury of the United States has discretionary authority to lend Fannie Mae up to $2.25 billion outstanding at any time, neither the United States nor any of its agencies or instrumentalities is obligated to finance Fannie Mae's operations or to assist Fannie Mae in any other manner. If Fannie Mae were unable to satisfy its obligations, distributions to holders of Fannie Mae Certificates would consist solely of payments and other recoveries on the underlying mortgage loans and, accordingly, monthly distributions to holders of Fannie Mae Certificates would be affected by delinquent payments and defaults on such mortgage loans. Fannie Mae Certificates evidencing interests in pools of mortgage loans formed on or after May 1, 1985 (other than Fannie Mae Certificates backed by pools containing graduated payment mortgage loans or mortgage loans secured by multifamily projects) are available in book-entry form only. Distributions of principal and interest on each Fannie Mae Certificate will be made by Fannie Mae on the 25th day of each month to the persons in whose name the Fannie 29 Mae Certificate is entered in the books of the Federal Reserve Banks (or registered on the Fannie Mae Certificate register in the case of fully registered Fannie Mae Certificates) as of the close of business on the last day of the preceding month. With respect to Fannie Mae Certificates issued in book-entry form, distributions will be made by wire and, with respect to fully registered Fannie Mae Certificates, distributions will be made by check. Stripped Mortgage-Backed Securities. Agency Securities may consist of one or more stripped mortgage-backed securities as described in this prospectus and in the related prospectus supplement. Each Agency Security of this type will represent an undivided interest in all or part of the principal distributions - but not the interest distributions, or the interest distributions - but not the principal distributions, or in some specified portion of the principal and interest distributions on certain Freddie Mac, Fannie Mae or Ginnie Mae Certificates. The underlying securities will be held under a trust agreement by Freddie Mac, Fannie Mae or Ginnie Mae, each as trustee, or by another trustee named in the related prospectus supplement. Freddie Mac, Fannie Mae or Ginnie Mae will guaranty each stripped Agency Security to the same extent as such entity guarantees the underlying securities backing the stripped Agency Security, unless otherwise specified in the related prospectus supplement. Other Agency Securities. If specified in the related prospectus supplement, a trust fund may include other mortgage pass-through certificates issued or guaranteed by Freddie Mac, Fannie Mae or Ginnie Mae. The characteristics of any such mortgage pass-through certificates will be described in the related prospectus supplement. If specified in the related prospectus supplement, a combination of different types of Agency Securities may be held in a trust fund. PRIVATE LABEL SECURITIES General. Private Label Securities or PLS (i.e., private mortgage-backed or asset-backed securities) may consist of o pass-through certificates or participation certificates evidencing an undivided interest in a pool of Single Family Loans, Home Equity Loans, Multifamily Loans, Manufactured Housing Contracts or Home Improvement Contracts, o collateralized mortgage obligations secured by Single Family Loans, Home Equity Loans, Multifamily Loans, Manufactured Housing Contracts or Home Improvement Contracts, or o other Private Label Securities. Private Label Securities may include stripped mortgage-backed securities representing an undivided interest in all or a part of the principal distributions - but not the interest distributions, or the interest distributions - but not the principal distributions, or in some specified portion of the principal and interest distributions on certain mortgage loans. The Private Label Securities will have been issued pursuant to a pooling and servicing agreement, an indenture or similar agreement. Unless otherwise specified in the related prospectus supplement, the seller/servicer of the underlying loans will have entered into a PLS Agreement with a trustee under that agreement. The PLS trustee or its agent, or a custodian, will possess the mortgage loans underlying the Private Label Securities. The loans underlying the Private Label Securities will 30 be serviced by a PLS servicer directly or by one or more subservicers which may be subject to the supervision of the PLS servicer. Unless otherwise specified in the related prospectus supplement, the PLS servicer will be a Fannie Mae- or Freddie Mac-approved servicer and, if FHA loans underlie the Private Label Securities, approved by HUD as an FHA mortgagee. The PLS issuer will be a financial institution or other entity engaged generally in the business of mortgage lending, a public agency or instrumentality of a state, local or federal government, or a limited purpose corporation organized for the purpose of, among other things, establishing trusts and acquiring and selling housing loans to trusts and selling beneficial interests in trusts. If specified in the related prospectus supplement, the PLS issuer may be an affiliate of the depositor. The obligations of the PLS issuer will generally be limited to certain representations and warranties with respect to the assets it conveys to the related trust. Unless otherwise specified in the related prospectus supplement, the PLS issuer will not have guaranteed any of the assets conveyed to the related trust or any of the Private Label Securities issued under the PLS agreement. Additionally, although the loans underlying the Private Label Securities may be guaranteed by an agency or instrumentality of the United States, the Private Label Securities themselves will not be so guaranteed, unless the related prospectus supplement specifies otherwise. Distributions of principal and interest will be made on the Private Label Securities on the dates specified in the related prospectus supplement. The Private Label Securities may be entitled to receive nominal or no principal distributions or nominal or no interest distributions. Principal and interest distributions will be made on the Private Label Securities by the PLS trustee or the PLS servicer. The PLS issuer or the PLS servicer may have the right to repurchase assets underlying the Private Label Securities after a particular date or under other circumstances specified in the related prospectus supplement. Underlying Loans. The loans underlying the PMBS may consist of fixed rate, level payment, fully amortizing loans or graduated payment mortgage loans, buydown loans, adjustable rate mortgage loans, or loans having balloon or other special payment features. The loans may be secured by one- to four-family residential property, small mixed-use property, five- to eight-family residential property, multifamily property, manufactured homes or by an assignment of the proprietary lease or occupancy agreement relating to a specific dwelling within a cooperative and the related shares issued by the cooperative. Except as otherwise specified in the related prospectus supplement, the loans will have the following characteristics: o no loan will have had a loan-to-value ratio at origination in excess of 95%; o each Single Family Loan secured by a mortgaged property having a loan-to-value ratio in excess of 80% at origination will be covered by a primary mortgage insurance policy; o each loan will have had an original term to stated maturity of not less than five years and not more than 40 years; 31 o no loan that was more than 89 days delinquent as to the payment of principal or interest will have been eligible for inclusion in the assets under the related PLS agreement; o each loan (other than a cooperative loan) will be required to be covered by a standard hazard insurance policy (which may be a blanket policy); and o each loan (other than a cooperative loan or a Manufactured Housing Contract) will be covered by a title insurance policy. Credit Support Relating to Private Label Securities. Credit support in the form of reserve funds, subordination of other private label securities issued under the PLS agreement, letters of credit, surety bonds, insurance policies or other types of credit support may be provided with respect to the loans underlying the Private Label Securities or with respect to the Private Label Securities themselves. Additional Information. If the trust fund for a series of securities includes Private Label Securities, the related prospectus supplement will specify o the aggregate approximate principal amount and type of Private Label Securities to be included in the trust fund, o the maximum original term-to-stated maturity of the PLS, o the weighted average term-to-stated maturity of the PLS, o the pass-through or certificate rate of the PLS, o the weighted average pass-through or interest rate of the PLS, o the PLS issuer, the PLS servicer (if other than the PLS issuer) and the PLS trustee, o certain characteristics of any credit support such as reserve funds, insurance policies, surety bonds, letters of credit or guaranties relating to the loans underlying the Private Label Securities themselves, o the terms on which the loans underlying the PLS may, or are required to, be purchased prior to their stated maturity or the stated maturity of the PLS and o the terms on which mortgage loans may be substituted for those originally underlying the PLS. In addition, the related prospectus supplement will provide information about the loans which comprise the underlying assets of the Private Label Securities, including o the payment features of the mortgage loans, o the approximate aggregate principal balance, if known, of underlying loans insured or guaranteed by a governmental entity, 32 o the servicing fee or range of servicing fees with respect to the loans, and o the minimum and maximum stated maturities of the underlying loans at origination. INCORPORATION OF CERTAIN INFORMATION BY REFERENCE We incorporate in this prospectus by reference all documents and reports filed by the applicable depositor, Greenwich Capital Acceptance, Inc. (GCA) or Financial Acceptance Securities Corp. (FASCO), with respect to a trust fund pursuant to Section 13(a), 14 or 15(d) of the Securities Exchange Act of 1934, as amended, prior to the termination of the offering of certificates evidencing interests in that trust fund. Upon request by any person to whom this prospectus is delivered in connection with the offering of one or more classes of certificates, the applicable depositor will provide without charge a copy of any such documents and/or reports incorporated herein by reference, in each case to the extent that the documents or reports relate to those classes of certificates, other than the exhibits to the documents (unless the exhibits are specifically incorporated by reference in such documents). Requests to the depositors should be directed in writing to: Paul D. Stevelman, Greenwich Capital Acceptance, Inc. or Financial Acceptance Securities Corp. as applicable, 600 Steamboat Road, Greenwich, Connecticut 06830, telephone number (203) 625-2700. Each depositor has determined that its financial statements are not material to the offering of any of the securities. Investors may read and copy the documents and/or reports incorporated herein by reference at the Public Reference Room of the Securities and Exchange Commission at 450 Fifth Street, N.W., Washington, DC 20549. Investors may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. In addition, the SEC maintains a website at http:\\www.sec.gov containing reports, proxy and information statements and other information regarding issuers, including each trust fund, that file electronically with the SEC. USE OF PROCEEDS The net proceeds to be received from the sale of the securities will be applied by the applicable depositor to the purchase of trust fund assets or will be used by the depositor for general corporate purposes. The depositors expect to sell securities in series from time to time, but the timing and amount of offerings of securities will depend on a number of factors, including the volume of assets acquired by the depositors, prevailing interest rates, availability of funds and general market conditions. THE DEPOSITORS Greenwich Capital Acceptance, Inc. is a Delaware corporation organized on April 23, 1987, and Financial Asset Securities Corp. is a Delaware corporation organized on August 2, 1995, in each case for the limited purpose of acquiring, owning and transferring mortgage assets and selling interests in those assets or bonds secured by those assets. Each of the depositors is a limited purpose finance subsidiary of Greenwich Capital Holdings, Inc. and an affiliate of Greenwich Capital Markets, Inc. Greenwich Capital Markets, Inc. is a registered broker-dealer engaged in the U.S. government securities market and related capital markets business. Each of 33 the depositors maintains its principal office at 600 Steamboat Road, Greenwich, Connecticut 06830 and the telephone number is (203) 625-2700. Neither the depositors nor any of their affiliates will ensure or guarantee distributions on the securities of any series. LOAN PROGRAM The depositor will have purchased the loans, either directly or through affiliates, from sellers. Unless otherwise specified in the related prospectus supplement, the loans acquired by the depositor will have been originated in accordance with the underwriting criteria specified under the heading "--Underwriting Standards" below. UNDERWRITING STANDARDS Unless otherwise specified in the related prospectus supplement, each seller will represent and warrant that all the loans that it originated and/or sold to the depositor or one of the depositor's affiliates will have been underwritten in accordance with standards consistent with those utilized by institutional lenders generally during the period of origination for similar types of loans. As to any loan insured by the FHA or partially guaranteed by the VA, the related seller will represent that it has complied with the underwriting policies of the FHA or the VA, as the case may be. Underwriting standards are applied by or on behalf of a lender to evaluate a prospective borrower's credit standing and repayment ability, and the value and adequacy of the mortgaged property as collateral. In general, a prospective borrower applying for a loan is required to fill out a detailed application designed to provide to the underwriting officer pertinent credit information, including the principal balance and payment history of any senior lien loan on the related mortgaged property. As part of the description of the borrower's financial condition, the borrower generally is required to provide a current list of assets and liabilities and a statement of income and expenses, as well as an authorization to apply for a credit report which summarizes the borrower's credit history with local merchants and lenders and any record of bankruptcy. Generally, an employment verification is obtained from an independent source, which is typically the borrower's employer. The verification reports the borrower's length of employment with its employer, current salary, and expectations of continued employment. If a prospective borrower is self-employed, the borrower may be required to submit copies of signed tax returns. The borrower may also be required to authorize verification of deposits at financial institutions where the borrower has demand or savings accounts. Underwriting standards which pertain to the creditworthiness of borrowers seeking Multifamily Loans will be described in the related prospectus supplement. In determining the adequacy of the mortgaged property as collateral, an appraisal is made of each property considered for financing. The appraiser is required to inspect the property and verify that it is in good repair and that construction, if new, has been completed. The appraisal generally is based on the market value of comparable homes, the estimated rental income (if considered applicable by the appraiser) and the cost of replacing the subject home. In connection with a Manufactured Housing Contract, the appraisal is based on recent sales of comparable 34 manufactured homes and, when deemed applicable, a replacement cost analysis based on the cost of a comparable manufactured home. In connection with a Multifamily Loan, the appraisal must specify whether an income analysis, a market analysis or a cost analysis was used. An appraisal employing the income approach to value analyzes a multifamily project's cashflow, expenses, capitalization and other operational information in determining the property's value. The market approach to value focuses its analysis on the prices paid for the purchase of similar properties in the multifamily project's area, with adjustments made for variations between these other properties and the multifamily project being appraised. The cost approach calls for the appraiser to make an estimate of land value and then determine the current cost of reproducing the building less any accrued depreciation. In any case, the value of the property being financed, as indicated by the appraisal, must be such that it currently supports, and is anticipated to support in the future, the outstanding loan balance. Once all applicable employment, credit and property information is received, a determination generally is made as to whether the prospective borrower has sufficient monthly income available o to meet the borrower's monthly obligations on the proposed loan, generally determined on the basis of the monthly payments due in the year of origination, and other expenses related to the mortgaged property such as property taxes and hazard insurance, and o to meet monthly housing expenses and other financial obligations and monthly living expenses. The underwriting standards applied by sellers, particularly with respect to the level of loan documentation and the borrower's income and credit history, may be varied in appropriate cases where factors such as low loan-to-value ratios or other favorable credit exist. In the case of a loan secured by a leasehold interest in real property, the title to which is held by a third-party lessor, the related seller will represent and warrant, among other things, that the remaining term of the lease and any sublease is at least five years longer than the remaining term of the related mortgage note. Some types of loans which may be included in the pools may involve additional uncertainties not present in traditional types of loans. For example, loans may provide for escalating or variable payments by the borrower. These types of loans are generally underwritten on the basis of a judgment that borrowers will have the ability to make the monthly payments required initially. In some instances, however, their incomes may not be sufficient to permit continued loan payments as payments increase. These types of loans may also be underwritten primarily upon the basis of loan-to-value ratios or other favorable credit factors. QUALIFICATIONS OF SELLERS Unless otherwise specified in the related prospectus supplement, each seller will be required to satisfy the qualifications set forth in the following sentence. Each seller must 35 o be an institution experienced in originating and servicing loans of the type contained in the related pool in accordance with accepted practices and prudent guidelines, o maintain satisfactory facilities to originate and service the loans, o be a seller/servicer approved by either Fannie Mae or Freddie Mac, and o be a mortgagee approved by the FHA or an institution the deposit accounts in which are insured by the Federal Deposit Insurance Corporation (FDIC). REPRESENTATIONS BY SELLERS; REPURCHASES OR SUBSTITUTIONS Each seller will have made representations and warranties in respect of the loans sold by that seller and evidenced by a series of securities. These representations and warranties, unless otherwise provided in the related prospectus supplement, generally include the following: o Except in the case of a cooperative loan, each Single Family Loan, Home Equity Loan or Multifamily Loan has a title insurance policy, required hazard insurance policy and any required primary mortgage insurance policy, each of which was in effect at the origination of the loan and remained in effect on the date that the loan was purchased from the seller by or on behalf of the depositor. If the related mortgaged property is located in an area where title insurance policies are generally not available, an attorney's certificate of title may be substituted. o The seller had good title to each loan and no loan was subject to offsets, defenses, counterclaims or rights of rescission except to the extent that any specified buydown agreement may forgive certain indebtedness of a borrower. o Each loan constituted a valid lien on, or a perfected security interest with respect to, the related mortgaged property, subject only to permissible title insurance exceptions, if applicable, and certain other exceptions described in the related servicing agreement. o The mortgaged property was free from damage and was in acceptable condition. o There were no delinquent tax or assessment liens against the mortgaged property. o No required payment on a loan was delinquent more than 30 days. o Each loan was made in compliance with, and is enforceable under, all applicable local, state and federal laws and regulations, in all material respects. If specified in the related prospectus supplement, the representations and warranties of a seller in respect of a loan will be made not as of the related cut-off date but as of the date on which the seller sold the loan to the depositor or one of its affiliates. Under these circumstances, a substantial period of time may have elapsed between that date and the date of initial issuance of the series of securities evidencing an interest in, or secured by, the loan. Since the representations and warranties of a seller do not address events that may occur following the sale 36 of the loan by that seller, the repurchase obligation described in the following paragraph will not arise if the relevant event that would otherwise have given rise to the obligation occurs after the date when the seller sold the loan to the depositor or one of its affiliates. However, the depositor will not include any loan in a trust fund if anything has come to the depositor's attention that would cause it to believe that the representations and warranties of the related seller regarding that loan will not be accurate and complete in all material respects as of the date when the related series of securities is issued. If the master servicer is also a seller of loans for a particular series, these representations will be in addition to the representations and warranties made by the master servicer in its capacity as master servicer. Unless otherwise specified in the related prospectus supplement, the seller will make certain representations and warranties in connection with Manufactured Housing Contracts included in the trust with respect to the enforceability of coverage under any related insurance policy or hazard insurance policy. The seller, if required by the rating agencies rating the related issue of securities, will obtain a surety bond, guaranty, letter of credit or other acceptable instrument to support its repurchase or substitution obligation specified in the immediately following paragraph. The master servicer, or the trustee if the master servicer is the seller, will promptly notify the relevant seller of any breach of any representation or warranty made by that seller in respect of a loan which materially and adversely affects the interests of the securityholders in the loan. Unless otherwise specified in the related prospectus supplement, if the seller cannot cure the breach within 90 days after notice from the master servicer or the trustee, as the case may be, then the seller will be obligated either o to repurchase that loan from the trust fund at a purchase price equal to 100% of the loan's unpaid principal balance as of the date of the repurchase plus accrued interest thereon to the first day of the month following the month of repurchase at the related loan rate, less any advances made by the seller or amount payable as related servicing compensation if the seller is the master servicer, or o substitute for that loan a replacement loan that satisfies the requirements set forth in the related prospectus supplement. This repurchase or substitution obligation will constitute the sole remedy available to the securityholders or the trustee for a breach of representation or warranty by the seller. Except in those cases in which the master servicer is the seller, the master servicer will be required under the applicable servicing agreement to enforce this obligation for the benefit of the trustee and the related securityholders, following the practices it would employ in its good faith business judgment were it the owner of the loan. If a REMIC election is to be made with respect to a trust fund, unless otherwise provided in the related prospectus supplement, the master servicer or a holder of the related residual certificate will be obligated to pay any prohibited transaction tax which may arise in connection with a repurchase or substitution. Unless otherwise specified in the related prospectus supplement, the master servicer will be entitled to reimbursement for any such payment from the 37 assets of the related trust fund or from any holder of the related residual certificate. See "Description of the Securities--General" in this prospectus. Neither the depositor nor the master servicer - unless the master servicer is the seller - will be obligated to purchase a loan if the seller defaults on its obligation to do so. No assurance can be given that sellers will carry out their respective repurchase or substitution obligations with respect to the loans. However, to the extent that a breach of a representation and warranty of a seller may also constitute a breach of a representation made by the master servicer, the master servicer may have a repurchase or substitution obligation as described under the heading "Operative Agreements--Assignment of Trust Fund Assets" in this prospectus. DESCRIPTION OF THE SECURITIES Either Greenwich Capital Acceptance, Inc. or Financial Asset Securities Corp., as depositor, will establish a trust fund for each series of securities. A particular series of securities will consist of mortgage-backed or asset-backed certificates or notes or both certificates and notes. Each series of certificates will be issued pursuant to a pooling and servicing agreement or a trust agreement, dated as of the related cut-off date, among the depositor, the trustee and, if the trust includes loans, the related master servicer. The provisions of each pooling and servicing agreement or trust agreement will vary depending upon the nature of the related certificates and the related trust fund. Forms of pooling and servicing and trust agreements are exhibits to the Registration Statement of which this prospectus forms a part. Each series of notes will be issued under an indenture between the related trust fund and the trustee named in the prospectus supplement for that series. If the trust fund includes loans, the trust fund and the servicer of the loans will also enter into a servicing agreement. Forms of indenture and servicing agreement have been filed as an exhibit to the registration statement of which this prospectus forms a part. The following summaries describe the material provisions which may appear in each pooling and servicing agreement or trust agreement, in the case of a series of certificates, and in each indenture and servicing agreement, in the case of a series of notes. The prospectus supplement for each series of securities will describe any provision of the operative agreements relating to that series which materially differs from the description contained in this prospectus. The summaries do not purport to be complete and are subject to, and are qualified in their entirety by reference to, all of the provisions of the related agreements and prospectus supplement. The applicable depositor will provide a copy of the operative agreements (without exhibits) relating to any series without charge, upon written request of a holder of record of a certificate or note of the series, addressed to Greenwich Capital Acceptance, Inc. or Financial Asset Securities Corp., as applicable, 600 Steamboat Road, Greenwich, Connecticut 06830, Attention: Asset Backed Finance Group. 38 GENERAL Unless otherwise specified in the related prospectus supplement, the securities of each series will o be issued in fully registered form only, in the authorized denominations specified in the prospectus supplement, o evidence specified beneficial ownership interests in the trust fund assets, in the case of a series of certificates, or be secured by the pledge of the trust fund assets, in the case of a series of notes, and o not be entitled to payments in respect of the assets included in any other trust fund established by the depositor. The securities will not represent obligations of the depositor or any of its affiliates. The loans will not be insured or guaranteed by any governmental entity or other person, unless otherwise specified in the related prospectus supplement. To the extent provided in the related operative agreements, each trust fund will consist of the following: o the assets as from time to time are subject to the related agreement, exclusive of any amounts specified in the related prospectus supplement as "retained interest"; o those assets as from time to time are required to be deposited in the related security account as defined under the heading "Operative Agreements--Payments on Loans; Deposits to Security Account" in this prospectus; o property which secured a loan and which is acquired on behalf of the securityholders by foreclosure or deed in lieu of foreclosure; and o primary mortgage insurance policies, FHA insurance and VA guarantees, if any, and any other insurance policies or other forms of credit enhancement required to be maintained pursuant to the related agreement. If specified in the related prospectus supplement, a trust fund may also include one or more of the following: o reinvestment income on payments received on the trust fund assets, o a reserve fund, o a pool insurance policy, o a special hazard insurance policy, o a bankruptcy bond, 39 o one or more letters of credit, o a surety bond, o guaranties, or o similar instruments or other agreements. Each series of securities will be issued in one or more classes. Each class of securities of a series will evidence beneficial ownership of a specified portion or percentage - which may be 0% - of future interest payments and a specified portion or percentage - which may be 0% - of future principal payments on the assets in the related trust fund. A series of securities may include one or more classes that are senior in right to payment to one or more other classes of securities of the series. A series or classes of securities may be covered by insurance policies, surety bonds or other forms of credit enhancement, in each case as described in this prospectus and in the related prospectus supplement. Distributions on one or more classes of a series of securities may be made prior to being made on one or more other classes, after the occurrence of specified events, in accordance with a schedule or formula, on the basis of collections from designated portions of the trust fund assets or on a different basis, in each case as specified in the related prospectus supplement. The timing and amounts of distributions may vary among classes or over time as specified in the related prospectus supplement. Unless otherwise specified in the related prospectus supplement, distributions of principal and interest, or, where applicable, of principal only or interest only, on the related securities will be made by the trustee on each distribution date. Distributions will be made monthly, quarterly, semi-annually, or at such other intervals and on the dates as are specified in the related prospectus supplement, in proportion to the percentages specified in the prospectus supplement. Distributions will be made to the persons in whose names the securities are registered at the close of business on the applicable record date specified in the related prospectus supplement. Distributions will be made in the manner specified in the related prospectus supplement to the persons entitled to them at the address appearing in the register maintained for the securityholders. In the case of the final distribution in retirement of the securities, payment will be made only upon presentation and surrender of the securities at the office or agency of the trustee or other person specified in the notice to securityholders of the final distribution. The securities will be freely transferable and exchangeable at the corporate trust office of the trustee named in the related prospectus supplement. No service charge will be made for any registration of exchange or transfer of securities of any series but the trustee may require payment of a sum sufficient to cover any related tax or other governmental charge. Under current law, the purchase and holding of certain classes of securities by or on behalf of, or with the assets of, an employee benefit plan or other retirement plan or arrangement subject to the provisions of ERISA or Section 4975 of the Internal Revenue Code may result in "prohibited transactions" within the meaning of Section 406 of ERISA or Section 4975 of the Code. See "ERISA Considerations" in this prospectus. As to each series of securities, an election may be made to treat the related trust fund, or designated portion of the trust fund, as a "real estate mortgage investment conduit" (REMIC) as 40 defined in the Internal Revenue Code. The related prospectus supplement will specify whether a REMIC election is to be made. Alternatively, the operative agreement for a series may provide that a REMIC election may be made at the discretion of the depositor or the master servicer and may only be made if certain conditions are satisfied. As to any series of securities for which a REMIC election will be made, the terms and provisions applicable to the making of the REMIC election, as well as any material federal income tax consequences to securityholders not otherwise described in this prospectus, will be set forth in the related prospectus supplement. If a REMIC election is made with respect to a series, one of the classes will be designated as evidencing the sole class of "residual interests" in the related REMIC, as defined in the Code. All other classes of securities in that series will constitute "regular interests" in the related REMIC, as defined in the Code. As to each series with respect to which a REMIC election is to be made, the master servicer or a holder of the related residual certificate will be obligated to take all actions required in order to comply with applicable laws and regulations and will be obligated to pay any prohibited transaction taxes. Unless otherwise specified in the related prospectus supplement, the master servicer will be entitled to reimbursement for any such payment from the assets of the trust fund or from any holder of the related residual certificate. DISTRIBUTIONS ON SECURITIES General. In general, the method of determining the amount of distributions on a particular series of securities will depend on the type of credit support, if any, that is used with respect to that series. See "Credit Enhancement" in this prospectus. Set forth below are descriptions of various methods that may be used to determine the amount of distributions on the securities of a particular series. The prospectus supplement for each series of securities will describe the method to be used in determining the amount of distributions on the securities of that series. The trustee will make distributions allocable to principal and interest on the securities out of, and only to the extent of, funds in the related security account, including any funds transferred from any reserve account. As between securities of different classes and as between distributions of principal (and, if applicable, between distributions of principal prepayments and scheduled payments of principal) and interest, distributions made on any distribution date will be applied as specified in the related prospectus supplement. Unless otherwise specified in the related prospectus supplement, distributions to any class of securities will be made pro rata to all securityholders of that class. Available Funds. All distributions on the securities of each series on each distribution date will be made from Available Funds in accordance with the terms described in the related prospectus supplement and specified in the related operative agreement. Unless otherwise provided in the related prospectus supplement, the term "Available Funds" for each distribution date will equal the sum of the following amounts: (i) the aggregate of all previously undistributed payments on account of principal, including principal prepayments, if any, and prepayment penalties, if so provided in the related prospectus supplement, and interest on the mortgage loans in the related trust fund (including Liquidation Proceeds and Insurance Proceeds and amounts drawn under letters of credit or other credit enhancement instruments as permitted thereunder and as specified in the related operative agreement) received by the master 41 servicer after the cut-off date and on or prior to the related determination date specified in the prospectus supplement except: o all payments which were due on or before the cut-off date; o all Liquidation Proceeds and all Insurance Proceeds, all principal prepayments and all other proceeds of any loan purchased by the depositor, the master servicer, any sub-servicer or any seller pursuant to the related operative agreement that were received after the prepayment period specified in the prospectus supplement and all related payments of interest representing interest for any period after the related collection period; o all scheduled payments of principal and interest due on a date or dates subsequent to the first day of the month of distribution; o amounts received on particular loans as late payments of principal or interest or other amounts required to be paid by borrowers, but only to the extent of any unreimbursed advance in respect of those loans made by the master servicer, the related sub-servicers, support servicers or the trustee; o amounts representing reimbursement, to the extent permitted by the related operative agreement and as described under the heading "--Advances" immediately below, for advances made by the master servicer, sub-servicers, support servicers or the trustee that were deposited into the security account, and amounts representing reimbursement for certain other losses and expenses incurred by the master servicer or the depositor and described below; and o that portion of each collection of interest on a particular loan in the trust fund which represents servicing compensation payable to the master servicer or retained interest which is to be retained from such collection or is permitted to be retained from related Insurance Proceeds, Liquidation Proceeds or proceeds of loans purchased pursuant to the related operative agreement; (ii) the amount of any advance made by the master servicer, sub-servicer, support servicer or the trustee as described under "--Advances" immediately below and deposited by it in the security account; (iii) if applicable, amounts withdrawn from a reserve account; (iv) any applicable, amounts provided under a letter of credit, insurance policy, surety bond or other third-party credit enhancement; and (v) if applicable, the amount of any prepayment interest shortfall. Distributions of Interest. Unless otherwise specified in the related prospectus supplement, interest will accrue on the aggregate principal balance of each class of securities or the aggregate notional principal balance of each class of securities entitled to distributions of interest only at the pass-through rate (or interest rate) and for the periods specified in the 42 prospectus supplement. Except in the case of a class of accrual securities that provides for interest that accrues but is not currently payable, the pass-through rate may be a fixed rate or an adjustable rate that adjusts as specified in the prospectus supplement. Interest accrued during each specified period on each class of securities entitled to interest will be distributable on the distribution dates specified in the related prospectus supplement, to the extent that funds are available, until the aggregate principal balance of the securities of that class has been distributed in full or, in the case of a class of securities entitled only to distributions allocable to interest, until the aggregate notional principal balance of that class is reduced to zero or for the period of time designated in the related prospectus supplement. The original principal balance of each security will equal the aggregate distributions allocable to principal to which that security is entitled. Unless otherwise specified in the related prospectus supplement, distributions allocable to interest on each security that is not entitled to distributions allocable to principal will be calculated based on the notional principal balance of that security. The notional principal balance of a security will not evidence an interest in or entitlement to distributions allocable to principal but will be used solely for convenience in expressing the calculation of interest and for certain other purposes. With respect to any class of accrual securities, if specified in the related prospectus supplement, any interest that has accrued but is not paid on any distribution date will be added to the aggregate principal balance of that class on that distribution date. Unless otherwise specified in the related prospectus supplement, distributions of interest on each class of accrual securities will commence only after the occurrence of the events specified in the prospectus supplement. Unless otherwise specified in the related prospectus supplement, the beneficial ownership interest of a class of accrual securities in the trust fund will increase on each distribution date, as reflected in the aggregate principal balance of that class, by the amount of interest that accrued on that class during the preceding interest accrual period but was not required to be distributed to the class on the distribution date. Each class of accrual securities will thereafter accrue interest on the outstanding aggregate principal balance of that class as so increased. Distributions of Principal. Unless otherwise specified in the related prospectus supplement, the aggregate principal balance of any class of securities entitled to distributions of principal will equal o the original aggregate principal balance of that class as specified in the related prospectus supplement reduced by o all distributions reported to securityholders of that class as allocable to principal increased by o in the case of a class of accrual securities, all interest accrued but not then distributable on that class and subject to o in the case of adjustable rate certificates, the effect of any negative amortization. 43 The related prospectus supplement will specify the method by which the amount of principal to be distributed on the securities on each distribution date will be calculated and the manner in which the amount will be allocated among the classes of securities entitled to distributions of principal. If so provided in the related prospectus supplement, one or more classes of senior securities will be entitled to receive all or a disproportionate percentage of the payments of principal which are received from borrowers in advance of their scheduled due dates and are not accompanied by amounts representing scheduled interest due after the month of such payments in the percentages and under the circumstances or for the periods specified in the prospectus supplement. Any allocation of principal prepayments to a class or classes of senior securities will have the effect of accelerating the amortization of the senior securities while increasing the interests evidenced by the subordinated securities in the related trust fund. Increasing the interests of the subordinated securities relative to that of the senior securities is intended to preserve the availability of the subordination provided by the subordinated securities. See "Credit Enhancement--Subordination" in this prospectus. Unscheduled Distributions. If specified in the related prospectus supplement, the securities will be subject to receipt of distributions before the next scheduled distribution date under the circumstances and in the manner described in this paragraph and the following paragraph and in the prospectus supplement. The trustee will be required to make such unscheduled distributions on the day and in the amount specified in the related prospectus supplement if, due to substantial payments of principal - including principal prepayments - on the trust fund assets, the trustee or the master servicer determines that the funds available or anticipated to be available from the security account and, if applicable, from any reserve account may be insufficient to make required distributions on the securities on that distribution date. Unless otherwise specified in the related prospectus supplement, the amount of any unscheduled distribution that is allocable to principal will not exceed the amount that would otherwise have been required to be distributed as principal on the securities on the next distribution date. Unless otherwise specified in the related prospectus supplement, all unscheduled distributions will include interest at the applicable pass-through rate, if any, on the amount of the unscheduled distribution allocable to principal for the period and to the date specified in the prospectus supplement. Unless otherwise specified in the related prospectus supplement, all distributions allocable to principal in any unscheduled distribution will be made in the same priority and manner as distributions of principal on the securities would have been made on the next distribution date, and with respect to securities of the same class, unscheduled distributions of principal will be made on a pro rata basis. Notice of any unscheduled distribution will be given by the trustee prior to the date of distribution. ADVANCES Unless otherwise provided in the related prospectus supplement, the master servicer will be required to make advances, from its own funds, from funds advanced by sub-servicers or support servicers or from funds held in the security account for future distributions to the securityholders. On each distribution date, the amount of any advances will be equal to the 44 aggregate of payments of principal and interest that were delinquent on the related determination date and were not advanced by any sub-servicer, subject to the master servicer's determination that these advances will be recoverable from late payments by borrowers, Liquidation Proceeds, Insurance Proceeds or otherwise. In the case of cooperative loans, the master servicer also will be required to advance any unpaid maintenance fees and other charges under the related proprietary leases as specified in the related prospectus supplement. In making advances, the master servicer will endeavor to maintain a regular flow of scheduled interest and principal payments to the securityholders rather than to guarantee or insure against losses. If advances are made by the master servicer from cash being held for future distribution to securityholders, the master servicer will replace those funds on or before any future distribution date to the extent that funds in the applicable security account on a distribution date would be less than the amount required to be available for distributions to securityholders on that date. Any funds advanced by the master servicer will be reimbursable to the master servicer out of recoveries on the specific loans with respect to which the advances were made (e.g., late payments made by the related borrower, any related Insurance Proceeds, Liquidation Proceeds or proceeds of any loan purchased by a sub-servicer or a seller under the circumstances described in this prospectus). Advances by the master servicer and any advances by a sub-servicer or a support servicer also will be reimbursable to the master servicer or sub-servicer or support servicer, as applicable, from cash otherwise distributable to securityholders, including the holders of senior securities, to the extent that the master servicer determines that any advances previously made are not ultimately recoverable as described in this paragraph. The master servicer also will be obligated to make advances, to the extent recoverable out of Insurance Proceeds, Liquidation Proceeds or otherwise, in respect of certain taxes and insurance premiums not paid by borrowers on a timely basis. Funds so advanced are reimbursable to the master servicer to the extent permitted by the related operative agreement. If specified in the related prospectus supplement, the obligations of the master servicer to make advances may be supported by a cash advance reserve fund, a surety bond or other arrangement, in each case as described in the related prospectus supplement. The master servicer or sub-servicer may enter into a support agreement with a support servicer pursuant to which the support servicer agrees to provide funds on behalf of the master servicer or sub-servicer in connection with the obligation of the master servicer or sub-servicer, as the case may be, to make advances. The support agreement will be delivered to the trustee and the trustee will be authorized to accept a substitute support agreement in exchange for an original support agreement, provided that the substitution of the support agreement will not adversely affect the rating or ratings assigned to the securities by each rating agency named in the related prospectus supplement. Unless otherwise provided in the prospectus supplement, in the event the master servicer, a sub-servicer or a support servicer fails to make an advance, the trustee will be obligated to make the advance in its capacity as successor servicer. If the trustee makes an advance, it will be entitled to be reimbursed for that advance to the same extent and degree as the master servicer, a sub-servicer or a support servicer is entitled to be reimbursed for advances. See "--Distributions on Securities" above. 45 REPORTS TO SECURITYHOLDERS Prior to or concurrently with each distribution on a distribution date and except as otherwise set forth in the related prospectus supplement, the master servicer or the trustee will furnish to each securityholder of record of the related series a statement setting forth, to the extent applicable to that series of securities, among other things: o the amount of the distribution that is allocable to principal, separately identifying the aggregate amount of any principal prepayments and, if specified in the prospectus supplement, any prepayment penalties included in the distribution; o the amount of the distribution allocable to interest; o the amount of any advances; o the aggregate amount (a) otherwise allocable to the subordinated securityholders on that distribution date and (b) withdrawn from the reserve fund, if any, that is included in the amounts distributed to the senior securityholders; o the outstanding aggregate principal balance or notional principal balance of each class after giving effect to the distribution of principal on that distribution date; o the percentage of principal payments on the loans (excluding prepayments), if any, which each class will be entitled to receive on the following distribution date; o the percentage of principal prepayments on the mortgage loans, if any, which each class will be entitled to receive on the following distribution date; o the amount of the servicing compensation retained or withdrawn from the security account by the master servicer and the amount of additional servicing compensation received by the master servicer attributable to penalties, fees, excess Liquidation Proceeds and other similar charges and items; o the number and aggregate principal balance of mortgage loans delinquent, but not in foreclosure, (i) from 30 to 59 days, (ii) from 60 to 89 days and (iii) 90 days or more, as of the close of business on the last day of the calendar month preceding that distribution date; o the number and aggregate principal balance of mortgage loans delinquent and in foreclosure (i) from 30 to 59 days, (ii) from 60 to 89 days and (iii) 90 days or more, as of the close of business on the last day of the calendar month preceding that distribution date; o the book value of any real estate acquired through foreclosure or grant of a deed in lieu of foreclosure and, if the real estate secured a Multifamily Loan, any additional information specified in the prospectus supplement; 46 o if a class is entitled only to a specified portion of interest payments on the loans in the related pool, the pass-through rate, if adjusted from the date of the last statement, of the loans expected to be applicable to the next distribution to that class; o if applicable, the amount remaining in any reserve account at the close of business on that distribution date; o the pass-through rate as of the day prior to the immediately preceding distribution date; and o the amounts remaining under any letters of credit, pool policies or other forms of credit enhancement applicable to the certificates. Where applicable, any amount set forth in the above list may be expressed as a dollar amount per single security of the relevant class having the percentage interest specified in the prospectus supplement. The report to securityholders for any series of securities may include additional or other information of a similar nature to that specified in the above list. In addition, within a reasonable period of time after the end of each calendar year, the master servicer or the trustee will mail, to each securityholder of record at any time during such calendar year, a report setting forth: o the aggregate of the amounts for that calendar year reported pursuant to the first two bullet points in the immediately preceding list or, in the event that the recipient was a securityholder of record only during a portion of the calendar year, for the applicable portion of the year; and o other customary information as may be deemed necessary or desirable for securityholders to have in order to prepare their tax returns. CREDIT ENHANCEMENT GENERAL Credit enhancement may be provided with respect to one or more classes of a series of securities or with respect to the assets in the related trust fund. Credit enhancement may take the form of one or more of the following: o a limited financial guaranty policy issued by an entity named in the related prospectus supplement, o the subordination of one or more classes of the securities of that series, o the establishment of one or more reserve accounts, o the use of a cross-support feature, 47 o a pool insurance policy, bankruptcy bond, special hazard insurance policy, surety bond, letter of credit, guaranteed investment contract, or o any other method of credit enhancement described in the related prospectus supplement. Unless otherwise specified in the related prospectus supplement, any credit enhancement will not provide protection against all risks of loss and will not guarantee repayment of the entire principal balance of the securities and interest. If losses occur which exceed the amount covered by the credit enhancement or which are not covered by the credit enhancement, securityholders will bear their allocable share of deficiencies. SUBORDINATION If specified in the related prospectus supplement, protection afforded to holders of one or more classes of the senior securities of a series by means of the subordination feature will be accomplished by the holders of one or more other classes of that series having a preferential right to distributions in respect of scheduled principal, principal prepayments, interest or any combination thereof that otherwise would have been payable to the holders of one or more other subordinated classes of securities of that series under the circumstances and to the extent specified in the prospectus supplement. If specified in the related prospectus supplement, protection may also be afforded to the holders of the senior securities of a series by: o reducing the ownership interest of the holders of the related subordinated securities, o a combination of the subordination feature and reducing the ownership interest of the subordinated securityholders, or o as otherwise described in the related prospectus supplement. If specified in the related prospectus supplement, delays in receipt of scheduled payments on the loans and losses on defaulted loans will be borne first by the various classes of subordinated securities and thereafter by the various classes of senior securities, in each case under the circumstances and subject to the limitations specified in that prospectus supplement. The related prospectus supplement may also limit the following: o the aggregate distributions in respect of delinquent payments on the loans over the lives of the securities or at any time, o the aggregate losses in respect of defaulted loans which must be borne by the subordinated securities by virtue of their subordination, and o the amount of the distributions otherwise distributable to the subordinated securityholders that will be distributable to senior securityholders on any distribution date. 48 If aggregate distributions in respect of delinquent payments on the loans or aggregate losses in respect of the loans were to exceed the amount specified in the related prospectus supplement, holders of the senior securities would experience losses on their securities. In addition to or in lieu of the foregoing, if specified in the related prospectus supplement, all or any portion of distributions otherwise payable to holders of the subordinated securities on any distribution date may instead be deposited into one or more reserve accounts established with the trustee. The related prospectus supplement may specify that deposits in any reserve account may be made o on each distribution date, o for specified periods, or o until the balance in the reserve account has reached a specified amount and, following payments from the reserve account to holders of the senior securities or otherwise, thereafter to the extent necessary to restore the balance in the reserve account to the specified level. If specified in the related prospectus supplement, amounts on deposit in the reserve account may be released to the holders of the class or classes of securities specified in the prospectus supplement at the times and under the circumstances specified in the prospectus supplement. If specified in the related prospectus supplement, various classes of senior securities and subordinated securities may themselves be subordinate in their right to receive certain distributions to other classes of senior and subordinated securities, respectively, through a cross-support mechanism or otherwise. As among classes of senior securities and as among classes of subordinated securities, distributions may be allocated among these classes as follows: o in the order of their scheduled final distribution dates, o in accordance with a schedule or formula, o in relation to the occurrence of events or otherwise, in each case as specified in the related prospectus supplement. As among classes of subordinated securities, the related prospectus supplement will specify the allocation of payments to holders of the related senior securities on account of delinquencies or losses and the allocation payments to any reserve account. POOL INSURANCE POLICIES The related prospectus supplement may specify that a separate pool insurance policy will be obtained for the pool. This policy will be issued by the pool insurer named in the prospectus supplement. Subject to the limits described in this section, each pool insurance policy will cover loss by reason of default in payment on loans in the related pool in an amount equal to a 49 percentage, which is specified in the related prospectus supplement, of the aggregate principal balances of the loans on the cut-off date which are not covered as to their entire outstanding principal balances by primary mortgage insurance policies. As more fully described in the following paragraph, the master servicer will present claims to the pool insurer on behalf of itself, the trustee and the securityholders. However, the pool insurance policies are not blanket policies against loss, since claims under the policies may only be made respecting particular defaulted loans and only upon satisfaction of the conditions precedent described in the following paragraph. Unless otherwise specified in the related prospectus supplement, no pool insurance policy will cover losses due to a failure to pay or denial of a claim under a primary mortgage insurance policy. Unless otherwise specified in the related prospectus supplement, the pool insurance policy will provide that no claims may be validly presented unless the following conditions are satisfied: o any required primary mortgage insurance policy is in effect for the defaulted loan and a claim under that policy has been submitted and settled; o hazard insurance on the related mortgaged property has been kept in force and real estate taxes and other protection and preservation expenses have been paid; o if there has been physical loss or damage to the mortgaged property, the property has been restored to its physical condition, reasonable wear and tear excepted, at the time of issuance of the policy; and o the insured has acquired good and merchantable title to the mortgaged property free and clear of liens except certain permitted encumbrances. Upon satisfaction of these conditions, the pool insurer will have the option either o to purchase the property securing the defaulted loan at a price equal to the loan's principal balance plus accrued and unpaid interest at the loan rate to the date of purchase plus certain expenses incurred by the master servicer on behalf of the trustee and securityholders, or o to pay the amount by which the sum of the principal balance of the defaulted loan plus accrued and unpaid interest at the loan rate to the date of payment of the claim and the aforementioned expenses exceeds the proceeds received from an approved sale of the mortgaged property, in either case net of amounts paid or assumed to have been paid under the related primary mortgage insurance policy. If any property securing a defaulted loan is damaged and proceeds, if any, from the related hazard insurance policy or any applicable special hazard insurance policy are insufficient to restore the damaged property to a condition sufficient to permit recovery under the pool insurance policy, the master servicer will not be required to expend its own funds to restore the damaged property unless it determines that 50 o the restoration will increase the proceeds to securityholders on liquidation of the related loan after reimbursement to the master servicer of its expenses, and o the master servicer will be able to recover its expenses from proceeds of the sale of the property or proceeds of the related pool insurance policy or any related primary mortgage insurance policy. Unless otherwise specified in the related prospectus supplement, no pool insurance policy will insure against losses sustained by reason of a default arising, among other things, from o fraud or negligence in the origination or servicing of a loan, including misrepresentation by the borrower, the originator or persons involved in the origination of the loan, or o failure to construct a mortgaged property in accordance with plans and specifications. Many primary mortgage insurance policies also do not insure against these types of losses. Nevertheless, a failure of coverage attributable to one of the foregoing events might result in a breach of the related seller's representations and, in that event, might give rise to an obligation on the part of the seller to purchase the defaulted loan if the breach cannot be cured. No pool insurance policy will cover a claim in respect of a defaulted loan that occurs when the loan's servicer, at the time of default or thereafter, was not approved by the insurer. Many primary mortgage insurance policies also do not cover claims in this case. Unless otherwise specified in the related prospectus supplement, the original amount of coverage under the pool insurance policy will be reduced over the life of the related securities by the aggregate dollar amount of claims paid, less the aggregate of the net amounts realized by the pool insurer upon disposition of all foreclosed properties. The amount of claims paid will include certain expenses incurred by the master servicer as well as accrued interest on delinquent loans to the date of payment of the claim, unless otherwise specified in the related prospectus supplement. Accordingly, if aggregate net claims paid under any pool insurance policy reach the original policy limit, coverage under that pool insurance policy will be exhausted and any further losses will be borne by the securityholders. The terms of any pool insurance policy relating to a pool of Manufactured Housing Contracts or Home Improvement Contracts will be described in the related prospectus supplement. FHA INSURANCE; VA GUARANTEES Single Family Loans designated in the related prospectus supplement as insured by the FHA will be insured by the FHA as authorized under the United States Housing Act of 1937, as amended. These mortgage loans will be insured under various FHA programs including the standard FHA 203(b) program to finance the acquisition of one- to four-family housing units and the FHA 245 graduated payment mortgage program. These programs generally limit the principal amount and interest rates of the mortgage loans insured. Single Family Loans insured by the FHA generally require a minimum down payment of approximately 5% of the original principal amount of the loan. No FHA-insured Single Family Loan relating to a series may have 51 an interest rate or original principal amount exceeding the applicable FHA limits at the time the loan was originated. The insurance premiums for Single Family Loans insured by the FHA are collected by lenders approved by the Department of Housing and Urban Development (HUD), or by the master servicer or any sub-servicer, and are paid to the FHA. The regulations governing FHA single-family mortgage insurance programs provide that insurance benefits are payable either upon foreclosure (or other acquisition of possession) and conveyance of the mortgaged property to HUD or upon assignment of the defaulted mortgage loan to HUD. With respect to a defaulted FHA-insured Single Family Loan, the master servicer or any sub-servicer is limited in its ability to initiate foreclosure proceedings. When it is determined by the master servicer or sub-servicer or HUD that the default was caused by circumstances beyond the mortgagor's control, the master servicer or such sub-servicer is expected to make an effort to avoid foreclosure by entering, if feasible, into one of a number of available forms of forbearance plans with the mortgagor. These plans may involve the reduction or suspension of regular mortgage payments for a specified period, with such payments to be made up on or before the maturity date of the mortgage, or the recasting of payments due under the mortgage up to or beyond the maturity date. In addition, when this type of default is accompanied by certain other criteria, HUD may provide relief by making payments to the master servicer or sub-servicer in partial or full satisfaction of amounts due under the mortgage loan or by accepting assignment of the loan from the master servicer or sub-servicer. Any payments made by HUD are to be repaid by the mortgagor to HUD. With certain exceptions, at least three full monthly installments must be due and unpaid under the mortgage loan, and HUD must have rejected any request for relief from the mortgagor, before the master servicer or sub-servicer may initiate foreclosure proceedings. In most cases, HUD has the option to pay insurance claims in cash or in debentures issued by HUD. Currently, claims are being paid in cash. Claims have not been paid in debentures since 1965. HUD debentures issued in satisfaction of FHA insurance claims bear interest at the applicable HUD debentures' interest rate. The master servicer or sub-servicer of each FHA-insured Single Family Loan will be obligated to purchase any HUD debenture issued in satisfaction of a mortgage loan upon default for an amount equal to the debenture's principal amount. The amount of insurance benefits paid by the FHA generally is equal to the entire unpaid principal amount of the defaulted mortgage loan adjusted to reimburse the master servicer or sub-servicer for certain costs and expenses and to deduct certain amounts received or retained by the master servicer or sub-servicer after default. When entitlement to insurance benefits results from foreclosure (or other acquisition of possession) and conveyance of the mortgaged property to HUD, the master servicer or sub-servicer is compensated for no more than two-thirds of its foreclosure costs, and is compensated for interest accrued and unpaid prior to the conveyance date generally only to the extent allowed pursuant to the related forbearance plan approved by HUD. When entitlement to insurance benefits results from assignment of the mortgage loan to HUD, the insurance payment includes full compensation for interest accrued and unpaid to the assignment date. The insurance payment itself, upon foreclosure of an FHA-insured Single Family Loan, bears interest from the date which is 30 days after the mortgagor's first uncorrected failure to perform any obligation to make any payment due under the mortgage loan and, upon 52 assignment, from the date of assignment to the date of payment of the claim, in each case at the same interest rate as the applicable HUD debenture interest rate. Single Family Loans designated in the related prospectus supplement as guaranteed by the VA will be partially guaranteed by the VA under the Serviceman's Readjustment Act of 1944, as amended, which permits a veteran, the spouse of a veteran in certain cases, to obtain a mortgage loan guaranteed by the VA covering financing of the purchase of a one- to four-family dwelling unit at interest rates permitted by the VA. The program has no mortgage loan limits, requires no down payment from the purchaser and permits the guarantee of mortgage loans of up to 30 years' duration. However, no Single Family Loan guaranteed by the VA will have an original principal amount greater than five times the partial VA guarantee for that mortgage loan. The maximum guarantee that may be issued by the VA under a VA-guaranteed mortgage loan depends upon the original principal amount of the mortgage loan, as further described in 38 U.S.C. Section 1803(a), as amended. As of November 1, 1998 the maximum guarantee that may be issued by the VA under a VA-guaranteed mortgage loan of more than $144,000 is the lesser of 25% of the original principal amount of the mortgage loan and $50,570. The liability on the guarantee is reduced or increased, pro rata, with any reduction or increase in the amount of indebtedness, but in no event will the amount payable under the guaranty exceed the amount of the original guaranty. The VA may, at its option and without regard to the guaranty, make full payment to a mortgage holder of unsatisfied indebtedness on a mortgage loan upon the loan's assignment to the VA. With respect to a defaulted VA-guaranteed Single Family Loan, the master servicer or sub-servicer is, absent exceptional circumstances, authorized to announce its intention to foreclose only when the default has continued for three months. Generally, a claim under the guaranty is submitted after liquidation of the mortgaged property. The amount payable under the guaranty will be the percentage of the VA-guaranteed Single Family Loan originally guaranteed applied to indebtedness outstanding as of the applicable date of computation specified in VA regulations. Payments under the guaranty will be equal to the unpaid principal amount of the loan, interest accrued on the unpaid balance of the loan to the appropriate date of computation and limited expenses of the mortgagee, but in each case only to the extent that these amounts have not been recovered through liquidation of the mortgaged property. The amount payable under the guaranty may in no event exceed the amount of the original guaranty. SPECIAL HAZARD INSURANCE POLICIES If specified in the related prospectus supplement, a separate special hazard insurance policy will be obtained for the pool and will be issued by the special hazard insurer named in the prospectus supplement. Subject to the limitations described in the immediately following sentence, each special hazard insurance policy will protect holders of the related securities from o loss by reason of damage to mortgaged properties caused by certain hazards -including earthquakes and, to a limited extent, tidal waves and related water damage or as otherwise specified in the prospectus supplement - not insured against under the 53 standard form of hazard insurance policy for the respective states in which the mortgaged properties are located or under a flood insurance policy if the mortgaged property is located in a federally designated flood area, and o loss caused by reason of the application of the coinsurance clause contained in hazard insurance policies. See "Operative Agreements--Hazard Insurance" in this prospectus. No special hazard insurance policy will cover losses occasioned by fraud or conversion by the trustee or master servicer, war, insurrection, civil war, certain governmental action, errors in design, faulty workmanship or materials (except under certain circumstances), nuclear or chemical reaction, flood (if the mortgaged property is located in a federally designated flood area), nuclear or chemical contamination and certain other risks. The amount of coverage under any special hazard insurance policy will be specified in the related prospectus supplement. Each special hazard insurance policy will provide that no claim may be paid unless hazard insurance and, if applicable, flood insurance on the related mortgaged property have been kept in force and other protection and preservation expenses have been paid. Subject to the limitations set forth in the immediately preceding paragraph, and unless otherwise specified in the related prospectus supplement, each special hazard insurance policy will provide coverage where there has been damage to property securing a foreclosed mortgage loan, and title to the mortgaged property has been acquired by the insured, to the extent that the damage is not covered by the hazard insurance policy or flood insurance policy, if any, maintained by the borrower or the master servicer. In this circumstance, the special hazard insurer will pay the lesser of o the cost to repair or replace the mortgaged property, and o upon transfer of the property to the special hazard insurer, the unpaid principal balance of the loan at the time the property is acquired by foreclosure or deed in lieu of foreclosure, plus accrued interest to the date of claim settlement, together with certain expenses incurred by the master servicer with respect to the property. If the unpaid principal balance of a loan plus accrued interest and certain servicing expenses are paid by the special hazard insurer, the amount of further coverage under the related special hazard insurance policy will be reduced by that amount less any net proceeds from the sale of the property. Any amount paid as the cost to repair the damaged property will also reduce coverage by such amount. So long as a pool insurance policy remains in effect, the payment by the special hazard insurer to cover the unpaid principal balance of a loan plus accrued interest and certain servicing expenses or to cover the cost to repair a mortgaged property will not affect the total insurance proceeds paid to securityholders, but will affect the relative amounts of coverage remaining under the special hazard insurance policy and the pool insurance policy. Since each special hazard insurance policy will be designed to permit full recovery under the mortgage pool insurance policy in circumstances in which recoveries would otherwise be unavailable because mortgaged properties have been damaged by a cause not insured against by a standard hazard policy and thus would not be restored, each operative agreement will provide 54 that, unless otherwise specified in the related prospectus supplement, the master servicer will be under no obligation to maintain the special hazard insurance policy once the related pool insurance policy has been terminated or been exhausted due to payment of claims. To the extent specified in the related prospectus supplement, the master servicer may deposit in a special trust account, cash, an irrevocable letter of credit or any other instrument acceptable to each rating agency named in the prospectus supplement, in order to provide protection in lieu of or in addition to that provided by a special hazard insurance policy. The amount of any special hazard insurance policy or of the deposit to the special trust account relating to securities may be reduced so long as the reduction will not result in a downgrading of the rating of the securities by any rating agency named in the prospectus supplement. The terms of any special hazard insurance policy relating to a pool of Manufactured Housing Contracts or Home Improvement Contracts will be described in the related prospectus supplement. BANKRUPTCY BONDS If specified in the related prospectus supplement, a bankruptcy bond for proceedings under the federal Bankruptcy Code will be issued by an insurer named in the prospectus supplement. Each bankruptcy bond will cover certain losses resulting from a reduction by a bankruptcy court of scheduled payments of principal and interest on a loan or a reduction by the court of the principal amount of a loan. The bankruptcy bond will also cover unpaid interest on the amount of such a principal reduction from the date of the filing of a bankruptcy petition. The required amount of coverage under any bankruptcy bond will be set forth in the related prospectus supplement. Coverage under a bankruptcy bond may be cancelled or reduced by the master servicer if the cancellation or reduction would not adversely affect the then current rating of the securities by any rating agency named in the prospectus supplement. See "Material Legal Aspects of the Mortgage Loans--Anti-Deficiency Legislation and Other Limitations on Lenders" in this prospectus. To the extent specified in the related prospectus supplement, the master servicer may deposit in a special trust account, cash, an irrevocable letter of credit or any other instrument acceptable to each rating agency named in the prospectus supplement, to provide protection in lieu of or in addition to that provided by a bankruptcy bond. The amount of any bankruptcy bond or of the deposit to the special trust account relating to the securities may be reduced so long as the reduction would not result in a downgrading of the rating of the securities by any rating agency named in the prospectus supplement. The terms of any bankruptcy bond relating to a pool of Manufactured Housing Contracts or Home Improvement Contracts will be described in the related prospectus supplement. FHA INSURANCE ON MULTIFAMILY LOANS There are two primary FHA insurance programs that are available for Multifamily Loans. Sections 221(d)(3) and (d)(4) of the National Housing Act allow HUD to insure mortgage loans that are secured by newly constructed and substantially rehabilitated multifamily rental projects. Section 244 of the Housing Act provides for co-insurance of mortgage loans made under 55 Sections 221(d)(3) and (d)(4) by HUD/FHA and a HUD-approved co-insurer. Generally the term of a mortgage loan may be up to 40 years and the ratio of loan amount to property replacement cost can be up to 90%. Section 223(f) of the National Housing Act allows HUD to insure mortgage loans made for the purchase or refinancing of existing apartment projects which are at least three years old. Section 244 also provides for co-insurance of mortgage loans made under Section 223(f). Under Section 223(f), the loan proceeds cannot be used for substantial rehabilitation work but repairs may be made for, generally up to the greater of 15% of the value of the project or a dollar amount per apartment unit established from time to time by HUD. In general the loan term may not exceed 35 years and a loan-to-value ratio of no more than 85% is required for the purchase of a project and a loan-to-value ratio of no more than 70% for the refinancing of a project. FHA insurance is generally payable in cash or, at the option of the mortgagee, in debentures. The insurance does not cover 100% of the mortgage loan but is subject to certain deductions and certain losses of interest from the date of the default. RESERVE ACCOUNTS If specified in the related prospectus supplement, credit support with respect to a series of securities may be provided by the establishment and maintenance of one or more reserve accounts for that series, in trust, with the related trustee. The prospectus supplement will specify whether or not a reserve accounts will be included in the related trust fund. The reserve account for a series of securities will be funded in one of the following ways: o by a deposit of cash, U.S. Treasury securities, instruments evidencing ownership of principal or interest payments on U.S. Treasury securities, letters of credit, demand notes, securities of deposit or a combination of these, in the aggregate amount specified in the related prospectus supplement; o by deposit from time to time of amounts specified in the related prospectus supplement to which the subordinated securityholders, if any, would otherwise be entitled; or o in such other manner as the prospectus supplement may specify. Any amounts on deposit in the reserve account and the proceeds of any other instrument upon maturity will be held in cash or will be invested in permitted investments. Unless otherwise specified in the related prospectus supplement, "permitted investments" will include obligations of the United States and certain of its agencies, certificates of deposit, certain commercial paper, time deposits and bankers acceptances sold by eligible commercial banks and certain repurchase agreements of United States government securities with eligible commercial banks. If a letter of credit is deposited with the trustee, the letter of credit will be irrevocable. Unless otherwise specified in the related prospectus supplement, any instrument deposited in a reserve account will name the trustee, in its capacity as trustee for the securityholders, as beneficiary and will be issued by an entity acceptable to each rating agency named in the 56 prospectus supplement. Additional information with respect to instruments deposited in the reserve account will be set forth in the related prospectus supplement. Any amounts deposited, and payments on instruments deposited, in a reserve account will be available for withdrawal from the reserve account for distribution to securityholders, for the purposes, in the manner and at the times specified in the related prospectus supplement. CROSS SUPPORT If specified in the related prospectus supplement, the beneficial ownership of separate groups of assets included in a trust fund may be evidenced by separate classes of securities. In this case, credit support may be provided by a cross support feature which requires that distributions be made with respect to securities evidencing a beneficial ownership interest in, or secured by, other asset groups within the same trust fund. The related prospectus supplement for a series which includes a cross support feature will describe the manner and conditions for applying the cross support feature. If specified in the related prospectus supplement, the coverage provided by one or more forms of credit support may apply concurrently to two or more related trust funds. If applicable, the related prospectus supplement will identify the trust funds to which the credit support relates and the manner of determining the amount of the coverage provided and the application of the coverage to the identified trust funds. OTHER INSURANCE, SURETY BONDS, GUARANTIES, LETTERS OF CREDIT AND SIMILAR INSTRUMENTS OR AGREEMENTS If specified in the related prospectus supplement, a trust fund may also include insurance, guaranties, surety bonds, letters of credit or similar arrangements for the following purposes: o to maintain timely payments or provide additional protection against losses on the assets included in the trust fund, o to pay administrative expenses, or o to establish a minimum reinvestment rate on the payments made in respect of the assets included in the trust fund or principal payment rate on the assets. These arrangements may include agreements under which securityholders are entitled to receive amounts deposited in various accounts held by the trustee upon the terms specified in the prospectus supplement. FINANCIAL INSTRUMENTS If specified in the related prospectus supplement, the trust fund may include one or more swap arrangements or other financial instruments that are intended to meet the following goals: 57 o to convert the payments on some or all of the assets from fixed to floating payments, or from floating to fixed, or from floating based on a particular index to floating based on another index; o to provide payments in the event that any index rises above or falls below specified levels; or o to provide protection against interest rate changes, certain types of losses, including reduced market value, or other payment shortfalls to one or more classes of the related series. If a trust fund includes financial instruments of this type, the instruments may be structured to be exempt from the registration requirements of the Securities Act of 1933, as amended. The related prospectus supplement will include, or incorporate by reference, material financial and other information about the provider of the financial instruments. YIELD AND PREPAYMENT CONSIDERATIONS The yields to maturity and weighted average lives of the certificates will be affected primarily by the amount and timing of principal payments received on or in respect of the assets included in the related trust fund. The original terms to maturity of the loans in a given pool will vary depending upon the types of loans included. Each prospectus supplement will contain information with respect to the types and maturities of the loans in the related pool. Unless otherwise specified in the related prospectus supplement, loans may be prepaid, without penalty, in full or in part at any time. Multifamily Loans may prohibit prepayment for a specified period after origination, may prohibit partial prepayments entirely, and may require the payment of a prepayment penalty upon prepayment in full or in part. The prepayment experience of the loans in a pool will affect the life of the related series of securities. The rate of prepayments on the loans cannot be predicted. A number of factors, including homeowner mobility, economic conditions, the presence and enforceability of due-on-sale clauses, mortgage market interest rates and the availability of mortgage funds may affect the prepayment experience of loans. Some of these factors, as well as other factors including limitations on prepayment and the relative tax benefits associated with the ownership of income-producing real property, may affect the prepayment experience of Multifamily Loans. Home Equity Loans and Home Improvement Contracts have been originated in significant volume only during the past few years and neither depositor is aware of any publicly available studies or statistics on the rate of prepayment of these types of loans. Generally, Home Equity Loans and Home Improvement Contracts are not viewed by borrowers as permanent financing. Accordingly, these loans may experience a higher rate of prepayment than traditional first mortgage loans. On the other hand, because Home Equity Loans that are revolving credit line loans generally are not fully amortizing, the absence of voluntary borrower prepayments could cause rates of principal payments to be lower than, or similar to, those of traditional fully-amortizing first mortgages. The prepayment experience of the related trust fund may also be 58 affected by the frequency and amount of any future draws on any revolving credit line loans. Other factors that might be expected to affect the prepayment rate of a pool of Home Equity Loans or Home Improvement Contracts include the amounts of, and interest rates on, the underlying senior mortgage loans, and the use of first mortgage loans as long-term financing for home purchase and junior mortgage loans as shorter-term financing for a variety of purposes, including home improvement, education expenses and purchases of consumer durables such as automobiles. Accordingly, these types of loans may experience a higher rate of prepayment than traditional fixed-rate mortgage loans. In addition, any future limitations on the right of borrowers to deduct interest payments on Home Equity Loans for federal income tax purposes may further increase the rate of prepayments of these loans. Collections on Home Equity Loans that are revolving credit line loans may vary because, among other things, borrowers may o make payments during any month as low as the minimum monthly payment for that month or, during the interest-only period for revolving credit line loans and, in more limited circumstances, closed-end loans, as to which an interest-only payment option has been selected, the interest and the fees and charges for that month; or o make payments as high as the entire outstanding principal balance plus accrued interest and related fees and charges. It is possible that borrowers may fail to make the required periodic payments. In addition, collection on these loans may vary due to seasonal purchasing and the payment habits of borrowers. Unless otherwise provided in the related prospectus supplement, all conventional loans other than Multifamily Loans will contain due-on-sale provisions permitting the mortgagee or holder of the contract to accelerate the maturity of the related loan upon the sale or certain other transfers of the related mortgaged property by the borrower. As described in the related prospectus supplement, conventional Multifamily Loans may contain due-on-sale provisions, due-on-encumbrance provisions or both. Loans insured by the FHA, and loans partially guaranteed by the VA, are assumable with the consent of the FHA and the VA, respectively. Thus, the rate of prepayments of these loans may be lower than that of conventional mortgage loans bearing comparable interest rates. Unless otherwise provided in the related prospectus supplement, the master servicer generally will enforce any due-on-sale or due-on-encumbrance clause, to the extent it has knowledge of the conveyance or further encumbrance or the proposed conveyance or proposed further encumbrance of the mortgaged property and reasonably believes that it is entitled to do so under applicable law. However, the master servicer will not take any enforcement action that would impair or threaten to impair any recovery under any related insurance policy. See "Operative Agreements--Collection Procedures" and "Material Legal Aspects of the Mortgage Loans" in this prospectus for a description of certain provisions of each operative agreement and certain legal matters that may affect the prepayment experience of the loans. The rate of prepayments of conventional mortgage loans has fluctuated significantly in recent years. In general, prepayment rates may be influenced by a variety of economic, 59 geographic, social and other factors, including changes in housing needs, job transfers, unemployment and servicing decisions. In general, however, if prevailing rates fall significantly below the loan rate borne by a loan, that loan is likely to be subject to a higher prepayment rate than would be the case if prevailing interest rates remain at or above its rate. Conversely, if prevailing interest rates rise appreciably above the loan rate borne by a loan, that loan is likely to experience a lower prepayment rate than would be the case if prevailing rates remain at or below its loan rate. However, there can be no assurance that these generalities will hold true in particular cases. The rate of prepayment of Multifamily Loans may also be affected by other factors including loan terms including the existence of lockout periods, due-on-sale and due-on-encumbrance clauses and prepayment changes, relative economic conditions in the area where the mortgaged properties are located, the quality of management of the mortgaged properties and possible changes in tax laws. When a loan is prepaid in full, the borrower is charged interest on the principal amount of the loan only for the number of days in the month actually elapsed up to the date of the prepayment rather than for a full month. Unless otherwise specified in the related prospectus supplement, the effect of a prepayment in full will be to reduce the amount of interest passed through in the following month to securityholders, because interest on the principal balance of the prepaid loan will be paid only to the date of prepayment. Partial prepayments in a given month may be applied to the outstanding principal balances of the prepaid loans either on the first day of the month of receipt or of the month following receipt. In the latter case, partial prepayments will not reduce the amount of interest passed through in that month. Unless otherwise specified in the related prospectus supplement, neither prepayments in full nor partial prepayments will be passed through until the month following receipt. Prepayment charges collected with respect to Multifamily Loans will be distributed to securityholders, or to other persons entitled to them, as described in the related prospectus supplement. If so specified in the related prospectus supplement, the master servicer will be required to remit to the trustee, with respect to each loan in the related trust as to which a principal prepayment in full or a principal payment which is in excess of the scheduled monthly payment and is not intended to cure a delinquency was received during any due period, an amount, from and to the extent of amounts otherwise payable to the master servicer as servicing compensation, equal to the excess, if any, of o 30 days' interest on the principal balance of the related loan at the loan rate net of the annual rate at which the master servicer's servicing fee accrues, over o the amount of interest actually received on that loan during the due period, net of the master servicer's servicing fee. If the rate at which interest is passed through to the holders of securities of a series is calculated on a loan by loan basis, disproportionate principal prepayments with respect to loans bearing different loan rates will affect the yield on the securities. In general, the effective yield to securityholders will be slightly lower than the yield otherwise produced by the applicable security pass-through rate and purchase price because, while interest generally will accrue on each loan from the first day of the month, the distribution of interest generally will not be made earlier than the month following the month of accrual. 60 Under certain circumstances, the master servicer, the holders of the residual interests in a REMIC or any other person named in the related prospectus supplement may have the option to purchase the assets of a trust fund to effect early retirement of the related series of securities. See "Operative Agreements--Termination; Optional Termination; Optional Calls" in this prospectus. Factors other than those identified in this prospectus and in the related prospectus supplement could significantly affect principal prepayments at any time and over the lives of the securities. The relative contribution of the various factors affecting prepayment may also vary from time to time. There can be no assurance as to the rate of payment of principal of trust fund assets at any time or over the lives of the securities. The prospectus supplement relating to a series of securities will discuss in greater detail the effect of the rate and timing of principal payments including prepayments, delinquencies and losses on the yield, weighted average lives and maturities of the securities. In the event that a receiver, bankruptcy trustee, debtor in possession or similar entity (each, an "insolvency trustee") is appointed with respect to a seller due to its insolvency or a seller becomes a debtor under the federal Bankruptcy Code or any similar insolvency law, the insolvency trustee may attempt to characterize the transfer of the related mortgage loans from the seller to the depositor as a pledge to secure a financing rather than as a sale. In the event that this attempt were successful, the insolvency trustee might elect, among other remedies, to accelerate payment of the related securities and liquidate the related loans, with each securityholder being entitled to receive its allocable share of the principal balance of the loans, together with its allocable share of interest on the loans at the applicable pass-through rate, or weighted average "strip rate" as defined in the related prospectus supplement, as the case may be, to the date of payment. In this event, the related securityholders might incur reinvestment losses with respect to principal received and investment losses attendant to the liquidation of the loans and the resulting early retirement of the related security. In addition, certain delays in distributions might be experienced by the securityholders in connection with any such insolvency proceedings. OPERATIVE AGREEMENTS Set forth below is a summary of the material provisions of each operative agreement that are not described elsewhere in this prospectus. This summary does not purport to be complete and is subject to, and qualified in its entirety by reference to, the provisions of each operative agreement applicable to a particular series of certificates. Where particular provisions or terms used in the operative agreements are referred to, those provisions or terms are as specified in the agreements. Except as otherwise specified, the operative agreements described in this prospectus contemplate a trust fund that is comprised of loans. Although an agreement governing a trust fund that consists of Agency Securities or Private Label Securities may contain provisions that are similar to those described below, they will be described more fully in the related prospectus supplement. 61 ASSIGNMENT OF TRUST FUND ASSETS Assignment of the Trust Fund Loans. When the securities of a series are issued, the depositor named in the prospective supplement will cause the loans comprising the related trust fund to be assigned to the trustee, together with all principal and interest received by or on behalf of the depositor with respect to those loans after the cut-off date, other than principal and interest due on or before the cut-off date and other than any retained interest specified in the related prospectus supplement. Concurrently with this assignment, the trustee will deliver the securities to the depositor in exchange for the loans. Each loan will be identified in a schedule appearing as an exhibit to the related agreement. The schedule will include information as to the outstanding principal balance of each loan after application of payments due on the cut-off date, as well as information regarding the loan rate or APR, the current scheduled monthly payment of principal and interest, the maturity of the loan, its loan-to-value ratio or combined loan-to-value ratio at origination and certain other information. If so specified in the related prospectus supplement, and in accordance with the rules of membership of Merscorp, Inc. and/or Mortgage Electronic Registration Systems, Inc. (MERS), assignments of the mortgages for some or all of the mortgage loans in the related trust will be registered electronically through the MERS(R) System. With respect to mortgage loans registered through the MERS(R) System, MERS shall serve as mortgagee of record solely as a nominee in an administrative capacity on behalf of the trustee and shall not have any interest in any of those mortgage loans. In addition, the depositor will deliver to the trustee or a custodian the following items in connection with each loan in the related trust fund: o the original mortgage note or contract, endorsed without recourse in blank or to the order of the trustee; o in the case of Single Family Loans, Home Equity Loans or Multifamily Loans, the mortgage, deed of trust or similar instrument (each, a "mortgage") with evidence of recording indicated on the mortgage; however, in the case of any mortgage not returned from the public recording office, the depositor will deliver or cause to be delivered a copy of the mortgage together with a certificate stating that the original mortgage was delivered to the recording office; o in the case of a contract, other than an unsecured contract, the security interest in the mortgaged property securing the contract; o an assignment of the mortgage or contract to the trustee, which assignment will be in recordable form in the case of a mortgage assignment or evidence that the mortgage is held for the trustee through the MERS(R) System; and o any other security documents as may be specified in the related prospectus supplement, including those relating to any senior lienholder interests in the related mortgaged property. 62 Unless otherwise specified in the related prospectus supplement, the depositor will promptly cause the assignments of any Single Family Loan, Home Equity Loan and Multifamily Loan (except for mortgages held under the MERS(R) System) to be recorded in the appropriate public office for real property records, except in states in which, in the opinion of counsel acceptable to the trustee, recording is not required to protect the trustee's interest in the loans against the claim of any subsequent transferee or any successor to, or creditor of, the depositor or the originator of the loans. Unless otherwise specified in the related prospectus supplement, the depositor will promptly make or cause to be made an appropriate filing of a UCC-1 financing statement in the appropriate states to give notice of the trustee's ownership of the contracts. With respect to any loans which are cooperative loans, the depositor will deliver the following items to the trustee: o the related original cooperative note endorsed, without recourse, in blank or to the order of the trustee, o the original security agreement, o the proprietary lease or occupancy agreement, o the recognition agreement, o an executed financing agreement and the relevant stock certificate, o related blank stock powers, and o any other document specified in the related prospectus supplement. The depositor will cause to be filed in the appropriate office an assignment and a financing statement evidencing the trustee's security interest in each cooperative loan. The trustee or custodian will review the mortgage loan documents, upon receipt, within the time period specified in the related prospectus supplement. The trustee will hold the documents in trust for the benefit of the securityholders. Unless otherwise specified in the related prospectus supplement, if any of these documents are found to be missing or defective in any material respect, the trustee or custodian will notify the master servicer and the depositor, and the master servicer will notify the related seller. If the seller cannot cure the omission or defect within a specified member of days after receipt of notice, the seller will be obligated either to purchase the loan from the trustee or to substitute a qualified substitute loan for the defective loan. There can be no assurance that a seller will fulfill this obligation. Although the master servicer may be obligated to enforce the seller's obligation to the extent described in this prospectus under "Mortgage Loan Program--Representations by Sellers; Repurchases", neither the master servicer nor the depositor will be obligated to purchase the mortgage loan if the seller defaults on its obligation, unless the breach also constitutes a breach of the representations or warranties of the master servicer or the depositor, as the case may be. Unless otherwise specified in the related prospectus supplement, the seller's obligation to cure, purchase or substitute constitutes the sole remedy available to the securityholders or the trustee for the omission of, or a material defect in, a constituent loan document. 63 The trustee will be authorized to appoint a custodian pursuant to a custodial agreement to maintain possession of and, if applicable, to review the documents relating to the loans as agent of the trustee. The master servicer will make certain representations and warranties regarding its authority to enter into, and its ability to perform its obligations under, the agreement. Upon a breach of any representation of the master servicer which materially and adversely affects the interests of the securityholders in a loan, the master servicer will be obligated either to cure the breach in all material respects or to purchase the loan. Unless otherwise specified in the related prospectus supplement, this obligation to cure, purchase or substitute constitutes the sole remedy available to the securityholders or the trustee for a breach of representation by the master servicer. Notwithstanding the provisions of the foregoing two paragraphs, with respect to a trust fund for which a REMIC election is to be made, unless the related prospectus supplement otherwise provides, no purchase or substitution of a loan will be made if the purchase or substitution would result in a prohibited transaction tax under the Internal Revenue Code. Assignment of Agency Securities. The applicable depositor will cause any Agency Securities included in a trust fund to be registered in the name of the trustee or its nominee, and the trustee concurrently will execute, countersign and deliver the securities. Each Agency Security will be identified in a schedule appearing as an exhibit to the related pooling and servicing agreement, which will specify as to each Agency Security its original principal amount, outstanding principal balance as of the cut-off date, annual pass-through rate, if any, and the maturity date. Assignment of Private Label Securities. The applicable depositor will cause any Private Label Securities included in a trust fund to be registered in the name of the trustee. The trustee or custodian will have possession of any Private Label Securities that are in certificated form. Unless otherwise specified in the related prospectus supplement, the trustee will not be in possession, or be assignee of record, of any assets underlying the Private Label Securities. See "The Trust Fund--Private Label Securities." The Private Label Securities will be identified in a schedule appearing as an exhibit to the related agreement, which will specify the original principal amount, the outstanding principal balance as of the cut-off date, the annual pass-through rate or interest rate, the maturity date and other pertinent information for the Private Label Securities conveyed to the trustee. PAYMENTS ON LOANS; DEPOSITS TO SECURITY ACCOUNT Each sub-servicer servicing a loan pursuant to a sub-servicing agreement will establish and maintain a subservicing account which meets the requirements and is otherwise acceptable to the master servicer. A sub-servicing account must be established with a Federal Home Loan Bank or with a depository institution (including the sub-servicer if it is a depository institution), the accounts in which are insured by the Federal Deposit Insurance Corporation (FDIC). If a sub-servicing account is maintained at an institution that is a Federal Home Loan Bank or an FDIC-insured institution and, in either case, the amount on deposit in the sub-servicing account exceeds the FDIC insurance coverage amount, then such excess amount must be remitted to the 64 master servicer within one business day after receipt. In addition, the sub-servicer must maintain a separate account for escrow and impound funds relating to the loans. Each sub-servicer is required to deposit into its sub-servicing account on a daily basis all amounts that it receives in respect of the loans described immediately below under "--Sub-Servicing by Sellers", less its servicing or other compensation. On or before the date specified in the sub-servicing agreement, the sub-servicer will remit to the master servicer or the trustee all funds held in the sub-servicing account with respect to the loans that are required to be remitted. The sub-servicer is also required to advance, on the scheduled remittance date, an amount corresponding to any monthly installment of principal and interest, less its servicing or other compensation, on any loan the payment of which was not received from the borrower. Unless otherwise specified in the related prospectus supplement, this obligation of each sub-servicer to advance continues up to and including the first of the month following the date on which the related mortgaged property is sold at a foreclosure sale or is acquired on behalf of the securityholders by deed in lieu of foreclosure, or until the related loan is liquidated. The master servicer will establish and maintain with respect to the related trust fund a security account which is a separate account or accounts for the collection of payments on the assets in the trust fund. Unless otherwise specified in the related prospectus supplement, each security account shall meet one of the requirements listed below. o It must be maintained with a depository institution the debt obligations of which (or in the case of a depository institution that is the principal subsidiary of a holding company, the obligations of which) are rated in one of the two highest rating categories by each rating agency rating(s) named in the prospectus supplement. o It must be an account the deposits in which are fully insured by the FDIC. o It must be an account or accounts the deposits in which are insured by the FDIC to its established limits and the uninsured deposits in which are otherwise secured such that, as evidenced by an opinion of counsel, the securityholders have a claim with respect to the funds in the security account or a perfected first priority security interest against any collateral securing those funds that is superior to the claims of any other depositors or general creditors of the depository institution with which the security account is maintained. o It must be an account otherwise acceptable to each rating agency named in the prospectus supplement. The collateral eligible to secure amounts in the security account is limited to United States government securities and other high-quality permitted investments. A security account may be maintained as an interest-bearing account or the funds held in the account may be invested pending each succeeding distribution date in permitted investments. Unless otherwise specified in the related prospectus supplement, the master servicer or its designee will be entitled to receive any interest or other income earned on funds in the security account as additional compensation and will be obligated to deposit in the security account the amount of any loss immediately as realized. The security account may be maintained with the master servicer or 65 with a depository institution that is an affiliate of the master servicer, provided that the master servicer or its affiliate, as applicable, meets the standards set forth above. On a daily basis, the master servicer will deposit in the certificate account for each trust fund, to the extent applicable and unless otherwise specified in the related prospectus supplement and provided in the pooling and servicing agreement, the following payments and collections received, or advances made, by the master servicer or on its behalf subsequent to the cut-off date, other than payments due on or before the cut-off date and exclusive of any amounts representing a retained interest: o all payments on account of principal, including principal prepayments and, if specified in the related prospectus supplement, prepayment penalties, on the loans; o all payments on account of interest on the loans, net of applicable servicing compensation; o Insurance Proceeds; o Liquidation Proceeds; o any net proceeds received on a monthly basis with respect to any properties acquired on behalf of the securityholders by foreclosure or deed in lieu of foreclosure; o all proceeds of any loan or mortgaged property purchased by the master servicer, the depositor, any sub-servicer or any seller as described in this prospectus under "Loan Program--Representations by Sellers; Repurchases or Substitutions" or "--Assignment of Trust Fund Assets" above and all proceeds of any loan repurchased as described in this prospectus under "--Termination; Optional Termination" below; o all payments required to be deposited in the security account with respect to any deductible clause in any blanket insurance policy described in this prospectus under "--Hazard Insurance" below; o any amount required to be deposited by the master servicer in connection with losses realized on investments of funds held in the security account made for the benefit of the master servicer; and o all other amounts required to be deposited in the security account pursuant to the related agreement. PRE-FUNDING ACCOUNT If so provided in the related prospectus supplement, the master servicer will establish and maintain a pre-funding account in the name of the trustee on behalf of the related securityholders into which the applicable depositor will deposit the pre-funded amount on the related closing date. The trustee will use the pre-funded amount to purchase subsequent loans from the depositor from time to time during the funding period which generally runs from the closing date to the date specified in the related prospectus supplement. At the end of the funding period, any 66 amounts remaining in the pre-funding account will be distributed to the related securityholders in the manner and priority specified in the related prospectus supplement as a prepayment of principal of the related securities. SUB-SERVICING OF LOANS Each seller of a loan or any other servicing entity may act as the sub-servicer for that loan pursuant to a sub-servicing agreement which will not contain any terms inconsistent with the related operative agreement. While each sub-servicing agreement will be a contract solely between the master servicer and the related sub-servicer, the operative agreement pursuant to which a series of securities is issued will provide that, the trustee or any successor master servicer must recognize the sub-servicer's rights and obligations under the sub-servicing agreement, if for any reason the master servicer for that series is no longer the master servicer of the related loans. With the approval of the master servicer, a sub-servicer may delegate its servicing obligations to third-party servicers, but the sub-servicer will remain obligated under its sub-servicing agreement. Each sub-servicer will be required to perform the customary functions of a servicer of mortgage loans. These functions generally include o collecting payments from borrowers and remitting collections to the master servicer; o maintaining hazard insurance policies as described in this prospectus and in any related prospectus supplement, and filing and settling claims under those policies, subject in certain cases to the master servicer's right to approve settlements in advance; o maintaining borrower escrow or impoundment accounts for payment of taxes, insurance and other items required to be paid by the borrower under the related loan; o processing assumptions or substitutions, although, unless otherwise specified in the related prospectus supplement, the master servicer is generally required to enforce due-on-sale clauses to the extent their enforcement is permitted by law and would not adversely affect insurance coverage; o attempting to cure delinquencies; o supervising foreclosures; o inspecting and managing mortgaged properties under certain circumstances; o maintaining accounting records relating to the loans; and o to the extent specified in the related prospectus supplement, maintaining additional insurance policies or credit support instruments and filing and settling claims under them. 67 A sub-servicer will also be obligated to make advances in respect of delinquent installments of principal and interest on loans, as described more fully in this prospectus under "--Payments on Loans; Deposits to Security Account" above, and in respect of certain taxes and insurance premiums not paid on a timely basis by borrowers. As compensation for its servicing duties, each sub-servicer will be entitled to a monthly servicing fee, to the extent the scheduled payment on the related loan has been collected, in the amount set forth in the related prospectus supplement. Each sub-servicer is also entitled to collect and retain, as part of its servicing compensation, any prepayment or late charges provided in the note or related instruments. Each sub-servicer will be reimbursed by the master servicer for certain expenditures which it makes, generally to the same extent the master servicer would be reimbursed under the agreement. The master servicer may purchase the servicing of loans if the sub-servicer elects to release the servicing of the loans to the master servicer. See "--Servicing and Other Compensation and Payment of Expenses" below. Each sub-servicer may be required to agree to indemnify the master servicer for any liability or obligation sustained by the master servicer in connection with any act or failure to act by the sub-servicer in its servicing capacity. Each sub-servicer will be required to maintain a fidelity bond and an errors and omissions policy with respect to its officers, employees and other persons acting on its behalf or on behalf of the master servicer. Each sub-servicer will be required to service each loan pursuant to the terms of its sub-servicing agreement for the entire term of the loan, unless the sub-servicing agreement is earlier terminated by the master servicer or unless servicing is released to the master servicer. The master servicer may terminate a sub-servicing agreement without cause, upon written notice to the sub-servicer in the manner specified in that sub-servicing agreement. The master servicer may agree with a sub-servicer to amend a sub-servicing agreement or, upon termination of the sub-servicing agreement, the master servicer may act as servicer of the related loans or enter into new sub-servicing agreements with other sub-servicers. If the master servicer acts as servicer, it will not assume liability for the representations and warranties of the sub-servicer which it replaces. Each sub-servicer must be a seller or meet the standards for becoming a seller or have such servicing experience as to be otherwise satisfactory to the master servicer and the depositor. The master servicer will make reasonable efforts to have the new sub-servicer assume liability for the representations and warranties of the terminated sub-servicer, but no assurance can be given that an assumption of liability will occur. In the event of an assumption of liability, the master servicer may in the exercise of its business judgment, release the terminated sub-servicer from liability in respect of such representations and warranties. Any amendments to a sub-servicing agreement or new sub-servicing agreements may contain provisions different from those which are in effect in the original sub-servicing agreement. However, each sub-servicing agreement will provide that any amendment or new agreement may not be inconsistent with or violate the original sub-servicing agreement. COLLECTION PROCEDURES The master servicer, directly or through one or more sub-servicers, will make reasonable efforts to collect all payments called for under the loans and will, consistent with each agreement 68 and any mortgage pool insurance policy, primary mortgage insurance policy, FHA insurance, VA guaranty and bankruptcy bond or alternative arrangements, follow such collection procedures as are customary with respect to loans that are comparable to the loans included in the related trust fund. Consistent with the preceding sentence, the master servicer may, in its discretion, o waive any assumption fee, late payment or other charge in connection with a loan; and o to the extent not inconsistent with the coverage of the loan by a pool insurance policy, primary mortgage insurance policy, FHA insurance, VA guaranty or bankruptcy bond or alternative arrangements, arrange with the borrower a schedule for the liquidation of delinquencies running for no more than 125 days after the applicable due date for each payment. Both the sub-servicer and the master servicer remain obligated to make advances during any period when an arrangement of this type is in effect. In certain instances in which a mortgage loan is in default (or if default is reasonably foreseeable), the master servicer may, acting in accordance with procedures specified in the applicable pooling and servicing agreement, permit certain modifications of the mortgage loan rather than proceeding with foreclosure. Modifications of this type may have the effect of reducing the mortgage rate, forgiving the payment of principal or interest or extending the final maturity date of the mortgage loan. Any such modified mortgage loan may remain in the related trust fund, and the reduction in collections resulting from the modification may result in reduced distributions of interest (or other amounts) on, or may extend the final maturity of, one or more classes of the related securities. If no satisfactory arrangement can be made for the collection of such delinquent payments, the master servicer will continue to follow procedures specified in the applicable pooling and servicing agreement. These procedures could result, among other possible outcomes, in the sale of the delinquent mortgage loan by the master servicer on behalf of the related trust fund. Unless otherwise specified in the related prospectus supplement, in any case in which property securing a loan has been, or is about to be, conveyed by the borrower, the master servicer will, to the extent it has knowledge of the conveyance or proposed conveyance, exercise its rights to accelerate the maturity of the loan under any applicable due-on-sale clause, but only if the exercise of its rights is permitted by applicable law and will not impair or threaten to impair any recovery under any primary mortgage insurance policy. If these conditions are not met or if the master servicer reasonably believes it is unable under applicable law to enforce the due-on-sale clause, or if the loan is insured by the FHA or partially guaranteed by the VA, the master servicer will enter into an assumption and modification agreement with the person to whom such property has been or is about to be conveyed. Pursuant to the assumption agreement, the transferee of the property becomes liable for repayment of the loan and, to the extent permitted by applicable law, the original borrower also remains liable on the loan. Any fee collected by or on behalf of the master servicer for entering into an assumption agreement will be retained by or on behalf of the master servicer as additional servicing compensation. In the case of Multifamily Loans and unless otherwise specified in the related prospectus supplement, the 69 master servicer will agree to exercise any right it may have to accelerate the maturity of a Multifamily Loan to the extent it has knowledge of any further encumbrance of the related mortgaged property effected in violation of any applicable due-on-encumbrance clause. See "Material Legal Aspects of the Mortgage Loans--Due-on-Sale Clauses" in this prospectus. In connection with any assumption, the terms of the original loan may not be changed. With respect to cooperative loans, any prospective purchaser of a cooperative unit will generally have to obtain the approval of the board of directors of the relevant cooperative before purchasing the shares and acquiring rights under the related proprietary lease or occupancy agreement. See "Material Legal Aspects of the Loans" in this prospectus. This approval is usually based on the purchaser's income and net worth and numerous other factors. Although the cooperative's approval is unlikely to be unreasonably withheld or delayed, the need to acquire approval could limit the number of potential purchasers for those shares and otherwise limit the trust fund's ability to sell and realize the value of those shares. In general, a "tenant-stockholder," as defined in Section 216(b)(2) of the Internal Revenue Code, of a corporation that qualifies as a "cooperative housing corporation" within the meaning of Section 216(b)(1) of the Code is allowed a deduction for amounts paid or accrued within his taxable year to the corporation representing his proportionate share of certain interest expenses and real estate taxes allowable as a deduction under Section 216(a) of the Code to the cooperative corporation under Sections 163 and 164 of the Code. In order for a corporation to qualify under Section 216(b)(1) of the Code for the taxable year in which these items are allowable as a deduction to the corporation, Section 216(b)(1) requires, among other things, that at least 80% of the gross income of the cooperative corporation be derived from its tenant-stockholders. By virtue of this requirement, the status of a corporation for purposes of Section 216(b)(1) of the Code must be determined on a year-to-year basis. Consequently, there can be no assurance that cooperatives relating to particular cooperative loans will qualify under this section for any given year. In the event that a cooperative fail to qualify for one or more years, the value of the collateral securing the related cooperative loan could be significantly impaired because no deduction would be allowable to tenant-stockholders under Section 216(a) of the Code with respect to those years. In view of the significance of the tax benefits accorded tenant-stockholders of a corporation that qualifies under Section 216(b)(1) of the Code, the likelihood that such a failure would be permitted to continue over a period of years appears remote. HAZARD INSURANCE The master servicer will require each borrower to maintain a hazard insurance policy providing for no less than the coverage of the standard form of fire insurance policy with extended coverage customary for the type of mortgaged property in the state where the property is located. This coverage will be in an amount not less than the replacement value of the improvements or manufactured home securing the loan or the principal balance owing on the loan, whichever is less. All amounts collected by the master servicer under any hazard policy will be deposited in the related security account, except for amounts to be applied to the restoration or repair of the mortgaged property or released to the borrower in accordance with the master servicer's normal servicing procedures. In the event that the master servicer maintains a blanket policy insuring against hazard losses on all the loans comprising part of a trust fund, it will conclusively be deemed to have satisfied its obligation to maintain hazard insurance. 70 A blanket policy may contain a deductible clause, in which case the master servicer will be required to deposit into the related security account from its own funds the amounts which would have been deposited in the security account but for the deductible clause. Any additional insurance coverage for mortgaged properties with respect to a pool of Multifamily Loans will be specified in the related prospectus supplement. In general, the standard form of fire and extended coverage policy covers physical damage to or destruction of the improvements or manufactured home securing a loan by fire, lightning, explosion, smoke, windstorm and hail, riot, strike and civil commotion, subject to the conditions and exclusions particularized in each policy. Although the policies relating to the loans may have been underwritten by different insurers under different state laws in accordance with different applicable forms and therefore may not contain identical terms and conditions, the basic policy terms are dictated by respective state laws. In addition, most policies typically do not cover any physical damage resulting from the following: war, revolution, governmental actions, floods and other water-related causes, earth movement (including earthquakes, landslides and mud flows), nuclear reactions, wet or dry rot, vermin, rodents, insects or domestic animals, theft and, in certain cases, vandalism. The foregoing list is merely indicative of certain kinds of uninsured risks and is not intended to be all-inclusive. If the mortgaged property securing a loan is located in a federally designated special flood area at the time of origination, the master servicer will require the borrower to obtain and maintain flood insurance. The hazard insurance policies covering mortgaged properties typically contain a clause which have the effect of requiring the insured at all times to carry insurance of a specified percentage -generally 80% to 90% - of the full replacement value of the mortgaged property in order to recover the full amount of any partial loss. If the insured's coverage falls below this specified percentage, then the insurer's liability in the event of partial loss will not exceed the larger of o the actual cash value (generally defined as replacement cost at the time and place of loss, less physical depreciation) of the improvements damaged or destroyed, generally defined to equal replacement cost at the time and place of the loss less physical depreciation; and o such proportion of the loss as the amount of insurance carried bears to the specified percentage of the full replacement cost of the improvements. Since the amount of hazard insurance that the master servicer may cause to be maintained on the improvements securing the loans will decline as the principal balances owing on the loans decrease, and since improved real estate generally has appreciated in value over time in the past, the effect of this requirement may be that, in the event of a partial loss, hazard insurance proceeds will be insufficient to restore the damaged property fully. If specified in the related prospectus supplement, a special hazard insurance policy will be obtained to insure against certain of the uninsured risks described. See "Credit Enhancement--Special Hazard Insurance Policies" in this prospectus. The master servicer will not require that a standard hazard or flood insurance policy be maintained on the cooperative dwelling relating to any cooperative loan. Generally, the 71 cooperative itself is responsible for maintenance of hazard insurance for the property owned by the cooperative and the tenant-stockholders of that cooperative do not maintain individual hazard insurance policies. To the extent, however, that a cooperative and the related borrower on a cooperative loan do not maintain such insurance or do not maintain adequate coverage or any insurance proceeds are not applied to the restoration of damaged property, any damage to the borrower's cooperative dwelling or the cooperative's building could significantly reduce the value of the collateral securing the cooperative loan to the extent not covered by other credit support. REALIZATION UPON DEFAULTED MORTGAGE LOANS Primary Mortgage Insurance Policies. To the extent specified in the related prospectus supplement, the master servicer will maintain, or cause each sub-servicer to maintain, in full force and effect, a primary mortgage insurance policy with regard to each loan for which coverage is required. The master servicer will not cancel or refuse to renew any primary mortgage insurance policy in effect at the time of the initial issuance of a series of securities that is required to be kept in force under the applicable agreement unless the primary mortgage insurance policy that replaces the cancelled or nonrenewed policy is maintained with an insurer whose claims-paying ability is sufficient to maintain the current rating of the classes of securities of that series by each rating agency named in the related prospectus supplement. Although the terms and conditions of primary mortgage insurance vary, the amount of a claim for benefits under a primary mortgage insurance policy covering a loan will consist of the insured percentage of the unpaid principal amount of the covered loan, accrued and unpaid interest thereon and reimbursement of certain expenses, less the following amounts: o all rents or other payments collected or received by the insured other than the proceeds of hazard insurance that are derived from or in any way related to the mortgaged property, o hazard insurance proceeds in excess of the amount required to restore the mortgaged property and which have not been applied to the payment of the loan, o amounts expended but not approved by the issuer of the related primary mortgage insurance policy, o claim payments previously made by the primary insurer, and o unpaid premiums. Primary mortgage insurance policies generally reimburse losses sustained by reason of defaults in payments by borrowers. Primary mortgage insurance policies do not insure against, and exclude from coverage, a loss sustained by reason of a default arising from or involving the following matters, among others: o fraud or negligence in origination or servicing of the loan, including misrepresentation by the originator, borrower or other persons involved in the origination of the loan, 72 o failure to construct the related mortgaged property in accordance with specified plans, o physical damage to the mortgaged property and o lack of approval by the primary mortgage insurance policy insurer of the master servicer or sub-servicer to act as servicer of the loan. Recoveries Under a Primary Mortgage Insurance Policy. As conditions precedent to the filing or payment of a claim under a primary mortgage insurance policy covering a loan, the insured will be required o to advance or discharge all hazard insurance policy premiums; o to advance - real estate property taxes, - all expenses required to maintain the related mortgaged property in at least as good a condition as existed at the effective date of the policy, ordinary wear and tear excepted, - mortgaged property sales expenses, - any outstanding liens on the mortgaged property (as defined in the policy) and - foreclosure costs, including court costs and reasonable attorneys' fees, in each case as necessary and approved in advance by the primary mortgage insurance policy insurer; o in the event of any physical loss or damage to the mortgaged property, to have the mortgaged property restored and repaired to at least as good a condition as existed at the effective date of the policy, ordinary wear and tear excepted; and o to tender to the primary mortgage insurance policy carrier good and merchantable title to and possession of the mortgaged property. In those cases in which a loan is serviced by a sub-servicer, the sub-servicer, on behalf of itself, the trustee and securityholders, will present claims to the primary mortgage insurance policy carrier, and all collections under the policy will be deposited in the sub-servicing account. In all other cases, the master servicer, on behalf of itself, the trustee and the securityholders, will present claims to the carrier of each primary mortgage insurance policy and will take such reasonable steps as are necessary to receive payment or to permit recovery under the policy with respect to defaulted loans. As set forth above, all collections by or on behalf of the master servicer under any primary mortgage insurance policy and, when the mortgaged property has not been restored, the hazard insurance policy are to be deposited in the security account, subject to withdrawal as previously described. 73 If the mortgaged property securing a defaulted loan is damaged and any proceeds from the related hazard insurance policy are insufficient to restore the damaged property to a condition sufficient to permit recovery under any related primary mortgage insurance policy, the master servicer is not required to expend its own funds to restore the damaged property unless it determines that o the restoration will increase the proceeds to securityholders upon liquidation of the loan after reimbursement of the master servicer for its expenses, and o the master servicer will be able to recover its expenses from related Insurance Proceeds or Liquidation Proceeds. If recovery on a defaulted loan is not available under the primary mortgage insurance policy for the reasons set forth in the preceding paragraph, or if the defaulted loan is not covered by a primary mortgage insurance policy, the master servicer will be obligated to follow such normal practices and procedures as it deems necessary or advisable to realize upon the defaulted loan. If the proceeds of any liquidation of the related mortgaged property are less than the principal balance of the loan plus accrued interest that is payable to securityholders, the trust fund will realize a loss in the amount of that difference plus the amount of expenses that it incurred in connection with the liquidation and that are reimbursable under the agreement. In the unlikely event that proceedings result in a total recovery which, after reimbursement to the master servicer of its expenses, is in excess of the principal balance of the defaulted loan plus accrued interest that is payable to securityholders, the master servicer will be entitled to withdraw or retain from the security account amounts representing its normal servicing compensation with respect to that loan and, unless otherwise specified in the related prospectus supplement, amounts representing the balance of the excess amount, exclusive of any amount required by law to be forwarded to the related borrower , as additional servicing compensation. If the master servicer or its designee recovers Insurance Proceeds which, when added to any related Liquidation Proceeds and after deduction of certain expenses reimbursable to the master servicer, exceed the principal balance of the related loan plus accrued interest that is payable to securityholders, the master servicer will be entitled to withdraw or retain from the security account amounts representing its normal servicing compensation with respect to that loan. In the event that the master servicer has expended its own funds to restore the damaged mortgaged property and those funds have not been reimbursed under the related hazard insurance policy, the master servicer will be entitled to withdraw from the security account, out of related Liquidation Proceeds or Insurance Proceeds, an amount equal to the expenses that it incurred, in which event the trust fund may realize a loss up to the amount of those expenses. Since Insurance Proceeds cannot exceed deficiency claims and certain expenses incurred by the master servicer, no payment or recovery will result in a recovery to the trust fund that exceeds the principal balance of the defaulted loan together with accrued interest. See "Credit Enhancement" in this prospectus supplement. SERVICING AND OTHER COMPENSATION AND PAYMENT OF EXPENSES The master servicer's primary servicing compensation with respect to a series of securities will come from the payment to it each month, out of each interest payment on a loan, 74 of an amount equal to the annual percentage specified in the related prospectus supplement of the outstanding principal balance of that loan. Since the master servicer's primary compensation is a percentage of the outstanding principal balance of each mortgage loan, this amount will decrease as the mortgage loans amortize. In addition to this primary servicing compensation, the master servicer or the sub-servicers will be entitled to retain all assumption fees and late payment charges to the extent collected from borrowers and, if so provided in the related prospectus supplement, any prepayment charges and any interest or other income which may be earned on funds held in the security account or any sub-servicing account. Unless otherwise specified in the related prospectus supplement, any sub-servicer will receive a portion of the master servicer's primary compensation as its sub-servicing compensation. Unless otherwise specified in the related prospectus supplement, the master servicer will pay from its servicing compensation, in addition to amounts payable to any sub-servicer, certain expenses incurred in connection with its servicing of the loans, including, without limitation o payment of any premium for any insurance policy, guaranty, surety or other form of credit enhancement as specified in the related prospectus supplement; o payment of the fees and disbursements of the trustee and independent accountants; o payment of expenses incurred in connection with distributions and reports to securityholders; and o payment of any other expenses described in the related prospectus supplement. EVIDENCE AS TO COMPLIANCE Each operative agreement will provide that a firm of independent public accountants will furnish a statement to the trustee, on or before a specified date in each year, to the effect that, on the basis of the examination by the firm conducted substantially in compliance with the Uniform Single Audit Program for Mortgage Bankers or the Audit Program for Mortgages Serviced for Freddie Mac, the servicing by or on behalf of the master servicer of loans, the Agency Securities or the Private Label Securities, under agreements substantially similar to one another (including the governing agreement), was conducted in compliance with those agreements except for any significant exceptions or errors in records that, in the opinion of the firm, the Uniform Single Audit Program for Mortgage Bankers or the Audit Program for Mortgages Serviced by Freddie Mac requires it to report. In rendering this statement the accounting firm may rely, as to matters relating to the direct servicing of mortgage loans, Agency Securities or Private Label Securities by sub-servicers, upon comparable statements of firms of independent public accountants rendered within one year with respect to the sub-servicers for examinations conducted substantially in compliance with the Uniform Single Audit Program for Mortgage Bankers or the Audit Program for Mortgages Serviced for Freddie Mac. Each operative agreement will also provide for delivery to the related trustee, on or before a specified date in each year, of an annual statement signed by two officers of the master servicer to the effect that the master servicer has fulfilled its obligations under the agreement throughout the preceding year. 75 Copies of the annual accountants' statement and the statement of officers of the master servicer may be obtained by securityholders of the related series without charge upon written request to the master servicer at the address set forth in the related prospectus supplement. CERTAIN MATTERS REGARDING THE MASTER SERVICER AND THE DEPOSITORS The master servicer under each operative agreement will be named in the related prospectus supplement. The entity serving as master servicer may have normal business relationships with the depositor or the depositor's affiliates. Each operative agreement will provide that the master servicer may not resign from its obligations and duties under the agreement except (i) upon a determination that it is no longer permissible to perform them under applicable law or (ii) if so provided in the related operative agreement, a determination by the master servicer that it will no longer engage in the business of servicing mortgage loans. In no event will the master servicer's resignation become effective until the trustee or a successor servicer has assumed the master servicer's obligations and duties under the agreement. Each operative agreement will further provide that none of the master servicer, the depositor or any director, officer, employee or agent of the master servicer or of the depositor will be under any liability to the related trust fund or the securityholders for any action taken, or for refraining from the taking of any action, in good faith pursuant to the agreement, or for errors in judgment. However, none of the master servicer, the depositor or any director, officer, employee or agent of the master servicer or of the depositor will be protected against any liability which would otherwise be imposed by reason of willful misfeasance, bad faith or negligence in the performance of duties under the agreement or by reason of reckless disregard of obligations and duties under the agreement. Each operative agreement will further provide that the master servicer, the depositor and any director, officer, employee or agent of the master servicer or of the depositor will be entitled to indemnification by the related trust fund and will be held harmless against any loss, liability or expense incurred in connection with (i) any legal action relating to the agreement or the securities or (ii) a breach of a representation or warranty regarding the loan or loans, other than o any loss, liability or expense related to any specific loan in the trust fund or the loans in general except for any loss, liability or expense otherwise reimbursable under the agreement, and o any loss, liability or expense incurred by reason of willful misfeasance, bad faith or negligence in the performance of duties under the agreement or by reason of reckless disregard of obligations and duties under the agreement. In addition to the foregoing, if so provided in the agreement, the master servicer, the depositor and any director, officer, employee or agent of the master servicer or of the depositor may be entitled to indemnification by the related trust fund and may be held harmless against any loss, liability or expense in connection with any actions taken under the agreement. In addition, each operative agreement will provide that neither the master servicer nor the depositor will be under any obligation to appear in, prosecute or defend any legal action which is 76 not incidental to its responsibilities under the agreement and which, in its opinion, may involve it in any expense or liability. However, the master servicer or the depositor may, in its discretion, undertake any action which it may deem necessary or desirable with respect to the agreement and the rights and duties of the parties and the interests of the securityholders. In that event, the legal expenses and costs of the action and any resulting liability will be expenses, costs and liabilities of the trust fund, and the master servicer or the depositor, as the case may be, will be entitled to reimbursement from funds otherwise distributable to securityholders. Any entity into which the master servicer may be merged or consolidated, or any entity resulting from any merger or consolidation to which the master servicer is a party, or any entity succeeding to the business of the master servicer, will be the successor of the master servicer under each agreement, provided that the successor entity is qualified to sell loans to, and service loans on behalf of, Fannie Mae or Freddie Mac and that the merger, consolidation or succession does not adversely affect the then current rating of the securities rated by each rating agency named in the related prospectus supplement. EVENTS OF DEFAULT; RIGHTS UPON EVENT OF DEFAULT Pooling and Servicing Agreement; Servicing Agreement. Unless otherwise specified in the related prospectus supplement, the following will be deemed "events of default" under each agreement: o any failure by the master servicer to distribute to security holders of any class any required payment - other than an advance - which failure continues unremedied for five business days after the giving of written notice to the master servicer by the trustee or the depositor, or to the master servicer, the depositor and the trustee by the holders of securities of that class evidencing not less than 25% of the aggregate percentage interests evidenced by that class; o any failure by the master servicer to make an advance as required under the agreement, unless cured as specified in the agreement; o any failure by the master servicer duly to observe or perform in any material respect any of its other covenants or agreements in the agreement, which failure continues unremedied for a specified number of days after the giving of written notice of the failure to the master servicer by the trustee or the depositor, or to the master servicer, the depositor and the trustee by the holders of securities of any class evidencing not less than 25% of the aggregate percentage interests constituting that class; and o events of insolvency, readjustment of debt, marshalling of assets and liabilities or similar proceedings and certain actions by or on behalf of the master servicer indicating its insolvency, reorganization or inability to pay its obligations. If specified in the related prospectus supplement, the agreement will permit the trustee to sell the assets of the trust fund in the event that payments are insufficient to make the payments required under the agreement. The assets of the trust fund will be sold only under the circumstances and in the manner specified in the related prospectus supplement. 77 So long as an event of default under the related agreement remains unremedied, the depositor or the trustee may, and, at the direction of holders of securities of any class evidencing not less than 51% of the aggregate percentage interests constituting that class and under such other circumstances as may be specified in the agreement, the trustee shall, terminate all of the rights and obligations of the master servicer relating to the trust fund and in and to the related loans. Thereupon the trustee will succeed to all of the responsibilities, duties and liabilities of the master servicer under the agreement, including, if specified in the related prospectus supplement, the obligation to make advances, and the trustee will be entitled to similar compensation arrangements. In the event that the trustee is unwilling or unable to act in this way, it may appoint, or petition a court of competent jurisdiction to appoint, a loan servicing institution with a net worth of at least $10,000,000 to act as successor to the master servicer under the agreement. Pending the appointment, the trustee is obligated to act in this capacity. The trustee and any successor master servicer may agree upon the servicing compensation to be paid, which in no event may be greater than the compensation payable to the master servicer under the agreement. No securityholder, solely by virtue of its status as a securityholder, will have any right under any agreement to institute any proceeding with respect to that agreement, unless o the holder has previously given to the trustee written notice of default; o the holders of securities of any class evidencing not less than 25% of the aggregate percentage interests constituting that class have made written request upon the trustee to institute the proceeding in its own name as trustee and have offered a reasonable indemnity to the trustee; and o the trustee for 60 days has neglected or refused to institute any such proceeding. Indenture. Unless otherwise specified in the related prospectus supplement, the following will be deemed "events of default" under the indenture for each series of notes: o failure to pay for five days or more any principal or interest on any note of that series; o failure by the depositor or the trust to perform any other covenant in the indenture, which failure continues unremedied for 30 days after notice is given in accordance with the procedures described in the related prospectus supplement; o the material breach of any representation or warranty made by the depositor or the trust in the indenture or in any document delivered under the indenture, which breach continues uncured for 30 days after notice is given in accordance with the procedures described in the related prospectus supplement; o events of bankruptcy insolvency, receivership or liquidation of the depositor in the trust; or o any other event of default specified in the indenture. 78 If an event of default with respect to the notes of a series (other than principal only notes) occurs and is continuing, either the trustee or the holders of a majority of the then aggregate outstanding amount of the notes of that series may declare the principal amount of all the notes of that series to be due and payable immediately. In the case of principal only notes, the portion of the principal amount necessary to make such a declaration will be specified in the related prospective supplement. This declaration may, under certain circumstances, be rescinded and annulled by the holders of more than 50% of the percentage ownership interest of the notes of that series. If, following an event of default with respect to any series of notes, the notes of that series have been declared to be due and payable, the trustee may, in its discretion, notwithstanding the acceleration, elect to maintain possession of the collateral securing the notes of that series and to continue to apply distributions on the collateral as if there had been no declaration of acceleration so long as the collateral continues to provide sufficient funds for the payment of principal and interest on the notes as they would have become due if there had not been a declaration. In addition, the trustee may not sell or otherwise liquidate the collateral securing the notes of a series following an event of default, unless one of the following conditions precedent has occurred: o the holders of 100% of the percentage ownership interest in the related notes consent to the sale or liquidation; o the proceeds of the sale or liquidation are sufficient to pay the full amount of principal and accrued interest, due and unpaid, on the related notes at the date of the sale or liquidation; or o the trustee determines that the collateral would not be sufficient on an ongoing basis to make all payments on the related notes as they would have become due if the notes had not been declared due and payable, and the trustee obtains the consent of the holders of 66% of the percentage ownership interest of each class of the related notes. Unless otherwise specified in the related prospectus supplement, in the event the principal of the notes of a series is declared due and payable as described above, the holders of any of those notes issued at a discount from par may be entitled to receive no more than an amount equal to the unpaid principal amount of those notes less the amount of the unamortized discount. Subject to the provisions of the indenture relating to the duties of the trustee, in case an event of default shall occur and be continuing with respect to a series of notes, the trustee shall be under no obligation to exercise any of the rights or powers under the indenture at the request or direction of any of the holder of the related notes, unless the holders offer to the trustee satisfactory security or indemnity against the trustee's costs, expenses and liabilities which might be incurred in complying with their request or direction. Subject to the indemnification provisions and certain limitations contained in the indenture, the holders of a majority of the then aggregate outstanding amount of the related notes of the series shall have the right to direct the time, method and place of conducting any proceeding for any remedy available to the trustee or exercising any trust or power conferred on the trustee with respect to the related notes, and 79 holders of a majority of the then aggregate outstanding amount of the related notes may, in certain cases, waive any default other than a default in the payment of principal or interest or a default in respect of a covenant or provision of the indenture that cannot be modified without the waiver or consent of all the holders of the affected notes. AMENDMENT Unless otherwise specified in the related prospectus supplement, each operative agreement may be amended by the depositor, the master servicer and the trustee, without the consent of any of the securityholders, for the following purposes: o to cure any ambiguity, o to correct or supplement any provision in the agreement which may be defective or inconsistent with any other provision, or o to make any other revisions with respect to matters or questions arising under the agreement which are not inconsistent with its other provisions. In no event, however, shall any amendment adversely affect in any material respect the interests of any securityholder as evidenced by either (i) an opinion of counsel or (ii) confirmation by the rating agencies that such amendment will not result in the downgrading of the securities. No amendment shall be deemed to adversely affect in any material respect the interests of any securityholder who shall have consented thereto, and no opinion of counsel or written notice from the rating agencies shall be required to address the effect of any such amendment on any such consenting securityholder. In addition, an agreement may be amended without the consent of any of the securityholders to change the manner in which the security account is maintained, so long as the amendment does not adversely affect the then current ratings of the securities rated by each rating agency named in the prospectus supplement. In addition, if a REMIC election is made with respect to a trust fund, the related agreement may be amended to modify, eliminate or add to any of its provisions to such extent as may be necessary to maintain the qualification of the trust fund as a REMIC, but the trustee shall have first received an opinion of counsel to the effect that the action is necessary or helpful to maintain the REMIC qualification. Unless otherwise specified in the related prospectus supplement, each operative agreement may also be amended by the depositor, the master servicer and the trustee with consent of holders of securities evidencing not less than 66% of the aggregate percentage ownership interests of each affected class for the purpose of adding any provisions to, or changing in any manner or eliminating any of the provisions of, the agreement or of modifying in any manner the rights of the holders of the related securities. In no event, however, shall any amendment o reduce in any manner the amount of, or delay the timing of, payments received on loans which are required to be distributed on any security without the consent of the holder of that security, or 80 o reduce the percentage of the securities of any class the holders of which are required to consent to any amendment without the consent of the holders of all securities of that class then outstanding. If a REMIC election is made with respect to a trust fund, the trustee will not be entitled to consent to an amendment to the agreement without having first received an opinion of counsel to the effect that the amendment will not cause the trust fund to fail to qualify as a REMIC. TERMINATION; OPTIONAL TERMINATION; CALLS Pooling and Servicing Agreement; Trust Agreement. Unless otherwise specified in the related prospectus supplement, the obligations created by the pooling and servicing agreement and trust agreement for the related series of securities will terminate upon the payment to the securityholders of all amounts held in the security account or held by the master servicer, and required to be paid to the securityholders under the agreement, following the later to occur of the following: o the final payment or other liquidation of the last of the assets of the trust fund subject to the agreement or the disposition of all property acquired upon foreclosure of any assets remaining in the trust fund, and o the purchase from the trust fund by the master servicer, or such other party as may be specified in the related prospectus supplement, of all of the remaining trust fund assets and all property acquired in respect of those assets. See "Material Federal Income Tax Consequences" in this prospectus. Unless otherwise specified in the related prospectus supplement, any purchase of trust fund assets and property acquired in respect of trust fund assets will be made at the option of the related master servicer or, if applicable, another designated party, at a price, and in accordance with the procedures, specified in the related prospectus supplement. The exercise of this right will effect early retirement of the securities of that series. However, this right can be exercised only at the times and upon the conditions specified in the related prospectus supplement. If a REMIC election has been made with respect to the trust fund, any repurchase pursuant to the second bullet point in the immediately preceding paragraph will be made only in connection with a "qualified liquidation" of the REMIC within the meaning of Section 860F(a)(4) of the Internal Revenue Code. Indenture. The indenture will be discharged with respect to a series of notes (except with respect to certain continuing rights specified in the indenture) upon the delivery to the trustee for cancellation of all the notes of that series or, with certain limitations, upon deposit with the trustee of funds sufficient for the payment in full of all of the notes of that series. If specified for the notes of any series, the indenture will provide that the related trust fund will be discharged from any and all obligations in respect of the notes of that series (except for certain obligations relating to temporary notes and exchange of notes, registering the transfer or exchange notes, replacing stolen, lost or mutilated notes, maintaining paying agencies and holding monies for payment in trust) upon the deposit with the trustee, in trust, of money and/or 81 direct obligations of or obligations guaranteed by the United States which, through the payment of interest and principal in accordance with their terms, will provide money in an amount sufficient to pay the principal and each installment of interest on the related notes on the last scheduled distribution date for the notes and any installment of interest on the notes in accordance with the terms of the indenture and the notes of that series. In the event of any such defeasance and discharge of a series of notes, holders of the related notes would be able to look only to such money and/or direct obligations for payment of principal and interest, if any, on their notes until maturity. Calls. One or more classes of securities may be subject to a mandatory or optional call at the times and subject to the conditions specified in the related prospectus supplement. In the case of a mandatory call or in the event an optional call is exercised with respect to one or more classes of securities, holders of each affected class of securities will receive the outstanding principal balance of their securities together with accrued and unpaid interest at the applicable pass-through rate, subject to the terms specified in the related prospectus supplement. THE TRUSTEE The trustee under each agreement will be named in the related prospectus supplement. The commercial bank or trust company serving as trustee may have normal banking relationships with the depositor, the master servicer and any of their respective affiliates. MATERIAL LEGAL ASPECTS OF THE LOANS The following discussion contains general summaries of material legal matters relating to the loans. Because the legal matters are determined primarily by applicable state law and because state laws may differ substantially, the summaries do not purport to be complete, to reflect the laws of any particular state or to encompass the laws of all states in which security for the loans may be situated. The summaries are qualified in their entirety by reference to the applicable laws of the states in which loans may be originated. GENERAL Single Family Loans, Multifamily Loans and Home Equity Loans. The loans may be secured by deeds of trust, mortgages, security deeds or deeds to secure debt, depending upon the prevailing practice in the state in which the property subject to the loan is located. A mortgage creates a lien upon the real property encumbered by the mortgage. The mortgage lien generally is not prior to the lien for real estate taxes and assessments. Priority between mortgages depends on their terms and generally on the order of recording with a state or county office. There are two parties to a mortgage: the mortgagor, who is the borrower and owner of the mortgaged property, and the mortgagee, who is the lender. Under the mortgage instrument, the mortgagor delivers to the mortgagee a note or bond and the mortgage. Although a deed of trust is similar to a mortgage, a deed of trust formally has three parties: the borrower-property owner called the trustor (similar to a mortgagor), a lender (similar to a mortgagee) called the beneficiary, and a third-party grantee called the trustee. Under a deed of trust, the borrower grants the property, irrevocably until the debt is paid, in trust, generally with a power of sale, to the trustee to secure payment of the obligation. A security deed and a deed to secure debt are special types of deeds 82 which indicate on their face that they are granted to secure an underlying debt. By executing a security deed or deed to secure debt, the grantor conveys to the grantee title to, as opposed to merely creating a lien upon, the subject property until such time as the underlying debt is repaid. The trustee's authority under a deed of trust, the mortgagee's authority under a mortgage and the grantee's authority under a security deed or deed to secure debt are governed by law and, with respect to some deeds of trust, the directions of the beneficiary. Cooperative Loans. Certain of the loans may be cooperative loans. The cooperative owns all the real property that comprises the related project, including the land, separate dwelling units and all common areas. The cooperative is directly responsible for project management and, in most cases, payment of real estate taxes and hazard and liability insurance. If, as is generally the case, there is a blanket mortgage on the cooperative and/or underlying land, the cooperative, as project mortgagor, is also responsible for meeting these mortgage obligations. A blanket mortgage is ordinarily incurred by the cooperative in connection with the construction or purchase of the cooperative's apartment building. The interest of the occupant under proprietary leases or occupancy agreements to which the cooperative is a party are generally subordinate to the interest of the holder of the blanket mortgage in that building. If the cooperative is unable to meet the payment obligations arising under its blanket mortgage, the mortgagee holding the blanket mortgage could foreclose on that mortgage and terminate all subordinate proprietary leases and occupancy agreements. In addition, the blanket mortgage on a cooperative may provide financing in the form of a mortgage that does not fully amortize with a significant portion of principal being due in one lump sum at final maturity. The inability of the cooperative to refinance this mortgage and its consequent inability to make such final payment could lead to foreclosure by the mortgagee providing the financing. A foreclosure in either event by the holder of the blanket mortgage could eliminate or significantly diminish the value of any collateral held by the lender who financed the purchase by an individual tenant-stockholder of cooperative shares or, in the case of a trust fund including cooperative loans, the collateral securing the cooperative loans. A cooperative is owned by tenant-stockholders who, through ownership of stock, shares or membership certificates in the corporation, receive proprietary leases or occupancy agreements which confer exclusive rights to occupy specific units. Generally, a tenant-stockholder of a cooperative must make a monthly payment to the cooperative representing such tenant-stockholder's pro rata share of the cooperative's payments for its blanket mortgage, real property taxes, maintenance expenses and other capital or ordinary expenses. An ownership interest in a cooperative and the accompanying rights are financed through a cooperative share loan evidenced by a promissory note and secured by a security interest in the occupancy agreement or proprietary lease and in the related cooperative shares. The lender takes possession of the share certificate and a counterpart of the proprietary lease or occupancy agreement and a financing statement covering the proprietary lease or occupancy agreement and the cooperative shares is filed in the appropriate state and local offices to perfect the lender's interest in its collateral. Subject to the limitations discussed below, upon default of the tenant-stockholder, the lender may sue for judgment on the promissory note, dispose of the collateral at a public or private sale or otherwise proceed against the collateral or against the tenant-stockholder as an individual as provided in the security agreement covering the assignment of the proprietary lease or occupancy agreement and the pledge of cooperative shares. 83 Manufactured Housing Contracts. Each Manufactured Housing Contract evidences both o the obligation of the borrower to repay the loan it represents, and o the grant of a security interest in a manufactured home to secure repayment of the loan. The Manufactured Housing Contracts generally are "chattel paper" as defined in the Uniform Commercial Code in effect in the states in which the manufactured homes initially were registered. Pursuant to the UCC, the rules governing the sale of chattel paper are similar to those governing the perfection of a security interest in chattel paper. Under the related pooling and servicing agreement, the depositor will transfer physical possession of the Manufactured Housing Contracts to the trustee or its custodian. In addition the depositor will file UCC-1 financing statements in the appropriate states to give notice of the trustee's ownership of the Manufactured Housing Contracts. Under the laws of most states, manufactured housing constitutes personal property and is subject to the motor vehicle registration laws of the state or other jurisdiction in which the unit is located. In a few states, where certificates of title are not required for manufactured homes, security interests are perfected by the filing of a financing statement under Article 9 of the UCC which has been adopted by all states. The certificate of title laws adopted by the majority of states provide that ownership of motor vehicles and manufactured housing shall be evidenced by a certificate of title generally issued by the motor vehicles department of the state. In states which have enacted certificate of title laws, a security interest in a unit of manufactured housing, so long as it is not attached to land in so permanent a fashion as to become a fixture, is generally perfected by the recording of the interest on the certificate of title to the unit in the appropriate motor vehicle registration office or by delivery of the required documents and payment of a fee to that office, depending on state law. Unless otherwise specified in the related prospectus supplement, the master servicer will be required to effect such notation or delivery of the required documents and fees and to obtain possession of the certificate of title, as appropriate under the laws of the state in which any manufactured home is registered. If the master servicer fails to effect such notation or delivery, due to clerical errors or otherwise, or files the security interest under the wrong law (for example, under a motor vehicle title statute rather than under the UCC, in a few states), the trustee may not have a first priority security interest in the manufactured home securing the affected Manufactured Housing Contract. As manufactured homes have become larger and have often been attached to their sites without any apparent intention to move them, courts in many states have held that manufactured homes may, under certain circumstances, become subject to real estate title and recording laws. As a result, a security interest in a manufactured home could be rendered subordinate to the interests of other parties claiming an interest in the home under applicable state real estate law. In order to perfect a security interest in a manufactured home under real estate laws, the holder of the security interest must file either a "fixture filing" under the provisions of the UCC or a real estate mortgage under the real estate laws of the state where the manufactured home is located. These filings must be made in the real estate records office of the county where the manufactured home is located. Generally, Manufactured Housing Contracts will contain provisions prohibiting the borrower from permanently attaching the manufactured home to its site. So long as the borrower does not violate this agreement, a security interest in the manufactured home will be governed by the certificate of title laws or the 84 UCC, and the notation of the security interest on the certificate of title or the filing of a UCC financing statement will be effective to maintain the priority of the security interest in the manufactured home. If, however, a manufactured home is permanently attached to its site, other parties could obtain an interest in the manufactured home which is prior to the security interest originally retained by the seller and transferred to the depositor. The depositor will assign to the trustee, on behalf of the securityholders, a security interest in the manufactured homes. Unless otherwise specified in the related prospectus supplement, none of the depositor, the master servicer or the trustee will amend the certificates of title to identify the trustee, on behalf of the securityholders, as the new secured party and, accordingly, the depositor or the seller will continue to be named as the secured party on the certificates of title relating to the manufactured homes. In most states, the assignment is an effective conveyance of the security interest without amendment of any lien noted on the related certificate of title and the new secured party succeeds to the depositor's rights as the secured party. However, in some states there exists a risk that, in the absence of an amendment to the certificate of title, assignment of the security interest might not be held effective against creditors of the depositor or seller. In the absence of fraud, forgery or permanent affixation of the manufactured home to its site by the home owner, or administrative error by state recording officials, the notation of the lien of the trustee on the certificate of title or delivery of the required documents and fees will be sufficient to protect the trustee against the rights of subsequent purchasers of the manufactured home or subsequent lenders who take a security interest in the manufactured home. In the case of any manufactured home as to which the security interest assigned to the depositor and the trustee is not perfected, the security interest would be subordinate to, among others, subsequent purchasers for value of the manufactured home and holders of perfected security interests in the home. There also exists a risk that, in not identifying the trustee, on behalf of the securityholders, as the new secured party on the certificate of title, the security interest of the trustee could be released through fraud or negligence. If the owner of a manufactured home moves it to a state other than the state in which it initially is registered, the perfected security interest in the manufactured home under the laws of most states would continue for four months after relocation and thereafter until the owner re-registers the manufactured home in the new state. If the owner were to relocate a manufactured home to another state and re-register the manufactured home in the new state, and if steps are not taken to re-perfect the trustee's security interest in the new state, the security interest in the manufactured home would cease to be perfected. A majority of states generally require surrender of a certificate of title to re-register a manufactured home. Accordingly, the trustee must surrender possession if it holds the certificate of title to the manufactured home or, in the case of manufactured homes registered in states which provide for notation of lien, the master servicer would receive notice of surrender if the security interest in the manufactured home is noted on the certificate of title. Accordingly, the trustee would have the opportunity to re-perfect its security interest in the manufactured home in the new state. In states which do not require a certificate of title for registration of a manufactured home, re-registration could defeat perfection. Similarly, when a borrower under a Manufactured Housing Contract sells a manufactured home, the lender must surrender possession of the certificate of title or it will receive notice as a result of its lien noted thereon and accordingly will have an opportunity to require satisfaction of the 85 related Manufactured Housing Contract before the lien is released. The master servicer will be obligated, at its own expense, to take all steps necessary to maintain perfection of security interests in the manufactured homes. Under the laws of most states, liens for repairs performed on a manufactured home take priority even over a perfected security interest. The depositor will obtain the representation of the seller that it has no knowledge of any repair liens with respect to any manufactured home securing a Manufactured Housing Contract. However, repair liens could arise at any time during the term of a Manufactured Housing Contract. No notice will be given to the trustee or securityholders in the event a repair lien arises. FORECLOSURE Single Family Loans, Multifamily Loans and Home Equity Loans. Foreclosure of a deed of trust is generally accomplished by a non-judicial sale under a specific provision in the deed of trust which authorizes the trustee to sell the mortgaged property at public auction upon any default by the borrower under the terms of the note or deed of trust. In some states, such as California, the trustee must record a notice of default and send a copy to the borrower-trustor, to any person who has recorded a request for a copy of any notice of default and notice of sale, to any successor in interest to the borrower-trustor, to the beneficiary of any junior deed of trust and to certain other persons. Before such non-judicial sale takes place, typically a notice of sale must be posted in a public place and published during a specific period of time in one or more newspapers, posted on the property and sent to parties having an interest of record in the property. Foreclosure of a mortgage is generally accomplished by judicial action. The action is initiated by the service of legal pleadings upon all parties having an interest in the mortgaged property. Delays in completion of the foreclosure may occasionally result from difficulties in locating necessary parties. Judicial foreclosure proceedings are often not contested by any of the parties. When the mortgagee's right to foreclosure is contested, the legal proceedings necessary to resolve the issue can be time consuming. After the completion of a judicial foreclosure proceeding, the court generally issues a judgment of foreclosure and appoints a referee or other court officer to conduct the sale of the property. In general, the borrower, or any other person having a junior encumbrance on the real estate, may, during a statutorily prescribed reinstatement period, cure a monetary default by paying the entire amount in arrears plus other designated costs and expenses incurred in enforcing the obligation. Generally, state law controls the amount of foreclosure expenses and costs, including attorneys' fees, which may be recovered by a lender. After the reinstatement period has expired without the default having been cured, the borrower or junior lienholder no longer has the right to reinstate the loan and must pay the loan in full to prevent the scheduled foreclosure sale. If the deed of trust is not reinstated, a notice of sale must be posted in a public place and, in most states, published for a specific period of time in one or more newspapers. In addition, some state laws require that a copy of the notice of sale be posted on the property and sent to all parties having an interest in the real property. Although foreclosure sales are typically public sales, frequently no third-party purchaser bids in excess of the lender's lien because of the difficulty of determining the exact status of title to the property, the possible deterioration of the property during the foreclosure proceedings and 86 a requirement that the purchaser pay for the property in cash or by cashier's check. Thus the foreclosing lender often purchases the property from the trustee or referee for an amount equal to the principal amount outstanding under the loan plus accrued and unpaid interest and the expenses of foreclosure. Thereafter, the lender will assume the burden of ownership, including obtaining hazard insurance and making such repairs at its own expense as are necessary to render the property suitable for sale. The lender will commonly obtain the services of a real estate broker and pay the broker's commission in connection with the sale of the property. Depending upon market conditions, the ultimate proceeds of the sale of the property may not equal the lender's investment in the property. When the beneficiary under a junior mortgage or deed of trust cures the default on the related senior mortgage or reinstates or redeems the senior mortgage by paying it in full, the amount paid by the beneficiary to cure, reinstate or redeem the senior mortgage becomes part of the indebtedness secured by the junior mortgage or deed of trust. See "--Junior Mortgages, Rights of Senior Mortgages" below. Cooperative Loans. Cooperative shares owned by a tenant-stockholder and pledged to a lender are, in almost all cases, subject to restrictions on transfer as set forth in the cooperative's articles of incorporation and by-laws, as well as in the proprietary lease or occupancy agreement, and may be cancelled by the cooperative if the tenant-stockholder fails to pay rent or other obligations or charges owed, including mechanics' liens against the cooperative apartment building incurred by such tenant-stockholder. The proprietary lease or occupancy agreement generally permits the cooperative to terminate such lease or agreement in the event an obligor fails to make payments or defaults in the performance of covenants required thereunder. Typically, the lender and the cooperative enter into a recognition agreement which establishes the rights and obligations of both parties in the event of a default by the tenant-stockholder on its obligations under the proprietary lease or occupancy agreement. A default by the tenant-stockholder under the proprietary lease or occupancy agreement will usually constitute a default under the security agreement between the lender and the tenant-stockholder. The recognition agreement generally provides that, in the event that the tenant-stockholder has defaulted under the proprietary lease or occupancy agreement, the cooperative will take no action to terminate such lease or agreement until the lender has been provided with an opportunity to cure the default. The recognition agreement typically provides, that if the proprietary lease or occupancy agreement is terminated, the cooperative will recognize the lender's lien against proceeds from the sale of the cooperative apartment, subject, however, to the cooperative's right to sums due under the proprietary lease or occupancy agreement. The total amount owed to the cooperative by the tenant-stockholder, which the lender generally cannot restrict and does not monitor, could reduce the value of the collateral below the outstanding principal balance of the cooperative loan and accrued and unpaid interest. Recognition agreements also provide that, in the event of a foreclosure on a cooperative loan, the lender must obtain the approval or consent of the cooperative as required by the proprietary lease before transferring the cooperative shares or assigning the proprietary lease. Generally, lenders are not limited in any rights they may have to dispossess tenant-stockholders. 87 In some states, foreclosure on the cooperative shares is accomplished by a sale in accordance with the provisions of Article 9 of the UCC and the security agreement relating to those shares. Article 9 of the UCC requires that a sale be conducted in a "commercially reasonable" manner. Whether a foreclosure sale has been conducted in a "commercially reasonable" manner will depend on the facts in each case. In determining commercial reasonableness, a court will look to the notice given the debtor and the method, manner, time, place and terms of the foreclosure. Article 9 of the UCC provides that the proceeds of the sale will be applied first to pay the costs and expenses of the sale and then to satisfy the indebtedness secured by the lender's security interest. The recognition agreement, however, generally provides that the lender's right to reimbursement is subject to the right of the cooperative to receive sums due under the proprietary lease or occupancy agreement. If there are proceeds remaining, the lender must account for the surplus to subordinate lenders or the tenant-stockholder as provided in the UCC. Conversely, if a portion of the indebtedness remains unpaid, the tenant-stockholder is generally responsible for the deficiency. See "--Anti-Deficiency Legislation and Other Limitations on Lenders" below. In the case of foreclosure on a building which was converted from a rental building to a building owned by a cooperative under a non-eviction plan, some states require that a purchaser at a foreclosure sale take the property subject to rent control and rent stabilization laws which apply to certain tenants who elected to remain in the building but who did not purchase shares in the cooperative when the building was so converted. REPOSSESSION OF MANUFACTURED HOMES Repossession of manufactured housing is governed by state law. A number of states have enacted legislation that requires that the debtor be given an opportunity to cure a monetary default (typically 30 days to bring the account current) before repossession can commence. So long as a manufactured home has not become attached to real estate in such way that it may be treated as a part of the real estate under applicable state law, repossession in the event of a default by the obligor will generally be governed by the UCC. Article 9 of the UCC provides the statutory framework for the repossession of manufactured housing. While the UCC as adopted by the various states may vary in certain particulars, the general repossession procedure is discussed below. Because manufactured homes generally depreciate in value, it is unlikely that repossession and resale of a manufactured home will result in the full recovery of the outstanding principal and unpaid interest on the related defaulted Manufactured Housing Contract. Except in those states where the debtor must receive notice of the right to cure a default, repossession can commence immediately upon default without prior notice. Repossession may be effected either through self-help (peaceable retaking without court order), voluntary repossession or through judicial process (repossession pursuant to court-issued writ of replevin). The self-help and/or voluntary repossession methods, which are more commonly employed, are accomplished simply by retaking possession of the manufactured home. In cases in which the debtor objects or raises a defense to repossession, a court order must be obtained from the 88 appropriate state court, and the manufactured home must then be repossessed in accordance with that order. Whether the method employed is self-help, voluntary repossession or judicial repossession, the repossession can be accomplished either by an actual physical removal of the manufactured home to a secure location for refurbishment and resale or by removing the occupants and their belongings from the manufactured home and maintaining possession of the manufactured home on the location where the occupants were residing. Various factors may affect whether the manufactured home is physically removed or left on location, such as the nature and term of the lease of the site on which it is located and the condition of the unit. In many cases, leaving the manufactured home on location is preferable, in the event that the home is already set up, because the expenses of retaking and redelivery will be saved. However, in those cases where the home is left on location, expenses for site rentals will usually be incurred. Once repossession has been achieved, preparation for the subsequent disposition of the manufactured home can commence. The disposition may be by public or private sale provided the method, manner, time, place and other terms of the sale are commercially reasonable. Sale proceeds are to be applied first to reasonable repossession expenses (expenses incurred in retaking, storage, preparing for sale to include refurbishing costs and selling) and then to satisfaction of the indebtedness. While some states impose prohibitions or limitations on deficiency judgments if the net proceeds from resale do not cover the full amount of the indebtedness, the remainder may be sought from the debtor in the form of a deficiency judgment in those states that do not prohibit or limit such judgments. The deficiency judgment is a personal judgment against the debtor for the shortfall. Occasionally, after resale of a manufactured home and payment of all expenses and indebtedness, there is a surplus of funds. In that case, the UCC requires the party suing for the deficiency judgment to remit the surplus to the subordinate creditors or the debtor, as provided in the UCC. Because the defaulting owner of a manufactured home generally has very little capital or income available following repossession, a deficiency judgment may not be sought in many cases or, if obtained, will be settled at a significant discount in light of the defaulting owner's strained financial condition. Any contract secured by a manufactured home located in Louisiana will be governed by Louisiana Revised Statutes in addition to Article 9 of the UCC. Louisiana law provides similar mechanisms for perfection and enforcement of a security interest in manufactured housing used as collateral for an installment sale contract or installment loan agreement. Under Louisiana law, a manufactured home that has been permanently affixed to real estate will nevertheless remain subject to the motor vehicle registration laws unless the obligor and any holder of a security interest in the property execute and file in the real estate records for the parish in which the property is located a document converting the unit into real property. A manufactured home that is converted into real property but is then removed from its site can be converted back to personal property governed by the motor vehicle registration laws if the obligor executes and files various documents in the appropriate real estate records and all mortgagees under real estate mortgages on the property and the land to which it was affixed file releases with the motor vehicle commission. So long as a manufactured home remains subject to the Louisiana motor vehicle laws, liens are recorded on the certificate of title by the motor vehicle commissioner and repossession 89 can be accomplished only after the obligor's abandonment or with the obligor's consent given after or in contemplation of default, or pursuant to judicial process and seizure by the sheriff. RIGHTS OF REDEMPTION Single Family Loans, Multifamily Loans and Home Equity Loans. In some states, after sale pursuant to a deed of trust or foreclosure of a mortgage, the borrower and foreclosed junior lienors are given a statutory period in which to redeem the mortgaged property from the foreclosure sale. In some states, redemption may occur only upon payment of the entire principal balance of the loan plus accrued interest and expenses of foreclosure. In other states, redemption may be authorized if the former borrower pays only a portion of the sums due. The effect of a statutory right of redemption would defeat the title of any purchaser from the lender subsequent to foreclosure or sale under a deed of trust. Consequently, the practical effect of the redemption right is to force the lender to retain the property and pay the expenses of ownership until the redemption period has run. Manufactured Housing Contracts. While state laws do not usually require notice to be given debtors prior to repossession, many states do require delivery of a notice of default and of the debtor's right to cure defaults before repossession. The law in most states also requires that the debtor be given notice of sale prior to the resale of a manufactured home so that the owner may redeem at or before resale. In addition, the sale generally must comply with the requirements of the UCC. EQUITABLE LIMITATIONS ON REMEDIES In connection with lenders' attempts to realize upon their security, courts have invoked general equitable principles. The equitable principles are generally designed to relieve the borrower from the legal effect of defaults under the loan documents. Examples of judicial remedies that have been fashioned include judicial requirements that the lender undertake affirmative and expensive actions to determine the causes of the borrower's default and the likelihood that the borrower will be able to reinstate the loan. In some cases, courts have substituted their judgment for the lender's judgment and have required that lenders reinstate loans or recast payment schedules in order to accommodate borrowers who are suffering from temporary financial disability. In other cases, courts have limited the right of a lender to realize upon its security if the default under the security agreement is not monetary, such as the borrower's failure to maintain the property adequately or the borrower's execution of secondary financing affecting the property. Finally, some courts have been faced with the issue of whether or not federal or state constitutional provisions reflecting due process concerns for adequate notice require that borrowers under security agreements receive notices in addition to the statutorily prescribed minimums. For the most part, these cases have upheld the notice provisions as being reasonable or have found that, in some cases involving the sale by a trustee under a deed of trust or by a mortgagee under a mortgage having a power of sale, there is insufficient state action to afford constitutional protections to the borrower. 90 ANTI-DEFICIENCY LEGISLATION AND OTHER LIMITATIONS ON LENDERS Generally, Article 9 of the UCC governs foreclosure on cooperative shares and the related proprietary lease or occupancy agreement. Certain states, including California, have adopted statutory prohibitions restricting the right of the beneficiary or mortgagee to obtain a deficiency judgment against borrowers financing the purchase of their residence or following sale under a deed of trust or certain other foreclosure proceedings. A deficiency judgment is a personal judgment against the borrower equal in most cases to the difference between the amount due to the lender and the fair market value of the real property sold at the foreclosure sale. As a result of these prohibitions, it is anticipated that in many instances the master servicer will not seek deficiency judgments against defaulting borrowers. Under the laws applicable in most states, a creditor is entitled to obtain a deficiency judgment for any deficiency following possession and resale of a manufactured home. However, some states impose prohibitions or limitations on deficiency judgments in these cases. In addition to anti-deficiency and related legislation, numerous other federal and state statutory provisions, including the Bankruptcy Code, the federal Servicemembers Civil Relief Act and state laws affording relief to debtors, may interfere with or affect the ability of the secured mortgage lender to realize upon its security. For example, in a proceeding under the Bankruptcy Code, a lender may not foreclose on the mortgaged property without the permission of the bankruptcy court. If the mortgaged property is not the debtor's principal residence and the bankruptcy court determines that the value of the mortgaged property is less than the principal balance of the mortgage loan, the rehabilitation plan proposed by the debtor may o reduce the secured indebtedness to the value of the mortgaged property as of the date of the commencement of the bankruptcy thereby rendering the lender a general unsecured creditor for the difference, o reduce the monthly payments due under the mortgage loan, o change the rate of interest of the mortgage loan, and o alter the mortgage loan repayment schedule. The effect of proceedings under the Bankruptcy Code, including but not limited to any automatic stay, could result in delays in receiving payments on the mortgage loans underlying a series of certificates and possible reductions in the aggregate amount of payments. The federal tax laws provide priority to certain tax liens over the lien of a mortgage or secured party. In addition, substantive requirements are imposed upon mortgage lenders in connection with the origination and the servicing of mortgage loans by numerous federal and some state consumer protection laws. These laws include the federal Truth-in-Lending Act, or TILA, as implemented by Regulation Z, Real Estate Settlement Procedures Act, as implemented by Regulation Z, Real Estate Settlement Procedures Act, as implemented by Regulation X, Equal Credit Opportunity Act, as implemented by Regulation B, Fair Credit Billing Act, Fair Credit Reporting Act and related statutes. These federal laws impose specific statutory liabilities upon lenders who originate mortgage loans and who fail to comply with the provisions of the law. In some cases, this liability may affect assignees of the mortgage loans. In particular, an 91 originator's failure to comply with certain requirements of the federal TILA, as implemented by Regulation Z, could subject both originators and assignees of such obligations to monetary penalties and could result in borrowers' rescinding the mortgage loans either against the originators or assignees. Further, the failure of the originator to use the correct form of notice of right to cancel in connection with non-purchase money transactions could subject the originator and assignees to extended borrower rescission rights. HOMEOWNERSHIP ACT AND SIMILAR STATE LAWS Some of the mortgage loans, known as High Cost Loans, may be subject to the Home Ownership and Equity Protection Act of 1994, or Homeownership Act, which amended TILA to provide new requirements applicable to loans not made to finance the purchase of a mortgaged property that exceed certain interest rate and/or points and fees thresholds. The Homeownership Act requires certain additional disclosures, specifies when those disclosures are to be made and limits or prohibits inclusion of certain features in High Cost Loans. Purchasers or assignees of any High Cost Loan, including any trust, could be liable under federal law for all claims and be subject to all defenses that the borrower could assert against the originator of the High Cost Loan under TILA or any other law, unless the purchaser or assignee did not know, and could not with reasonable diligence have determined, that the loan was subject to the Homeownership Act. Remedies available to the borrower include monetary penalties as well as rescission rights, if the appropriate disclosures were not given as required or if the particular loan includes features prohibited by the Homeownership Act. The maximum damages that may be recovered from an assignee, including the related trust, is the remaining amount of indebtedness plus the total amount paid by the borrower in connection with the mortgage loan. In addition to the Homeownership Act, a number of legislative proposals have been introduced at both the federal and state levels that are designed to discourage predatory lending practices. Some states have enacted, and other state or local governments may enact, laws that impose requirements and restrictions greater than those in the Homeownership Act. These laws prohibit inclusion of certain features in mortgage loans that have interests rates or origination costs in excess of prescribed levels, and require that borrowers be given certain disclosures prior to the consummation of the mortgage loans. Purchasers or assignees of a mortgage loan, including the related trust, could be exposed to all claims and defenses that the borrower could assert against the originator of the mortgage loan for a violation of state law. Claims and defenses available to the borrower could include actual, statutory and punitive damages, costs and attorneys' fees, rescission rights, defenses to foreclosure action or an action to collect, and other equitable remedies. Unless otherwise specified in the accompanying prospectus supplement, the depositor will represent and warrant that all of the mortgage loans in the related pool complied in all material respects with all applicable local, state and federal laws at the time of origination. Although the depositor will be obligated to repurchase any mortgage loan as to which a breach of its representation and warranty has occurred (so long as the breach is materially adverse to the interests of the securityholders), the repurchase price of those mortgage loans could be less than the monetary damages and/or any equitable remedies imposed pursuant to various state laws. 92 Lawsuits have been brought in various states making claims against assignees of High Cost Loans for violations of federal and state law allegedly committed by the originator. Named defendants in these cases include numerous participants within the secondary mortgage market, including some securitization trusts. Under the anti-predatory lending laws of some states, the borrower is required to meet a net tangible benefits test in connection with the origination of the related mortgage loan. This test may be highly subjective and open to interpretation. As a result, a court may determine that a mortgage loan does not meet the test even if the originator reasonably believed that the test was satisfied. Any determination by a court that the mortgage loan does not meet the test will result in a violation of the state anti-predatory lending law, in which case the related seller will be required to purchase that mortgage loan from the trust. The so-called Holder-in-Due-Course Rule of the Federal Trade Commission has the effect of subjecting a seller and certain related creditors and their assignees in a consumer credit transaction, and any assignee of the creditor, to all claims and defenses which the debtor in the transaction could assert against the seller of the goods. Liability under this FTC Rule is limited to the amounts paid by a debtor on a Manufactured Housing Contract, and the holder of the Manufactured Housing Contract may also be unable to collect amounts still due under the Manufactured Housing Contract. Most of the Manufactured Housing Contracts in a pool will be subject to the requirements of this FTC Rule. Accordingly, the trustee, as holder of the Manufactured Housing Contracts, will be subject to any claims or defenses that the purchaser of the related manufactured home may assert against the seller of the manufactured home, or that the purchaser of the home improvements may assert against the contractor, subject to a maximum liability equal to the amounts paid by the obligor on the Manufactured Housing Contract. If an obligor is successful in asserting any such claim or defense, and if the seller had or should have had knowledge of such claim or defense, the master servicer will have the right to require the seller to repurchase the Manufactured Housing Contract because of a breach of its representation and warranty that no claims or defenses exist which would affect the borrower's obligation to make the required payments under the Manufactured Housing Contract. A number of lawsuits are pending in the United States alleging personal injury from exposure to the chemical formaldehyde, which is present in many building materials including such manufactured housing components as plywood flooring and wall paneling. Some of these lawsuits are pending against manufacturers of manufactured housing, suppliers of component parts and others in the distribution process. Plaintiffs have won judgments in some of these lawsuits. Under the FTC Rule discussed above, the holder of a Manufactured Housing Contract secured by a manufactured home with respect to which a formaldehyde claim has been asserted successfully may be liable to the borrower for the amount paid by the borrower on that Manufactured Housing Contract and may be unable to collect amounts still due under that Manufactured Housing Contract. Because the successful assertion of this type of claim would constitute the breach of a representation or warranty of the seller, the related securityholders would suffer a loss only to the extent that 93 o the seller fails to perform its obligation to repurchase that Manufactured Housing Contract, and o the seller, the applicable depositor or the trustee is unsuccessful in asserting a claim of contribution or subrogation on behalf of the securityholders against the manufacturer or other who are directly liable to the plaintiff for damages. Typical product liability insurance policies held by manufacturers and component suppliers of manufactured homes may not cover liabilities from the presence of formaldehyde in manufactured housing. As a result, recoveries from manufacturers and component suppliers may be limited to their corporate assets without the benefit of insurance. DUE-ON-SALE CLAUSES Unless otherwise provided in the related prospectus supplement, each conventional loan will contain a due-on-sale clause which will generally provide that, if the mortgagor or obligor sells, transfers or conveys the mortgaged property, the loan may be accelerated by the mortgagee or secured party. Unless otherwise provided in the related prospectus supplement, the master servicer will, to the extent it has knowledge of the sale, transfer or conveyance, exercise its rights to accelerate the maturity of the related loans through enforcement of the due-on-sale clauses, subject to applicable state law. Section 341(b) of the Garn-St. Germain Depository Institutions Act of 1982 (Garn-St. Germain) permits a lender, subject to certain conditions, to "enter into or enforce a contract containing a due-on-sale clause with respect to a real property loan," notwithstanding any contrary state law. Garn-St. Germain gave states that previously had enacted "due-on-sale" restrictions a three-year window to reenact the previous restrictions or enact new restrictions. Only six states acted within this window period: Arizona, Florida, Michigan, Minnesota, New Mexico and Utah. Consequently, due-on-sale provisions in documents governed by the laws of those state are not preempted by federal law. With respect to loans secured by an owner-occupied residence including a manufactured home, the Garn-St Germain Act sets forth nine specific instances in which a mortgagee covered by the act may not exercise its rights under a due-on-sale clause, notwithstanding the fact that a transfer of the property may have occurred. The inability to enforce a due-on-sale clause may result in transfer of the mortgaged property to an uncreditworthy person, which could increase the likelihood of default, or may result in a mortgage bearing an interest rate below the current market rate being assumed by a new home buyer, which may affect the average life of the loans and the number of loans which may extend to maturity. In addition, under the federal Bankruptcy Code, due-on-sale clauses may not be enforceable in bankruptcy proceedings and under certain circumstances may be eliminated in a resulting loan modification. PREPAYMENT CHARGES; LATE FEES Under certain state laws, prepayment charges with respect to prepayments on loans secured by liens encumbering owner-occupied residential properties may not be imposed after a certain period of time following the origination of a loan. Since many of the mortgaged properties will be owner-occupied, it is anticipated that prepayment charges may not be imposed 94 with respect to many of the loans. The absence of this type of a restraint on prepayment, particularly with respect to fixed rate loans having higher loan rates or APRs, may increase the likelihood of refinancing or other early retirement of the loans. Legal restrictions, if any, on prepayment of Multifamily Loans will be described in the related prospectus supplement. Loans may also contain provisions obligating the borrower to pay a late fee if payments are not timely made. In some states there may be specific limitations on the late charges that a lender may collect from the borrower for delinquent payments. Unless otherwise specified in the related prospectus supplement, late fees will be retained by the applicable servicer as additional servicing compensation. Some state laws restrict the imposition of prepayment charges and late fees even when the loans expressly provide for the collection of those charges. Although the Alternative Mortgage Transaction Parity Act 1982, or the Parity Act, permits the collection of prepayment charges and late fees in connection with some types of eligible loans preempting any contrary state law prohibitions, some states may not recognize the preemptive authority of the Parity Act or have formally opted out of the Parity Act. As a result, it is possible that prepayment charges may not be collected even on loans that provide for the payment of those charges unless otherwise specified in the accompanying prospectus supplement. The master servicer or any entity identified in the accompanying prospectus supplement will be entitled to all prepayment charges and late payment charges received on the loans and these amounts will not be available for payment on the securities. The Office of Thrift Supervision or OTS, the agency that administers the Parity Act for unregulated housing creditors, has withdrawn its favorable Parity Act regulations and chief counsel opinions that authorized lenders to charge prepayment charges and late fees in certain circumstances notwithstanding contrary state law, effective July 1, 2003. However, the OTS's ruling does not have retroactive effect on loans originated before July 1, 2003. APPLICABILITY OF USURY LAWS Title V of the Depository Institutions Deregulation and Monetary Control Act of 1980 provides that state usury limitations shall not apply to certain types of residential first mortgage loans originated by certain lenders after March 31, 1980. The Office of Thrift Supervision, as successor to the Federal Home Loan Bank Board, is authorized to issue rules and regulations and to publish interpretations governing implementation of Title V. The statute authorized any state to reimpose limitations on interest rates and finance charges by adopting before April 1, 1983 a law or constitutional provision which expressly rejects application of the federal law. Fifteen states adopted such a law prior to the April 1, 1983 deadline. In addition, even where Title V was not rejected, any state is authorized to adopt a provision limiting discount points or other charges on loans covered by Title V. No Manufactured Housing Contract secured by a manufactured home located in any state in which application of Title V was expressly rejected or a provision limiting discount points or other charges has been adopted will be included in any trust fund if the Manufactured Housing Contract imposes finance charges or provides for discount points or charges in excess of permitted levels. Title V also provides that state usury limitations will not apply to any loan which is secured by a first lien on certain kinds of manufactured housing provided that certain conditions 95 are satisfied. These conditions relate to the terms of any prepayment, balloon payment, late charges and deferral fees and the requirement of a 30-day notice period prior to instituting any action leading to repossession of or foreclosure with respect to the related unit. SERVICEMEMBERS CIVIL RELIEF ACT Generally, under the terms of the Servicemembers Civil Relief Act (referred to herein as the Relief Act), borrowers who enter military service after the origination of their mortgage loan may not be charged interest above an annual rate of 6% during the period of active duty status. In addition to adjusting the interest, the lender must forgive any such interest in excess of the annual 6% rate, unless a court or administrative agency of the United States or of any state orders otherwise upon application of the lender. The Relief Act applies to borrowers who are members of the Air Force, Army, Marines, Navy or Coast Guard, and officers of the U.S. Public Health Service or the National Oceanic and Atmospheric Administration assigned to duty with the military. The Relief Act also applies to borrowers who are members of the National Guard or are on reserve status at the time their mortgage is originated and are later called to active duty. It is possible that the interest rate limitation could have an effect, for an indeterminate period of time, on the ability of the master servicer to collect full amounts of interest on affected mortgage loans. Unless otherwise provided in the related prospectus supplement, any shortfall in interest collections resulting from the application of the Relief Act could result in losses to the related securityholders. In addition, the Relief Act imposes limitations which would impair the ability of the master servicer to foreclose on an affected mortgage loan during the borrower's period of active duty status. Thus, in the event that a mortgage loan goes into default, the application of the Relief Act could cause delays and losses occasioned by the lender's inability to realize upon the mortgaged property in a timely fashion. ENVIRONMENTAL RISKS Real property pledged as security to a lender may be subject to unforeseen environmental risks. Under the laws of certain states, contamination of a property may give rise to a lien on the property to assure the payment of the costs of clean-up. In several states such a lien has priority over the lien of an existing mortgage against such property. In addition, under the federal Comprehensive Environmental Response, Compensation and Liability Act of 1980 (CERCLA), the United States Environmental Protection Agency (EPA) may impose a lien on property where the EPA has incurred clean-up costs. However, a CERCLA lien is subordinate to pre-existing, perfected security interests. Under the laws of some states and under CERCLA, there is a possibility that a lender may be held liable as an "owner" or "operator" for costs of addressing releases or threatened releases of hazardous substances at a property, regardless of whether or not the environmental damage or threat was caused by a current or prior owner or operator. CERCLA imposes liability for such costs on any and all "responsible parties," including owners or operators of the property who did not cause or contribute to the contamination. Furthermore, liability under CERCLA is not limited to the original or outstanding balance of a loan or to the value of the related mortgaged property. Lenders may be held liable under CERCLA as owners or operators unless they qualify for the secured creditor exemption to CERCLA. This exemption exempts from the definition of "owner" or "operator" those who, without participating in the management of a 96 facility, hold indicia of ownership primarily to protect a security interest in the facility. Thus, if a lender's activities begin to encroach on the actual management of a contaminated facility or property, the lender may incur liability as an "owner" or "operator" under CERCLA. Similarly, if a lender forecloses and takes title to a contaminated facility or property, the lender may incur CERCLA liability in various circumstances, including, but not limited to, when it holds the facility or property as an investment, including leasing the facility or property to a third party, or fails to market the property in a timely fashion. The Asset Conservation, Lender Liability and Deposit Insurance Act of 1996, or Conservation Act, amended, among other things, the provisions of CERCLA with respect to lender liability and the secured creditor exemption. The Conservation Act offers substantial protection to lenders by defining the activities which a lender can engage in without losing the benefit of the secured creditor exemption. For a lender to be deemed to have participated in the management of a mortgaged property, the lender must actually participate in the management or operational affairs of the mortgaged property. The Conservation Act provides that "merely having the capacity to influence, or the unexercised right to control" operations does not constitute participation in management. A lender will lose the protection of the secured creditor exemption only if it (1) exercises decision-making control over the borrower's environmental compliance and hazardous substance handling or disposal practices for the mortgaged property, or (2) assumes responsibility for the overall management of the mortgaged property, including day-to-day decision-making for environmental compliance, or (3) assumes management of substantially all operational functions of the mortgaged property. The Conservation Act also provides that a lender will continue to have the benefit of the secured creditor exemption even in the event that it forecloses on a mortgaged property, purchases it at a foreclosure sale or accepts a deed-in-lieu of foreclosure so long as the lender seeks to sell the mortgaged property at the earliest practicable commercially reasonable time on commercially reasonable terms. CERCLA does not apply to petroleum products, and the secured creditor exclusion does not govern liability for cleanup costs under federal laws other than CERCLA, in particular Subtitle I of the federal Resource Conservation and Recovery Act, which regulates underground petroleum storage tanks other than heating oil tanks. The EPA has adopted a lender liability rule for underground storage tanks under Subtitle I of the Resource Conservation Act. Under this rule, a holder of a security interest in an underground storage tank or real property containing an underground storage tank is not considered an operator of the underground storage tank as long as petroleum is not added to, stored in or dispensed from the tank. Moreover, under the Conservation Act, the protections accorded to lenders under CERCLA are also accorded to holders of security interests in underground petroleum storage tanks. It should be noted, however, that liability for cleanup of petroleum contamination may be governed by state law, which may not provide for any specific protection for secured creditors. The Conservation Act specifically addresses the potential liability under CERCLA of lenders that hold mortgages or similar conventional security interests in real property, as the trust fund generally does in connection with the loans. However, the Conservation Act does not clearly address the potential liability of lenders who retain legal title to a property and enter into an agreement with the purchaser for the payment of the purchase price and interest over the term of the contract as is the case with the installment contracts. 97 If a lender (including a lender under an installment contract) is or becomes liable under CERCLA, it may be authorized to bring a statutory action for contribution against any other "responsible parties", including a previous owner or operator. However, these persons or entities may be bankrupt or otherwise judgment proof, and the costs associated with environmental cleanup and related actions may be substantial. Moreover, some state laws imposing liability for addressing hazardous substances do not contain exemptions from liability for lenders. Whether the costs of addressing contamination at a property pledged as collateral for one of the loans (or at a property subject to an installment contract), would be imposed on the trust fund, and thus occasion a loss to the securityholders, depends on the specific factual and legal circumstances at issue. Except as otherwise specified in the applicable prospectus supplement, at the time the mortgage loans were originated, no environmental assessment or a very limited environment assessment of the mortgage properties was conducted. Traditionally, many residential mortgage lenders have not taken steps to determine whether contaminants are present on a mortgaged property prior to the origination of a single family mortgage loan or prior to foreclosure or accepting a deed-in-lieu of foreclosure. Except as otherwise specified in the applicable prospectus supplement, neither the depositor nor any master servicer will be required by any agreement to undertake any of these evaluations prior to foreclosure or accepting a deed-in-lieu of foreclosure. The depositor does not make any representations or warranties or assume any liability with respect to the absence or effect of contaminants on any mortgaged property or any casualty resulting from the presence or effect of contaminants. However, the master servicer will not be obligated to foreclose on any mortgaged property or accept a deed-in-lieu of foreclosure if it knows or reasonably believes that there are material contaminated conditions on the property. A failure so to foreclose may reduce the amounts otherwise available to securityholders of the related series. The pooling and servicing agreement will provide that the master servicer, acting on behalf of the trust fund, may not acquire title to a multifamily residential property or mixed-use property underlying a loan or take over its operation unless the master servicer has previously determined, based upon a report prepared by a person who regularly conducts environmental audits, that the mortgaged property is in compliance with applicable environmental laws and regulations or that the acquisition would not be more detrimental than beneficial to the value of the mortgaged property and the interests of the related securityholders. THE HOME IMPROVEMENT CONTRACTS General. The Home Improvement Contracts, other than those that are unsecured or secured by mortgages on real estate, generally are "chattel paper" or constitute "purchase money security interests" each as defined in the UCC. Under the UCC, the sale of chattel paper is treated in a manner similar to perfection of a security interest in chattel paper. Under the related agreement, the depositor will transfer physical possession of these contracts to the trustee or a designated custodian or may retain possession of them as custodian for the trustee. In addition, the depositor will file a UCC-1 financing statement in the appropriate states to give notice of the trustee's ownership of the contracts. Unless otherwise specified in the related prospectus supplement, the contracts will not be stamped or otherwise marked to reflect their assignment 98 from the depositor to the trustee. Therefore, if through negligence, fraud or otherwise, a subsequent purchaser were able to take physical possession of the contracts without notice of such assignment, the trustee's interest in the contracts could be defeated. Security Interests in Home Improvements. The Home Improvement Contracts that are secured by the related home improvements grant to the originator a purchase money security interest in the home improvements to secure all or part of the purchase price of the home improvements and related services. A financing statement generally is not required to be filed to perfect a purchase money security interest in consumer goods and the purchase money security interests are assignable. In general, a purchase money security interest grants to the holder a security interest that has priority over a conflicting security interest in the same collateral and the proceeds of the collateral. However, to the extent that the collateral subject to a purchase money security interest becomes a fixture, in order for the related purchase money security interest to take priority over a conflicting interest in the fixture, the holder's interest in the home improvement must generally be perfected by a timely fixture filing. In general, a security interest does not exist under the UCC in ordinary building material incorporated into an improvement on land. Home Improvement Contracts that finance lumber, bricks, other types of ordinary building material or other goods that are deemed to lose such characterization upon incorporation of such materials into the related property, will not be secured by a purchase money security interest in the home improvement being financed. Enforcement of Security Interest in Home Improvements. So long as the home improvement has not become subject to the real estate law, a creditor can repossess a home improvement securing a contract by voluntary surrender, by "self-help" repossession that is "peaceful" (i.e., without breach of the peace) or, in the absence of voluntary surrender and the ability to repossess without breach of the peace, by judicial process. The holder of a contract must give the debtor a number of days' notice, which varies from 10 to 30 days depending on the state, prior to commencement of any repossession. The UCC and consumer protection laws in most states place restrictions on repossession sales, including requiring prior notice to the debtor and commercial reasonableness in effecting such a sale. The law in most states also requires that the debtor be given notice of any sale prior to resale of the unit that the debtor may redeem at or before the resale. Under the laws applicable in most states, a creditor is entitled to obtain a deficiency judgment from a debtor for any deficiency on repossession and resale of the property securing the debtor's loan. However, some states impose prohibitions or limitations on deficiency judgments, and in many cases the defaulting borrower would have no assets with which to pay a judgment. Certain other statutory provisions, including federal and state bankruptcy and insolvency laws and general equitable principles, may limit or delay the ability of a lender to repossess and resell collateral or enforce a deficiency judgment. INSTALLMENT CONTRACTS Under an installment contract the seller retains legal title to the property and enters into an agreement with the purchaser/borrower for the payment of the purchase price, plus interest, 99 over the term of the contract. Only after full performance by the borrower of the contract is the lender obligated to convey title to the property to the purchaser. As with mortgage or deed of trust financing, during the effective period of the installment contract, the borrower is generally responsible for maintaining the property in good condition and for paying real estate taxes, assessments and hazard insurance premiums associated with the property. The method of enforcing the rights of the lender under an installment contract varies on a state-by-state basis depending upon the extent to which state courts are willing, or able pursuant to state statute, to enforce the contract strictly according to the terms. The terms of installment contracts generally provide that upon a default by the borrower, the borrower loses his or her right to occupy the property, the entire indebtedness is accelerated, and the buyer's equitable interest in the property is forfeited. The lender in such a situation does not have to foreclose in order to obtain title to the property, although in some cases a quiet title action is in order if the borrower has filed the installment contract in local land records and an ejectment action may be necessary to recover possession. In a few states, particularly in cases of borrower default during the early years of an installment contract, the courts will permit ejectment of the buyer and a forfeiture of his or her interest in the property. However, most state legislatures have enacted provisions by analogy to mortgage law protecting borrowers under installment contracts from the harsh consequences of forfeiture. Under such statutes, a judicial or nonjudicial foreclosure may be required, the lender may be required to give notice of default and the borrower may be granted some grace period during which the installment contract may be reinstated upon full payment of the default amount and the borrower may have a post-foreclosure statutory redemption right. In other states, courts in equity may permit a borrower with significant investment in the property under an installment contract for the sale of real estate to share in the proceeds of sale of the property after the indebtedness is repaid or may otherwise refuse to enforce the forfeiture clause. Nevertheless, generally speaking, the lender's procedures for obtaining possession and clear title under an installment contract in a given state are simpler and less time-consuming and costly than are the procedures for foreclosing and obtaining clear title to a property subject to one or more liens. JUNIOR MORTGAGES; RIGHTS OF SENIOR MORTGAGEES To the extent that the loans comprising the trust fund for a series are secured by mortgages which are junior to other mortgages held by other lenders or institutional investors, the rights of the trust fund (and therefore the securityholders), as mortgagee under any such junior mortgage, are subordinate to those of any mortgagee under any senior mortgage. The senior mortgagee has the right to receive hazard insurance and condemnation proceeds and to cause the property securing the loan to be sold upon default of the mortgagor, thereby extinguishing the junior mortgagee's lien unless the junior mortgagee asserts its subordinate interest in the property in foreclosure litigation and, possibly, satisfies the defaulted senior mortgage. A junior mortgagee may satisfy a defaulted senior loan in full and, in some states, may cure such default and bring the senior loan current, in either event adding the amounts expended to the balance due on the junior loan. In most states, absent a provision in the mortgage or deed of trust, no notice of default is required to be given to a junior mortgagee. The standard form of the mortgage used by most institutional lenders confers on the mortgagee the right both to receive all proceeds collected under any hazard insurance policy and 100 all awards made in connection with condemnation proceedings, and to apply such proceeds and awards to any indebtedness secured by the mortgage, in such order as the mortgagee may determine. Thus, in the event improvements on the property are damaged or destroyed by fire or other casualty, or in the event the property is taken by condemnation, the mortgagee or beneficiary under underlying senior mortgages will have the prior right to collect any insurance proceeds payable under a hazard insurance policy and any award of damages in connection with the condemnation and to apply the same to the indebtedness secured by the senior mortgages. Proceeds in excess of the amount of senior mortgage indebtedness, in most cases, may be applied to the indebtedness of a junior mortgage. Another provision sometimes found in the form of the mortgage or deed of trust used by institutional lenders obligates the mortgagor to pay before delinquency all taxes and assessments on the property and, when due, all encumbrances, charges and liens on the property which appear prior to the mortgage or deed of trust, to provide and maintain fire insurance on the property, to maintain and repair the property and not to commit or permit any waste, and to appear in and defend any action or proceeding purporting to affect the property or the rights of the mortgagee under the mortgage. Upon a failure of the mortgagor to perform any of these obligations, the mortgagee is given the right under certain mortgages to perform the obligation itself, at its election, with the mortgagor agreeing to reimburse the mortgagee for any sums expended by the mortgagee on behalf of the mortgagor. All sums so expended by the mortgagee become part of the indebtedness secured by the mortgage. The form of credit line trust deed or mortgage generally used by most institutional lenders which make revolving credit line loans typically contains a "future advance" clause, which provides, in essence, that additional amounts advanced to or on behalf of the borrower by the beneficiary or lender are to be secured by the deed of trust or mortgage. Any amounts so advanced after the cut-off date with respect to any mortgage will not be included in the trust fund. The priority of the lien securing any advance made under the clause may depend in most states on whether the deed of trust or mortgage is called and recorded as a credit line deed of trust or mortgage. If the beneficiary or lender advances additional amounts, the advance is entitled to receive the same priority as amounts initially advanced under the trust deed or mortgage, notwithstanding the fact that there may be junior trust deeds or mortgages and other liens which intervene between the date of recording of the trust deed or mortgage and the date of the future advance, and notwithstanding that the beneficiary or lender had actual knowledge of such intervening junior trust deeds or mortgages and other liens at the time of the advance. In most states, the trust deed or mortgage lien securing mortgage loans of the type which includes home equity credit lines applies retroactively to the date of the original recording of the trust deed or mortgage, provided that the total amount of advances under the home equity credit line does not exceed the maximum specified principal amount of the recorded trust deed or mortgage, except as to advances made after receipt by the lender of a written notice of lien from a judgment lien creditor of the trustor. THE TITLE I PROGRAM General. Certain of the loans contained in a trust fund may be loans insured under the FHA Title I Insurance program created pursuant to Sections 1 and 2(a) of the National Housing Act of 1934. Under the Title I Program, the FHA is authorized and empowered to insure 101 qualified lending institutions against losses on eligible loans. The Title I Program operates as a coinsurance program in which the FHA insures up to 90% of certain losses incurred on an individual insured loan, including the unpaid principal balance of the loan, but only to the extent of the insurance coverage available in the lender's FHA insurance coverage reserve account. The owner of the loan bears the uninsured loss on each loan. Title I loan means a loan made to finance actions or items that substantially protect or improve the basic livability or utility of a one- to four-family residential property. There are two basic methods of lending or originating such loans which include a "direct loan" or a "dealer loan". With respect to a direct loan, the borrower makes application directly to a lender without any assistance from a dealer, which application may be filled out by the borrower or by a person acting at the direction of the borrower who does not have a financial interest in the loan transaction, and the lender may disburse the loan proceeds solely to the borrower or jointly to the borrower and other parties to the transaction. With respect to a dealer loan, the dealer, who has a direct or indirect financial interest in the loan transaction, assists the borrower in preparing the loan application or otherwise assists the borrower in obtaining the loan from the lender. The lender may disburse proceeds solely to the dealer or the borrower or jointly to the borrower and the dealer or other parties to the transaction. With respect to a dealer Title I loan, a dealer may include a seller, a contractor or supplier of goods or services. Loans insured under the Title I Program are required to have fixed interest rates and generally provide for equal installment payments due weekly, biweekly, semi-monthly or monthly, except that a loan may be payable quarterly or semi-annually where a borrower has an irregular flow of income. The first or last payments (or both) may vary in amount but may not exceed 150% of the regular installment payment, and the first payment may be due no later than two months from the date of the loan. The note must contain a provision permitting full or partial prepayment of the loan. The interest rate must be negotiated and agreed to by the borrower and the lender and must be fixed for the term of the loan and recited in the note. Interest on an insured loan must accrue from the date of the loan and be calculated according to the actuarial method. The lender must assure that the note and all other documents evidencing the loan are in compliance with applicable federal, state and local laws. Each insured lender is required to use prudent lending standards in underwriting individual loans and to satisfy the applicable loan underwriting requirements under the Title I Program prior to its approval of the loan and disbursement of loan proceeds. Generally, the lender must exercise prudence and diligence to determine whether the borrower and any co-maker is solvent and an acceptable credit risk, with a reasonable ability to make payments on the loan obligation. The lender's credit application and review must determine whether the borrower's income will be adequate to meet the periodic payments required by the loan, as well as the borrower's other housing and recurring expenses, which determination must be made in accordance with the expense-to-income ratios published by the Secretary of HUD unless the lender determines and documents in the loan file the existence of compensating factors concerning the borrower's creditworthiness which support approval of the loan. Under the Title I Program, the FHA does not review or approve for qualification for insurance the individual loans insured thereunder at the time of approval by the lending 102 institution (as is typically the case with other federal loan programs). If, after a loan has been made and reported for insurance under the Title I Program, the lender discovers any material misstatement of fact or that the loan proceeds have been misused by the borrower, dealer or any other party, it shall promptly report this to the FHA. In such case, provided that the validity of any lien on the property has not been impaired, the insurance of the loan under the Title I Program will not be affected unless such material misstatements of fact or misuse of loan proceeds was caused by (or was knowingly sanctioned by) the lender or its employees. Requirements for Title I Loans. The maximum principal amount for Title I loans must not exceed the actual cost of the project plus any applicable fees and charges allowed under the Title I Program; provided that such maximum amount does not exceed $25,000 (or the current applicable amount) for a single family property improvement loan. Generally, the term of a Title I loan may not be less than six months nor greater than 20 years and 32 days. A borrower may obtain multiple Title I loans with respect to multiple properties, and a borrower may obtain more than one Title I loan with respect to a single property, in each case as long as the total outstanding balance of all Title I loans in the same property does not exceed the maximum loan amount for the type of Title I loan thereon having the highest permissible loan amount. Borrower eligibility for a Title I loan requires that the borrower have at least a one-half interest in either fee simple title to the real property, a lease thereof for a term expiring at least six months after the final maturity of the Title I loan or a recorded land installment contract for the purchase of the real property. In the case of a Title I loan with a total principal balance in excess of $15,000, if the property is not occupied by the owner, the borrower must have equity in the property being improved at least equal to the principal amount of the loan, as demonstrated by a current appraisal. Any Title I loan in excess of $7,500 must be secured by a recorded lien on the improved property which is evidenced by a mortgage or deed of trust executed by the borrower and all other owners in fee simple. The proceeds from a Title I loan may be used only to finance property improvements which substantially protect or improve the basic livability or utility of the property as disclosed in the loan application. The Secretary of HUD has published a list of items and activities which cannot be financed with proceeds from any Title I loan and from time to time the Secretary of HUD may amend such list of items and activities. With respect to any dealer Title I loan, before the lender may disburse funds, the lender must have in its possession a completion certificate on a HUD approved form, signed by the borrower and the dealer. With respect to any direct Title I loan, the lender is required to obtain, promptly upon completion of the improvements but not later than 6 months after disbursement of the loan proceeds with one 6 month extension if necessary, a completion certificate, signed by the borrower. The lender is required to conduct an on-site inspection on any Title I loan where the principal obligation is $7,500 or more, and on any direct Title I loan where the borrower fails to submit a completion certificate. FHA Insurance Coverage. Under the Title I Program, the FHA establishes an insurance coverage reserve account for each lender which has been granted a Title I contract of insurance. The amount of insurance coverage in this account is a maximum of 10% of the amount disbursed, advanced or expended by the lender in originating or purchasing eligible loans registered with the FHA for Title I insurance, with certain adjustments. The balance in the insurance coverage reserve account is the maximum amount of insurance claims the FHA is 103 required to pay to the Title I lender. Loans to be insured under the Title I Program will be registered for insurance by the FHA and the insurance coverage attributable to such loans will be included in the insurance coverage reserve account for the originating or purchasing lender following the receipt and acknowledgment by the FHA of a loan report on the prescribed form pursuant to the Title I regulations. For each eligible loan reported and acknowledged for insurance, the FHA charges a premium. For loans having a maturity of 25 months or less, the FHA bills the lender for the entire premium in an amount equal to the product of 0.50% of the original loan amount and the loan term. For home improvement loans with a maturity greater than 25 months, each year that a loan is outstanding the FHA bills the lender for a premium in an amount equal to 0.50% of the original loan amount. If a loan is prepaid during the year, the FHA will not refund or abate the premium paid for that year. Under the Title I Program the FHA will reduce the insurance coverage available in the lender's FHA insurance coverage reserve account with respect to loans insured under the lender's contract of insurance by (i) the amount of the FHA insurance claims approved for payment relating to such insured loans and (ii) the amount of insurance coverage attributable to insured loans sold by the lender, and such insurance coverage may be reduced for any FHA insurance claims rejected by the FHA. The balance of the lender's FHA insurance coverage reserve account will be further adjusted as required under Title I or by the FHA, and the insurance coverage therein may be earmarked with respect to each or any eligible loans insured thereunder, if a determination is made by the Secretary of HUD that it is in its interest to do so. Originations and acquisitions of new eligible loans will continue to increase a lender's insurance coverage reserve account balance by 10% of the amount disbursed, advanced or expended in originating or acquiring such eligible loans registered with the FHA for insurance under the Title I Program. The Secretary of HUD may transfer insurance coverage between insurance coverage reserve accounts with earmarking with respect to a particular insured loan or group of insured loans when a determination is made that it is in the Secretary's interest to do so. The lender may transfer (except as collateral in a bona fide transaction) insured loans and loans reported for insurance only to another qualified lender under a valid Title I contract of insurance. Unless an insured loan is transferred with recourse or with a guaranty or repurchase agreement, the FHA, upon receipt of written notification of the transfer of such loan in accordance with the Title I regulations, will transfer from the transferor's insurance coverage reserve account to the transferee's insurance coverage reserve account an amount, if available, equal to 10% of the actual purchase price or the net unpaid principal balance of such loan (whichever is less). However, under the Title I Program not more than $5,000 in insurance coverage shall be transferred to or from a lender's insurance coverage reserve account during any October 1 to September 30 period without the prior approval of the Secretary of HUD. Amounts which may be recovered by the Secretary of HUD after payment of an insurance claim are not added to the amount of insurance coverage in the related lender's insurance coverage reserve account. Claims Procedures Under Title I. Under the Title I Program the lender may accelerate an insured loan following a default on such loan only after the lender or its agent has contacted the borrower in a face-to-face meeting or by telephone to discuss the reasons for the default and to seek its cure. If the borrower does not cure the default or agree to a modification agreement or repayment plan, the lender will notify the borrower in writing that, unless within 30 days the 104 default is cured or the borrower enters into a modification agreement or repayment plan, the loan will be accelerated and that, if the default persists, the lender will report the default to an appropriate credit agency. The lender may rescind the acceleration of maturity after full payment is due and reinstate the loan only if the borrower brings the loan current, executes a modification agreement or agrees to an acceptable repayment plan. Following acceleration of maturity upon a secured Title I loan, the lender may either (a) proceed against the property under any security instrument, or (b) make a claim under the lender's contract of insurance. If the lender chooses to proceed against the property under a security instrument (or if it accepts a voluntary conveyance or surrender of the property), the lender may file an insurance claim only with the prior approval of the Secretary of HUD. When a lender files an insurance claim with the FHA under the Title I Program, the FHA reviews the claim, the complete loan file and documentation of the lender's efforts to obtain recourse against any dealer who has agreed thereto, certification of compliance with applicable state and local laws in carrying out any foreclosure or repossession, and evidence that the lender has properly filed proofs of claims, where the borrower is bankrupt or deceased. Generally, a claim for reimbursement for loss on any Title I loan must be filed with the FHA no later than 9 months after the date of default of the loan. Concurrently with filing the insurance claim, the lender shall assign to the United States of America the lender's entire interest in the loan note (or a judgment in lien of the note), in any security held and in any claim filed in any legal proceedings. If, at the time the note is assigned to the United States, the Secretary has reason to believe that the note is not valid or enforceable against the borrower, the FHA may deny the claim and reassign the note to the lender. If either such defect is discovered after the FHA has paid a claim, the FHA may require the lender to repurchase the paid claim and to accept a reassignment of the loan note. If the lender subsequently obtains a valid and enforceable judgment against the borrower, the lender may resubmit a new insurance claim with an assignment of the judgment. Although the FHA may contest any insurance claim and make a demand for repurchase of the loan at any time up to two years from the date the claim was certified for payment and may do so thereafter in the event of fraud or misrepresentation on the part of the lender, the FHA has expressed an intention to limit the period of time within which it will take such action to one year from the date the claim was certified for payment. Under the Title I Program the amount of an FHA insurance claim payment, when made, is equal to the claimable amount, up to the amount of insurance coverage in the lender's insurance coverage reserve account. The "claimable amount" means an amount equal to 90% of the sum of: o the unpaid loan obligation (net unpaid principal and the uncollected interest earned to the date of default) with adjustments thereto if the lender has proceeded against property securing the loan; o the interest on the unpaid amount of the loan obligation from the date of default to the date of the claim's initial submission for payment plus 15 calendar days (but not to exceed 9 months from the date of default), calculated at the rate of 7% per year; o the uncollected court costs; 105 o the attorney's fees not to exceed $500; and o the expenses for recording the assignment of the security to the United States. The Secretary of HUD may deny a claim for insurance in whole or in part for any violations of the regulations governing the Title I Program; however, the Secretary of HUD may waive such violations if it determines that enforcement of the regulations would impose an injustice upon a lender which has substantially complied with the regulations in good faith. MATERIAL FEDERAL INCOME TAX CONSEQUENCES The following summary of the material federal income tax consequences of the purchase, ownership and disposition of certificates is based on the opinion of tax counsel to the depositor, either Sidley Austin Brown & Wood LLP or Thacher Proffitt & Wood LLP, as specified in the related prospectus supplement. This summary is based on the provisions of the Internal Revenue Code of 1986, as amended, and the regulations, including the REMIC Regulations, rulings and decisions promulgated thereunder and, where applicable, proposed regulations, all of which are subject to change either prospectively or retroactively. This summary does not address the material federal income tax consequences of an investment in securities applicable to certain financial institutions, banks, insurance companies, tax exempt organizations, dealers in options, currency or securities, traders in securities that elect to mark to market, or persons who hold positions other than securities such that the securities are treated as part of a hedging transaction, straddle, conversion or other integrated transaction which are subject to special rules. Because of the complexity of the tax issues involved, we strongly suggest that prospective investors consult their tax advisors regarding the federal, state, local and any other tax consequences to them of the purchase, ownership and disposition of securities. GENERAL The federal income tax consequences to securityholders will vary depending on whether an election is made to treat the trust fund relating to a particular series of securities as a REMIC under the Code. The prospectus supplement for each series of securities will specify whether a REMIC election will be made. In the discussion that follows, all references to a "section" or "sections" shall be understood to refer, unless otherwise specifically indicated, to a section or sections of the Code. If a REMIC election is not made, in the opinion of tax counsel the trust fund will not be classified as a publicly traded partnership, a taxable mortgage pool, or an association taxable as a corporation. A trust fund that qualifies as a "grantor trust" for federal income tax purposes also will receive an opinion of tax counsel to the effect that: o the trust fund will be classified as a grantor trust under subpart E, part I of subchapter J of the Code; and o owners of certificates will be treated for federal income tax purposes as owners of a portion of the trust fund's assets as described below. 106 A trust fund that issues notes may also receive an opinion of tax counsel regarding the characterization of the notes as debt instruments for federal income tax purposes. With respect to each trust fund that elects REMIC status, in the opinion of tax counsel, assuming compliance with all provisions of the related agreement, the trust fund will qualify as a REMIC and the related certificates will be considered to be regular interests or residual interests in the REMIC. The related prospectus supplement for each series of securities will indicate whether the trust fund will make a REMIC election and whether a class of securities will be treated as a regular or residual interest in the REMIC. Each opinion is an expression of an opinion only, is not a guarantee of results and is not binding on the Internal Revenue Service or any third party. If, contrary to the opinion of tax counsel, the IRS successfully were to assert that a class of notes did not represent debt instruments for federal income tax purposes, that class of notes would be treated as equity interests in the related trust fund. The trust fund would then be treated as a partnership and could be a publicly traded partnership. If the trust fund were classified as a publicly traded partnership, it would not be subject to taxation as a corporation because its income would constitute "qualifying income" not derived in the conduct of a financial business. Nevertheless, if the trust fund were classified as a partnership, treatment of a class of notes as equity interests in such a partnership could have adverse tax consequences to certain holders. For example, income to foreign holders of such a class generally would be subject to U.S. tax and withholding requirements, and individual holders of such a class would be allocated their proportionate share of the trust's income but might be subject to certain limitations on their ability to deduct their share of the trust's expenses. TAXATION OF DEBT SECURITIES Status as Real Property Loans. Except to the extent otherwise provided in the related prospectus supplement, if the securities are regular interests in a REMIC or represent interests in a grantor trust, in the opinion of tax counsel: o securities held by a domestic building and loan association will constitute "loans... secured by an interest in real property" within the meaning of section 7701(a)(19)(C)(v) of the Code; and o securities held by a real estate investment trust will constitute "real estate assets" within the meaning of section 856(c)(4)(A) of the Code and interest on securities will be considered "interest on obligations secured by mortgages on real property or on interests in real property" within the meaning of section 856(c)(3)(B) of the Code. Interest and Acquisition Discount. In the opinion of tax counsel, securities that are REMIC regular interests are generally taxable to holders in the same manner as evidences of indebtedness issued by the REMIC. Stated interest on the securities that are REMIC regular interests will be taxable as ordinary income and taken into account using the accrual method of accounting, regardless of the holder's normal accounting method. Interest (other than original issue discount) on securities (other than securities that are REMIC regular interests) which are 107 characterized as indebtedness for federal income tax purposes will be includible in income by their holders in accordance with their usual methods of accounting. When we refer to "debt securities" in this section, we mean securities characterized as debt for federal income tax purposes and securities that are REMIC regular interests. In the opinion of tax counsel, "compound interest securities" (i.e., debt securities that permit all interest to accrue for more than one year before payments of interest are scheduled to begin) will, and certain of the other debt securities issued at a discount may, be issued with "original issue discount" or OID. The following discussion is based in part on the OID Regulations. A holder should be aware, however, that the OID Regulations do not adequately address certain issues relevant to prepayable securities, such as the debt securities. In general, OID, if any, will equal the difference between the stated redemption price at maturity of a debt security and its issue price. In the opinion of tax counsel, a holder of a debt security must include OID in gross income as ordinary interest income as it accrues under a method taking into account an economic accrual of the discount. In general, OID must be included in income in advance of the receipt of the cash representing that income. The amount of OID on a debt security will be considered to be zero if it is less than a de minimis amount determined under the Code. The issue price of a debt security is the first price at which a substantial amount of debt securities of that class are sold to the public (excluding bond houses, brokers, underwriters or wholesalers). If less than a substantial amount of a particular class of debt securities is sold for cash on or prior to the closing date, the issue price for that class will be treated as the fair market value of that class on the closing date. The issue price of a debt security also includes the amount paid by an initial debt security holder for accrued interest that relates to a period prior to the issue date of the debt security. The stated redemption price at maturity of a debt security includes the original principal amount of the debt security, but generally will not include distributions of interest if the distributions constitute "qualified stated interest." Under the OID Regulations, qualified stated interest generally means interest payable at a single fixed rate or qualified variable rate (as described below), provided that the interest payments are unconditionally payable at intervals of one year or less during the entire term of the debt security. The OID Regulations state that interest payments are unconditionally payable only if a late payment or nonpayment is expected to be penalized or reasonable remedies exist to compel payment. Debt securities may provide for default remedies in the event of late payment or nonpayment of interest. Although the matter is not free from doubt, the trustee intends to treat interest on such debt securities as unconditionally payable and as constituting qualified stated interest, not OID. However, absent clarification of the OID Regulations, where debt securities do not provide for default remedies, the interest payments will be included in the debt security's stated redemption price at maturity and taxed as OID. Interest is payable at a single fixed rate only if the rate appropriately takes into account the length of the interval between payments. Distributions of interest on debt securities with respect to which deferred interest will accrue, will not constitute qualified stated interest payments, in which case the stated redemption price at maturity of such debt securities includes all distributions of interest as well as principal thereon. Where the interval between the issue date and the first distribution date on a debt security is longer than the interval between subsequent distribution dates, the greater of (i) the interest 108 foregone and (ii) the excess of the stated principal amount over the issue price will be included in the stated redemption price at maturity and tested under the de minimis rule described below. Where the interval between the issue date and the first distribution date on a debt security is shorter than the interval between subsequent distribution dates, all of the additional interest will be included in the stated redemption price at maturity and tested under the de minimis rule described below. In the case of a debt security with a long first period that has non-de minimis OID, all stated interest in excess of interest payable at the effective interest rate for the long first period will be included in the stated redemption price at maturity and the debt security will generally have OID. Holders of debt securities should consult their own tax advisors to determine the issue price and stated redemption price at maturity of a debt security. Under the de minimis rule, OID on a debt security will be considered to be zero if the OID is less than 0.25% of the stated redemption price at maturity of the debt security multiplied by the weighted average maturity of the debt security. For this purpose, the weighted average maturity of the debt security is computed as the sum of the amounts determined by multiplying the number of full years (i.e., rounding down partial years) from the issue date until each distribution in reduction of stated redemption price at maturity is scheduled to be made by a fraction, the numerator of which is the amount of each distribution included in the stated redemption price at maturity of the debt security and the denominator of which is the stated redemption price at maturity of the debt security. Holders generally must report de minimis OID pro rata as principal payments are received, and such income will be capital gain if the debt security is held as a capital asset. However, accrual method holders may elect to accrue all de minimis OID as well as market discount under a constant interest method. Debt securities may provide for interest based on a qualified variable rate. Under the OID Regulations, interest is generally treated as payable at a qualified variable rate and not as contingent interest if o the interest is unconditionally payable at least annually, o the issue price of the debt instrument does not exceed the total noncontingent principal payments, and o interest is based on a "qualified floating rate," an "objective rate," or a combination of "qualified floating rates" that do not operate in a manner that significantly accelerates or defers interest payments on the debt security. In the case of compound interest securities, certain interest weighted securities, and certain of the other debt securities, none of the payments under the instrument will be considered qualified stated interest, and thus the aggregate amount of all payments will be included in the stated redemption price at maturity. The Internal Revenue Service issued contingent payment regulations governing the calculation of OID on instruments having contingent interest payments. These contingent payment regulations represent the only guidance regarding the views of the IRS with respect to contingent interest instruments and specifically do not apply for purposes of calculating OID on debt instruments subject to section 1272(a)(6) of the Code, such as the debt securities. 109 Additionally, the OID Regulations do not contain provisions specifically interpreting section 1272(a)(6) of the Code. Until the Treasury issues guidance to the contrary, the trustee intends to base its computation on section 1272(a)(6) and the OID Regulations as described in this prospectus. However, because no regulatory guidance currently exists under section 1272(a)(6) of the Code, there can be no assurance that such methodology represents the correct manner of calculating OID. The holder of a debt security issued with OID must include in gross income, for all days during its taxable year on which it holds the debt security, the sum of the "daily portions" of OID. The amount of OID includible in income by a holder will be computed by allocating to each day during a taxable year a pro rata portion of the original issue discount that accrued during the relevant accrual period. In the case of a debt security that is not a Regular Interest Security and the principal payments on which are not subject to acceleration resulting from prepayments on the loans, the amount of OID includible in income of a holder for an accrual period (generally the period over which interest accrues on the debt instrument) will equal the product of the yield to maturity of the debt security and the adjusted issue price of the debt security, reduced by any payments of qualified stated interest. The adjusted issue price is the sum of its issue price plus prior accruals of OID, reduced by the total payments made with respect to the debt security in all prior periods, other than qualified stated interest payments. Certain classes of the debt securities may be "pay-through securities," which are debt instruments that are subject to acceleration due to prepayments on other debt obligations securing those instruments. The amount of OID to be included in the income of a pay-through security is computed by taking into account the prepayment rate assumed in pricing the debt instrument. The amount of OID that will accrue during an accrual period on a pay-through security is the excess, if any, of the o sum of - the present value of all payments remaining to be made on the pay-through security as of the close of the accrual period and - the payments during the accrual period of amounts included in the stated redemption price of the pay-through security, over o the adjusted issue price of the pay-through security at the beginning of the accrual period. The present value of the remaining payments is to be determined on the basis of three factors: o the original yield to maturity of the pay-through security (determined on the basis of compounding at the end of each accrual period and properly adjusted for the length of the accrual period), o events that have occurred before the end of the accrual period, and 110 o the assumption that the remaining payments will be made in accordance with the original prepayment assumption. The effect of this method is to increase the portions of OID required to be included in income by a holder to take into account prepayments with respect to the loans at a rate that exceeds the prepayment assumption, and to decrease (but not below zero for any period) the portions of OID required to be included in income by a holder of a pay-through security to take into account prepayments with respect to the loans at a rate that is slower than the prepayment assumption. Although OID will be reported to holders of pay-through securities based on the prepayment assumption, no representation is made to holders that loans will be prepaid at that rate or at any other rate. The depositor may adjust the accrual of OID on a class of securities that are regular REMIC interests (or other regular interests in a REMIC) in a manner that it believes to be appropriate, to take account of realized losses on the loans, although the OID Regulations do not provide for such adjustments. If the IRS were to require that OID be accrued without such adjustments, the rate of accrual of OID for a class of securities that are regular REMIC interests could increase. Certain classes of securities that are regular REMIC interests may represent more than one class of REMIC regular interests. Unless otherwise provided in the related prospectus supplement, the applicable trustee intends, based on the OID Regulations, to calculate OID on such securities as if, solely for the purposes of computing OID, the separate regular interests were a single debt instrument. A subsequent holder of a debt security will also be required to include OID in gross income, but the holder who purchases the debt security for an amount that exceeds its adjusted issue price will be entitled (as will an initial holder who pays more than a debt security's issue price) to offset such OID by comparable economic accruals of portions of the excess. Effects of Defaults and Delinquencies. In the opinion of tax counsel, holders will be required to report income with respect to the related securities under an accrual method without giving effect to delays and reductions in distributions attributable to a default or delinquency on the loans, except possibly to the extent that it can be established that such amounts are uncollectible. As a result, the amount of income (including OID) reported by a holder of a security in any period could significantly exceed the amount of cash distributed to the holder in that period. The holder will eventually be allowed a loss (or will be allowed to report a lesser amount of income) to the extent that the aggregate amount of distributions on the securities is reduced as a result of a loan default. However, the timing and character of losses or reductions in income are uncertain and, accordingly, holders of securities should consult their own tax advisors on this point. Interest Weighted Securities. An "interest weighted security" is a security that is a REMIC regular interest or a "stripped" security (as discussed under "--Tax Status as a Grantor Trust; General" below) the payments on which consist solely or primarily of a specified portion of the interest payments on qualified mortgages held by the REMIC or on loans underlying pass-through securities. It is not clear how income should be accrued with respect to interest 111 weighted securities. The trustee intends to take the position that all of the income derived from an interest weighted security should be treated as OID and that the amount and rate of accrual of such OID should be calculated by treating the interest weighted security as a compound interest security. However, in the case of interest weighted securities that are entitled to some payments of principal and are REMIC regular interests, the IRS could assert that income derived from the interest weighted security should be calculated as if the security were a security purchased at a premium equal to the excess of the price paid by the holder for the Security over its stated principal amount, if any. Under this approach, a holder would be entitled to amortize such premium only if it has in effect an election under section 171 of the Code with respect to all taxable debt instruments held by such holder, as described below. Alternatively, the IRS could assert that an interest weighted security should be taxable under the rules governing bonds issued with contingent payments. This treatment may be more likely in the case of interest weighted securities that are stripped securities as described below. See "--Non-REMIC Certificates--B. Multiple Classes of Senior Certificates--Stripped Bonds and Stripped Coupons" below. Variable Rate Debt Securities. In the opinion of tax counsel, in the case of debt securities bearing interest at a rate that varies directly, according to a fixed formula, with an objective index, it appears that the yield to maturity of the debt securities and in the case of pay-through securities, the present value of all payments remaining to be made on the debt securities, should be calculated as if the interest index remained at its value as of the issue date of the securities. Because the proper method of adjusting accruals of OID on a variable rate debt security is uncertain, holders of variable rate debt securities should consult their own tax advisers regarding the appropriate treatment of such securities for federal income tax purposes. Market Discount. In the opinion of tax counsel, a purchaser of a security may be subject to the market discount rules of sections 1276 through 1278 of the Code. A holder that acquires a debt security with more than a prescribed de minimis amount of "market discount" (generally, the excess of the principal amount of the debt security over the purchaser's purchase price) will be required to include accrued market discount in income as ordinary income in each month, but limited to an amount not exceeding the principal payments on the debt security received in that month and, if the securities are sold, the gain realized. This market discount would accrue in a manner to be provided in Treasury regulations but, until such regulations are issued, market discount would in general accrue either o on the basis of a constant yield (in the case of a pay-through security, taking into account a prepayment assumption) or o in the ratio of (a) in the case of securities (or in the case of a pass-through security, as set forth below, the loans underlying the security) not originally issued with OID, stated interest payable in the relevant period to total stated interest remaining to be paid at the beginning of the period or (b) in the case of securities (or, in the case of a pass-through security, as described below, the loans underlying the security) originally issued at a discount, OID in the relevant period to total OID remaining to be paid. Section 1277 of the Code provides that, regardless of the origination date of the debt security (or, in the case of a pass-through security, the loans), the excess of interest paid or 112 accrued to purchase or carry the security (or, in the case of a pass-through security, as described below, the underlying loans) with market discount over interest received on the security is allowed as a current deduction only to the extent such excess is greater than the market discount that accrued during the taxable year in which such interest expense was incurred. In general, the deferred portion of any interest expense will be deductible when such market discount is included in income, including upon the sale, disposition, or repayment of the security (or in the case of a pass-through security, an underlying loan). A holder may elect to include market discount in income currently as it accrues, on all market discount obligations acquired by such holder during the taxable year such election is made and thereafter, in which case the interest deferral rule will not apply. Premium. In the opinion of tax counsel, a holder who purchases a debt security (other than an interest weighted security to the extent described above) at a cost greater than its stated redemption price at maturity, generally will be considered to have purchased the security at a premium, which it may elect to amortize as an offset to interest income on the security (and not as a separate deduction item) on a constant yield method. Although no regulations addressing the computation of premium accrual on comparable securities have been issued, the legislative history of the 1986 Act indicates that premium is to be accrued in the same manner as market discount. Accordingly, it appears that the accrual of premium on a class of pay-through securities will be calculated using the prepayment assumption used in pricing the class. If a holder makes an election to amortize premium on a debt security, the election will apply to all taxable debt instruments (including all REMIC regular interests and all pass-through certificates representing ownership interests in a trust holding debt obligations) held by the holder at the beginning of the taxable year in which the election is made, and to all taxable debt instruments acquired thereafter by the holder, and will be irrevocable without the consent of the IRS. Purchasers who pay a premium for the securities should consult their tax advisers regarding the election to amortize premium and the method to be employed. On December 30, 1997, the IRS issued final amortizable bond premium regulations dealing with amortizable bond premium. The regulations specifically do not apply to prepayable debt instruments subject to section 1272(a)(6) of the Code. Absent further guidance from the IRS, the trustee intends to account for amortizable bond premium in the manner described above. Prospective purchasers of the debt securities should consult their tax advisors regarding the possible application of the amortizable bond premium regulations. Election to Treat All Interest as Original Issue Discount. The OID Regulations permit the holder of a debt security to elect to accrue all interest, discount (including de minimis market discount or OID) and premium income as interest, based on a constant yield method for Debt securities acquired on or after April 4, 1994. If such an election were to be made with respect to a debt security with market discount, the holder of the debt security would be deemed to have made an election to include in income currently market discount with respect to all other debt instruments having market discount that such holder of the debt security acquires during the year of the election or thereafter. Similarly, the holder of a debt security that makes this election for a debt security that is acquired at a premium will be deemed to have made an election to amortize bond premium with respect to all debt instruments having amortizable bond premium that the holder owns or acquires. The election to accrue interest, discount and premium on a constant yield method with respect to a debt security is irrevocable. 113 Sale or Exchange of a Debt Security. Sale or exchange of a debt security prior to its maturity will result in gain or loss equal to the difference, if any, between the amount received and the seller's adjusted basis in the debt security. Such adjusted basis generally will equal the seller's purchase price for the debt security, increased by the OID and market discount included in the seller's gross income with respect to the debt security, and reduced by principal payments on the debt security previously received by the seller and any premium amortized by the seller. Such gain or loss will be capital gain or loss to a seller for which a debt security is a "capital asset" within the meaning of section 1221 of the Code except to the extent of any accrued but unrecognized market discount, and will be long-term or short-term depending on whether the debt security has been owned for the long-term capital gain holding period (currently more than one year). Non-corporate taxpayers are subject to reduced maximum rates on long-term capital gains and are generally subject to tax at ordinary income rates on short-term capital gains. The deductibility of capital losses is subject to certain limitations. Prospective investors should consult their own tax advisors concerning these tax law provisions. It is possible that capital gain realized by holders of debt securities could be considered gain realized upon the disposition of property that was part of a "conversion transaction." A sale of a debt security will be part of a conversion transaction if substantially all of the holder's expected return is attributable to the time value of the holder's net investment, and at least one of the following conditions is met: o the holder entered the contract to sell the debt security substantially contemporaneously with acquiring the debt security; o the debt security is part of a straddle; o the debt security is marketed or sold as producing capital gain; or o other transactions to be specified in Treasury regulations that have not yet been issued occur. If the sale or other disposition of a debt security is part of a conversion transaction, all or any portion of the gain realized upon the sale or other disposition would be treated as ordinary income instead of capital gain. Non-U.S. Persons. Generally, to the extent that a debt security evidences ownership in mortgage loans that are issued on or before July 18, 1984, interest or OID paid by the person required to withhold tax under section 1441 or 1442 of the Code to (i) an owner that is not a U.S. Person or (ii) a debt securityholder holding on behalf of an owner that is not a U.S. Person, will be subject to federal income tax, collected by withholding, at a rate of 30% (or such lower rate as may be provided for interest by an applicable tax treaty). Accrued OID recognized by the owner on the sale or exchange of such a debt security also will be subject to federal income tax at the same rate. Generally, such payments would not be subject to withholding to the extent that a debt security evidences ownership in mortgage loans issued after July 18, 1984, if 114 o the debt securityholder does not actually or constructively own 10% or more of the combined voting power of all classes of equity in the issuer (which for purposes of this discussion may be defined as the trust fund); o the debt securityholder is not a controlled foreign corporation within the meaning of section 957 of the Code related to the issuer; and o the debt securityholder complies with certain identification requirements, including delivery of a statement, signed by the debt securityholder under penalties of perjury, certifying that it is not a U.S. Person and providing its name and address. Information Reporting and Backup Withholding. The master servicer will furnish or make available, within a reasonable time after the end of each calendar year, to each holder of a debt security at any time during the year, such information as may be deemed necessary or desirable to assist securityholders in preparing their federal income tax returns, or to enable holders to make the information available to owners or other financial intermediaries of holders that hold the debt securities as nominees. If a holder, owner or other recipient of a payment on behalf of an owner fails to supply a certified taxpayer identification number or if the Secretary of the Treasury determines that such person has not reported all interest and dividend income required to be shown on its federal income tax return, backup withholding may be required with respect to any payments. Any amounts deducted and withheld from a distribution to a recipient would be allowed as a credit against the recipient's federal income tax liability. NON-REMIC CERTIFICATES A. Single Class of Senior Certificates Characterization. The trust fund may be created with one class of senior certificates and one class of subordinated certificates. In this case, each senior certificateholder will be treated as the owner of a pro rata undivided interest in the interest and principal portions of the trust fund represented by that senior certificate and will be considered the equitable owner of a pro rata undivided interest in each of the mortgage loans in the related mortgage pool. Any amounts received by a senior certificateholder in lieu of amounts due with respect to any mortgage loan because of a default or delinquency in payment will be treated for federal income tax purposes as having the same character as the payments they replace. Each holder of a senior certificate will be required to report on its federal income tax return its pro rata share of the entire income from the mortgage loans in the trust fund represented by that senior certificate, including interest, original issue discount, if any, prepayment fees, assumption fees, any gain recognized upon an assumption and late payment charges received by the master servicer in accordance with the senior certificateholder's method of accounting. Under section 162 or 212 of the Code, each senior certificateholder will be entitled to deduct its pro rata share of servicing fees, prepayment fees, assumption fees, any loss recognized upon an assumption and late payment charges retained by the master servicer, provided that these amounts are reasonable compensation for services rendered to the trust fund. A senior certificateholder that is an individual, estate or trust will be entitled to deduct its share of expenses only to the extent such expenses, plus all other section 212 expenses, exceed 2% of 115 that senior certificateholder's adjusted gross income. A senior certificateholder using the cash method of accounting must take into account its pro rata share of income and deductions as and when collected by or paid to the master servicer. A senior certificateholder using an accrual method of accounting must take into account its pro rata share of income and deductions as they become due or are paid to the master servicer, whichever is earlier. If the servicing fees paid to the master servicer were deemed to exceed reasonable servicing compensation, the amount of such excess could be considered as a retained ownership interest by the master servicer, or any person to whom the master servicer assigned for value all or a portion of the servicing fees, in a portion of the interest payments on the mortgage loans. The mortgage loans might then be subject to the "coupon stripping" rules of the Code discussed below. Unless otherwise specified in the related prospectus supplement, tax counsel will deliver its opinion to the depositor with respect to each series of certificates that: o a senior certificate owned by a "domestic building and loan association" within the meaning of section 7701(a)(19) of the Code representing principal and interest payments on mortgage loans will be considered to represent "loans . . . secured by an interest in real property which is . . . residential property" within the meaning of section 7701(a)(19)(C)(v) of the Code to the extent that the mortgage loans represented by that senior certificate are of a type described in the section; o a senior certificate owned by a real estate investment trust representing an interest in mortgage loans will be considered to represent "real estate assets" within the meaning of section 856(c)(4)(A) of the Code and interest income on the mortgage loans will be considered "interest on obligations secured by mortgages on real property" within the meaning of section 856(c)(3)(B) of the Code to the extent that the mortgage loans represented by that senior certificate are of a type described in the section; and o a senior certificate owned by a REMIC will be an "obligation . . . which is principally secured by an interest in real property" within the meaning of section 860G(a)(3)(A) of the Code. The Small Business Job Protection Act of 1996, as part of the repeal of the bad debt reserve method for thrift institutions, repealed the application of section 593(d) of the Code to any taxable year beginning after December 31, 1995. The assets constituting certain trust funds may include "buydown" mortgage loans. The characterization of any investment in "buydown" mortgage loans will depend upon the precise terms of the related buydown agreement, but to the extent that such "buydown" mortgage loans are secured in part by a bank account or other personal property, they may not be treated in their entirety as assets described in the foregoing sections of the Code. There are no directly applicable precedents with respect to the federal income tax treatment or the characterization of investments in "buydown" mortgage loans. Accordingly, holders of senior certificates should consult their own tax advisors with respect to characterization of investments in senior certificates representing an interest in a trust fund that includes "buydown" mortgage loans. 116 Premium. The price paid for a senior certificate by a holder will be allocated to the holder's undivided interest in each mortgage loan based on each mortgage loan's relative fair market value, so that the holder's undivided interest in each mortgage loan will have its own tax basis. A senior certificateholder that acquires an interest in mortgage loans at a premium may elect to amortize the premium under a constant interest method, provided that the mortgage loan was originated after September 27, 1985. Premium allocable to a mortgage loan originated on or before September 27, 1985 should be allocated among the principal payments on the mortgage loan and allowed as an ordinary deduction as principal payments are made. Amortizable bond premium will be treated as an offset to interest income on a senior certificate. The basis for a senior certificate will be reduced to the extent that amortizable premium is applied to offset interest payments. It is not clear whether a reasonable prepayment assumption should be used in computing amortization of premium allowable under section 171 of the Code. A certificateholder that makes this election for a certificate that is acquired at a premium will be deemed to have made an election to amortize bond premium with respect to all debt instruments having amortizable bond premium that the certificateholder acquires during the year of the election or thereafter. If a premium is not subject to amortization using a reasonable prepayment assumption, the holder of a senior certificate acquired at a premium should recognize a loss, if a mortgage loan prepays in full, equal to the difference between the portion of the prepaid principal amount of the mortgage loan that is allocable to the senior certificate and the portion of the adjusted basis of the senior certificate that is allocable to the mortgage loan. If a reasonable prepayment assumption is used to amortize the premium, it appears that a loss would be available, if at all, only if prepayments have occurred at a rate faster than the reasonable assumed prepayment rate. It is not clear whether any other adjustments would be required to reflect differences between an assumed prepayment rate and the actual rate of prepayments. On December 30, 1997, the Internal Revenue Service issued final amortizable bond premium regulations. These regulations, which generally are effective for bonds issued or acquired on or after March 2, 1998 (or, for holders making an election for the taxable year that included March 2, 1998 or any subsequent taxable year, shall apply to bonds held on or after the first day of the taxable year of the election). The amortizable bond premium regulations specifically do not apply to prepayable debt instruments or any pool of debt instruments, such as the trust fund, the yield on which may be affected by prepayments which are subject to section 1272(a)(6) of the Code. Absent further guidance from the IRS and unless otherwise specified in the related prospectus supplement, the trustee will account for amortizable bond premium in the manner described above. Prospective purchasers should consult their tax advisors regarding amortizable bond premium and the amortizable bond premium regulations. Original Issue Discount. The IRS has stated in published rulings that, in circumstances similar to those described herein, the special rules of the Code (currently sections 1271 through 1273 and section 1275) relating to original issue discount (OID) will be applicable to a senior certificateholder's interest in those mortgage loans meeting the conditions necessary for these sections to apply. Accordingly, the following discussion is based in part on the Treasury's OID Regulations issued on February 2, 1994 under sections 1271 through 1273 and section 1275 of the Code. Certificateholders should be aware, however, that the OID Regulations do not 117 adequately address certain issues relevant to prepayable securities, such as the certificates. Rules regarding periodic inclusion of OID income are applicable to mortgages of corporations originated after May 27, 1969, mortgages of noncorporate mortgagors (other than individuals) originated after July 1, 1982, and mortgages of individuals originated after March 2, 1984. OID could arise by the financing of points or other charges by the originator of the mortgages in an amount greater than a statutory de minimis exception to the extent that the points are not currently deductible under applicable provisions of the Code or are not for services provided by the lender. OID generally must be reported as ordinary gross income as it accrues under a constant interest method. See "--B. Multiple Classes of Senior Certificates--Senior Certificates Representing Interests in Loans Other than ARM Loans--Accrual of Original Issue Discount" below. Market Discount. A senior certificateholder that acquires an undivided interest in mortgage loans may be subject to the market discount rules of sections 1276 through 1278 to the extent an undivided interest in a mortgage loan is considered to have been purchased at a "market discount". Generally, the excess of the portion of the principal amount of a mortgage loan allocable to the holder's undivided interest over the holder's tax basis in such interest. Market discount with respect to a senior certificate will be considered to be zero if the amount allocable to the senior certificate is less than 0.25% of the senior certificate's stated redemption price at maturity multiplied by the weighted average maturity remaining after the date of purchase. Treasury regulations implementing the market discount rules have not yet been issued; therefore, investors should consult their own tax advisors regarding the application of these rules and the advisability of making any of the elections allowed under sections 1276 through 1278 of the Code. The Code provides that any principal payment, whether a scheduled payment or a prepayment, or any gain on disposition of a market discount bond acquired by the taxpayer after October 22, 1986 shall be treated as ordinary income to the extent that it does not exceed the accrued market discount at the time of such payment. The amount of accrued market discount for purposes of determining the tax treatment of subsequent principal payments or dispositions of the market discount bond is to be reduced by the amount so treated as ordinary income. The Code also grants to the Department of the Treasury authority to issue regulations providing for the computation of accrued market discount on debt instruments, the principal of which is payable in more than one installment. Although the Treasury has not yet issued regulations, rules described in the relevant legislative history will apply. Under those rules, the holder of a market discount bond may elect to accrue market discount either on the basis of a constant interest rate or according to one of the following methods. If a senior certificate is issued with OID, the amount of market discount that accrues during any accrual period is equal to the product of o the total remaining market discount times 118 o a fraction, the numerator of which is the original issue discount accruing during the period and the denominator of which is the total remaining original issue discount at the beginning of the accrual period. For senior certificates issued without OID, the amount of market discount that accrues during a period is equal to the product of o the total remaining market discount times o a fraction, the numerator of which is the amount of stated interest paid during the accrual period and the denominator of which is the total amount of stated interest remaining to be paid at the beginning of the accrual period. For purposes of calculating market discount under any of the above methods in the case of instruments (such as the senior certificates) which provide for payments which may be accelerated by reason of prepayments of other obligations securing such instruments, the same prepayment assumption applicable to calculating the accrual of original issue discount will apply. Because the regulations described above have not been issued, it is impossible to predict what effect those regulations might have on the tax treatment of a senior certificate purchased at a discount or premium in the secondary market. A holder who acquires a senior certificate at a market discount also may be required to defer, until the maturity date of the senior certificate or its earlier disposition in a taxable transaction, the deduction of a portion of the amount of interest that the holder paid or accrued during the taxable year on indebtedness incurred or maintained to purchase or carry the senior certificate in excess of the aggregate amount of interest (including OID) includible in such holder's gross income for the taxable year with respect to the senior certificate. The amount of such net interest expense deferred in a taxable year may not exceed the amount of market discount accrued on the senior certificate for the days during the taxable year on which the holder held the senior certificate and, in general, would be deductible when such market discount is includible in income. The amount of any remaining deferred deduction is to be taken into account in the taxable year in which the senior certificate matures or is disposed of in a taxable transaction. In the case of a disposition in which gain or loss is not recognized in whole or in part, any remaining deferred deduction will be allowed to the extent of gain recognized on the disposition. This deferral rule does not apply if the senior certificateholder elects to include such market discount in income currently as it accrues on all market discount obligations acquired by the senior certificateholder in that taxable year or thereafter. Election to Treat All Interest as Original Issue Discount. The OID Regulations permit a certificateholder to elect to accrue all interest, discount (including de minimis market or original issue discount) and premium in income as interest, based on a constant yield method for certificates acquired on or after April 4, 1994. If such an election is made with respect to a mortgage loan with market discount, the certificateholder will be deemed to have made an election to include in income currently market discount with respect to all other debt instruments having market discount that such certificateholder acquires during the year of the election or 119 thereafter. Similarly, a certificateholder that makes this election for a certificate that is acquired at a premium will be deemed to have made an election to amortize bond premium with respect to all debt instruments having amortizable bond premium that such certificateholder owns or acquires. See "--Regular Certificates--Original Issue Discount and Premium" below. The election to accrue interest, discount and premium on a constant yield method with respect to a certificate is irrevocable. Anti-abuse Rule. The IRS is permitted to apply or depart from the rules contained in the OID Regulations as necessary or appropriate to achieve a reasonable result where a principal purpose in structuring a mortgage asset, mortgage loan or senior certificate, or the effect of applying the otherwise applicable rules, is to achieve a result that is unreasonable in light of the purposes of the applicable statutes (which generally are intended to achieve the clear reflection of income for both issuers and holders of debt instruments). B. Multiple Classes of Senior Certificates Stripped Bonds and Stripped Coupons General. Pursuant to section 1286 of the Code, the separation of ownership of the right to receive some or all of the interest payments on an obligation from ownership of the right to receive some or all of the principal payments results in the creation of "stripped bonds" with respect to principal payments and "stripped coupons" with respect to interest payments. For purposes of sections 1271 through 1288 of the Code, section 1286 treats a stripped bond or a stripped coupon as an obligation issued on the date that such stripped interest is created. If a trust fund is created with two classes of senior certificates, one class of senior certificates will represent the right to principal and interest, or principal only, on all or a portion of the mortgage loans ("stripped bond certificates"), while the second class of senior certificates will represent the right to some or all of the interest on such portion ("stripped coupon certificates"). Servicing fees in excess of reasonable servicing fees will be treated under the stripped bond rules. If such excess servicing fee is less than 100 basis points (i.e., 1% interest on the mortgage loan principal balance) or the certificates are initially sold with a de minimis discount (assuming no prepayment assumption is required), any non-de minimis discount arising from a subsequent transfer of the certificates should be treated as market discount. The IRS appears to require that reasonable servicing fees be calculated on a mortgage loan by mortgage loan basis, which could result in some mortgage loans being treated as having more than 100 basis points of interest stripped off. Although not entirely clear, a stripped bond certificate generally should be treated as a single debt instrument issued on the day it is purchased for purposes of calculating any original issue discount. Generally, if the discount on a stripped bond certificate is larger than a de minimis amount (as calculated for purposes of the original issue discount rules), a purchaser of such a certificate will be required to accrue the discount under the original issue discount rules of the Code. See "--Single Class of Senior Certificates--Original Issue Discount" above. However, a purchaser of a stripped bond certificate will be required to account for any discount on the certificate as market discount rather than original issue discount if either 120 o the amount of OID with respect to the certificate was treated as zero under the OID de minimis rule when the certificate was stripped, or o no more than 100 basis points (including any amount of servicing in excess of reasonable servicing) are stripped off the trust fund's mortgage loans. Pursuant to Revenue Procedure 91-49 issued on August 8, 1991, purchasers of stripped bond certificates using an inconsistent method of accounting must change their method of accounting and request the consent of the IRS to the change in their accounting method on a statement attached to their first timely tax return filed after August 8, 1991. The precise tax treatment of stripped coupon certificates is substantially uncertain. The Code could be read literally to require that original issue discount computations be made on a mortgage loan by mortgagee loan basis. However, based on recent IRS guidance, it appears that a stripped coupon certificate should be treated as a single installment obligation subject to the original issue discount rules of the Code. As a result, all payments on a stripped coupon certificate would be included in the certificate's stated redemption price at maturity for purposes of calculating income on such certificate under the original issue discount rules of the Code. It is unclear under what circumstances, if any, the prepayment of mortgage loans will give rise to a loss to the holder of a stripped bond certificate purchased at a premium or a stripped coupon certificate. If a senior certificate is treated as a single instrument (rather than an interest in discrete mortgage loans) and the effect of prepayments is taken into account in computing yield with respect to the senior certificate, it appears that no loss may be available as a result of any particular prepayment unless prepayments occur at a rate faster than the assumed prepayment rate. However, if the senior certificate is treated as an interest in discrete mortgage loans or if no prepayment assumption is used, then, when a mortgage loan is prepaid, the holder of the certificate should be able to recognize a loss equal to the portion of the adjusted issue price of the certificate that is allocable to the mortgage loan. Because of the complexity of these issues, we strongly suggest that holders of stripped bond certificates and stripped coupon certificates consult with their own tax advisors regarding the proper treatment of these certificates for federal income tax purposes. Treatment of Certain Owners. Several sections of the Code provide beneficial treatment to certain taxpayers that invest in mortgage loans of the type that make up the trust fund. With respect to these sections, no specific legal authority exists regarding whether the character of the senior certificates, for federal income tax purposes, will be the same as that of the underlying mortgage loans. While section 1286 treats a stripped obligation as a separate obligation for purposes of the provisions of the Code addressing original issue discount, it is not clear whether such characterization would apply with regard to these other sections. Although the issue is not free from doubt, in the opinion of tax counsel, based on policy considerations, each class of senior certificates should be considered to represent "real estate assets" within the meaning of section 856(c)(4)(A) of the Code and "loans . . . secured by, an interest in real property which is . . . residential real property" within the meaning of section 7701(a)(19)(C)(v) of the Code, and interest income attributable to senior certificates should be considered to represent "interest on obligations secured by mortgages on real property" within the meaning of section 856(c)(3)(B) 121 of the Code, provided that in each case the underlying mortgage loans and interest on such mortgage loans qualify for such treatment. Prospective purchasers to which such characterization of an investment in senior certificates is material should consult their own tax advisors regarding the characterization of the senior certificates and related income. Senior certificates will be "obligations (including any participation or certificate of beneficial ownership therein) which are principally secured by an interest in real property" within the meaning of section 860G(a)(3)(A) of the Code. 122 Senior Certificates Representing Interests in Loans Other Than ARM Loans General. The OID rules of sections 1271 through 1275 of the Code will be applicable to a senior certificateholder's interest in those mortgage loans as to which the conditions for the application of those sections are met. Rules regarding periodic inclusion of original issue discount in income are applicable to mortgages of corporations originated after May 27, 1969, mortgages of noncorporate mortgagors (other than individuals) originated after July 1, 1982, and mortgages of individuals originated after March 2, 1984. Under the OID Regulations, OID could arise by the charging of points by the originator of the mortgage in an amount greater than the statutory de minimis exception, including a payment of points that is currently deductible by the borrower under applicable provisions of the Code, or, under certain circumstances, by the presence of "teaser" rates on the mortgage loans. OID on each senior certificate must be included in the owner's ordinary income for federal income tax purposes as it accrues, in accordance with a constant interest method that takes into account the compounding of interest, in advance of receipt of the cash attributable to such income. The amount of OID required to be included in an owner's income in any taxable year with respect to a senior certificate representing an interest in mortgage loans other than mortgage loans with interest rates that adjust periodically (ARM loans) likely will be computed as described under "--Accrual of Original Issue Discount" below. The following discussion is based in part on the OID Regulations and in part on the provisions of the Tax Reform Act of 1986, as amended. The OID Regulations generally are effective for debt instruments issued on or after April 4, 1994, but may be relied upon as authority with respect to debt instruments such as the senior certificates issued after December 21, 1992. Alternatively, proposed Treasury regulations issued December 21, 1992 may be treated as authority for debt instruments issued after December 21, 1992 and prior to April 4, 1994, and proposed Treasury regulations issued in 1986 and 1991 may be treated as authority for instruments issued before December 21, 1992. In applying these dates, the issue date of the mortgage loans should be used or, in the case of stripped bond certificates or stripped coupon certificates, the date when these certificates are acquired. The holder of a senior certificate should be aware, however, that neither the proposed OID Regulations nor the OID Regulations adequately address certain issues relevant to prepayable securities. Under the Code, the mortgage loans underlying each senior certificate will be treated as having been issued on the date they were originated with an amount of OID equal to the excess of such mortgage loan's stated redemption price at maturity over its issue price. The issue price of a mortgage loan is generally the amount lent to the mortgagee, which may be adjusted to take into account certain loan origination fees. The stated redemption price at maturity of a mortgage loan is the sum of all payments to be made on such mortgage loan other than payments that are treated as qualified stated interest payments. The accrual of this OID, as described under "--Accrual of Original Issue Discount" below, will, unless otherwise specified in the related prospectus supplement, utilize the original yield to maturity of the senior certificate calculated based on a reasonable assumed prepayment rate for the mortgage loans underlying the senior certificates and will take into account events that occur during the calculation period. This prepayment assumption will be determined in the manner prescribed by regulations that have not yet been issued. The legislative history of the Tax Reform Act provides, however, that the regulations will require that this prepayment assumption be the prepayment assumption that is used in determining the offering price of the certificate. No representation is made that any certificate will prepay at the prepayment assumption or at any other rate. The prepayment assumption contained in the Code literally only applies to debt instruments collateralized by other debt instruments that are subject to prepayment rather than direct ownership interests in 123 such debt instruments, such as the certificates represent. However, no other legal authority provides guidance with regard to the proper method for accruing OID on obligations that are subject to prepayment, and, until further guidance is issued, the master servicer intends to calculate and report OID under the method described below. Accrual of Original Issue Discount. Generally, the owner of a senior certificate must include in gross income the sum of the "daily portions", as defined below, of the OID on that senior certificate for each day on which it owns the senior certificate, including the date of purchase but excluding the date of disposition. In the case of an original owner, the daily portions of original issue discount with respect to each component generally will be determined as follows under the Amendments. A calculation will be made by the master servicer or such other entity specified in the related prospectus supplement of the portion of original issue discount that accrues during each successive monthly accrual period (or shorter period from the date of original issue) that ends on the day in the calendar year corresponding to each of the distribution dates on the senior certificate (or the day prior to each such date). This will be done, in the case of each full month accrual period, by adding o the present value at the end of the accrual period (determined by using as a discount factor the original yield to maturity of the respective component, under the Prepayment Assumption) of all remaining payments to be received under the Prepayment Assumption on the respective component, and o any payments received during such accrual period (other than a payment of qualified stated interest), and subtracting from that total the "adjusted issue price" of the respective component at the beginning of such accrual period. The "adjusted issue price" of a senior certificate at the beginning of the first accrual period is its issue price; the "adjusted issue price" of a senior certificate at the beginning of a subsequent accrual period is the "adjusted issue price" at the beginning of the immediately preceding accrual period plus the amount of OID allocable to that accrual period reduced by the amount of any payment (other than a payment of qualified stated interest) made at the end of or during that accrual period. The OID during the accrual period will then be divided by the number of days in the period to determine the daily portion of OID for each day in the period. With respect to an initial accrual period shorter than a full monthly accrual period, the daily portions of original issue discount must be determined according to an appropriate allocation under any reasonable method. OID generally must be reported as ordinary gross income as it accrues under a constant interest method that takes into account the compounding of interest as it accrues rather than when received. However, the amount of OID includible in the income of a holder of an obligation is reduced when the obligation is acquired after its initial issuance at a price greater than the sum of the original issue price and the previously accrued OID, less prior payments of principal. Accordingly, if mortgage loans acquired by a certificateholder are purchased at a price equal to the then unpaid principal amount of such mortgage loan, no original issue discount attributable to the difference between the issue price and the original principal amount of such mortgage loan (i.e., points) will be includible by such holder. Other OID on the mortgage loans (e.g., that arising from a "teaser" rate) would still need to be accrued. 124 Senior Certificates Representing Interests in ARM Loans The OID Regulations do not address the treatment of instruments, such as the senior certificates (if the related trust fund includes ARM loans), which represent interests in ARM loans. Additionally, the IRS has not issued guidance under the coupon stripping rules of the Code with respect to these instruments. In the absence of any authority, the master servicer will report OID on senior certificates attributable to ARM loans ("stripped ARM obligations") to holders in a manner it believes to be consistent with the rules described under the heading "--Senior Certificates Representing Interests in Loans Other Than ARM Loans" above and with the OID Regulations. In general, application of these rules may require inclusion of income on a stripped ARM obligation in advance of the receipt of cash attributable to such income. Further, the addition of deferred interest resulting from negative amortization to the principal balance of an ARM loan may require the inclusion of such amount in the income of the senior certificateholder when the amount accrues. Furthermore, the addition of deferred interest to the senior certificate's principal balance will result in additional income (including possibly OID income) to the senior certificateholder over the remaining life of the senior certificates. Because the treatment of stripped ARM obligations is uncertain, investors are urged to consult their tax advisors regarding how income will be includible with respect to these certificates. C. Possible Application of Contingent Payment Regulations to Certain Non-REMIC Certificates Final regulations issued on June 11, 1996 with respect to OID under section 1275 include "contingent payment regulations" covering obligations that provide for one or more contingent payments. Rights to interest payments on a mortgage loan might be considered to be contingent within the meaning of the contingent payment regulations if the interest would not be paid if the borrower exercised its right to prepay the mortgage loan. However, in the case of an investor having a right to shares of the interest and principal payments on a mortgage loan when the share of interest is not substantially greater than the share of principal, the possibility of prepayment should not be considered to characterize otherwise noncontingent interest payments as contingent payments. The absence of interest payments following a prepayment would be the normal consequence of the return of the investor's capital in the form of a principal payment. On the other hand, a right to interest on such a mortgage loan is more likely to be regarded as contingent if held by an investor that does not also hold a right to the related principal. Such an investor would not recover its capital through receipt of a principal payment at the time of the prepayment of the mortgage loan. Applying these principles to the senior certificates, because the mortgage loans are subject to prepayment at any time, payments on a class of senior certificates representing a right to interest on the mortgage loans could be considered to be contingent within the meaning of the contingent payment regulations, at least if the senior certificate was issued at a premium. The likelihood that such payments will be considered contingent increases the greater the amount of such premium. In the event that payments on a senior certificate in respect of interest on the mortgage loans are considered contingent, then the holder would generally report income or loss as 125 described under the heading "--Stripped Bonds and Stripped Coupons" above; provided, however, that the yield that would be used in calculating interest income would not be the actual yield but would instead equal the "applicable Federal rate" (AFR), in effect at the time of purchase of the senior certificate by the holder. The AFR generally is an average of current yields on Treasury securities computed and published monthly by the IRS. In addition, once the holder's adjusted basis in the senior certificate has been reduced (by prior distributions or losses) to an amount equal to the aggregate amount of the remaining noncontingent payments of the mortgage loans that are allocable to the senior certificate (or to zero if the senior certificate does not share in principal payments), then the holder would recognize income in each subsequent month equal to the full amount of interest on the mortgage loans that accrues in that month and is allocable to the senior certificate. It is uncertain whether, under the contingent payment regulations, any other adjustments would be made to take account of prepayments of the mortgage loans. D. Sale or Exchange of a Senior Certificate Sale or exchange of a senior certificate prior to its maturity will result in gain or loss equal to the difference, if any, between the amount received and the seller's adjusted basis in the senior certificate. Such adjusted basis generally will equal the seller's purchase price for the senior certificate, increased by the OID and market discount included in the seller's gross income with respect to the senior certificate, and reduced by principal payments on the senior certificate previously received by the seller and any premium amortized by the seller. Such gain or loss will be capital gain or loss to a seller for which a senior certificate is a "capital asset" within the meaning of section 1221 of the Code except to the extent of any accrued but unrecognized market discount, and will be long-term or short-term depending on whether the senior certificate has been owned for the long-term capital gain holding period (currently more than one year). Non-corporate taxpayers are subject to reduced maximum rates on long-term capital gains and are generally subject to tax at ordinary income rates on short-term capital gains. The deductibility of capital losses is subject to certain limitations. Prospective investors should consult their own tax advisors concerning these tax law provisions. It is possible that capital gain realized by holders of the senior certificates could be considered gain realized upon the disposition of property that was part of a "conversion transaction". A sale of a senior certificate will be part of a conversion transaction if substantially all of the holder's expected return is attributable to the time value of the holder's net investment, and at least one of the following conditions is met: o the holder entered the contract to sell the senior certificate substantially contemporaneously with acquiring the senior certificate; o the senior certificate is part of a straddle; o the senior certificate is marketed or sold as producing capital gain; or o other transactions to be specified in Treasury regulations that have not yet been issued occur. 126 If the sale or other disposition of a senior certificate is part of a conversion transaction, all or any portion of the gain realized upon the sale or other disposition would be treated as ordinary income instead of capital gain. Senior certificates will be "evidences of indebtedness" within the meaning of section 582(c)(1) of the Code, so that gain or loss recognized from the sale of a senior certificate by a bank or a thrift institution to which such section applies will be ordinary income or loss. E. Non-U.S. Persons Generally, to the extent that a senior certificate evidences ownership in mortgage loans that are issued on or before July 18, 1984, interest or OID paid by the person required to withhold tax under section 1441 or 1442 to (i) an owner that is not a U.S. Person or (ii) a senior certificateholder holding on behalf of an owner that is not a U.S. Person, will be subject to federal income tax, collected by withholding, at a rate of 30% or such lower rate as may be provided for interest by an applicable tax treaty. Accrued OID recognized by the owner on the sale or exchange of such a senior certificate also will be subject to federal income tax at the same rate. Generally, such payments would not be subject to withholding to the extent that a senior certificate evidences ownership in mortgage loans issued after July 18, 1984, if o the senior certificateholder does not actually or constructively own 10% or more of the combined voting power of all classes of equity in the issuer (which for purposes of this discussion may be defined as the trust fund); o the senior certificateholder is not a controlled foreign corporation within the meaning of section 957 of the Code related to the issuer; and o the senior certificateholder complies with certain identification requirements, including delivery of a statement, signed by the senior certificateholder under penalties of perjury, certifying that it is not a U.S. Person and providing its name and address. F. Information Reporting and Backup Withholding The master servicer will furnish or make available, within a reasonable time after the end of each calendar year, to each certificateholder at any time during the year, such information as may be deemed necessary or desirable to assist securityholders in preparing their federal income tax returns, or to enable holders to make the information available to owners or other financial intermediaries of holders that hold the certificates as nominees. If a holder, owner or other recipient of a payment on behalf of an owner fails to supply a certified taxpayer identification number or if the Secretary of the Treasury determines that such person has not reported all interest and dividend income required to be shown on its federal income tax return, backup withholding may be required with respect to any payments. Any amounts deducted and withheld from a distribution to a recipient would be allowed as a credit against the recipient's federal income tax liability. 127 REMIC CERTIFICATES A. General The trust fund relating to a series of certificates may elect to be treated as a REMIC. Qualification as a REMIC requires ongoing compliance with certain conditions. Although a REMIC is not generally subject to federal income tax (see, however, "--Prohibited Transactions and Other Taxes") below, if a trust fund with respect to which a REMIC election is made fails to comply with one or more of the ongoing requirements of the Code for REMIC status during any taxable year (including the implementation of restrictions on the purchase and transfer of the residual interest in a REMIC as described under "--Residual Certificates" below), the Code provides that a trust fund will not be treated as a REMIC for such year and thereafter. In that event, such entity may be taxable as a separate corporation, and the related REMIC certificates may not be accorded the status or given the tax treatment described below. While the Code authorizes the Treasury to issue regulations providing relief in the event of an inadvertent termination of status as a REMIC, no such regulations have been issued. Moreover, any relief may be accompanied by sanctions such as the imposition of a corporate tax on all or a portion of the REMIC's income for the period in which the requirements for such status are not satisfied. With respect to each trust fund that elects REMIC status, in the opinion of tax counsel, assuming compliance with all provisions of the related Agreement, the trust fund will qualify as a REMIC and the related certificates will be considered to be regular interests ("regular certificates") or residual interests ("residual certificates") in the REMIC. The related prospectus supplement for each series of certificates will indicate whether the trust fund will make a REMIC election and whether a class of certificates will be treated as a regular or residual interest in the REMIC. In general, with respect to each series of certificates for which a REMIC election is made, o certificates held by a thrift institution taxed as a "domestic building and loan association" will constitute assets described in section 7701(a)(19)(C) of the Code; o certificates held by a real estate investment trust will constitute "real estate assets" within the meaning of section 856(c)(4)(A) of the Code; and o interest on certificates held by a real estate investment trust will be considered "interest on obligations secured by mortgages on real property" within the meaning of section 856(c)(3)(B) of the Code. If less than 95% of the REMIC's assets are assets qualifying under any of the foregoing sections, the certificates will be qualifying assets only to the extent that the REMIC's assets are qualifying assets. In addition, payments on mortgage loans held pending distribution on the REMIC certificates will be considered to be qualifying assets under the foregoing sections. In some instances, the mortgage loans may not be treated entirely as assets described in the foregoing sections. See, in this regard, the discussion of "buydown" mortgage loans contained in "--Non-REMIC Certificates--Single Class of Senior Certificates" above. REMIC certificates held by a real estate investment trust will not constitute "Government Securities" 128 within the meaning of section 856(c)(4)(A) of the Code and REMIC certificates held by a regulated investment company will not constitute "Government Securities" within the meaning of section 851(b)(4)(A)(ii) of the Code. REMIC certificates held by certain financial institutions will constitute "evidences of indebtedness" within the meaning of section 582(c)(1) of the Code. A "qualified mortgage" for REMIC purposes is any obligation (including certificates of participation in such an obligation) that is principally secured by an interest in real property and that is transferred to the REMIC within a prescribed time period in exchange for regular or residual interests in the REMIC. The REMIC Regulations provide that manufactured housing or mobile homes (not including recreational vehicles, campers or similar vehicles) which are "single family residences" under section 25(e)(10) of the Code will qualify as real property without regard to state law classifications. Under section 25(e)(10), a single family residence includes any manufactured home which has a minimum of 400 square feet of living space and a minimum width in excess of 102 inches and which is of a kind customarily used at a fixed location. B. Tiered REMIC Structures For certain series of certificates, two separate elections may be made to treat designated portions of the related trust fund as REMICs (respectively, the "subsidiary REMIC" and the "master REMIC") for federal income tax purposes. Upon the issuance of any such series of certificates, tax counsel will deliver its opinion generally to the effect that, assuming compliance with all provisions of the related pooling and servicing agreement, the master REMIC as well as any subsidiary REMIC will each qualify as a REMIC and the REMIC certificates issued by the master REMIC and the subsidiary REMIC, respectively, will be considered to evidence ownership of regular certificates or residual certificates in the related REMIC within the meaning of the REMIC provisions. Only REMIC certificates issued by the master REMIC will be offered under this prospectus. The subsidiary REMIC and the master REMIC will be treated as one REMIC solely for purposes of determining o whether the REMIC certificates will be (i) "real estate assets" within the meaning of section 856(c)(4)(A) of the Code or (ii) "loans secured by an interest in real property" under section 7701(a)(19)(C) of the Code; and o whether the income on the certificates is interest described in section 856(c)(3)(B) of the Code. C. Regular Certificates General. Except as otherwise stated in this discussion, regular certificates will be treated for federal income tax purposes as debt instruments issued by the REMIC and not as ownership interests in the REMIC or its assets. Moreover, holders of regular certificates that otherwise report income under a cash method of accounting will be required to report income with respect to regular certificates under an accrual method. 129 Original Issue Discount and Premium. The regular certificates may be issued with OID within the meaning of section 1273(a) of the Code. Generally, the amount of OID, if any, will equal the difference between the "stated redemption price at maturity" of a regular certificate and its "issue price". Holders of any class of certificates issued with OID will be required to include such OID in gross income for federal income tax purposes as it accrues, in accordance with a constant interest method based on the compounding of interest, in advance of receipt of the cash attributable to such income. The following discussion is based in part on the OID Regulations and in part on the provisions of the Tax Reform Act. Holders of regular certificates should be aware, however, that the OID Regulations do not adequately address certain issues relevant to prepayable securities such as the regular certificates. Rules governing OID are set forth in sections 1271 through 1273 and section 1275 of the Code. These rules require that the amount and rate of accrual of OID be calculated based on a Prepayment Assumption and prescribe a method for adjusting the amount and rate of accrual of such discount where the actual prepayment rate differs from the Prepayment Assumption. Under the Code, the Prepayment Assumption must be determined in the manner prescribed by regulations which have not yet been issued. The Legislative History provides, however, that Congress intended the regulations to require that the Prepayment Assumption be the prepayment assumption that is used in determining the initial offering price of the regular certificates. The prospectus supplement for each series of regular certificates will specify the prepayment assumption to be used for the purpose of determining the amount and rate of accrual of OID. No representation is made that the regular certificates will prepay at the prepayment assumption or at any other rate. In general, each regular certificate will be treated as a single installment obligation issued with an amount of OID equal to the excess of its "stated redemption price at maturity" over its "issue price". The issue price of a regular certificate is the first price at which a substantial amount of regular certificates of that class are sold to the public (excluding bond houses, brokers, underwriters or wholesalers). If less than a substantial amount of a particular class of regular certificates is sold for cash on or prior to the date of their initial issuance, the issue price for that class will be treated as the fair market value of that class on the initial issue date. The issue price of a regular certificate also includes the amount paid by an initial regular certificateholder for accrued interest that relates to a period prior to the initial issue date of the regular certificate. The stated redemption price at maturity of a regular certificate includes the original principal amount of the regular certificate, but generally will not include distributions of interest if such distributions constitute "qualified stated interest". Qualified stated interest generally means interest payable at a single fixed rate or qualified variable rate (as described below) provided that the interest payments are unconditionally payable at intervals of one year or less during the entire term of the regular certificate. Interest is payable at a single fixed rate only if the rate appropriately takes into account the length of the interval between payments. Distributions of interest on regular certificates with respect to which deferred interest will accrue will not constitute qualified stated interest payments, in which case the stated redemption price at maturity of the regular certificates includes all distributions of interest as well as principal thereon. Where the interval between the initial issue date and the first distribution date on a regular certificate is longer than the interval between subsequent distribution dates, the greater of 130 any OID (disregarding the rate in the first period) and any interest foregone during the first period is treated as the amount by which the stated redemption price at maturity of the certificate exceeds its issue price for purposes of the de minimis rule described below. The OID Regulations suggest that all interest on a long-first-period regular certificate that is issued with non-de minimis OID, as determined under the foregoing rule, will be treated as OID. Where the interval between the issue date and the first distribution date on a regular certificate is shorter than the interval between subsequent distribution dates, interest due on the first Distribution Date in excess of the amount that accrued during the first period would be added to the certificates stated redemption price at maturity. Regular securityholders should consult their own tax advisors to determine the issue price and stated redemption price at maturity of a regular certificate. Under the de minimis rule, OID on a regular certificate will be considered to be zero if the amount of OID is less than 0.25% of the stated redemption price at maturity of the regular certificate multiplied by the weighted average maturity of the regular certificate. For this purpose, the weighted average maturity of the regular certificate is computed as the sum of the amounts determined by multiplying o the number of full years (i.e., rounding down partial years) from the issue date until each distribution in reduction of stated redemption price at maturity is scheduled to be made times o a fraction, the numerator of which is the amount of each distribution included in the stated redemption price at maturity of the regular certificate and the denominator of which is the stated redemption price at maturity of the regular certificate. Although currently unclear, it appears that the schedule of such distributions should be determined in accordance with the assumed rate of prepayment of the mortgage loans and the anticipated reinvestment rate, if any, relating to the regular certificates. This prepayment assumption with respect to a series of regular certificates will be set forth in the related prospectus supplement. Holders generally must report de minimis OID pro rata as principal payments are received and such income will be capital gain if the regular certificate is held as a capital asset. However, accrual method holders may elect to accrue all de minimis OID as well as market discount under a constant interest method. The prospectus supplement with respect to a trust fund may provide for certain regular certificates to be issued as "super-premium" certificates at prices significantly exceeding their principal amounts or based on notional principal balances. The income tax treatment of these super-premium certificates is not entirely certain. For information reporting purposes, the trust fund intends to take the position that the stated redemption price at maturity of the super-premium certificates is the sum of all payments to be made on these certificates determined under the prepayment assumption set forth in the related prospectus supplement, with the result that the super-premium certificates would be treated as being issued with OID. The calculation of income in this manner could result in negative OID (which delays future accruals of OID 131 rather than being immediately deductible) when prepayments on the mortgage loans exceed those estimated under the prepayment assumption. The IRS might contend, however, that the contingent payment regulations should apply to the super-premium certificates. Although the contingent payment regulations are not applicable to instruments governed by section 1272(a)(6) of the Code, they represent the only guidance regarding the current view of the IRS with respect to contingent payment instruments. In the alternative, the IRS could assert that the stated redemption price at maturity of such regular certificates should be limited to their principal amount (subject to the discussion under "--Accrued Interest Certificates" below), so that such regular certificates would be considered for U.S. federal income tax purposes to be issued at a premium. If such position were to prevail, the rules described under "--Premium" below would apply. It is unclear when a loss may be claimed for any unrecovered basis for a super-premium certificate. It is possible that a holder of a super-premium certificate may only claim a loss when its remaining basis exceeds the maximum amount of future payments, assuming no further prepayments, or when the final payment is received with respect to the super-premium certificate. Under the REMIC Regulations, if the issue price of a regular certificate (other than regular certificate based on a notional amount) does not exceed 125% of its actual principal amount, the interest rate is not considered disproportionately high. Accordingly, a regular certificate generally should not be treated as a super-premium certificate and the rules described below under "--Premium" below should apply. However, it is possible that holders of regular certificates issued at a premium, even if the premium is less than 25% of the certificate's actual principal balance, will be required to amortize the premium under an OID method or contingent interest method even though no election under section 171 of the Code is made to amortize such premium. Generally, a regular certificateholder must include in gross income the "daily portions," as determined below, of the OID that accrues on a regular certificate for each day the regular certificateholder holds the regular certificate, including the purchase date but excluding the disposition date. In the case of an original holder of a regular certificate, a calculation will be made of the portion of the OID that accrues during each successive accrual period that ends on the day in the calendar year corresponding to a distribution date (or if distribution dates are on the first day or first business day of the immediately preceding month, interest may be treated as payable on the last day of the immediately preceding month) and begins on the day after the end of the immediately preceding accrual period (or on the issue date in the case of the first accrual period). This will be done, in the case of each full accrual period, by adding o the present value at the end of the accrual period (determined by using as a discount factor the original yield to maturity of the regular certificates as calculated under the Prepayment Assumption) of all remaining payments to be received on the regular certificate under the Prepayment Assumption, and o any payments included in the stated redemption price at maturity received during the accrual period, 132 and subtracting from that total the "adjusted issue price" of the regular certificates at the beginning of the accrual period. The "adjusted issue price" of a regular certificate at the beginning of the first accrual period is its issue price; the "adjusted issue price" of a regular certificate at the beginning of a subsequent accrual period is the "adjusted issue price" at the beginning of the immediately preceding accrual period plus the amount of OID allocable to that accrual period and reduced by the accrual period. The OID accrued during an accrual period will then be divided by the number of days in the period to determine the daily portion of OID for each day in the accrual period. The calculation of OID under the method described above will cause the accrual of OID to either increase or decrease (but never below zero) in a given accrual period to reflect the fact that prepayments are occurring faster or slower than under the Prepayment Assumption. With respect to an initial accrual period shorter than a full ac