NCUA NGN 2010-R1 - Final Prelim Offering Memorandum

Subject to Completion, Amendment or Other Change, Dated October 13, 2010
This Preliminary Offering Memorandum and the information contained herein are subject to completion, amendment or other change without notice. Under no circumstances shall this Preliminary Offering Memorandum constitute an offer to sell or the solicitation of an offer to buy, nor will there be any sale of the Offered Notes in any jurisdiction in which such offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of such jurisdict ion.
THIS PRELIMINARY OFFERING MEMORANDUM IS NOT TO BE SHOWN OR GIVEN TO ANY PERSON OTHER THAN ITS INTENDED RECIPIENT AND IS NOT TO BE COPIED OR OTHERWISE REPRODUCED IN ANY MANNER WHATSOEVER.
NCUA GUARANTEED NOTES

NCUA GUARANTEED NOTES TRUST 2010-R1
as Issuer
$3,846,500,000 (Approximate) (subject to a permitted variance of plus or minus 5%) NCUA GUARANTEED NOTES SERIES 2010-R1
PRELIMINARY OFFERING MEMORANDUM CONFIDENTIAL This preliminary offering memorandum (Memorandum) is designed to be delivered by the National Credit Union Administration Board in its capacity as liquidating agent of U.S. Central Federal Credit Union (the Seller) and Barclays Capital Inc., J.P. Morgan Securities LLC and Wells Fargo Securities, LLC (collectively, the Initial Purchasers) to permitted offerees solely via e-mail as a non-editable PDF file. This Memorandum and the information contained herein is confidential and may not be forwarded, transmitted, copied or otherwise reproduced by any recipient hereof in any manner whatsoever. If this Memorandum was received by any means other than via e-mail or other electronic transmission from a sender authorized by the Initial Purchasers, there is a presumption that this Memorandum has been improperly reproduced and circulated, in which case the Seller and the Initial Purchasers disclaim any responsibility for its contents and use. No person has been authorized to give any information or to make any representations other than those contained in this Memorandum and, if given or made, such information or representations must not be relied upon. The delivery of this Memorandum at any time does not imply that the information herein is correct as of any time subsequent to its date. This Memorandum has been prepared by the Seller for the use of the Initial Purchasers solely in connection with the offering of the Senior I-A Notes and Senior II-A Notes (together, the Offered Notes) listed in the table captioned The Securities under the heading Offered Notes. Neither the Seller nor any Initial Purchaser has authorized or assumed any liability for any use of this Memorandum in connection with any other offer or sale of the Offered Notes by any other person. INVESTORS INTERESTED IN PURCHASING ANY CLASS OF OFFERED NOTES DESCRIBED HEREIN SHOULD REVIEW THE UNDERLYING OFFERING DOCUMENTS, UNDERLYING AGREEMENTS AND UNDERLYING DISTRIBUTION REPORTS IN CONJUNCTION WITH THIS MEMORANDUM (CERTAIN OF WHICH DOCUMENTS MAY BE FOUND AT WWW.STRUCTUREDFN.COM). The Offered Notes described herein are exempted securities under Section 3(a)(2) of the Securities Act of 1933, as amended (the Securities Act), and are exempted securities under Section 3(a)(12)(A)(i) of the Securities Exchange Act of 1934, as amended (the Exchange Act). See Plan of Distribution in this Memorandum. The National Credit Union Administration in its capacity as an Agency of the Executive Branch of the United States will fully and unconditionally guarantee the timely payment of all amounts of principal and interest due and payable on the Offered Notes pursuant to a guaranty agreement dated as of October [27], 2010, by and among the Guarantor, the Issuer and the Indenture Trustee (the Guaranty). The Guaranty is backed by the full faith and credit of the United States. It is anticipated that the purchase by the Initial Purchasers of the Offered Notes will take place on October [27], 2010 (the Closing Date). It is expected that delivery of the Offered Notes will be made in book-entry form through the facilities of The Depository Trust Company.
(Lead Manager and Bookrunner) J.P. Morgan (Co-manager)

CastleOak Securities, L.P.
Wells Fargo Securities (Co-manager)

The Williams Capital Group, L.P.
CU Investment Solutions, Inc. Loop Capital Markets LLC (Selling Group Members)
The date of this Memorandum is October [_], 2010
PRELIMINARY OFFERING MEMORANDUM NCUA Guaranteed Notes NCUA Guaranteed Notes Trust 2010-R1 NCUA Guaranteed Notes Series 2010-R1 The Offered Notes
CONFIDENTIAL
will consist of the notes identified in the table captioned The Securities under the heading Offered Notes and will be issued in two series (each, a Series), the Series I Notes and the Series II Notes, will represent debt obligations of NCUA Guaranteed Notes Trust 2010-R1 (the Trust or the Issuer) whose assets will consist of approximately 126 previously issued residential mortgage-backed securities and securities backed by residential mortgage-backed securities (collectively, the Underlying Securities) identified in the table captioned The Underlying Securities, which will be pledged by the Trust to the Indenture Trustee pursuant to the Indenture, will receive payments solely from amounts received in respect of the Underlying Securities of the related Series, with no cross-collateralization from any Underlying Securities of the other Series, will receive monthly payments commencing on November 4, 2010, will have the benefit of the following credit enhancement: excess spread generated from the related Underlying Securities; overcollateralization with respect to the related Underlying Securities; and any indirect benefits of the credit enhancement provided to the related Underlying Securities as described in the related Underlying Offering Documents; and
will have the benefit of the Guaranty provided by the National Credit Union Administration.
ii
THE SECURITIES Initial Note Principal Balance1

$3,280,000,000 $566,500,000
Class
Senior I-A Senior II-A
Note Rate Offered Notes

Adjustable2 [____]%
Type
Senior, Guaranteed, Adjustable Rate Senior, Guaranteed, Fixed Rate
Expected Initial Rating

[AAA/Aaa] [AAA/Aaa]
Non-Offered Securities
Series I Owner Trust Certificate Series II Owner Trust Certificate (3) (4) N/A N/A Series I Residual Series II Residual N/A N/A
(1) Subject to a permitted variance of plus or minus 5%. (2) With respect to any Payment Date and the Senior I-A Notes, a per annum rate equal to one-month LIBOR (calculated as set forth under Description of the Offered NotesCalculation of One-Month LIBOR in this Memorandum) plus [____]% per annum, subject to a maximum rate of [7.00]% per annum. (3) The certificate principal balance of the Series I Owner Trust Certificates at any time represents the amount of overcollateralization with respect to the Series I Notes. See Description of the Offered NotesDefinitions in this Memorandum. The initial certificate principal balance of the Series I Owner Trust Certificates will equal approximately $434,177,752.60. (4) The certificate principal balance of the Series II Owner Trust Certificates at any time represents the amount of overcollateralization with respect to the Series II Notes. See Description of the Offered NotesDefinitions in this Memorandum. The initial certificate principal balance of the Series II Owner Trust Certificates will equal approximately $94,685,360.72.
The Issuer The Issuer will be established pursuant to a trust agreement (the Trust Agreement), dated as of October [27], 2010, by and among the Seller, Wells Fargo Delaware Trust Company, N.A., as owner trustee (the Owner Trustee), and The Bank of New York Mellon, as certificate registrar (the Certificate Registrar) and certificate paying agent (the Certificate Paying Agent). The Issuer will pledge the Underlying Securities to secure payment on the Offered Notes pursuant to the Indenture (the Indenture), dated as of October [27], 2010, by and between the Issuer and The Bank of New York Mellon, as indenture trustee (the Indenture Trustee).
iii
THE UNDERLYING SECURITIES

Original Deposited Underlying Underlying Security Security Principal Balance Principal as of Balance (adjusted September 25, 2010 based on (adjusted based on Percentage Percentage Percentage Interest) Interest) Interest (%) Factor (approximate) (approximate) (approximate) ($) ($)(1) 21,929,000.00 47.75 1.000000 21,929,000.00 36,000,000.00 33.84 1.000000 36,000,000.00 100,000,000.00 25.96 0.088530 8,853,012.49 124,798,000.00 46.09 0.448779 56,006,717.31 140,000,000.00 58.53 0.657325 92,025,534.43 80,000,000.00 62.48 0.218342 17,467,395.05 31,498,000.00 100.00 1.000000 31,498,000.00 44,107,000.00 46.87 0.811165 35,778,055.76 30,000,000.00 14.83 1.000000 30,000,000.00 200,000,000.00 27.39 0.525196 105,039,266.71 136,000,000.00 100.00 0.540616 73,523,762.34 104,526,000.00 77.70 1.000000 104,526,000.00 54,248,000.00 35.17 1.000000 54,248,000.00 24,000,000.00 33.10 1.000000 24,000,000.00 24,405,000.00 18.86 1.000000 24,405,000.00 41,205,000.00 49.23 0.623061 25,673,244.76 103,150,000.00 25.36 0.340391 35,111,325.87 50,000,000.00 39.48 0.701548 35,077,383.92 85,820,000.00 51.75 0.680782 58,424,688.78 25,000,000.00 13.97 0.582953 14,573,818.37 35,000,000.00 100.00 0.422500 14,787,502.17 86,500,000.00 51.02 0.072517 6,272,709.01 109,266,000.00 26.90 0.395937 43,262,486.38 10,568,000.00 50.00 1.000000 10,568,000.00 26,120,000.00 54.28 0.156045 4,075,891.10 15,000,000.00 33.04 1.000000 15,000,000.00 44,000,000.00 68.22 0.526308 23,157,531.84 205,207,000.00 82.01 0.535645 109,918,203.12 Deposited
Underlying Series Transaction Class I ABFC 2006-OPT2 A-3D I ACCR 2005-4 A-2D I AHMA 2005-2 1-A-1 I BAFC 2006-I 2-A-1 I BAFC 2007-D 1-A-1 I BOAMS 2005-H 2-A-3 I BSABS 2005-EC1 A-3 I BSABS 2006-HE4 I-A-2 I BSARM 2005-10 A-2 I BSARM 2006-1 A-1 I CMLTI 2005-8 II-A1 I CMLTI 2006-AR6 2-A3 I CMLTI 2006-WFHE3 A-4 I CMLTI 2006-WFHE4 A-4 I CMLTI 2007-AHL2 A-3B I CSFB 2005-10 V-A-1 I CWALT 2005-31 1-A-1 I CWALT 2005-42CB A-1 I CWALT 2005-54CB 1-A-1 I CWALT 2005-79CB A-1 I CWALT 2006-28CB A-10 I DMSI 2004-4 II-AR-2 I FFML 2005-FF12 A-2B I FFML 2005-FF12 A-2C I FFML 2005-FFH4 II-A3 I FFML 2006-FF2 A5 I FHAMS 2005-FA10 I-A-1 I FHAMS 2005-FA9 A-1
CUSIP 00075XAF4 004375EJ6 02660VAY4 05951VAD1 05952GAA9 05949CFY7 0738795B0 07388AAB0 07387AES0 07387AGZ2 17307GF78 17309RAJ1 17309QAD6 17309SAD2 17312TAJ2 225470EC3 12667GYX5 12667G4S9 12668ANT8 12668BAA1 02147TAK2 251563EV0 32027NXU0 32027NXV8 32027NXB2 32027NA35 32051GE50 32051GZP3
Original Issue Date 10/12/2006 11/23/2005 12/28/2005 11/30/2006 5/31/2007 8/30/2005 12/30/2005 4/28/2006 10/31/2005 2/28/2006 10/31/2005 8/31/2006 10/31/2006 11/30/2006 5/31/2007 10/28/2005 6/29/2005 8/30/2005 9/29/2005 12/22/2005 8/30/2006 5/27/2004 12/28/2005 12/28/2005 12/15/2005 2/28/2006 11/30/2005 10/28/2005
Ratings as of the Underlying Closing Date (S&P/ Moodys/Fitch/ DBRS)(2) AAA/Aaa/AAA/NR AAA/Aaa/NR/AAA AAA/Aaa/AAA/NR AAA/Aaa/AAA/NR AAA/Aaa/NR/NR AAA/NR/AAA/NR AAA/Aaa/NR/NR AAA/Aaa/NR/NR AAA/NR/AAA/NR NR/Aaa/AAA/NR AAA/Aaa/NR/NR AAA/Aaa/NR/NR AAA/Aaa/NR/AAA AAA/Aaa/NR/AAA AAA/Aaa/NR/NR AAA/Aaa/NR/NR AAA/Aaa/NR/NR AAA/Aaa/NR/NR AAA/Aaa/NR/NR AAA/Aaa/NR/NR AAA/Aaa/AAA/NR AAA/Aaa/NR/NR AAA/Aaa/NR/NR AAA/Aaa/NR/NR NR/Aaa/AAA/NR AAA/NR/AAA/AAA AAA/Aaa/NR/NR AAA/Aaa/NR/NR
Ratings as of October 1, 2010 (S&P/Moodys/Fitch/ DBRS)(2) B+(sf)/Ca(sf)/CC(sf)/NR AAA(sf)/Ba1(sf)/NR/BBB(sf) D(sf)/Ca(sf)/D(sf)/NR AAA(sf)/Baa3(sf)/AAA*(sf)/NR CCC(sf)/B3*-(sf)/NR/NR B(sf)/NR/A(sf)/NR AAA(sf)/Aa3(sf)/NR/NR CCC(sf)/Caa3(sf)/NR/NR BB+(sf)/NR/BBB(sf)/NR NR/B2(sf)/A*(sf)/NR CCC(sf)/B3*-(sf)/NR/NR CCC(sf)/Caa1*-(sf)/NR/NR BB+(sf)/Caa3(sf)/NR/BB(sf) B(sf)/Caa3(sf)/NR/B(sf) BB-(sf)/Ca(sf)/NR/NR CC(sf)/Caa2(sf)/NR/NR B-(sf)/Ba2*-(sf)/NR/NR CCC(sf)/Caa1(sf)/NR/NR CCC(sf)/Caa2(sf)/NR/NR CCC(sf)/Caa3(sf)/NR/NR CC(sf)/Caa3(sf)/C(sf)/NR AAA(sf)/Aa1*-(sf)/NR/NR AA+(sf)/Ba1(sf)/NR/NR AA+(sf)/Ba2(sf)/NR/NR NR/Aa1(sf)/AAA*(sf)/NR B+(sf)/NR/CC(sf)/C(sf) CCC(sf)/Caa2(sf)/NR/NR CCC(sf)/Caa2(sf)/NR/NR
iv
Original Deposited Underlying Underlying Security Security Principal Balance Principal as of Balance (adjusted September 25, 2010 Ratings as of the based on (adjusted based on Underlying Closing Percentage Percentage Percentage Interest) Date (S&P/ Interest) Interest (%) Factor (approximate) Moodys/Fitch/ (approximate) (approximate) ($) ($)(1) DBRS)(2) 15,000,000.00 27.93 1.000000 15,000,000.00 AAA/Aaa/NR/AAA 113,791,000.00 100.00 0.221674 25,224,449.37 AAA/Aaa/AAA/NR 33,000,000.00 32.02 0.742133 24,490,376.19 AAA/Aaa/AAA/NR 35,000,000.00 37.23 1.000000 35,000,000.00 AAA/Aaa/AAA/AAA 40,000,000.00 58.65 0.504558 20,182,328.04 AAA/Aaa/AAA/NR 70,000,000.00 60.76 0.119184 8,342,869.32 AAA/Aaa/AAA/NR 50,000,000.00 25.00 0.532948 26,647,422.39 AAA/Aaa/AAA/NR 100,000,000.00 28.54 0.545690 54,568,987.73 AAA/Aaa/NR/NR 60,287,000.00 68.29 0.559891 33,754,149.80 AAA/Aaa/NR/NR 75,000,000.00 18.75 0.587770 44,082,741.59 AAA/Aaa/NR/NR 20,000,000.00 33.67 0.883333 17,666,659.64 AAA/Aaa/NR/NR 63,375,000.00 23.78 0.315842 20,016,467.68 AAA/Aaa/AAA/NR 15,255,000.00 51.09 0.924414 14,101,937.20 AAA/Aaa/AAA/NR 19,007,000.00 55.10 1.000000 19,007,000.00 AAA/Aaa/AAA/NR 75,000,000.00 27.27 0.480731 36,054,835.10 AAA/Aaa/NR/NR 49,472,000.00 100.00 1.000000 49,472,000.00 AAA/Aaa/NR/NR 117,285,000.00 30.86 0.482318 56,568,718.98 AAA/Aaa/NR/NR 46,165,000.00 70.34 1.000000 46,165,000.00 AAA/Aaa/NR/NR 50,000,000.00 55.56 0.855448 42,772,421.42 AAA/Aaa/NR/NR 38,717,000.00 100.00 1.000000 38,717,000.00 AAA/Aaa/NR/NR 39,041,000.00 66.13 0.601740 23,492,548.59 AAA/Aaa/AAA/NR 105,000,000.00 68.65 0.267823 28,121,444.30 NR/Aaa/AAA/NR 100,000,000.00 31.05 0.469463 46,946,261.14 AAA/Aaa/NR/NR 90,000,000.00 64.29 0.506327 45,569,390.32 AAA/Aaa/AAA/NR 58,582,000.00 50.00 0.868103 50,855,227.00 AAA/Aaa/NR/NR 150,000,000.00 27.28 0.561716 84,257,344.91 AAA/Aaa/NR/NR 100,000,000.00 36.48 0.379234 37,923,399.81 AAA/NR/AAA/NR 74,039,000.00 78.73 0.147186 10,897,529.61 AAA/NR/AAA/NR 27,325,000.00 100.00 1.000000 27,325,000.00 AAA/NR/AAA/NR 220,023,038.00 98.21 0.306220 67,375,385.69 AAA/Aaa/NR/NR Deposited
Underlying Series Transaction I FHLT 2005-D I HASC 2005-OPT1 I HASC 2006-OPT4 I HEAT 2006-8 I HFCHC 2006-4 I HFCHC 2007-1 I HFCHC 2007-2 I HVMLT 2006-11 I INDA 2005-AR2 I INDX 2006-AR29 I INDX 2006-AR29 I JPALT 2006-A1 I JPALT 2006-A2 I JPALT 2006-A2 I JPALT 2006-A6 I JPALT 2006-A6 I JPALT 2006-A7 I JPALT 2006-A7 I JPALT 2006-S4 I JPALT 2006-S4 I JPMAC 2005-WMC1 I JPMMT 2006-A2 I JPMMT 2006-A3 I LXS 2007-3 I MANA 2007-A1 I MARM 2007-HF1 I MLMI 2004-A4 I MLMI 2005-HE3 I MLMI 2005-HE3 I MLMI 2006-A2
Class 2-A-4 A-3 II-A-3 2-A-3 A-2V A-1V A-S A-1A 3-A-1 A-1 A-4 1-A-1 1-A-3 1-A-4 1-A-1 1-A-3 1-A-1 1-A-3 A-2-B A-3-B A-4 1-A-1 7-A-1 1B-A2 A-2C A-1 A-1 A-2B A-2C I-A
CUSIP 35729PME7 40430HBY3 40430KAE1 43709QAD8 40430VAD9 40431FAD3 40431MAA4 41162GAA0 45660LZ28 45662DAA3 45662DAD7 46627MCS4 46628GAC3 46628GAD1 466285AA1 466285AC7 466286AA9 466286AC5 466302AD8 466302AF3 46626LBG4 466247H89 46628KAV2 525245AD8 59023MAD2 57645RAA9 59020ULQ6 59020UX91 59020UY25 590215AA7
Original Issue Date 11/18/2005 11/29/2005 4/28/2006 12/1/2006 12/14/2006 4/26/2007 5/24/2007 11/13/2006 11/29/2005 9/28/2006 9/28/2006 2/28/2006 4/28/2006 4/28/2006 10/30/2006 10/30/2006 11/29/2006 11/29/2006 11/29/2006 11/29/2006 10/27/2005 3/30/2006 4/27/2006 2/28/2007 2/9/2007 4/27/2007 10/29/2004 12/28/2005 12/28/2005 4/28/2006
Ratings as of October 1, 2010 (S&P/Moodys/Fitch/ DBRS)(2) A+(sf)/B3(sf)/NR/BBB(sf) AAA(sf)/Aa3*-(sf)/AA*(sf)/NR AAA(sf)/Ba2(sf)/CCC(sf)/NR B-(sf)/C(sf)/C(sf)/C(sf) AAA(sf)/Aaa(sf)/AAA(sf)/NR AAA(sf)/Aaa(sf)/AAA(sf)/NR AAA(sf)/Aa1(sf)/AA*(sf)/NR CCC(sf)/Caa1*-(sf)/NR/NR BBB(sf)/Caa1(sf)/NR/NR CC(sf)/Caa3*-(sf)/NR/NR CC(sf)/Caa3*-(sf)/NR/NR CCC(sf)/Caa2(sf)/CC(sf)/NR CCC(sf)/B3(sf)/CCC(sf)/NR CCC(sf)/Ca(sf)/C(sf)/NR CCC(sf)/Ca(sf)/NR/NR CCC(sf)/Caa2(sf)/NR/NR CCC(sf)/Caa3(sf)/NR/NR CCC(sf)/Caa2(sf)/NR/NR CCC(sf)/B1(sf)/NR/NR CCC(sf)/Caa2(sf)/NR/NR AAA(sf)/Aa3(sf)/AAA(sf)/NR NR/B3(sf)/CCC(sf)/NR BBB(sf)/B3(sf)/NR/NR D(sf)/Caa3*-(sf)/D(sf)/NR CCC(sf)/Ca(sf)/NR/NR CCC(sf)/Caa3(sf)/NR/NR AAA(sf)/NR/AAA*(sf)/NR A(sf)/NR/AA*(sf)/NR CCC(sf)/NR/CC(sf)/NR CCC(sf)/Ca(sf)/NR/NR
Original Deposited Underlying Underlying Security Security Principal Balance Principal as of Balance (adjusted September 25, 2010 Ratings as of the based on (adjusted based on Underlying Closing Percentage Percentage Percentage Interest) Date (S&P/ Interest) Interest (%) Factor (approximate) Moodys/Fitch/ (approximate) (approximate) ($) ($)(1) DBRS)(2) 185,995,000.00 100.00 0.630438 117,258,286.51 AAA/Aaa/NR/NR 64,000,000.00 50.10 1.000000 64,000,000.00 AAA/Aaa/NR/NR 22,000,000.00 19.13 0.329086 7,239,899.65 AAA/Aaa/AAA/NR 35,000,000.00 35.69 1.000000 35,000,000.00 AAA/Aaa/NR/NR 18,000,000.00 30.77 0.874109 15,733,966.32 AAA/Aaa/AAA/NR 65,963,000.00 100.00 0.018026 1,189,063.44 AAA/Aaa/NR/NR 156,500,000.00 49.77 0.434664 68,024,899.86 AAA/Aaa/NR/NR 400,000,000.00 40.00 0.060973 24,389,050.35 AAA/Aaa/AAA/NR 15,169,000.00 50.28 1.000000 15,169,000.00 AAA/Aaa/NR/NR 53,225,000.00 38.51 0.389861 20,750,375.86 AAA/Aaa/NR/NR 19,918,000.00 100.00 0.394287 7,853,407.77 NR/NR/AA/NR 41,000,000.00 44.51 1.000000 41,000,000.00 AAA/Aaa/NR/NR 50,000,000.00 66.02 1.000000 50,000,000.00 AAA/NR/NR/NR 96,737,000.00 100.00 1.000000 96,737,000.00 AAA/Aaa/NR/NR 80,457,000.00 100.00 1.000000 80,457,000.00 AAA/Aaa/NR/NR 50,000,000.00 71.44 0.267275 13,363,726.87 AAA/Aaa/AAA/NR 53,481,000.00 39.76 0.115870 6,196,854.97 AAA/Aaa/NR/NR 41,946,000.00 100.00 0.526719 22,093,755.84 AAA/Aaa/NR/NR 45,487,000.00 62.42 0.377570 17,174,542.06 AAA/Aaa/AAA/NR 40,970,000.00 50.60 0.367832 15,070,080.47 AAA/Aaa/AAA/NR 49,000,000.00 17.86 0.146075 7,157,674.96 AAA/Aaa/NR/NR 11,724,000.00 100.00 1.000000 11,724,000.00 AAA/Aaa/NR/NR 15,000,000.00 34.22 1.000000 15,000,000.00 AAA/Aaa/NR/NR 24,002,000.00 61.54 1.000000 24,002,000.00 AAA/Aaa/AAA/AAA 35,000,000.00 22.09 0.340780 11,927,309.07 AAA/Aaa/NR/NR 74,683,000.00 100.00 0.402206 30,037,951.29 AAA/Aaa/AAA/NR 100,822,000.00 56.38 0.630477 63,565,947.14 AAA/Aaa/NR/NR 25,000,000.00 28.06 0.771794 19,294,860.51 AAA/Aaa/AAA/NR 15,700,000.00 51.14 0.956551 15,017,843.59 AAA/Aaa/AAA/NR 164,735,000.00 33.37 0.629851 103,758,449.29 AAA/Aaa/AAA/NR Deposited
Series I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I
Underlying Transaction MLMI 2006-FF1 MLMI 2006-FF1 MSAC 2005-HE5 MSAC 2006-HE7 MSHEL 2005-4 MSM 2004-7AR MSM 2006-3AR NHEL 2003-2 NHEL 2006-5 NMFT 2006-MTA1 OOWLT 2002-2 OPMAC 2005-5 OWNIT 2005-4 PHHAM 2007-2 PHHAM 2007-3 RAAC 2005-SP3 RALI 2004-QA1 RALI 2005-QA11 RALI 2006-QS4 RALI 2006-QS5 RAMP 2005-EFC5 RAMP 2005-EFC6 RAMP 2006-NC2 SABR 2006-FR4 SABR 2006-NC1 SACO 2005-9 SARM 2007-5 SASC 2006-OPT1 SAST 2005-3 SEMT 2007-2
Class A-2B A-2C A-2C A-2D A-2C 2-A-2 1-A-3 A-1 A-2D 2A-1B M I-A1D A-3 1-A-4 A-3 A-2 A-I VI-A-1 A-12 A-7 A-2 A-I-3 A-3 A-2C A-2 A-3 1-A1 A4 A-2D 1-A2
CUSIP 59023WAK4 59023WAL2 61744CUR5 61750MAF2 61744CVH6 61748HCF6 61748HWP2 66987WAP2 66988YAE2 66988UAC4 68400XAU4 68383NCY7 69121PAX1 69337HAD3 69337MAC4 76112BS35 76110HRL5 761118LQ9 749228AM4 75114TAG6 76112BH29 76112BJ92 75156TAC4 81377GAC3 81375HAB5 785778MM0 86363XAA5 86359UAD1 805564SR3 81744LAZ7
Ratings as of October 1, 2010 (S&P/Moodys/Fitch/ DBRS)(2) AAA(sf)/Ba1(sf)/NR/NR AAA(sf)/B1(sf)/NR/NR AAA(sf)/Aa2(sf)/AAA(sf)/NR B-(sf)/Ca(sf)/NR/NR AAA(sf)/B1(sf)/BBB**(sf)/NR AAA(sf)/A1*-(sf)/NR/NR CC(sf)/Caa3(sf)/NR/NR AAA(sf)/Aaa*-(sf)/AA*(sf)/NR CCC(sf)/Ca(sf)/NR/NR CCC(sf)/B2*-(sf)/NR/NR NR/NR/NR/NR A-(sf)/Ba2*-(sf)/NR/NR A-(sf)/NR/NR/NR CCC(sf)/B3*-(sf)/NR/NR CCC(sf)/B3*-(sf)/NR/NR AAA(sf)/A1*-(sf)/AAA*(sf)/NR AAA(sf)/Aa3*-(sf)/NR/NR D(sf)/Caa3(sf)/NR/NR D(sf)/Caa2*-(sf)/D(sf)/NR D(sf)/Caa2*-(sf)/C(sf)/NR AAA(sf)/A1*-(sf)/NR/NR AAA(sf)/A3*-(sf)/NR/NR CCC(sf)/C(sf)/NR/NR CCC(sf)/Ca(sf)/C(sf)/C(sf) CCC(sf)/Caa3(sf)/NR/NR A(sf)/Ca(sf)/BB*(sf)/NR CCC(sf)/B2*-(sf)/NR/NR AAA(sf)/Ba3(sf)/B*(sf)/NR AAA(sf)/Aaa(sf)/AA**(sf)/NR AA(sf)/Baa3(sf)/AAA*(sf)/NR
vi
Original Deposited Underlying Underlying Security Security Principal Balance Principal as of Balance (adjusted September 25, 2010 Ratings as of the based on (adjusted based on Underlying Closing Percentage Percentage Percentage Interest) Date (S&P/ Interest) Interest (%) Factor (approximate) Moodys/Fitch/ (approximate) (approximate) ($) ($)(1) DBRS)(2) 81,594,000.00 100.00 0.693540 56,588,685.99 AAA/Aaa/NR/NR 20,000,000.00 54.69 0.805429 16,108,587.37 AAA/Aaa/AAA/NR 30,637,000.00 55.07 1.000000 30,637,000.00 AAA/Aaa/AAA/NR 20,000,000.00 6.86 0.442140 8,842,793.53 AAA/Aaa/NR/NR 100,000,000.00 8.99 0.407505 40,750,531.30 AAA/Aaa/NR/NR 92,188,000.00 15.94 0.562805 51,883,908.36 AAA/Aaa/NR/NR 80,000,000.00 14.29 0.531720 42,537,628.78 AAA/Aaa/NR/NR 100,000,000.00 22.21 0.553959 55,395,940.97 AAA/Aaa/NR/NR 20,000,000.00 39.98 0.553959 11,079,188.19 AAA/Aaa/NR/NR 100,000,000.00 33.33 0.640839 64,083,946.56 AAA/Aaa/AAA/NR 120,000,000.00 25.30 0.261679 31,401,515.24 AAA/NR/AAA/NR 70,000,000.00 15.28 0.282898 19,802,857.36 AAA/NR/AAA/NR 50,000,000.00 29.44 1.000000 50,000,000.00 AAA/Aaa/NR/NR 100,000,000.00 66.67 0.530768 53,076,797.88 NR/Aaa/AAA/NR 10,076,000.00 100.00 1.000000 10,076,000.00 AAA/Aaa/AAA/AAA 25,000,000.00 64.27 0.843421 21,085,529.99 AAA/Aaa/NR/AAA 10,000,000.00 24.10 0.804972 8,049,720.20 AAA/Aaa/NR/AAA 53,218,000.00 49.63 0.401387 21,361,005.77 AAA/Aaa/NR/NR 35,000,000.00 37.69 0.960250 33,608,740.74 AAA/Aaa/NR/NR 28,591,000.00 22.23 0.495345 14,162,416.64 AAA/Aaa/NR/NR 25,000,000.00 25.00 0.630075 15,751,875.88 AAA/Aaa/NR/NR 90,000,000.00 69.44 1.000000 90,000,000.00 AAA/Aaa/NR/NR 48,871,000.00 39.45 1.000000 48,871,000.00 AAA/Aaa/NR/NR 82,600,000.00 69.65 0.971474 80,243,791.94 AAA/Aaa/NR/NR 75,000,000.00 43.17 0.818196 61,364,678.03 AAA/Aaa/NR/NR 11,000,000.00 20.79 0.975925 10,735,172.81 AAA/Aaa/AAA/NR 10,000,000.00 28.82 1.000000 10,000,000.00 AAA/Aaa/AAA/NR 35,255,000.00 48.97 0.632512 22,299,204.74 AAA/Aaa/NR/NR 43,229,633.00 100.00 0.172086 7,439,227.56 NR/NR/AAA/NR 50,000,000.00 95.12 0.304981 15,249,042.67 AAA/Aaa/NR/NR Deposited
Series I I I I I I I I I I I I I I II II II II II II II II II II II II II II II II
Underlying Transaction SURF 2006-AB1 SVHE 2005-4 SVHE 2006-WF2 TMST 2006-4 TMST 2006-6 TMST 2007-1 TMST 2007-2 TMST 2007-2 TMST 2007-2 WAMU 2003-AR10 WAMU 2005-AR16 WAMU 2005-AR18 WAMU 2005-AR4 WFMBS 2006-AR7 CBASS 2005-CB8 CMLTI 2005-WF1 CMLTI 2005-WF1 CRMSI 2006-2 CSMC 2007-3 CWALT 2005-75CB CWL 2006-S8 GMACM 2007-HE1 GMACM 2007-HE1 GMACM 2007-HE1 GMACM 2007-HE2 HFCHC 2007-2 HFCHC 2007-2 OPMAC 2005-5 PHHMC 2005-2 RALI 2003-QR13
Class A-3 II-A4 A-2D A-1 A-1 A-3A A-2A A-3A A-3B A-7 1-A1 1-A1 A-5 II-A-1 AF-4 A-3 A-5 A-3 1-A-6A A-3 A-6 A-3 A-4 A-5 A-4 A-2F A-3F II-A1B A-2 A-1
CUSIP 84751PKV0 83611MKC1 83612MAE7 88522AAA9 88522NAA1 88522EAE3 88522WAB9 88522WAD5 88522WAE3 92922FEB0 92922F6W3 92922F8K7 92922FG77 94983WAD5 12489WQF4 17307GPD4 17307GPF9 17310EAC2 12638PAJ8 12668AF83 12668XAF2 36186KAC9 36186KAD7 36186KAE5 36186LAD5 40431MAE6 40431MAG1 68383NDM2 69336RAB6 76110HKB4
Ratings as of October 1, 2010 (S&P/Moodys/Fitch/ DBRS)(2) AAA(sf)/Baa2(sf)/NR/NR AAA(sf)/Aa1(sf)/A(sf)/NR B(sf)/B2(sf)/CCC(sf)/NR B+(sf)/Caa1(sf)/NR/NR AAA(sf)/B2(sf)/NR/NR AAA(sf)/B1(sf)/NR/NR AA+(sf)/Caa1(sf)/NR/NR AA+(sf)/B1(sf)/NR/NR BB-(sf)/Ca(sf)/NR/NR AAA(sf)/Aa1*-(sf)/AAA*(sf)/NR CCC(sf)/NR/BB*(sf)/NR CCC(sf)/NR/BB*(sf)/NR AA-(sf)/B3(sf)/NR/NR NR/Caa2(sf)/CC(sf)/NR B(sf)/Ca(sf)/CCC(sf)/C(sf) AAA(sf)/Aa2*-(sf)/NR/AAA(sf) AAA(sf)/Aa3*-(sf)/NR/AL(sf) AAA(sf)/A2(sf)/NR/NR CCC(sf)/B3*-(sf)/NR/NR CCC(sf)/Caa2(sf)/NR/NR BB+(sf)/B3(sf)/NR/NR BB+(sf)/B3(sf)/NR/NR BB+(sf)/B3(sf)/NR/NR BB+(sf)/B3(sf)/NR/NR D(sf)/Caa3(sf)/NR/NR AAA(sf)/Aaa(sf)/AAA*(sf)/NR AAA(sf)/Aaa(sf)/AAA*(sf)/NR BBB-(sf)/B1*-(sf)/NR/NR NR/NR/AAA(sf)/NR AAA(sf)/Aaa*-(sf)/NR/NR
vii
Original Deposited Underlying Underlying Security Security Principal Balance Principal as of Balance (adjusted September 25, 2010 Ratings as of the based on (adjusted based on Underlying Closing Ratings as of Original Percentage Percentage Percentage Interest) Date (S&P/ October 1, 2010 Underlying Issue Interest) Interest (%) Factor (approximate) Moodys/Fitch/ (S&P/Moodys/Fitch/ (approximate) (approximate) Series Transaction Class CUSIP Date ($) ($)(1) DBRS)(2) DBRS)(2) II RALI 2003-QS15 A-1 76110HGP8 8/28/2003 218,500,000.00 75.46 0.132521 28,955,853.72 AAA/Aaa/NR/NR AAA(sf)/Aa2*-(sf)/NR/NR II RALI 2005-QS13 I-A-3 761118GU6 9/29/2005 10,000,000.00 100.00 1.000000 10,000,000.00 NR/Aaa/AAA/NR NR/Caa2(sf)/CC(sf)/NR II RAMP 2003-RZ1 A-I-7 760985RQ6 1/30/2003 110,000,000.00 100.00 0.073492 8,084,127.83 AAA/Aaa/AAA/NR A(sf)/A2*-(sf)/WD/NR II RASC 2003-KS2 A-I-6 76110WQR0 4/2/2003 28,000,000.00 32.94 0.649820 18,194,962.87 AAA/Aaa/NR/NR AAA(sf)/Aaa*-(sf)/NR/NR II RASC 2003-KS8 M-I-3 76110WTW6 9/29/2003 7,000,000.00 77.78 0.538967 3,772,770.07 BBB+/Baa2/BBB+/NR CC(sf)/B3*-(sf)/C(sf)/NR II RASC 2004-KS3 M-I-2 76110WXB7 3/30/2004 7,000,000.00 100.00 0.507353 3,551,467.53 A+/A2/A/NR B-(sf)/Baa3*-(sf)/CCC(sf)/NR II RFMS2 2007-HSA2 A-3 43710RAD3 4/27/2007 130,759,000.00 57.92 0.383605 50,159,771.71 AAA/Aaa/AAA/NR BB+(sf)/B3(sf)/WD/NR II WFHET 2004-2 AI-5 94980GAF8 9/28/2004 68,169,000.00 37.79 1.000000 68,169,000.00 AAA/Aaa/AAA/AAA AAA(sf)/Aaa*-(sf)/AAA(sf)/AAA(sf) (1) No Implied Writedown Amounts (as defined herein) have been applied in reduction of the Deposited Underlying Security Principal Balances as of September 25, 2010. (2) The ratings were determined using information from Bloomberg L.P. and the websites of S&P, Fitch, Moodys and DBRS, Inc. (DBRS). * Negative watch as of October 1, 2010. * Negative outlook as of October 1, 2010. ** Positive outlook as of October 1, 2010. Deposited
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Investors may, upon written request, obtain a copy of the Indenture, the Trust Agreement and the Guaranty from the Indenture Trustee. INVESTORS INTERESTED IN PURCHASING ANY CLASS OF OFFERED NOTES ARE URGED TO REVIEW, IN CONJUNCTION WITH THIS MEMORANDUM, THE PROSPECTUS SUPPLEMENT AND PROSPECTUS, OR PRIVATE PLACEMENT MEMORANDUM, AND ANY AMENDMENTS OR SUPPLEMENTS THERETO, FOR EACH OF THE RELATED UNDERLYING SECURITIES AND, IF APPLICABLE, EACH OF THE SECURITIES UNDERLYING THE RELATED UNDERLYING SECURITIES (EACH, AN UNDERLYING OFFERING DOCUMENT), THE POOLING AND SERVICING AGREEMENT, TRUST AGREEMENT, INDENTURE, OR MORTGAGE LOAN PURCHASE & SERVICING AGREEMENT, AS APPLICABLE, AND ANY AMENDMENTS OR SUPPLEMENTS THERETO, FOR EACH OF THE RELATED UNDERLYING SECURITIES AND, IF APPLICABLE, EACH OF THE SECURITIES UNDERLYING THE RELATED UNDERLYING SECURITIES (EACH, AN UNDERLYING AGREEMENT), THE JULY 2010, AUGUST 2010 AND SEPTEMBER 2010 DISTRIBUTION REPORTS FOR EACH OF THE RELATED UNDERLYING TRANSACTIONS AND, IF APPLICABLE, THE RELATED DISTRIBUTION REPORTS FOR EACH OF THE TRANSACTIONS UNDERLYING THE RELATED UNDERLYING TRANSACTIONS (AS DEFINED HEREIN) (EACH AN UNDERLYING DISTRIBUTION REPORT), AS WELL AS ANY REPORTS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION UNDER THE EXCHANGE ACT RELATING TO THOSE UNDERLYING TRANSACTIONS AND, IF APPLICABLE THE TRANSACTIONS UNDERLYING THOSE UNDERLYING TRANSACTIONS (THE UNDERLYING 1934 ACT REPORTS AND TOGETHER WITH THE UNDERLYING OFFERING DOCUMENTS, UNDERLYING AGREEMENTS AND UNDERLYING DISTRIBUTION REPORTS, THE UNDERLYING DOCUMENTS). In connection with the offering of the Offered Notes, (i) none of the Issuer, the Seller, the Guarantor, the Initial Purchasers, the Owner Trustee or the Indenture Trustee has made any inquiry with respect to the information provided in the Underlying Documents, and (ii) the information provided therein or in any documents referred to therein has not been verified by the Issuer, the Seller, the Guarantor, the Initial Purchasers, the Owner Trustee or the Indenture Trustee. None of the Seller (other than the limited representations and warranties made by the Seller under the Trust Agreement), the Issuer, the Guarantor, the Initial Purchasers, the Owner Trustee or the Indenture Trustee makes any representation or warranty as to the Underlying Securities or as to the Underlying Documents or the information contained in the Underlying Documents. See Risk FactorsLimited Information regarding the Underlying Securities and the Underlying Mortgage Loans. Among other things, no representation is made either as to (i) the anticipated rate or amount of prepayments, delinquencies, defaults or losses on the Underlying Mortgage Loans, (ii) the timing of distributions of principal on the Underlying Securities, or (iii) the anticipated yields on the Offered Notes. See Risk FactorsRisks Associated with the Underlying Mortgage Loans, Prepayments on the Underlying Mortgage Loans and Variability in Yields and Weighted Average Lives below. CERTAIN OF THE UNDERLYING DOCUMENTS MAY BE FOUND AT WWW.STRUCTUREDFN.COM. EACH OF THESE DOCUMENTS WILL REMAIN AVAILABLE AT WWW.STRUCTUREDFN.COM THROUGH AND INCLUDING THE END OF SIX MONTHS FOLLOWING THE CLOSING DATE. WHILE UNDERLYING DOCUMENTS RELATING TO PRIVATE OFFERINGS OF UNDERLYING SECURITIES WILL BE PRESENTED IN A READ-ONLY FORMAT, UNDERLYING DOCUMENTS RELATING TO REGISTERED OFFERINGS OF UNDERLYING SECURITIES WILL BE AVAILABLE FOR DOWNLOAD FROM WWW.STRUCTUREDFN.COM. PROSPECTIVE INVESTORS IN THE OFFERED NOTES ARE URGED TO DOWNLOAD AND PRESERVE THESE DOCUMENTS FOR FUTURE REFERENCE. NONE OF THE ISSUER, THE SELLER, THE INITIAL PURCHASERS, THE INDENTURE TRUSTEE, THE OWNER TRUSTEE OR THE GUARANTOR WILL HAVE ANY OBLIGATION TO UPDATE ANY OF THE DOCUMENTS MADE AVAILABLE AT WWW.STRUCTUREDFN.COM.
ix
PROSPECTIVE INVESTORS IN THE OFFERED NOTES SHOULD CAREFULLY REVIEW RISK FACTORS IN THIS MEMORANDUM FOR A DESCRIPTION OF CERTAIN RISKS ASSOCIATED WITH OWNING THE OFFERED NOTES. PROSPECTIVE INVESTORS SHOULD ALSO REVIEW YIELD, PREPAYMENT AND MATURITY CONSIDERATIONS IN THIS MEMORANDUM FOR A DESCRIPTION OF FACTORS THAT WILL IMPACT THE YIELDS TO MATURITY OF THE OFFERED NOTES. THE SOLE SOURCES OF PAYMENTS ON THE OFFERED NOTES ARE THE PROCEEDS OF THE ASSETS IN THE TRUST WITH RESPECT TO THE RELATED SERIES TOGETHER WITH AMOUNTS PAYABLE UNDER THE GUARANTY. THE OFFERED NOTES DO NOT REPRESENT AN INTEREST IN OR OBLIGATION OF THE SELLER, THE INITIAL PURCHASERS, THE INDENTURE TRUSTEE, THE OWNER TRUSTEE OR ANY OF THEIR RESPECTIVE AFFILIATES. NONE OF THE UNDERLYING SECURITIES OR THE UNDERLYING MORTGAGE LOANS ARE INSURED OR GUARANTEED BY ANY GOVERNMENTAL AGENCY OR INSTRUMENTALITY OR BY THE GUARANTOR, THE ISSUER, THE SELLER, THE INITIAL PURCHASERS, THE INDENTURE TRUSTEE, THE OWNER TRUSTEE OR ANY OF THEIR RESPECTIVE AFFILIATES. THE GUARANTOR WILL FULLY AND UNCONDITIONALLY GUARANTEE THE TIMELY PAYMENT OF ALL AMOUNTS OF PRINCIPAL AND INTEREST DUE AND PAYABLE ON THE OFFERED NOTES, AS DESCRIBED HEREIN. THE GUARANTY IS BACKED BY THE FULL FAITH AND CREDIT OF THE UNITED STATES. NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS MEMORANDUM AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON. THIS MEMORANDUM DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE SECURITIES OFFERED HEREBY. THIS MEMORANDUM DOES NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY, NOR WILL ANY SALE OF THE OFFERED NOTES BE PERMITTED, IN ANY STATE OR OTHER JURISDICTION IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF SUCH STATE OR OTHER JURISDICTION. THE DELIVERY OF THIS MEMORANDUM AT ANY TIME DOES NOT IMPLY THAT INFORMATION HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE OF THIS MEMORANDUM. THE INITIAL PURCHASERS MAY, FROM TIME TO TIME, OFFER THE OFFERED NOTES AS DESCRIBED UNDER PLAN OF DISTRIBUTION IN THIS MEMORANDUM. THE OFFERED NOTES DESCRIBED HEREIN ARE EXEMPTED SECURITIES UNDER SECTION 3(a)(2) OF THE SECURITIES ACT AND ARE EXEMPTED SECURITIES UNDER SECTION 3(a)(12)(A)(i) OF THE EXCHANGE ACT. HOWEVER, SUBSEQUENT TRANSFERS OF THE OFFERED NOTES ARE SUBJECT TO CERTAIN CONDITIONS AS DESCRIBED HEREIN. SEE RISK FACTORSLACK OF LIQUIDITY; CONDITIONS TO TRANSFER; ABSENCE OF SECONDARY MARKET AND DESCRIPTION OF THE OFFERED NOTESCONDITIONS TO TRANSFER OF THE OFFERED NOTES IN THIS MEMORANDUM. A PROSPECTIVE TRANSFEREE OF AN OFFERED NOTE OR ANY INTEREST THEREIN WHO IS A PLAN TRUSTEE OR IS ACTING ON BEHALF OF A PLAN OR A PLAN SUBJECT TO ANY FEDERAL, STATE OR LOCAL LAW MATERIALLY SIMILAR TO SECTION 406 OF THE EMPLOYEE RETIREMENT INCOME SECURITY ACT OF 1974, AS AMENDED (ERISA), OR SECTION 4975 OF THE INTERNAL REVENUE CODE OF 1986, AS AMENDED (THE CODE), OR USING PLAN ASSETS TO EFFECT SUCH TRANSFER SHALL BE DEEMED TO REPRESENT THAT SUCH TRANSFEREE AGREES TO TREAT SUCH OFFERED NOTE AS INDEBTEDNESS WITHOUT SUBSTANTIAL EQUITY FEATURES FOR PURPOSES OF THE PLAN ASSET REGULATION AND THAT THE ACQUISITION AND HOLDING OF SUCH OFFERED NOTE WILL NOT GIVE RISE TO A NON-EXEMPT PROHIBITED TRANSACTION UNDER SECTION 406 OF ERISA OR SECTION 4975 OF THE CODE. ANY PURPORTED TRANSFER IN VIOLATION OF THE ABOVE-DESCRIBED CONDITIONS WILL BE VOID AB INITIO, AND SUCH TRANSFER WILL NOT BE GIVEN EFFECT. x
THIS MEMORANDUM IS FURNISHED TO THE RECIPIENT OF THIS ELECTRONIC TRANSMISSION ON A CONFIDENTIAL BASIS SOLELY FOR THE PURPOSE OF EVALUATING THE INVESTMENT OFFERED HEREBY. THE INFORMATION CONTAINED HEREIN MAY NOT BE REPRODUCED OR USED IN WHOLE OR IN PART FOR ANY OTHER PURPOSE. THIS MEMORANDUM HAS BEEN PREPARED BY THE SELLER FOR USE SOLELY IN CONNECTION WITH THE INITIAL OFFERING OF THE OFFERED NOTES DESCRIBED HEREIN BY THE INITIAL PURCHASERS TO ONE OR MORE PURCHASERS. NEITHER THE SELLER NOR ANY INITIAL PURCHASER HAS AUTHORIZED OR ASSUMED ANY LIABILITY FOR ANY USE OF THIS MEMORANDUM IN CONNECTION WITH ANY OTHER OFFER OR SALE OF THE OFFERED NOTES BY ANY OTHER PERSON. THE INFORMATION CONTAINED HEREIN IS CONFIDENTIAL. AN INVESTOR OR POTENTIAL INVESTOR IN THE OFFERED NOTES (AND EACH EMPLOYEE, REPRESENTATIVE, OR OTHER AGENT OF SUCH PERSON OR ENTITY) MAY DISCLOSE TO ANY AND ALL PERSONS, WITHOUT LIMITATION, THE TAX TREATMENT AND TAX STRUCTURE OF THE TRANSACTION AND ALL RELATED MATERIALS OF ANY KIND, INCLUDING OPINIONS OR OTHER TAX ANALYSES, THAT ARE PROVIDED TO SUCH PERSON OR ENTITY. HOWEVER, SUCH PERSON OR ENTITY MAY NOT DISCLOSE ANY OTHER INFORMATION RELATING TO THIS TRANSACTION UNLESS SUCH INFORMATION IS RELATED TO SUCH TAX TREATMENT AND TAX STRUCTURE. THIS MEMORANDUM IS PERSONAL TO THE RECIPIENT OF THIS ELECTRONIC TRANSMISSION AND DOES NOT CONSTITUTE AN OFFER TO ANY OTHER PERSON OR TO THE PUBLIC GENERALLY TO SUBSCRIBE FOR OR OTHERWISE ACQUIRE THE OFFERED NOTES. DISTRIBUTION OF THIS MEMORANDUM OR ANY COPIES OF THIS MEMORANDUM OR ANY DOCUMENTS REFERRED TO HEREIN TO ANY PERSON OTHER THAN THE OFFEREE AND THOSE PERSONS, IF ANY, RETAINED TO ADVISE SUCH OFFEREE WITH RESPECT THERETO IS UNAUTHORIZED, AND ANY DISCLOSURE OF ANY OF THE CONTENTS HEREOF WITHOUT THE PRIOR WRITTEN CONSENT OF THE ISSUER IS PROHIBITED. EACH OFFEREE, BY ACCEPTING DELIVERY OF THIS MEMORANDUM, AGREES TO THE FOREGOING AND, IF SUCH OFFEREE DOES NOT PURCHASE ANY OFFERED NOTES OR THE OFFERING THEREOF CONTEMPLATED HEREUNDER IS TERMINATED, TO RETURN TO THE SELLER OR THE INITIAL PURCHASERS THIS MEMORANDUM AND ALL DOCUMENTS DELIVERED HEREWITH OR OTHERWISE DISCARD OR DESTROY SUCH DOCUMENTS OR ELECTRONIC TRANSMISSION. NONE OF THE INITIAL PURCHASERS, THE GUARANTOR, THE INDENTURE TRUSTEE OR THE OWNER TRUSTEE MAKES ANY REPRESENTATIONS OR WARRANTIES AS TO THE ACCURACY OR COMPLETENESS OF THE INFORMATION CONTAINED IN THIS MEMORANDUM, AND NOTHING HEREIN WILL BE DEEMED TO CONSTITUTE SUCH A REPRESENTATION OR WARRANTY BY ANY SUCH PERSON OR ANY PROMISE OR REPRESENTATION AS TO THE FUTURE PERFORMANCE OF THE OFFERED NOTES, THE TRUST, THE UNDERLYING SECURITIES OR THE UNDERLYING MORTGAGE LOANS. IT IS EXPECTED THAT INVESTORS INTERESTED IN PARTICIPATING IN THIS OFFERING WILL CONDUCT AN INDEPENDENT INVESTIGATION OF THE RISKS POSED BY AN INVESTMENT IN THE OFFERED NOTES. ACCORDINGLY, INVESTORS SHOULD FAMILIARIZE THEMSELVES WITH THE CHARACTERISTICS OF THE UNDERLYING SECURITIES AND THE UNDERLYING MORTGAGE LOANS PRESENTED IN THE UNDERLYING DOCUMENTS. THE INDENTURE, TRUST AGREEMENT AND GUARANTY CONTAIN THE PROVISIONS, AMONG OTHER THINGS, THAT GOVERN THE OFFERED NOTES AND THE PAYMENTS THEREON AND THAT DEFINE THE DUTIES AND OBLIGATIONS OF THE SELLER, THE GUARANTOR, THE INDENTURE TRUSTEE AND THE OWNER TRUSTEE. INVESTORS MAY, UPON WRITTEN REQUEST, OBTAIN A COPY OF THE INDENTURE, THE TRUST AGREEMENT AND THE GUARANTY FROM THE INDENTURE TRUSTEE. INVESTORS WHOSE INVESTMENT AUTHORITY IS SUBJECT TO LEGAL RESTRICTIONS SHOULD CONSULT THEIR OWN LEGAL ADVISORS TO DETERMINE WHETHER AND TO WHAT xi
EXTENT THE OFFERED NOTES WILL CONSTITUTE LEGAL INVESTMENTS FOR THEM. THE OFFERED NOTES WILL NOT BE MORTGAGE RELATED SECURITIES FOR PURPOSES OF THE SECONDARY MORTGAGE MARKET ENHANCEMENT ACT OF 1984 (SMMEA). THERE IS CURRENTLY NO SECONDARY MARKET FOR THE OFFERED NOTES, AND THERE CAN BE NO ASSURANCE THAT A SECONDARY MARKET WILL DEVELOP OR, IF IT DOES DEVELOP, THAT IT WILL PROVIDE HOLDERS OF THE OFFERED NOTES WITH LIQUIDITY OF INVESTMENT OR WILL CONTINUE FOR THE LIFE OF THE OFFERED NOTES. TO THE EXTENT STATEMENTS CONTAINED HEREIN DO NOT RELATE TO HISTORICAL OR CURRENT INFORMATION, THIS MEMORANDUM MAY BE DEEMED TO CONSIST OF FORWARD LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES THAT MAY ADVERSELY AFFECT THE PAYMENTS TO BE MADE ON, OR THE YIELDS OF, THE OFFERED NOTES, SOME OF WHICH RISKS AND UNCERTAINTIES ARE DISCUSSED UNDER RISK FACTORS AND YIELD, PREPAYMENT AND MATURITY CONSIDERATIONS IN THIS MEMORANDUM. AS A CONSEQUENCE OF THE FOREGOING, NO ASSURANCE CAN BE GIVEN AS TO THE ACTUAL PAYMENTS ON, OR THE YIELDS OF, THE OFFERED NOTES.
xii
IRS CIRCULAR 230 NOTICE TO ENSURE COMPLIANCE WITH INTERNAL REVENUE SERVICE CIRCULAR 230, SECURITYHOLDERS ARE HEREBY NOTIFIED THAT (I) ANY DISCUSSION OF U.S. FEDERAL TAX ISSUES IN THIS MEMORANDUM IS NOT INTENDED OR WRITTEN BY US TO BE RELIED UPON, AND CANNOT BE RELIED UPON, BY SECURITYHOLDERS FOR THE PURPOSE OF AVOIDING PENALTIES THAT MAY BE IMPOSED ON SECURITYHOLDERS UNDER THE INTERNAL REVENUE CODE; (II) SUCH DISCUSSION IS WRITTEN IN CONNECTION WITH THE PROMOTION OR MARKETING OF THE TRANSACTIONS OR MATTERS ADDRESSED HEREIN; AND (III) SECURITYHOLDERS SHOULD SEEK ADVICE BASED ON THEIR PARTICULAR CIRCUMSTANCES FROM AN INDEPENDENT TAX ADVISOR.
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TABLE OF CONTENTS Caption Page
SUMMARY OF MEMORANDUM........................................................................................................................1 NOTICE TO INVESTORS .....................................................................................................................................7 RISK FACTORS ....................................................................................................................................................8 SUMMARY OF TRANSACTION........................................................................................................................ 18 DESCRIPTION OF THE OFFERED NOTES....................................................................................................... 19 THE UNDERLYING SECURITIES ..................................................................................................................... 29 THE UNDERLYING MORTGAGE LOANS........................................................................................................ 30 NATIONAL CREDIT UNION ADMINISTRATION............................................................................................ 31 THE ISSUER ....................................................................................................................................................... 32 THE INDENTURE TRUSTEE ............................................................................................................................. 32 THE OWNER TRUSTEE..................................................................................................................................... 33 THE ADMINISTRATOR..................................................................................................................................... 34 DESCRIPTION OF THE GUARANTY................................................................................................................ 34 DESCRIPTION OF THE INDENTURE ............................................................................................................... 35 DESCRIPTION OF THE TRUST AGREEMENT................................................................................................. 42 YIELD, PREPAYMENT AND MATURITY CONSIDERATIONS ...................................................................... 44 IRS CIRCULAR 230 NOTICE TO CERTAIN FEDERAL INCOME TAX CONSEQUENCES AND ERISA CONSIDERATIONS .................................................................................................................. 48 CERTAIN FEDERAL INCOME TAX CONSEQUENCES................................................................................... 48 STATE AND OTHER TAX CONSEQUENCES................................................................................................... 53 ERISA CONSIDERATIONS................................................................................................................................ 53 PLAN OF DISTRIBUTION.................................................................................................................................. 55 RATINGS ............................................................................................................................................................ 55 SECONDARY MARKET AND ADDITIONAL INFORMATION ....................................................................... 55 LEGAL MATTERS.............................................................................................................................................. 56 LEGAL INVESTMENT ....................................................................................................................................... 56 SCHEDULE I DECREMENT TABLES.......................................................................................................... I-1 SCHEDULE II YIELD SENSITIVITY TABLES ...........................................................................................II-1
xiv
SUMMARY OF MEMORANDUM The following summary is a broad overview of the Offered Notes and does not contain all of the information you should consider in making your investment decision. To understand all of the terms of each class of Offered Notes, carefully read this entire Memorandum and the Indenture, the Guaranty, the Trust Agreement and the Underlying Documents. This summary provides an overview of certain calculations, cash flow priorities and other information to aid your understanding and is qualified in its entirety by the full description of these calculations, cash flow priorities and other information in this Memorandum. Some of the information consists of forward-looking statements relating to future economic performance or projections and other financial items. Forwardlooking 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 project in our forward-looking statements. Title of Series......................................... Issuer or Trust........................................ NCUA Guaranteed Notes Trust 2010-R1, NCUA Guaranteed Notes Series 2010-R1. NCUA Guaranteed Notes Trust 2010-R1, a Delaware statutory trust to be established on or before the Closing Date by the Seller and the Owner Trustee pursuant to the Trust Agreement. See The Issuer in this Memorandum. The National Credit Union Administration (the NCUA), in its capacity as an Agency of the Executive Branch of the United States. See National Credit Union Administration and Description of the Guaranty in this Memorandum. The National Credit Union Administration Board (the NCUA Board), in its capacity as liquidating agent of U.S. Central Federal Credit Union (the Corporate Credit Union). Pursuant to the Trust Agreement, the Seller will sell the Underlying Securities to the Issuer and will make limited representations and warranties regarding the Sellers ownership of the Underlying Securities. See National Credit Union Administration in this Memorandum. The Bank of New York Mellon. See The Indenture Trustee and The Administrator in this Memorandum. Wells Fargo Delaware Trust Company, N.A. See The Owner Trustee in this Memorandum. Distributions on the Underlying Securities are made on one of the following dates: (i) the 18th day of each month or, if such 18th day is not a business day, the next succeeding business day; (ii) the 19th day of each month or, if such 19th day is not a business day, the next succeeding business day; (iii) the 20th day of each month or, if such 20th day is not a business day, the next succeeding business day; or (iv) the 25th day of each month or, if such 25th day is not a business day, the next succeeding business day (each of (i), (ii), (iii), and (iv), an Underlying Distribution Date, and the latest to occur of such Underlying
Guarantor...............................................
Seller .....................................................
Indenture Trustee, Certificate Paying Agent, Certificate Registrar and Administrator.................... Owner Trustee ....................................... Underlying Distribution Date .................
Distribution Dates, the Last Underlying Distribution Date). Payment Date......................................... Payments on the Offered Notes will be made eight business days following the Last Underlying Distribution Date (each, a Payment Date), beginning on November 4, 2010. The Record Date for each class of Offered Notes and any Payment Date will be the close of business on the business day immediately preceding such Payment Date. The Final Scheduled Payment Date with respect to both the Senior I-A Notes and the Senior II-A Notes will be the Payment Date on October 7, 2020, which is the 120th Payment Date. See Description of the Offered NotesEarly Termination and Yield, Prepayment and Maturity Considerations in this Memorandum.
Record Date...........................................
Final Scheduled Payment Date ...............
Offered Notes The Offered Notes will have the initial Note Principal Balances and Note Rates shown under the heading Offered Notes in the table captioned The Securities in this Memorandum. The Senior I-A Notes will be entitled to payments of both interest and principal from distributions received by the Indenture Trustee on the Underlying Securities relating to Series I, as identified in the table captioned The Underlying Securities in this Memorandum (collectively, the Series I Underlying Securities). The Senior II-A Notes will be entitled to payments of both interest and principal from distributions received by the Indenture Trustee on the Underlying Securities relating to Series II, as identified in the table captioned The Underlying Securities in this Memorandum (collectively, the Series II Underlying Securities). The Offered Notes for a Series will not be cross-collateralized with the Offered Notes for the other Series. See Description of the Offered Notes in this Memorandum. Other Securities The Trust will also issue two classes of owner trust certificates: the Series I Owner Trust Certificates and the Series II Owner Trust Certificates, which are referred to in this Memorandum as the Owner Trust Certificates. The Series I Owner Trust Certificates, together with the Series I Notes, are referred to in this Memorandum as the Series I Securities. The Series II Owner Trust Certificates, together with the Series II Notes, are referred to in this Memorandum as the Series II Securities. The Series I Securities and Series II Securities are referred to in this Memorandum as the Securities. The Series I Owner Trust Certificates will represent the beneficial ownership in the portion of the Trust relating to the Series I Underlying Securities and will be entitled to all payments from the Trust relating to the Series I Underlying Securities only after the Note Principal Balance of the Senior I-A Notes has been reduced to zero, all accrued and unpaid interest has been paid on the Senior I-A Notes and all amounts owed to the Guarantor, the Indenture Trustee in all of its related capacities, the Administrator and the Owner Trustee in respect of Series I have been paid in full as described under Description of the Offered NotesAllocation of Available Funds in this Memorandum. The Series II Owner Trust Certificates will represent the beneficial ownership in the portion of the Trust 3
relating to the Series II Underlying Securities and will be entitled to all payments from the Trust relating to the Series II Underlying Securities only after the Note Principal Balance of the Senior II-A Notes has been reduced to zero, all accrued and unpaid interest has been paid on the Senior II-A Notes and all amounts owed to the Guarantor, the Indenture Trustee in all of its related capacities, the Administrator and the Owner Trustee in respect of Series II have been paid in full as described under Description of the Offered NotesAllocation of Available Funds in this Memorandum. The Owner Trust Certificates for a Series will not be cross-collateralized with the Owner Trust Certificates for the other Series. Each class of Owner Trust Certificates will be issued in definitive, fully registered form and will have a certificate principal balance as shown under the heading Non-Offered Securities in the table captioned The Securities in this Memorandum. Neither class of Owner Trust Certificates will have a certificate rate. The Owner Trust Certificates are not being offered by this Memorandum. Closing Date On or about October [27], 2010. Underlying Securities The Underlying Securities are owned by the Seller and will be sold to the Issuer pursuant to the Trust Agreement on or prior to the Closing Date. The Underlying Securities are identified in detail in the table captioned The Underlying Securities in this Memorandum. For a more complete description of any Underlying Security, please review the related Underlying Offering Documents and related Underlying Agreement. Each Underlying Security was previously issued in connection with a securitization of residential mortgage loans, or a resecuritization of one or more securities previously issued in connection with a securitization of residential mortgage loans, in the transactions identified on the table captioned The Underlying Securities in this Memorandum (each, an Underlying Transaction or an Underlying Trust). Each Underlying Security is entitled to monthly distributions of interest at the rate set forth in the related Underlying Agreement and principal, to the extent applicable, in the order of priority set forth in the related Underlying Agreement.
See Description of the Offered Notes in this Memorandum and Description of the Certificates or similar heading in the related Underlying Offering Documents. The Underlying Transactions The Underlying Mortgage Loans The mortgage loans included in, or, in the case of Underlying Securities backed by residential mortgage-backed securities, underlying the Underlying Transactions are fixed rate and adjustable rate, fully amortizing and balloon, mortgage loans, secured by first and second liens on one- to fourfamily residential properties (collectively, the Underlying Mortgage Loans). The Underlying Mortgage Loans with respect to Series I include mortgage loans that have a negative amortization feature and the Underlying Mortgage Loans with respect to Series II do not include mortgage loans that have a negative amortization feature. With respect to any Underlying Transaction, see the related Underlying Offering Documents for additional information about the related Underlying Mortgage Loans, the originators of such Underlying Mortgage Loans, the underwriting standards pursuant to which such Underlying Mortgage Loans were originated and other aspects of the nature of such Underlying Mortgage Loans and related aspects of the structure of such Underlying Transaction. See also the Underlying Distribution Reports which set forth, as of the dates specified in each such Underlying Distribution Report, the delinquency status of the related Underlying Mortgage Loans and the cumulative realized losses, foreclosures in process and mortgaged properties acquired by the related Underlying Transaction with respect to the related defaulted Underlying Mortgage Loans. The Underlying Distribution Reports may include additional information regarding the Underlying Mortgage Loans. The Underlying Servicers and Underlying Originators The servicers of the Underlying Mortgage Loans (collectively, the Underlying Servicers) are required to service and administer the Underlying Mortgage Loans as described in the related Underlying Offering Documents. The Underlying Mortgage Loans were originated by certain mortgage lenders (collectively, the Underlying Originators) as described in the related Underlying Offering Documents.
No assurance can be made that the information about any of the Underlying Servicers or Underlying Originators, as of the date of the related Underlying Offering Documents, remains accurate and complete as of the date hereof. See The Underlying Mortgage LoansThe Underlying Servicers and Underlying Originators in this Memorandum. Payments on the Offered Notes General The Indenture Trustee will make payments on the Offered Notes on each Payment Date to the holders of record of the Offered Notes as of the related Record Date. The only sources of cash available to make interest and principal payments on any class of Offered Notes will be distributions received on the related Underlying Securities on the related Underlying Distribution Date and any amounts paid under the Guaranty. Interest Payments Each class of Offered Notes will accrue interest at its Note Rate on its Note Principal Balance outstanding immediately prior to each Payment Date. Interest will be paid to the holders of the Offered Notes on each Payment Date in an amount and priority as described under Description of the Offered NotesAllocation of Available Funds in this Memorandum. The Note Rate for each class of Offered Notes and any Payment Date will be the per annum rate as described in the table captioned The Securities in this Memorandum and under the definition of Note Rate under Description of the Offered Notes Definitions in this Memorandum. Interest on the Offered Notes accrues during the applicable accrual period. The accrual period for each Payment Date will be the period beginning on the immediately preceding Payment Date (or the Closing Date in the case of the first accrual period) and ending on the day immediately prior to such Payment Date. All calculations of interest on the Senior I-A Notes will be based on a 360-day year and the actual number of days in the applicable accrual period, and all calculations of interest on the Senior II-A Notes will be based on a 360-day year consisting of twelve 30-day months (or a 7-day period in the case of the first Payment Date). See Description of the Offered Notes in this Memorandum. 4
Principal Payments The Offered Notes will be entitled to payments of principal, including any Parity Payments (as defined herein), on each Payment Date in an amount and priority as described under Description of the Offered NotesAllocation of Available Funds in this Memorandum. Denominations and Form The Offered Notes will be issued in book-entry form only through the facilities of The Depository Trust Company and will be issued in minimum denominations of $10,000 initial Note Principal Balance and integral multiples of $10,000 in excess thereof, provided that one Series I Note and one Series II Note, or an interest therein, may be issued in a different amount or multiple in excess of such minimum denomination. See Description of the Offered NotesDenominations and Form in this Memorandum. Credit Enhancement This transaction employs certain forms of credit enhancement that provide limited protection to the holders of the Offered Notes against shortfalls in payments received on the Underlying Securities. If such credit enhancement is unavailable to cover a loss or shortfall that would otherwise be borne by a class of Offered Notes, a payment will be made under the Guaranty as described under Description of the Guaranty in this Memorandum. It is anticipated that the Underlying Securities of each Series will initially generate more interest than is needed to pay interest on the related Offered Notes and certain trust expenses primarily because of the significant amount of overcollateralization with respect to each Series of Offered Notes as of the Closing Date, resulting in interest being paid on an aggregate principal balance of Underlying Securities (as reduced in respect of any related Implied Writedown Amount (as defined herein)) that is initially larger than the Note Principal Balance of the related Offered Notes. In addition, the weighted average of the rates on the Underlying Securities may also be higher at times than the Note Rate on the related Offered Notes. Further, principal collections on the Underlying Securities will be applied to pay interest due on the related Offered Notes before being applied to pay principal. As a result, the amount of available funds for each Series in excess of the amount that is needed to pay interest on the related Offered Notes and any related fees and trust expenses and, if applicable, to fund the related Expense 5
Reserve Fund on the related Payment Date will be used to reduce the Note Principal Balance of such Offered Notes prior to any distributions on the related Owner Trust Certificates. This accelerated principal payment feature is likely to increase the amount of overcollateralization with respect to each Series over time, unless such overcollateralization is offset by losses allocated to the related Underlying Securities. The Guaranty The Guarantor will fully and unconditionally guarantee the timely payment of all amounts of interest and principal due and payable on the Offered Notes pursuant to the Guaranty. The Guaranty is backed by the full faith and credit of the United States. See Description of the Offered Notes and Description of the Guaranty in this Memorandum. Early Termination At its option, the Majority Certificateholder for each Series may, subject to certain conditions provided in the Indenture and Trust Agreement, purchase the related Underlying Securities on any Payment Date following the Payment Date on which the aggregate principal balance of such Underlying Securities (as reduced in respect of any related Implied Writedown Amount) is less than or equal to 10% of the aggregate principal balance of such Underlying Securities (as reduced in respect of any related Implied Writedown Amount) immediately following distributions made on such Underlying Securities on the related Underlying Distribution Date in September 2010. The Majority Certificateholder with respect to each Series is a holder of the Owner Trust Certificates who, as of the related Record Date, owns in the aggregate Owner Trust Certificates in such Series evidencing greater than 50% of the percentage interests of the outstanding Owner Trust Certificates in such Series. If a Majority Certificateholder exercises its right to purchase the Underlying Securities of a Series as described in this Memorandum, the related Offered Notes outstanding at that time will be retired earlier than would otherwise be the case. See Description of the Offered Notes Early Termination in this Memorandum. In addition, if an optional purchase of the Underlying Mortgage Loans is exercised for any Underlying Transaction, the related Underlying Securities will receive their final distribution under the circumstances described under The Underlying SecuritiesEarly Termination in this Memorandum.
Federal Income Tax Status Stradley Ronon Stevens & Young, LLP, counsel to the Seller and the Guarantor, will deliver its opinion generally to the effect that, assuming compliance with the Indenture, the Trust Agreement and certain related documents, and based in part on the facts set forth in this Memorandum and certain additional information and representations, for federal income tax purposes, (i) each class of Offered Notes will be characterized as indebtedness to a Noteholder other than the owner of the related Owner Trust Certificates and not as ownership interests in the related Trust Estate, and (ii) the related Trust Estate will not be classified as a taxable mortgage pool as defined in Section 7701(i) of the Code, as an association taxable as a corporation or as a publiclytraded partnership as defined in Section 7704 of the Code that is taxable as a corporation. Under the Indenture, each Noteholder will agree to treat the Offered Notes as indebtedness for federal, state and local income and franchise tax purposes. See Certain Federal Income Tax Consequences in this Memorandum. Legal Investment Institutions whose investment activities are subject to legal investment laws and regulations or to review by certain regulatory authorities may be subject to restrictions on investment in the Securities. The Offered Notes will not constitute mortgage related securities for purposes of SMMEA. However, the Offered Notes have the benefit of the Guaranty, which is backed by the full faith and credit of the United States. Investors should consult their own legal advisors regarding applicable investment restrictions and the effect of any restrictions on the liquidity of the Offered Notes prior to investing in the Offered Notes.
See Legal Investment in this Memorandum. ERISA Considerations The Offered Notes may be purchased by a plan or entity using plan assets subject to the considerations and required representations set forth in ERISA Considerations in this Memorandum. The Owner Trust Certificates may not be purchased by a plan or entity using plan assets. See ERISA Considerations in this Memorandum. Ratings It is a condition to the issuance of the Offered Notes that they receive ratings of AAA/Aaa from at least two of Standard & Poors Ratings Services, a division of The McGraw-Hill Companies, Inc. (Standard & Poors), Moodys Investors Service, Inc. (Moodys), and Fitch Ratings (Fitch and, together with Standard & Poors and Moodys, the Rating Agencies). A security rating is not a recommendation to buy, sell or hold securities and may be subject to revision or withdrawal at any time by the assigning rating organization. Each security rating should be evaluated independently of any other security rating. In the event the ratings initially assigned to the Offered Notes are subsequently lowered for any reason, no person or entity is obligated to provide any additional credit support or credit enhancement with respect to the Offered Notes. See Ratings and Risk FactorsWithdrawal or Downgrading of Initial Ratings will Reduce the Value of the Offered Notes in this Memorandum.
NOTICE TO INVESTORS Because of the following conditions, purchasers of the Offered Notes are advised to consult legal counsel prior to purchasing or making any offer, resale, pledge or other transfer of the Offered Notes. The Offered Notes described herein are exempted securities under Section 3(a)(2) of the Securities Act and are exempted securities under Section 3(a)(12)(A)(i) of the Exchange Act. However, the Offered Notes are subject to certain conditions on transferability and resale and may not be transferred or resold except in accordance with the terms of the Indenture. The Indenture will provide that no transfer of any Offered Note will be registered by the Indenture Trustee unless certain required certifications are provided to the Indenture Trustee, at the expense of the transferee, with respect to its compliance with such conditions. For so long as the Offered Notes are book-entry certificates, transferees acquiring interests in the Offered Notes will be deemed to have made such certifications. Any purported transfer in violation of such certifications or deemed certifications will be void ab initio, and such transfer will not be given effect. See ERISA Considerations in this Memorandum.
RISK FACTORS The following information, in addition to the matters set forth elsewhere in this Memorandum and the risk factors set forth in the Underlying Offering Documents, all of which investors should carefully consider, identifies certain significant sources of risk associated with an investment in the Offered Notes. General In order to understand the structure and characteristics of any class of Offered Notes, and the potential merits and risks of an investment in any class of Offered Notes, in addition to reviewing the Trust Agreement, the Indenture and the Guaranty, potential investors must review and be familiar with the related Underlying Offering Documents and Underlying Agreements. The Underlying Offering Documents generally describe the Underlying Mortgage Loans and Underlying Securities and may include the following information: (i) a description of the related Underlying Mortgage Loans as of the cut-off date for the related Underlying Transaction (each, an Underlying Cut-off Date), (ii) a description of the related Underlying Servicers obligations, (iii) the priority of distributions and the application of funds as among the various classes of the certificates issued in the related Underlying Transaction, (iv) the method of calculating interest and principal distributions on the classes of certificates issued in the related Underlying Transaction, and (v) the method of calculating and allocating losses, shortfalls and similar items among the various classes of certificates issued in the related Underlying Transaction. With respect to each Underlying Transaction, for information concerning the performance of the Underlying Mortgage Loans and distributions on the Underlying Securities since the related closing date, potential investors should review the related Underlying Distribution Reports. This Memorandum does not contain a complete description of the Underlying Securities. References to the terms of the Underlying Securities are derived solely from the descriptions of the Underlying Securities in the related Underlying Offering Documents. No representation is made by the Seller, the Guarantor, the Initial Purchasers, the Indenture Trustee in any of its related capacities, the Administrator or the Owner Trustee as to the accuracy or completeness of such descriptions. Investors in the Offered Notes Should Note that the Underlying Transactions Have Experienced Significant Delinquencies and Losses Investors in the Offered Notes should note that a majority of the Underlying Transactions have experienced significant delinquencies and realized losses. Any additional realized losses, to the extent they are allocated to the Underlying Securities of a Series, will reduce available overcollateralization, which may reduce the amount of excess interest available to pay principal on the Offered Notes and will increase the likelihood of eventual receipt by related Noteholders of payments under the Guaranty. In general, reduction of overcollateralization initially will have the effect of slowing the rate of principal payments on the related Offered Notes. After the overcollateralization with respect to a Series has been exhausted, any additional realized losses on the Underlying Mortgage Loans relating to the Underlying Securities of a Series, to the extent allocated to reduce the principal balances of the related Underlying Securities, will not result in an allocation of a loss to the related Offered Notes but rather will result in receipt by the related Noteholders of Parity Payments (as defined herein) pursuant to the terms of the Indenture. If the Issuer is unable to pay any portion of any such Parity Payment from remaining Available Funds, the Guarantor will pay such portion of that Parity Payment pursuant to the Guaranty. See Description of the Offered Notes Principal Payments Due to the Allocation of Losses and Description of the Guaranty in this Memorandum. In some cases, the Underlying Agreements for certain Underlying Securities do not provide for a reduction of the principal balances of such Underlying Securities by the allocable portion of the amount of any realized losses on the related Underlying Mortgage Loans. To the extent any related overcollateralization, subordination, bond insurance policy or other credit enhancement with respect to these Underlying Securities is not available to cover realized losses, these Underlying Securities will be undercollateralized because the aggregate principal balance of the Underlying Mortgage Loans will be less than the aggregate principal balance of the related Underlying Securities. Consequently, the amount of collections on the Underlying Mortgage Loans available to make interest and principal distributions on the Underlying Securities will be substantially reduced. In this case and for purposes of this transaction, the principal balances of such Underlying Securities will be deemed to have been reduced by their pro rata share (based on the then outstanding principal balances of such Underlying Securities after giving
effect to distributions on the related Underlying Distribution Date) of any amount by which the aggregate principal balance of such Underlying Securities (together with related securities of the same priority) exceeds the aggregate principal balance of the related Underlying Mortgage Loans as of the related Underlying Distribution Date and the amount of overcollateralization with respect to the related Series of Offered Notes will be reduced by that pro rata amount. As of the Last Underlying Distribution Date in September 2010, no Implied Writedown Amounts have been applied in reduction of the aggregate principal balance of the Underlying Securities as of such Underlying Distribution Date. See Description of the Offered NotesPrincipal Payments Due to the Allocation of Losses, Description of the Guaranty and the table captioned The Securities in this Memorandum. Set forth below are certain factors contributing to delinquencies and realized losses with respect to the Underlying Mortgage Loans, which delinquencies and realized losses may have an effect on the yields and weighted average lives of the Offered Notes as described in more detail in this Memorandum. See Variability in Yields and Weighted Average Lives in this Memorandum. Investors in the Offered Notes should carefully review the Underlying Distribution Reports and, if necessary, request in writing from the Indenture Trustee similar reports from prior Underlying Distribution Dates in order to determine the percentages of the Underlying Mortgage Loans that are delinquent, in default, in foreclosure or with respect to which the borrower has filed bankruptcy for each Underlying Transaction. The Indenture Trustee will require requesting Noteholders to certify as to their ownership of the Offered Notes and will provide such reports only to the extent they are either in the Indenture Trustees possession or can reasonably be obtained by the Indenture Trustee from the underlying trustee. Increases in Defaults and Delinquencies Since late 2006, delinquencies, defaults and foreclosures on residential mortgage loans have increased, and they may continue to increase in the future. Certain of the Underlying Mortgage Loans in the Underlying Transactions were originated with little or no documentation of borrower income and/or assets. In addition, originators underwriting standards generally allowed for exceptions with compensating factors. These factors, however, may not be adequate to compensate for the exception to the standard. Recent recessive economic trends and high levels of unemployment in the United States continue to be primary indicators of defaults and delinquencies. The lasting impact of the recent economic recession and high unemployment could increase the likelihood of delinquencies and defaults. A general unavailability of credit and an increase in job losses may adversely affect the overall economy in ways that result in increased delinquencies and defaults on the Underlying Mortgage Loans. Although economic indicators are beginning to show that the United States economy may be improving, delinquencies and defaults on loans underlying residential mortgage-backed securities may continue to rise, or may remain at high levels, as a result of factors such as persistent, high unemployment rates, high levels of foreclosures and large inventories of unsold properties. A significant majority of the Underlying Servicers have the authority under the related Underlying Agreement to modify Underlying Mortgage Loans if it is in the best interests of the holders of the related Underlying Securities and subject to the applicable servicing standard set forth in the related Underlying Agreement. Modifications of Underlying Mortgage Loans may have the effect of, among other things, reducing or otherwise changing the mortgage rate, forgiving payments of principal or interest or other amounts owed under an Underlying Mortgage Loan, extending the final maturity, capitalizing or deferring delinquent interest and other amounts owed under an Underlying Mortgage Loan, reducing the principal balance of an Underlying Mortgage Loan or any combination of these or other modifications. Any modified Underlying Mortgage Loan may remain in the related Underlying Trust, and the reduction in collections resulting from a modification may result in (i) a lower rate on the related Underlying Securities, (ii) reduced distributions of interest or principal on the related Underlying Securities, (iii) an extension of the weighted average lives of the related Underlying Securities, (iv) undercollateralization with respect to the related Underlying Securities, or (v) an allocation of a realized loss to the related Underlying Securities to the extent any related credit enhancement is not available to cover such losses. Loan modifications are more likely to be used to the extent that borrowers are less able to refinance or sell their homes due to market conditions and to the extent that the potential recovery from a foreclosure is reduced due
to lower property values. A significant number of loan modifications could result in a significant reduction in cash flows to the Underlying Trusts on an ongoing basis. Home Price Depreciation In addition to higher delinquency, default and foreclosure rates, loss severities on all types of residential mortgage loans have increased due to declines in residential real estate values, resulting in reduced home equity. Higher loan-to-value ratios and combined loan-to-value ratios generally result in lower recoveries on foreclosure and an increase in loss severities above those that would have been realized had property values remained the same or continued to increase. Each Underlying Offering Document contains statistical information on the related Underlying Mortgage Loans as of the Underlying Cut-off Date specified in the related Underlying Offering Document. However, because housing values have declined in many areas of the country, and the decline has been substantial in some cases, such statistics relating to the value of the mortgaged properties (e.g., loan-to-value ratios) of the related Underlying Mortgage Loans are very likely to be worse than shown in the related Underlying Offering Documents. Inability to Refinance or Sell Following Increased Payments Due to Rate Adjustment To the extent market interest rates have increased or increase in the future, increases in monthly payments with respect to adjustable rate mortgage loans that have or will enter their adjustable rate period may result in, and borrowers may become increasingly likely to, default on payment obligations. Current market conditions may impair borrowers ability to refinance or sell their residential properties, which may contribute to higher delinquency and default rates. Borrowers seeking to avoid increased monthly payments by refinancing may no longer be able to find available replacement loans at comparably low interest rates. In the past two years, in response to increased delinquencies and losses, many originators have implemented more conservative underwriting criteria for mortgage loans, which will likely result in reduced availability of refinancing alternatives for such borrowers. These risks would be exacerbated to the extent prevailing mortgage interest rates increase from current levels. Home price depreciation experienced to date and any further price depreciation may also leave borrowers, in particular those with negative amortization loans, with insufficient equity in their homes to permit them to refinance. Borrowers who intended to sell their homes on or before the expiration of the fixed rate periods on their adjustable rate mortgage loans may find they cannot sell their property for an amount equal to or greater than the unpaid principal balance of their loans. In addition, some mortgage loans may include prepayment premiums that would further inhibit refinancing. While some lenders and servicers have created modification programs to assist borrowers with refinancing or otherwise meeting their payment obligations, not all borrowers have qualified for or taken advantage of these opportunities. Future Regulatory Uncertainty There are a number of regulatory proposals that have been issued for comment, which give rise to questions about the legal environment for securitizations going forward. In April 2010, the Securities and Exchange Commission issued for comment proposed regulations that would have important impacts on asset-backed securities and structured finance products, including the following: increased asset level data disclosure and reporting requirements; a requirement to file a waterfall model; new conditions on the use of shelf registration for assetbacked securities, including a risk retention requirement and an undertaking to provide Exchange Act reporting over the life of the transaction; and new requirements that would condition reliance on private placement safe harbors for structured finance products on the provision to investors of the same disclosure and reporting that would be required for a registered offering. The Dodd-Frank Wall Street Reform and Consumer Protection Act was signed into law on July 21, 2010, and mandates, among other financial reform regulations, the imposition of new requirements on securitizations, including requiring that the applicable regulatory agencies prescribe new regulations for risk retention. While the ultimate outcome remains uncertain, it is possible these proposals and new regulations could significantly affect the economics or practicability of future securitizations, which in turn could affect the market value and liquidity of structured finance products generally.
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Risks Associated with Rule 17g-5 under the Exchange Act This securitization is subject to Rule 17g-5 under the Exchange Act. In order to comply with Rule 17g-5, the issuer has created a password-protected website that is accessible to all nationally recognized statistical rating organizations (NRSROs) (not just the Rating Agencies) meeting applicable criteria, so that they may obtain information about this securitization. This information could be used by those NRSROs to publish unsolicited ratings on certain classes of the Offered Notes. These ratings could reduce the liquidity and market value of such Offered Notes and could adversely affect any investor relying on credit ratings for any purpose. None of the Issuer, the Seller, the Guarantor, the Initial Purchasers, the Indenture Trustee in any of its related capacities, the Administrator or the Owner Trustee, or any other party to this transaction will have any control over these unsolicited ratings. In addition, Rule 17g-5 requires the posting of ongoing information about the securitization on a website accessible to NRSROs. As a result, an unsolicited rating from an NRSRO could be published at any time during the life of the transaction. None of the Issuer, the Seller, the Guarantor, the Initial Purchasers, the Indenture Trustee in any of its related capacities, the Administrator or the Owner Trustee, or any other party to this transaction, will have any obligation to disclose these unsolicited ratings, if any, and will not update this Memorandum or otherwise inform investors of any unsolicited ratings of the Offered Notes. Risks Associated with the Underlying Mortgage Loans For a description of the risks associated with the Underlying Mortgage Loans, investors should review the risk factors section of each of the related Underlying Offering Documents. In addition to the risks highlighted in the related Underlying Offering Documents, investors should note the following risks presented by some of the features of the Underlying Mortgage Loans, which may have an effect on distributions and realized losses with respect to the related Underlying Securities and, to such extent, will affect the yields to maturity and the weighted average lives of the related Offered Notes: Adjustable Rate Mortgage Loans. Certain of the Underlying Transactions include a significant portion of adjustable rate mortgage loans whose mortgage rates are fixed for several years following origination and then adjust annually based on an index. At the time of origination of such mortgage loans, the related borrower may have qualified based on an initial fixed rate (the Teaser Rate) that was significantly below the mortgage rate calculated using the sum of the applicable loan index at origination and the related gross margin. In determining a borrowers ability to pay, the underwriting standards of the Underlying Originators often (i) allowed debt-to-income ratios higher than Fannie Mae and Freddie Mac standards, (ii) looked at the Teaser Rate on such mortgage loan and not the related fully-indexed mortgage rate, and (iii) did not factor in tax and insurance payments. As a result, as interest rates adjust and monthly payments on such Underlying Mortgage Loans increase, delinquencies, foreclosures, bankruptcies and losses on such Underlying Mortgage Loans may increase. Interest Only Mortgage Loans. Many of the Underlying Transactions include a portion of interest only mortgage loans that only require the borrower to make payments of interest on the mortgage loan for a number of years following origination. Such borrowers will be exposed to increased monthly payments when the interest only term expires and the monthly payments on these loans are recalculated to amortize the outstanding principal balance over the remaining term. Similar to adjustable rate mortgage loans, each Underlying Originator likely determined the loan amount that a borrower could afford based on the borrowers initial scheduled monthly payments, rather than based on the adjusted monthly payments as of the principal amortization date. As a result, as monthly payments on interest only Underlying Mortgage Loans increase once the interest only term expires, delinquencies, foreclosures, bankruptcies and losses on such Underlying Mortgage Loans may increase. Reduced Documentation Mortgage Loans. Many of the Underlying Mortgage Loans included in an Underlying Transaction may have been originated based on stated, reduced or no documentation regarding a borrowers income and/or assets. Borrowers under such Underlying Mortgage Loans may not actually have sufficient income or assets or may have overstated their income or assets and, as a consequence, may be unable to make their monthly mortgage loan payments. As a result, such reduced documentation Underlying Mortgage Loans may experience increased delinquencies, foreclosures, bankruptcies and losses. Negative Amortization Mortgage Loans. The Underlying Transactions related to the Series I Notes include Underlying Mortgage Loans that permit the borrower to make mortgage payments in an amount that is less than the 11
full amount of accrued interest payable on such Underlying Mortgage Loans. That portion of accrued interest will become deferred interest that will be added to the principal balance of the related Underlying Mortgage Loan. The amount of deferred interest, if any, with respect to such Underlying Mortgage Loans for a given month will reduce the amount of interest collected on these Underlying Mortgage Loans that is available for distributions of interest on the securities in the related Underlying Transactions. The resulting reduction in interest collections on these Underlying Transactions may result in a reduction of accrued interest distributable to each class of related Underlying Securities and a portion of deferred interest may be added to the principal balance of those Underlying Securities. Any such allocation of deferred interest could, as a result, affect the weighted average lives of the related Underlying Securities. During periods in which the outstanding principal balance of an Underlying Mortgage Loan is increasing due to the addition of deferred interest, the increasing principal balance of that Underlying Mortgage Loan may approach or exceed the value of the related mortgaged property, especially given recent home price depreciation, thus increasing the likelihood of defaults as well as the amount of any loss experienced with respect to any such Underlying Mortgage Loan that is required to be liquidated. Furthermore, each such Underlying Mortgage Loan provides for the payment of any remaining unamortized principal balance of such Underlying Mortgage Loan (due to the addition of deferred interest, if any, to the principal balance of such Underlying Mortgage Loan) in a single payment at the maturity of the Underlying Mortgage Loan. Because the mortgagors may be required to make a larger single payment upon maturity, it is possible the default risk associated with these Underlying Mortgage Loans is greater than that associated with fully amortizing mortgage loans. Geographic Concentration. Many of the Underlying Transactions include a portion of Underlying Mortgage Loans secured by mortgaged properties located in states where housing values have declined substantially. Certain of these states have experienced severe declines in property values and are experiencing a disproportionately high rate of delinquencies and foreclosures relative to other states. The current loan-to-value ratios of many of those Underlying Mortgage Loans, if they were recalculated based on the current value of the related mortgaged property, may be considerably higher than their original loan-to-value ratios. In addition, any concentration of Underlying Mortgage Loans in one or more states will have a disproportionate effect on the Underlying Securities if the regulatory authorities in any of those states take actions against an Underlying Originator and an Underlying Servicer that impair the related Underlying Trusts ability to realize on such Underlying Mortgage Loans. For a discussion of additional risks associated with the Underlying Mortgage Loans, see Risk Factors and The Mortgage Pool or information contained under a similar heading in the related Underlying Offering Documents. Limited Information Regarding the Underlying Securities and the Underlying Mortgage Loans The information about each of the Underlying Securities and the related Underlying Mortgage Loans disclosed in this Memorandum has been obtained from the Underlying Offering Documents, the Underlying Agreements and the Underlying Distribution Reports. Each Underlying Offering Document contains information as of the date thereof. You should be aware, however, that changes may have occurred since the preparation of the Underlying Offering Documents and the composition and performance of the applicable mortgage pools may have changed. As a result, there may be differences between the current characteristics of the Underlying Mortgage Loans included in any Underlying Transaction and the characteristics described in the related Underlying Offering Documents. Except as set forth in the Underlying Distribution Reports, no information is provided in this Memorandum regarding the current composition or characteristics of any of the Underlying Mortgage Loans. Investors in any class of Offered Notes must (i) make their own analysis of the performance of the related Underlying Mortgage Loans and current composition of the related Underlying Mortgage Loans, (ii) consider that detailed pool information may not be available from any source, and (iii) consider that the characteristics of the related Underlying Mortgage Loans may have evolved unfavorably over time. Neither the Seller nor any Initial Purchaser prepared the Underlying Offering Documents, the Underlying Agreements or the Underlying Distribution Reports and the Seller (other than the limited representations and warranties made by the Seller under the Trust Agreement) and the Initial Purchasers do not make any representation as to the accuracy or completeness of information provided in any of those documents or any representation or warranty regarding the Underlying Mortgage Loans or the Underlying Securities. In addition, the information 12
contained in this Memorandum regarding the Underlying Securities has not been independently verified by any of the Issuer, the Seller, the Guarantor, the Initial Purchasers, the Indenture Trustee in any of its related capacities, the Administrator or the Owner Trustee or otherwise covered by representations to any party as to accuracy and completeness. Prospective investors are advised to consider the limited nature of such available information in evaluating the suitability of any investment in the Offered Notes. Prospective purchasers of Offered Notes are not to construe the contents of the Underlying Distribution Reports or any prior or subsequent communications from the Seller or the Initial Purchasers or any of their officers, employees or agents as investment, legal or tax advice. Limited Information Regarding the Underlying Originators and Underlying Servicers Information about certain Underlying Originators and Underlying Servicers who originated and service, respectively, the Underlying Mortgage Loans may be found in the related Underlying Offering Documents. However, some Underlying Originators and Underlying Servicers may have experienced serious financial difficulties and may have been acquired, gone out of business or been subject to a bankruptcy or receivership or may be insolvent. Material developments have likely taken place with respect to certain Underlying Originators and Underlying Servicers. In connection with the offering of the Offered Notes, neither the Seller nor any Initial Purchaser has made any inquiry with respect to such information or otherwise with respect to such Underlying Originators and Underlying Servicers. None of the Issuer, the Seller, the Guarantor, the Initial Purchasers, the Indenture Trustee in any of its related capacities, the Administrator or the Owner Trustee has verified or makes any representation or warranty as to any such information. Noncompliance by Underlying Servicers and Sub-Servicers The Underlying Servicers and any sub-servicers appointed by the Underlying Servicers are required to comply with laws and regulations relating to their activities in connection with servicing the Underlying Mortgage Loans. Certain Underlying Servicers have experienced financial difficulties, in part due to the recent credit market conditions and additional costs in servicing an increasingly delinquent mortgage loan portfolio, which may impede their ability to make advances required under the related Underlying Agreement or otherwise comply with the terms of the related Underlying Agreement or to employ loss mitigation practices effectively. In certain circumstances, an Underlying Servicer or sub-servicer may be required to resign and a successor servicer or sub-servicer, as applicable, must be appointed in accordance with the related Underlying Agreement. If this happens, a transfer of servicing will occur that may result in a temporary increase in the delinquencies, defaults and losses on the transferred mortgage loans. These factors may affect the timing and receipt of payments and the amount of losses on the related Underlying Securities. Noncompliance by an Underlying Servicer or sub-servicer, as applicable, could result in claims against such Underlying Servicer or sub-servicer and could limit or restrict the ability of the Underlying Servicer or sub-servicer to collect amounts due under the related Underlying Mortgage Loans or to realize on the collateral securing the related Underlying Mortgage Loans. Foreclosure Moratoriums by Underlying Servicers Investors in the Offered Notes should note that several major servicers of mortgage loans, including JPMorgan Chase, Bank of America and GMAC Mortgage, have recently announced that they were halting foreclosures in certain states pending the resolution of issues related to the signing of documents in connection with foreclosure. Many of the servicers that have declared foreclosure moratoriums are Underlying Servicers servicing the Underlying Mortgage Loans. Any resulting delays may be significant and may result in additional payments made to subordinate securities or senior securities in the related Underlying Transaction than would otherwise be the case. These additional distributions to subordinate securities will reduce the amount of credit enhancement for the related senior securities, including the related Underlying Securities, and may eventually result in a greater loss to such senior securities. In addition, the costs of resolving these issues may be allocated to the related Underlying Trust. In addition, the rating agencies may reduce or withdraw the servicer ratings of these Underlying Servicers, which in turn could lead to such servicers being removed and replaced in certain Underlying Transactions. There can be no assurance that other Underlying Servicers will not also make the decision to halt foreclosure.
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Prepayments on the Underlying Mortgage Loans The Underlying Mortgage Loans included in each of the Underlying Trusts may be prepaid, as described in the related Underlying Offering Documents. The rate of prepayments is influenced by many factors and cannot be predicted. The timing of changes in the rate of prepayments on the Underlying Mortgage Loans may significantly affect an investors actual yield to maturity even if the average rate of principal payments is consistent with an investors expectation. If you purchase the Offered Notes at a discount and principal is repaid slower than you anticipate, then your yield may be lower than you anticipate. If you purchase the Offered Notes at a premium and principal is repaid faster than you anticipate, then your yield may be lower than you anticipate. In addition, the timing and amount of cash flows on the Underlying Securities will be affected by the exercise of any early termination with respect to any Underlying Trust. Typically, the earlier a prepayment of principal on the Underlying Mortgage Loans the greater the effect on an investors yield to maturity. As a result, principal payments occurring at an early date at a rate higher (or lower) than the rate anticipated by the investor may adversely affect an investors anticipated yield even when an offsetting reduction (or increase) in the rate of principal payments occurs later. Variability in Yields and Weighted Average Lives The yields to investors in the Offered Notes will be sensitive to, among other things, the rate and timing of principal distributions on, and realized losses allocated to, the related Underlying Securities and the amount of interest distributions on the related Underlying Securities. Distributions on the Underlying Securities will be sensitive to, among other things, the rate and timing of principal payments on the related Underlying Mortgage Loans (including prepayments on the related Underlying Mortgage Loans, which generally may be prepaid in full or in part at any time, except that, if so specified in the related Underlying Agreement, certain prepayments may subject the borrower to a penalty), modifications to the payment terms and any losses and shortfalls on the Underlying Mortgage Loans allocable to the related Underlying Securities as described in this Memorandum and in the Underlying Offering Documents and the manner in which principal payments on the Underlying Mortgage Loans are allocated among the various classes of certificates issued in the related Underlying Transaction. It is anticipated that the Underlying Securities of each Series initially will generate more interest than is needed to pay interest on the related Offered Notes and certain trust expenses primarily because of the significant amount of overcollateralization with respect to each Series of Offered Notes as of the Closing Date, resulting in interest being paid on an aggregate principal balance of Underlying Securities (as reduced in respect of any related Implied Writedown Amount) that is initially larger than the Note Principal Balance of the related Offered Notes. In addition, the weighted average of the rates on the Underlying Securities may be higher at times than the Note Rate on the related Offered Notes. Further, principal collections on the Underlying Securities will be applied to pay interest due on the related Offered Notes before being applied to pay principal. The amount of overcollateralization provided by the Underlying Securities of each Series immediately following distributions made on such Underlying Securities on the related Underlying Distribution Date in September 2010 was approximately 11.69% of the aggregate principal balance of the Series I Underlying Securities (as reduced in respect of any related Implied Writedown Amount) and approximately 14.32% of the aggregate principal balance of the Series II Underlying Securities (as reduced in respect of any related Implied Writedown Amount). As a result, the amount of available funds for each Series in excess of the amount that is needed to pay interest on the related Offered Notes and any related fees and trust expenses on the related Payment Date will be used to reduce the Note Principal Balance of such Offered Notes and, therefore, will result in an accelerated rate of principal payments to holders of the related Offered Notes. An earlier return of principal to the Noteholders as a result of the use of excess interest to make principal payments will influence the yields on the Offered Notes in a manner similar to the manner in which principal prepayments on the related Underlying Mortgage Loans will influence the yields on the related Underlying Securities.
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There can be no assurance as to whether the initial amount of overcollateralization for either Series will be maintained or the rate at which such amount of overcollateralization may be increased or reduced. On each Payment Date with respect to each Series of Offered Notes, the Issuer will be required to make a principal payment to the holders of such Offered Notes in an amount equal to the Parity Payment, if any, for such Series and such Payment Date, in each case in reduction of the Note Principal Balance thereof. If the Issuer is unable to pay any portion of a Parity Payment for a Series of Offered Notes from related Available Funds, the Guarantor will pay such portion of that Parity Payment pursuant to the Guaranty. Any such Parity Payment may affect the yield to maturity and reduce the weighted average life of the related Offered Notes. See Description of the Offered NotesPrincipal Payments Due to the Allocation of Losses and Description of the Guaranty in this Memorandum. The Seller makes no representation as to the anticipated rate or timing of payments, the rate, timing or severity of losses on the Underlying Mortgage Loans, the anticipated weighted average lives or the anticipated yields to maturity of the Offered Notes. Lack of Liquidity; Conditions to Transfer; Absence of Secondary Market The Offered Notes are subject to certain conditions to transfer and resale and may not be transferred or resold except in accordance with the terms of the Indenture. Certain investors may not be permitted to purchase the Offered Notes. See Notice to Investors, ERISA Considerations and Legal Investment in this Memorandum. The secondary mortgage markets are currently experiencing unprecedented disruptions resulting from, among other things, reduced investor demand for mortgage loans and mortgage-backed securities, increased investor yield requirements for those loans and securities, downgrades of the ratings of mortgage-backed securities and monoline insurers by the rating agencies and liquidations of investment portfolios, collateralized debt obligations and structured investment vehicles that contain mortgage-backed securities. Fluctuating investor confidence in the mortgage industry also will continue to contribute to an illiquid market for mortgage-backed securities, generally. As a result, the secondary market for mortgage-backed securities is experiencing extremely limited liquidity. There is currently no secondary market for the Offered Notes. In addition, the Offered Notes will not be listed on any securities exchange. As a result, investors must be prepared to bear the risk of holding the Offered Notes to maturity. The primary source of information available to investors concerning the Offered Notes will be monthly statements to Noteholders made available by the Indenture Trustee. There can be no assurance that any additional information regarding the Offered Notes will be available to Noteholders through any source. In addition, neither the Seller nor any Initial Purchaser is aware of any source through which price information about the Offered Notes will be generally available on an ongoing basis. The limited nature of such information regarding the Offered Notes may adversely affect the liquidity of the Offered Notes, even if a secondary market for the Offered Notes becomes available. Special Assessments and Energy Efficiency Liens May Take Priority over the Mortgage Lien on the Underlying Mortgage Loans Mortgaged properties securing the Underlying Mortgage Loans may be subject to the lien of special property taxes and/or special assessments. These liens are superior to the liens securing the Underlying Mortgage Loans, irrespective of the date of the mortgage. In some instances, individual borrowers may be able to elect to enter into contracts with governmental agencies for Property Assessed Clean Energy (PACE) or similar assessments that are intended to secure the payment of energy and water efficiency and distributed energy generation improvements that are permanently affixed to their properties, possibly without notice to or the consent of the mortgagee. These assessments also have lien priority over the mortgages securing mortgage loans. No assurance can be given that any mortgaged property so assessed will increase in value to the extent of the assessment lien. Additional indebtedness secured by the assessment lien would reduce the amount of the value of the mortgaged property available to satisfy the affected Underlying Mortgage Loan.
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Changes in the Accounting Rules May Affect You The Financial Accounting Standards Board recently adopted changes to the accounting standards for investments, such as the Offered Notes, in interests in securitization vehicles such as the Trust. These changes, and any other future changes in accounting standards, may affect the manner in which you must account for your investment in any Offered Notes and, under some circumstances, may require that you consolidate the entire Trust on your balance sheet. Prospective investors in the Offered Notes should consult their accounting advisors to determine the effect that accounting standards, including the recent changes, may have on them. We make no representation or warranty regarding the treatment of any Offered Notes or the Trust for purposes of any accounting standards. Offered Notes May Not Be Appropriate for All Investors The Offered Notes are not suitable investments for all investors. In particular, you should not purchase the Offered Notes unless you understand the prepayment, extension, liquidity and market risks associated with the Offered Notes because: The timing of payments you receive on the Offered Notes will depend on distributions on the related Underlying Securities, which will depend primarily on the amount of the payments borrowers make on the related Underlying Mortgage Loans. Because we cannot predict the rate at which borrowers will repay or default on their mortgage loans or the degree to which there will be modifications to the payment terms on the Underlying Mortgage Loans, you may receive payments of principal on the Offered Notes on any particular Payment Date in amounts that are larger or smaller than you expect. In addition, the lives of the Offered Notes may be longer or shorter than anticipated. Because of this, we cannot assure you that you will receive payments of principal or that you will receive a specific amount of principal on any specific future date; provided, however, payment of the remaining Note Principal Balance of the Offered Notes outstanding as of the related Final Scheduled Payment Date will be paid under the terms of the Indenture and, to the extent necessary, under the Guaranty. The amount of overcollateralization and any excess interest generated by the Underlying Securities of the related Series, in excess of the amount that is needed to pay interest on the related Offered Notes and any Guaranty Fee, related fees and trust expenses and to fund the related Expense Reserve Fund, will impact the rate of principal payments on the Offered Notes, thereby affecting the yields to maturity and weighted average lives of the Offered Notes. The yields to maturity on the Offered Notes will also depend on the purchase price of the Offered Notes and the rate of principal distributions on, and realized losses allocated to, the related Underlying Securities. The rate of distributions on the Underlying Securities will be affected by any adjustments to the monthly payments on the related Underlying Mortgage Loans as a result of loan modifications. Rapid prepayment rates on the Underlying Mortgage Loans are likely to coincide with periods of low prevailing interest rates. During these periods, the yield at which you may be able to reinvest amounts received as payments on the Offered Notes may be lower than the yields on the Offered Notes. Conversely, slow prepayment rates on the related Underlying Mortgage Loans are likely to coincide with periods of high interest rates. During these periods, the amount of payments made to you for reinvestment at such high rates may be relatively low. The Note Rate of the Senior I-A Notes will be based on the level of One-Month LIBOR, subject to a specified maximum rate. Thus, the yield to investors in the Senior I-A Notes will be sensitive to fluctuations in the level of One-Month LIBOR. Lower levels of One-Month LIBOR will generally reduce the yield on the Senior I-A Notes. You should bear in mind that the timing of changes in the level of OneMonth LIBOR may affect your yield. We cannot assure you as to the level, rate or timing of changes in any index.
Withdrawal or Downgrade of Initial Ratings will Reduce the Value of the Offered Notes The ratings assigned to the Offered Notes by the Rating Agencies should not be deemed a recommendation to purchase, hold or sell Offered Notes, since they do not address market price or suitability for a particular investor. 16
There is also no assurance these ratings will remain in effect for any given period of time or may not be lowered or withdrawn entirely by a Rating Agency if, in its judgment, future circumstances so warrant. Any reduction or withdrawal of a rating may have an adverse effect on the value of the Offered Notes. The Offered Notes are complex securities. You should possess, either alone or together with an investment advisor, the expertise necessary to evaluate the information contained herein in the context of your financial situation and tolerance for risk. You should carefully consider, among other things, the factors described below and under Yield, Prepayment and Maturity Considerations in this Memorandum before purchasing the Offered Notes.
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SUMMARY OF TRANSACTION On the Closing Date, (i) the Seller will transfer the Underlying Securities to the Issuer pursuant to the Trust Agreement and the Owner Trustee will cause the Owner Trust Certificates to be issued, (ii) the Issuer will pledge the Underlying Securities and the other assets of each Trust Estate to the Indenture Trustee and cause the Offered Notes to be issued pursuant to the Indenture, (iii) the Owner Trustee will deliver the Owner Trust Certificates upon the order of the Seller to the Seller or its designees, and (iv) the Indenture Trustee will deliver the Offered Notes upon the order of the Seller to the Initial Purchasers or their designees in connection with the sale by the Seller to the Initial Purchasers of the Offered Notes pursuant to the Note Purchase Agreement. On each Underlying Distribution Date, the Indenture Trustee will receive all distributions, if any, on the Underlying Securities. On each Payment Date, from such distributions received on the Underlying Securities, the Indenture Trustee, on behalf of the Issuer, will make payments on the related Offered Notes as set forth under Description of the Offered NotesAllocation of Available Funds in this Memorandum. The Offered Notes will also have the benefit of the Guaranty that will fully and unconditionally guarantee all amounts of principal and interest due on the Offered Notes under the terms of the Indenture. See Description of the Guaranty in this Memorandum.
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DESCRIPTION OF THE OFFERED NOTES General The Offered Notes will be issued pursuant to the Indenture. Set forth below are summaries of the specific terms and provisions pursuant to which the Offered Notes will be issued. The following summaries do not purport to be complete and are subject to, and are qualified in their entirety by reference to, the provisions of the Indenture, the Trust Agreement and the Guaranty. Investors may, upon written request, obtain a copy of the Indenture, the Trust Agreement and the Guaranty from the Indenture Trustee. The Offered Notes will have the initial Note Principal Balances and Note Rates shown under the heading Offered Notes in the table captioned The Securities in this Memorandum. The Senior I-A Notes will be entitled to payments of interest and principal from distributions received on the Series I Underlying Securities as set forth under Allocation of Available Funds in this Memorandum. The Senior II-A Notes will be entitled to payments of interest and principal from distributions received on the Series II Underlying Securities as set forth under Allocation of Available Funds in this Memorandum. The Offered Notes for a Series will not be cross-collateralized with the Offered Notes for the other Series. The Series I Owner Trust Certificates will represent the beneficial ownership in the portion of the Trust relating to the Series I Underlying Securities and will be entitled to all payments from the Trust relating to the Series I Underlying Securities only after the Senior I-A Notes are paid in full and all other payments relating to Series I as described in clauses (i) - (viii) under Allocation of Available Funds in this Memorandum have been paid. The Series II Owner Trust Certificates will represent the beneficial ownership in the portion of the Trust relating to the Series II Underlying Securities and will be entitled to all payments from the Trust relating to the Series II Underlying Securities only after the Senior II-A Notes are paid in full and all other payments relating to Series II as described in clauses (i) - (viii) under Allocation of Available Funds in this Memorandum have been paid. The Owner Trust Certificates will be issued in definitive, fully registered form. The Owner Trust Certificates for a Series will not be cross-collateralized with the Owner Trust Certificates for the other Series. The Owner Trust Certificates are not being offered by this Memorandum. The Offered Notes represent a non-recourse obligation of the Issuer. Each Series is secured by a pledge of a trust estate consisting of the related Underlying Securities and other rights as described below (each, a Trust Estate). The Noteholders will also have the benefit of the Guaranty. The assets of each Trust Estate will consist primarily of all right, title and interest in and to (i) the related Underlying Securities and all distributions thereon beginning with the Underlying Distribution Date in October 2010, (ii) amounts on deposit in the related Note Account, the related Certificate Account, the related Expense Reserve Fund and certain other accounts specified in the Indenture, (iii) the right of the Issuer to enforce remedies under certain agreements, (iv) all present and future claims, demands, causes and choses in action in respect of the foregoing, including the rights of the Issuer under the related Underlying Securities, and (v) all proceeds of the foregoing of every kind and nature whatsoever, including, without limitation, all proceeds of the conversion thereof, voluntary or involuntary, into cash or other liquid property, all cash proceeds, accounts receivable, notes, drafts, acceptances, chattel paper, checks, deposit accounts, rights to payment of any and every kind and other forms of obligations and receivables, instruments and other property that at any time constitute all or part of or are included in the proceeds of the foregoing. All payments to holders of the Offered Notes, other than the final payment on the Offered Notes, will be made on each Payment Date by or on behalf of the Indenture Trustee to the persons in whose names the Offered Notes are registered at the close of business on each Record Date. The final payment on the Offered Notes will be made in like manner but only upon presentment and surrender of the Offered Notes at the applicable corporate trust office of the Indenture Trustee or such other location specified in the notice to Noteholders of such final payment.
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Denominations and Form The Offered Notes will be issued in book-entry form only (the Book-Entry Notes). All of the BookEntry Notes will be issued in minimum denominations of $10,000 initial Note Principal Balance and integral multiples of $10,000 in excess thereof, provided that one Senior I-A Note and one Senior II-A Note, or an interest therein, may be issued in a different amount or multiple in excess of such minimum denomination. The Book-Entry Notes will initially be issued through the facilities of the Depository Trust Company (DTC). The Book-Entry Notes may also be held through Clearstream Banking (Clearstream) and the Euroclear System (Euroclear), as participants in DTC. A beneficial interest in a Book-Entry Note may be transferred to a person who takes delivery in the form of a beneficial interest in a Book-Entry Note and is deemed to have made the certifications required under the Indenture. The beneficial owners ownership of a Book-Entry Note will be recorded on the records of the brokerage firm, bank, thrift institution or other financial intermediary (each, a Financial Intermediary) that maintains the beneficial owners account for such purpose. In turn, the Financial Intermediarys ownership of such Book-Entry Note will be recorded on the records of DTC (or of a participating firm that acts as agent for the Financial Intermediary, whose interest will in turn be recorded on the records of DTC, if the beneficial owners Financial Intermediary is not a DTC participant). Beneficial owners will receive all payments of principal of and interest on the Book-Entry Notes from the Indenture Trustee through DTC and DTC participants. While the Book-Entry Notes are outstanding (except under the circumstances described below), under the rules, regulations and procedures creating and affecting DTC and its operations (the Rules), DTC is required to make book-entry transfers among participants on whose behalf it acts with respect to the Book-Entry Notes and is required to receive and transmit payments of principal of, and interest on, the Book-Entry Notes. Participants and indirect participants with whom beneficial owners have accounts with respect to Book-Entry Notes are similarly required to make book-entry transfers and receive and transmit such payments on behalf of their respective beneficial owners. Accordingly, although beneficial owners will not possess notes representing their respective interests in the Book-Entry Notes, the Rules provide a mechanism by which beneficial owners will receive payments and will be able to transfer their interests in the Book-Entry Notes. Transfers between participants will occur in accordance with the Rules. DTC, which is a New York-chartered limited purpose trust company, performs services for its participants, some of which (and/or their representatives) own DTC. In accordance with its normal procedures, DTC is expected to record the positions held by each DTC participant in the Book-Entry Notes, whether held for its own account or as a nominee for another person. In general, beneficial ownership of Book-Entry Notes will be subject to the Rules, as in effect from time to time. Payments on the Book-Entry Notes will be made on each Payment Date by the Indenture Trustee to DTC. DTC will be responsible for crediting the amount of such payments to the accounts of the applicable DTC participants in accordance with DTCs normal procedures. Each DTC participant will be responsible for disbursing such payments to the beneficial owners of the Book-Entry Notes that it represents and to each Financial Intermediary for which it acts as agent. Each such Financial Intermediary will be responsible for disbursing funds to the beneficial owners of the Book-Entry Notes that it represents. Under a book-entry format, beneficial owners of the Book-Entry Notes may experience some delay in their receipt of payments, since such payments will be forwarded by the Indenture Trustee to DTC. Because DTC can only act on behalf of Financial Intermediaries, the ability of a beneficial owner to pledge Book-Entry Notes to persons or entities that do not participate in DTCs depository system, or otherwise take actions in respect of such Book-Entry Notes, may be limited due to the lack of a physical note for such Book-Entry Notes. DTC has advised the Indenture Trustee that, unless and until definitive, fully registered form only notes (Definitive Notes) are issued, DTC will take any action permitted to be taken by the holders of the Book-Entry
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Notes under the Indenture only at the direction of one or more participants to whose DTC accounts the Book-Entry Notes are credited, to the extent that such actions are taken on behalf of Financial Intermediaries whose holdings include such Book-Entry Notes. DTC may take actions, at the direction of the related participants, with respect to some Book-Entry Notes that conflict with actions taken with respect to other Book-Entry Notes. Definitive Notes will be issued to beneficial owners of the Book-Entry Notes, or their nominees, rather than to DTC, only if DTC advises the Issuer, the Note Registrar and the Indenture 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 Notes and the Issuer or the Indenture Trustee is unable to locate a qualified successor. Upon the occurrence of the event described in the immediately preceding paragraph, the Indenture Trustee will be required to notify all beneficial owners through DTC of the occurrence of such event and the availability through DTC of Definitive Notes. Upon surrender by DTC of the Book-Entry Notes and receipt of instructions for re-registration, the Issuer will execute and the Indenture Trustee will authenticate and deliver Definitive Notes. The Holders of such Definitive Notes will be recognized as Noteholders under the Indenture. Although DTC, Euroclear and Clearstream have agreed to the foregoing procedures in order to facilitate transfers of Book-Entry Notes among participants of DTC, Euroclear and Clearstream, they are under no obligation to perform or continue to perform such procedures and such procedures may be discontinued at any time. None of the Issuer, the Seller, the Guarantor or the Indenture Trustee will have any responsibility for any aspect of the records relating to or payments made through DTC or any similar book-entry facility on account of beneficial ownership interests of the Book-Entry Notes held by Cede & Co., as nominee for DTC, or for maintaining, supervising or reviewing any records relating to such beneficial ownership interests. Conditions to Transfer of the Offered Notes The sale, pledge or other transfer of any Offered Note or any interest therein will be subject to the conditions described under Notice to Investors in this Memorandum. The Offered Notes will bear a legend referring to the transfer conditions thereof. Any holder of an Offered Note desiring to effect any transfer of an Offered Note or interest therein will be deemed to have agreed to comply with such transfer conditions and indemnify the Indenture Trustee, the Guarantor and the Seller against any liability that may result if the transfer is not made in accordance with the provisions of the Indenture. Allocation of Available Funds On or before the Closing Date, the Indenture Trustee will establish an account for each Series (each, a Note Account) for the benefit of the related Noteholders and the Guarantor into which will be deposited amounts received on the Underlying Securities for payment to the related Securityholders and transaction parties. On each Payment Date, the Indenture Trustee will make the following disbursements and transfers from the Available Funds for each Series in the following order of priority, in each case to the extent of remaining Available Funds for the related Series: (i) concurrently, to the Indenture Trustee, the related Indenture Trustee Fee, if any, for such Payment Date and, to the Owner Trustee, the related Owner Trustee Fee for such Payment Date; (ii) to the Guarantor, the Guaranty Fee due to the Guarantor under the Guaranty in respect of the related Offered Notes; (iii) any Extraordinary Trust Expenses for the related Series for such Payment Date, to The Bank of New York Mellon (in each of its various capacities) and the Owner Trustee, on a pro rata basis based on the amounts owed thereto; provided, however, that the amount of Extraordinary Trust Expenses for the related Series payable pursuant to this clause shall not exceed $100,000 in the aggregate for such Series for such Payment Date;
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(iv) to the holders of the related Offered Notes, the related Accrued Interest for such class for such Payment Date; (v) to the Expense Reserve Fund for each Series, up to an amount that in the aggregate equals approximately $102,500 with respect to the Expense Reserve Fund for Series I and approximately $102,500 with respect to the Expense Reserve Fund for Series II; (vi) first, to the holders of the related Offered Notes, as principal, an amount equal to the related Parity Payment, if any, for such Payment Date, until the Note Principal Balance thereof has been reduced to zero and, second, to the holders of the related Offered Notes, as principal, until the Note Principal Balance thereof has been reduced to zero; (vii) Notes; (viii) any Extraordinary Trust Expenses for the related Series for such Payment Date, to the extent unpaid after payments pursuant to clause (iii) above, to The Bank of New York Mellon (in each of its various capacities) and the Owner Trustee, on a pro rata basis based on the amounts owed thereto; and (ix) any remaining related Available Funds, to the holders of the Owner Trust Certificates for the related Series. Credit Enhancement It is anticipated that the Underlying Securities of each Series initially will generate more interest than is needed to pay interest on the related Offered Notes and certain trust expenses primarily because of the significant amount of overcollateralization with respect to each Series of Offered Notes as of the Closing Date, resulting in interest being paid on an aggregate principal balance of Underlying Securities (as reduced in respect of any related Implied Writedown Amount) that is initially larger than the Note Principal Balance of the related Offered Notes. In addition, the weighted average of the rates on the Underlying Securities may be higher at times than the Note Rate on the related Offered Notes. Further, principal collections on the Underlying Securities will be applied to pay interest due on the related Offered Notes before being applied to pay principal. The amount of overcollateralization provided by the Underlying Securities of each Series, immediately following distributions made on such Underlying Securities on the related Underlying Distribution Date in September 2010, was approximately 11.69% of the aggregate principal balance of the Series I Underlying Securities (as reduced in respect of any related Implied Writedown Amount) and approximately 14.32% of the aggregate principal balance of the Series II Underlying Securities (as reduced in respect of any related Implied Writedown Amount). As a result, Available Funds for each Series in excess of the amount that is needed to pay interest on the related Offered Notes, the related Guaranty Fee, the related Indenture Trustee Fee, if any, the related Owner Trustee Fee and any related Extraordinary Trust Expenses and, if applicable, to fund the related Expense Reserve Fund on the related Payment Date will be used to reduce the Note Principal Balance of such Offered Notes prior to any other distributions, including any distributions on the related Owner Trust Certificates, as described under Allocation of Available Funds. This accelerated principal payment feature is likely to increase the amount of overcollateralization with respect to each Series of Offered Notes over time, unless such overcollateralization is offset by losses allocated to the related Underlying Securities. Principal Payments Due to the Allocation of Losses Any losses allocated to the Underlying Securities of a Series on any Underlying Distribution Date (including but not limited to any realized loss allocated to the Underlying Mortgage Loans, which are in turn allocated to the related Underlying Securities) (Losses) will reduce the amount of overcollateralization with respect to the related Offered Notes, with a corresponding reduction to the Certificate Principal Balance of the related Owner Trust Certificates. On each Payment Date with respect to each Series of Offered Notes, the Issuer will be required to make a principal payment to the holders of such Offered Notes in an amount equal to the amount, if any, by which (i) the Note Principal Balance (after taking into account all payments to be made from the related to the Guarantor, any unpaid Reimbursement Amounts with respect to the related Offered
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Available Funds on such Payment Date) of such Offered Notes is greater than (ii) the aggregate principal balance of the related Underlying Securities (as reduced in respect of any related Implied Writedown Amount) after distributions on the related Underlying Distribution Date (such amount with respect to each Series, the Parity Payment), in each case in reduction of the Note Principal Balance thereof. If the Issuer is unable to pay any portion of a Parity Payment for a Series of Offered Notes from related Available Funds, the Guarantor will pay such portion of that Parity Payment pursuant to the Guaranty. See Description of the Guaranty in this Memorandum. In some cases, the Underlying Agreements for certain Underlying Securities do not provide for a reduction of the principal balance of such Underlying Securities by the allocable portion of the amount of any realized losses on the related Underlying Mortgage Loans. To the extent any related overcollateralization, subordination, bond insurance policy or other credit enhancement with respect to these Underlying Securities is not available to cover realized losses, these Underlying Securities will be undercollateralized because the aggregate principal balance of the Underlying Mortgage Loans will be less than the aggregate principal balance of the related Underlying Securities. In this case and for purposes of this transaction, the principal balance of such Underlying Securities will be deemed to have been reduced by their pro rata share (based on the then outstanding principal balance of such Underlying Securities after giving effect to distributions on the related Underlying Distribution Date) of any amount by which the aggregate principal balance of such Underlying Securities (together with related securities of the same priority) exceeds the aggregate principal balance of the related Underlying Mortgage Loans (such pro rata amount, the Implied Writedown Amount) as of the related Underlying Distribution Date and the amount of overcollateralization with respect to the related Series of Offered Notes will be reduced by the amount of such Implied Writedown Amount on the related Payment Date. To the extent the overcollateralization with respect to any Series of Offered Notes is exhausted, any remaining Implied Writedown Amount will result in a principal payment on such Series of Offered Notes as described in the preceding paragraph. The Expense Reserve Funds On any Payment Date, the amount of any Extraordinary Trust Expenses with respect to a Series for such Payment Date will reduce the amount of Available Funds for such Series for such Payment Date prior to the payments on the related Offered Notes, up to a specified amount. Any remaining Extraordinary Trust Expenses will be paid from related Available Funds or the related Expense Reserve Funds as described below. On the Closing Date, the Indenture Trustee shall establish and maintain a segregated account with respect to each Trust Estate (each, an Expense Reserve Fund). Amounts on deposit in each Expense Reserve Fund shall be invested by the Indenture Trustee, at the written direction of the Seller, in investments that mature no later than one business day prior to each Payment Date. In the event that on any Payment Date the Seller fails to provide written investment instructions to the Indenture Trustee, the Indenture Trustee shall invest such amounts in the permitted investment, if any, specified by the Seller in its last written investment instructions. In the absence of such written instructions, such amounts shall remain uninvested. On each Payment Date, the Indenture Trustee will deposit into such accounts any Available Funds remaining after payment of certain fees and expenses and Accrued Interest on the related Offered Notes up to the aggregate amount specified in this Memorandum for each Expense Reserve Fund. After a Series of Offered Notes is (i) paid in full following (a) the acceleration of payments on such Series of Offered Notes upon an Event of Default, or (b) the exercise be the related Majority Certificateholder of its early termination option, or (ii) paid in part or in full following the exercise by the Optional Purchaser of its option to purchase the related Underlying Securities, all as described in this Memorandum, to the extent not otherwise paid from related Available Funds on the related Payment Date, any amounts on deposit in the related Expense Reserve Fund will be used to pay any Indenture Trustee Fees and Owner Trustee Fees due and unpaid and any unreimbursed Extraordinary Trust Expenses for the related Series as of such Payment Date, in each case in the manner and order of priority described in this Memorandum. After the foregoing payments have been made, any amounts remaining in an Expense Reserve Fund on the related Payment Date will be applied first to pay any related Guaranty Fees and Reimbursement Amounts due and unpaid to the Guarantor, in each case to the extent not paid from related Available Funds, and then for distribution to the holders of the related Owner Trust Certificates. On the Final Scheduled Payment Date, so long as no Event of Default exists on such Final Scheduled Payment Date, any amounts remaining in the related Expense
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Reserve Fund shall be included in related Available Funds for such Payment Date and will be paid in accordance with the priorities set forth in this Memorandum. See Allocation of Available Funds in this Memorandum. Definitions Accrual Period for each Payment Date will be the period beginning on the immediately preceding Payment Date (or the Closing Date in the case of the first Accrual Period) and ending on the day immediately prior to such Payment Date. All calculations of interest on the Senior I-A Notes will be based on a 360-day year based on the actual number of days in the applicable Accrual Period, and all calculations of interest on the Senior II-A Notes will be based on a 360-day year consisting of twelve 30-day months (or a 7-day period in the case of the first Payment Date). Accrued Interest for each Payment Date and each class of Offered Notes will be an amount equal to interest accrued at the Note Rate for such class of Offered Notes during the related Accrual Period on the Note Principal Balance of such class of Offered Notes immediately prior to such Payment Date, plus the amount of Accrued Interest remaining unpaid from prior Payment Dates with interest thereon at the applicable Note Rate. Available Funds for each Series for any Payment Date will be an amount equal to the sum of (i) the amount of distributions in respect of interest on the related Underlying Securities received by the Indenture Trustee on the Underlying Distribution Date immediately preceding such Payment Date (which, for the avoidance of doubt, may include but are not limited to, amounts payable from any related derivative, bond insurance policy or auction proceeds), (ii) the amount of distributions in respect of principal on the related Underlying Securities received by the Indenture Trustee on the Underlying Distribution Date immediately preceding such Payment Date (which, for the avoidance of doubt, may include but are not limited to, amounts payable from any related derivative, bond insurance policy or auction proceeds), (iii) the amount received by the Indenture Trustee in connection with (a) the optional purchase of the related Underlying Securities by the related Majority Certificateholder in connection with an early termination, (b) the optional purchase of the related Underlying Securities by the Optional Purchaser, or (c) the sale by the Indenture Trustee of the related Underlying Securities following acceleration upon an Event of Default, and (iv) any income earned on amounts on deposit in the related Note Account as of such Payment Date. Certificateholder with respect to a class of Owner Trust Certificates is the beneficial owner of any of such Owner Trust Certificates as registered on the certificate register maintained pursuant to the Trust Agreement. Certificate Principal Balance of (i) the Series I Owner Trust Certificates immediately prior to any Payment Date will be the excess, if any, of the aggregate principal balance of the Series I Underlying Securities (as reduced in respect of any related Implied Writedown Amount) as of the Underlying Distribution Date immediately prior to such Payment Date over the Note Principal Balance of the Series I Notes immediately prior to such Payment Date, and (ii) the Series II Owner Trust Certificates immediately prior to any Payment Date will be the excess, if any, of the aggregate principal balance of the Series II Underlying Securities (as reduced in respect of any related Implied Writedown Amount) as of the Underlying Distribution Date immediately prior to such Payment Date over the Note Principal Balance of the Series II Notes immediately prior to such Payment Date. Extraordinary Trust Expenses with respect to each Series and each Payment Date, are certain taxes payable pursuant to the Indenture or Trust Agreement and expense reimbursements and indemnity payments to which each of The Bank of New York Mellon (in each of its various capacities) and the Owner Trustee is entitled pursuant to the Indenture, Administration Agreement or Trust Agreement, in each case with respect to such Series. Indenture Trustee Fee for each Series for any Payment Date will be (i) $0.00 for so long as The Bank of New York Mellon is the Indenture Trustee, and (ii) an amount not to exceed $6,500 per month in the event The Bank of New York Mellon is replaced by a successor indenture trustee. Noteholder is the beneficial owner of any of the Offered Notes as registered on the note register maintained pursuant to the Indenture.
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Note Principal Balance of a class of Offered Notes immediately prior to any Payment Date will be equal to the initial Note Principal Balance thereof shown under the heading Offered Notes in the table captioned The Securities in this Memorandum, reduced by all payments of principal made with respect to such class of Offered Notes prior to such Payment Date including all payments under the Guaranty in respect of principal made prior to such Payment Date. Note Rate for any Payment Date and (i) the Senior I-A Notes, is a per annum rate equal to One-Month LIBOR, plus [____]% per annum, subject to a maximum rate equal to [7.00]% per annum, and (ii) the Senior II-A Notes, is a per annum rate equal to [____]% per annum. Owner Trustee Fee for each Series will consist of (i) an initial fee of $2,500 to be paid on the initial Payment Date, and (ii) an annual fee of $2,500 to be paid on the initial Payment Date and on the Payment Date immediately following the Last Underlying Distribution Date occurring in October of each calendar year thereafter. Security is any Offered Note or any Owner Trust Certificate. Securityholder with respect to any Offered Note or Owner Trust Certificate is the beneficial owner of such Security as registered on the note register maintained pursuant to the Indenture or the certificate register maintained pursuant to the Trust Agreement, as applicable. Calculation of One-Month LIBOR On the second LIBOR Business Day (as defined below) preceding the commencement of each Accrual Period for the Senior I-A Notes (each such date, a LIBOR Determination Date), the Indenture Trustee will determine one-month LIBOR (One-Month LIBOR) for such Accrual Period on the basis of the London interbank offered rate for one-month United States dollar deposits, as such rates appear on the Reuters Screen LIBOR01 Page, as of 11:00 a.m. (London time) on such LIBOR Determination Date. If such rate does not appear on Reuters Screen LIBOR01 Page, the rate for that day will be determined on the basis of the offered rates of the Reference Banks for one-month United States dollar deposits, as of 11:00 a.m. (London time) on such LIBOR Determination Date. The Indenture Trustee will request the principal London office of each of the Reference Banks to provide a quotation of its rate. If on such LIBOR Determination Date two or more Reference Banks provide such offered quotations, OneMonth LIBOR for the related Accrual Period will be the arithmetic mean of such offered quotations (rounded upwards if necessary to the nearest whole multiple of 0.0625%). If on such LIBOR Determination Date fewer than two Reference Banks provide such offered quotations, One-Month LIBOR for the related Accrual Period will be the higher of (i) One-Month LIBOR as determined on the previous LIBOR Determination Date, and (ii) the Reserve Interest Rate. As used in this section, LIBOR Business Day means a day on which banks are open for dealing in foreign currency and exchange in London and New York City; Reuters Screen LIBOR01 Page means the display page currently so designated on the Reuters Monitor Money Rates Service (or such other page as may replace that page on that service for the purpose of displaying comparable rates or prices); Reference Banks means leading banks as specified in the Indenture, that engage in transactions in Eurodollar deposits in the international Eurocurrency market (i) with an established place of business in London, and (ii) not controlling, controlled by or under common control with the Seller; and Reserve Interest Rate will be the rate per annum that the Indenture Trustee determines to be either (i) the arithmetic mean (rounded upwards, if necessary, to the nearest whole multiple of 0.0625%) of the one-month United States dollar lending rates which New York City banks as specified in the Indenture are quoting on the relevant LIBOR Determination Date to the principal London offices of leading banks in the London interbank market, or (ii) in the event the Indenture Trustee can determine no such arithmetic mean, the lowest one-month United States dollar lending rate that New York City banks specified in the Indenture are quoting on such LIBOR Determination Date to leading European banks. The establishment of One-Month LIBOR on each LIBOR Determination Date by the Indenture Trustee and the Indenture Trustees calculation of the rate of interest applicable to the Senior I-A Notes for the related Accrual Period will (in the absence of manifest error) be final and binding.
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Reports to Securityholders On each applicable Payment Date, the Indenture Trustee will make available to each holder of a Security and the Guarantor a statement, based upon information contained in the Underlying Distribution Reports for the related Underlying Distribution Dates, generally setting forth the following information, among other things: (i) the amount of the payment made on such Payment Date to the holders of each class of Offered Notes in respect of interest for such Payment Date; (ii) the amount of the payment made on such Payment Date to the holders of each class of Offered Notes in respect of principal for such Payment Date; (iii) the amount of the distribution made on such Payment Date to the holders of each class of Owner Trust Certificates for such Payment Date; (iv) the Note Principal Balance and Note Rate of each class of Offered Notes and the Certificate Principal Balance of each class of Owner Trust Certificates after giving effect to payments in respect of principal on such Payment Date; (v) (vi) the Available Funds for each Series on such Payment Date; the Accrued Interest for each class of Offered Notes for such Payment Date;
(vii) with respect to each Series, the aggregate Implied Writedown Amount and Parity Payment for such Payment Date; (viii) with respect to each Series, the Indenture Trustee Fee, if any, the Owner Trustee Fee and the amount of any Extraordinary Trust Expenses incurred for such Payment Date; (ix) with respect to each Series, the Guaranty Fee for such Payment Date;
(x) with respect to each Series, the amount of any payments made under the Guaranty on such Payment Date and the aggregate amount of payments made under the Guaranty as of such Payment Date, the aggregate amount of payments made under the Guaranty as a percentage of the initial Note Principal Balance of the related Offered Notes, and any Reimbursement Amounts paid on such Payment Date and the aggregate amount of Reimbursement Amounts paid as of such Payment Date; (xi) (xii) the amount of any Losses for each Series for such Payment Date; and amounts deposited in and on deposit as of such Payment Date in each Expense Reserve Fund.
The Indenture Trustee will make each monthly statement (and, at its option, any additional files containing the same information in an alternative format) available each month via the Indenture Trustees website to Securityholders that provide appropriate certification in the form furnished by the Indenture Trustee (which form may be furnished and submitted electronically via the Indenture Trustees internet website), to any designee of the Issuer, and to the Issuer, the Seller, and to each Rating Agency. The Indenture Trustee will also make available all information provided to the holders of the Underlying Securities in its possession upon reasonable written request. The Indenture Trustees internet website will initially be located at https://gctinvestorreporting.bnymellon.com. Assistance in using the website can be obtained by calling the Indenture Trustees customer service desk at (800) 254-2826. Parties that are unable to use the above distribution option are entitled to have a paper copy mailed to them via first class mail by calling the customer service desk and requesting a copy. The Indenture Trustee shall have the right to change the way the monthly statements to Securityholders are distributed in order to make such distribution more convenient and/or more accessible to the Securityholders and the Indenture Trustee shall provide timely and adequate notification to the Securityholders, the Issuer, the Seller and the Rating Agency regarding any such changes. As a condition to access the Indenture Trustees website, the Indenture Trustee may require
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registration and the acceptance of a disclaimer. The Indenture Trustee will not be liable for use or subsequent dissemination of any information once the Indenture Trustee has disseminated such information in accordance with the Indenture. The Indenture Trustee will be entitled to rely on but will not be responsible for the accuracy or content of any information provided to it in the Underlying Documents and may affix any disclaimer it deems appropriate in its reasonable discretion. In addition, within a reasonable period of time after the end of each calendar year, the Indenture Trustee will furnish to each person (upon the written request of such person) who was a Securityholder of record at any time during such calendar year such other customary information in its possession as may be deemed necessary or desirable for such Securityholder to prepare its tax returns. Early Termination At its option, the Majority Certificateholder for each Series may, subject to certain conditions provided in the Indenture and Trust Agreement, purchase all of the related Underlying Securities on any Payment Date following the Payment Date on which the aggregate principal balance of such Underlying Securities (as reduced in respect of any related Implied Writedown Amount) is less than or equal to 10% of the aggregate principal balance of such Underlying Securities (as reduced in respect of any related Implied Writedown Amount) immediately following distributions made on such Underlying Securities on the related Underlying Distribution Date in September 2010. In the event a Majority Certificateholder exercises its termination option, the purchase price payable in connection with the option will be equal to the sum of (i) the greater of (a) the fair market value of the related Underlying Securities, and (b) the amount necessary to reduce the Note Principal Balance of the related Offered Notes to zero, plus accrued interest for such Offered Notes at the related Note Rate, (ii) any related Indenture Trustee Fees and related Owner Trustee Fees due and unpaid, (iii) any related Guaranty Fees and related Reimbursement Amounts due and unpaid to the Guarantor under the Guaranty, and (iv) any unreimbursed Extraordinary Trust Expenses for the related Series as of the date of purchase. Funds on deposit in the related Expense Reserve Fund shall first be applied to pay the amounts set forth in clauses (ii) through (iv) of the preceding sentence, and the related Majority Certificateholder will be required to cover any remaining shortfall. The fair market value of the Underlying Securities for any Series shall be determined as agreed upon among all of the holders of the related Owner Trust Certificates. If the holders of the related Owner Trust Certificates do not agree upon the fair market value of the Underlying Securities of the related Series, the related Majority Certificateholder shall direct the Indenture Trustee to solicit good faith bids for such Underlying Securities from bidders in an auction in accordance with the Auction Procedures and as provided in the Indenture. Any Certificateholders of the related Series may, but will not be required to, bid at any such auction. Pursuant to the Trust Agreement, the Issuer will agree, and the holders of the related Owner Trust Certificates, by their acceptance of an Owner Trust Certificate or any interest therein, shall be deemed to have agreed, to the terms of such auction and the Majority Certificateholders right to exercise the option described above. See Auction of Underlying Securities in this Memorandum. See Auction of Underlying Securities in this Memorandum. If a Majority Certificateholder exercises its right to purchase the Underlying Securities of a Series as described in this Memorandum, the related Offered Notes outstanding at that time will be retired earlier than would otherwise be the case. Optional Purchase of Underlying Securities During the period commencing on the day following the Payment Date immediately preceding the Final Scheduled Payment Date and ending on the eighth business day prior to the Final Scheduled Payment Date, the Seller, so long as the Seller is the related Majority Certificateholder (the Optional Purchaser), will have the option to purchase all or any portion of the related Underlying Securities in one or more transactions. In the event the Optional Purchaser exercises its purchase option, the purchase price payable in connection with any such purchase will be equal to the sum of, (i) the greater of (a) the fair market value of the related Underlying Securities and (b) the aggregate principal balance of the related Underlying Securities (as reduced in respect of any related Implied Writedown Amount) as of the immediately preceding related Underlying Distribution Date, plus accrued interest on such Underlying Securities for the related underlying accrual period, (ii) any related Indenture Trustee Fees and related Owner Trustee Fees due and unpaid, (iii) any related Guaranty Fees and related Reimbursement 27
Amounts due and unpaid to the Guarantor under the Guaranty, and (iv) any unreimbursed Extraordinary Trust Expenses for the related Series as of the date of purchase (the Optional Purchase Price). Funds on deposit in the related Expense Reserve Fund shall first be applied to pay the amounts set forth in clauses (ii) through (iv) of the preceding sentence, and the Optional Purchaser will be required to cover any remaining shortfall. The Optional Purchaser shall remit the Optional Purchase Price to the Indenture Trustee on the eighth business day prior to the Final Scheduled Payment Date for payment to related Securityholders on the Final Scheduled Payment Date in accordance with the priorities set forth above in Allocation of Available Funds in this Memorandum. The fair market value of the Underlying Securities for any Series shall be determined as agreed upon among all of the holders of the related Owner Trust Certificates. If the holders of the related Owner Trust Certificates do not agree upon the fair market value of the Underlying Securities of the related Series, the related Majority Certificateholder shall direct the Indenture Trustee to solicit good faith bids for such Underlying Securities from bidders in an auction in accordance with the Auction Procedures and as provided in the Indenture. Any Certificateholders of the related Series may, but will not be required to, bid at any such auction. Pursuant to the Trust Agreement, the Issuer will agree, and the holders of the related Owner Trust Certificates, by their acceptance of an Owner Trust Certificate or any interest therein, shall be deemed to have agreed, to the terms of such auction and the Optional Purchaser's right to exercise the option described above. See Auction of Underlying Securities in this Memorandum. Auction of Underlying Securities In accordance with the procedures (the Auction Procedures) set forth in the Indenture, if there are any Reimbursement Amounts remaining unpaid after the related Series of Offered Notes are paid in full following the acceleration of payments on such Series of Offered Notes upon an Event of Default, the Indenture Trustee, at the direction of the Guarantor, shall conduct an auction (the Auction) of all of the Underlying Securities related to such Series of Offered Notes. Pursuant to the Trust Agreement, the Issuer will agree, and the holders of the related Owner Trust Certificates, by their acceptance of an Owner Trust Certificate or any interest therein, shall be deemed to have agreed, to the terms of such Auction and the Guarantors rights to direct such Auction as provided under the Indenture. The Indenture Trustee shall solicit bids for all or a portion of the related Underlying Securities from bidders in accordance with the Auction Procedures. If the Indenture Trustee receives bids for all or a portion of the related Underlying Securities and any such bids or combination of bids for the Underlying Securities are equal to or greater than the sum of the aggregate of all unpaid Reimbursement Amounts, any related Guarantor Fee due, any other amounts owed to the Guarantor and certain other fees and expenses after taking into account any related Available Funds (such amount in the aggregate, the Minimum Bid Price), the Indenture Trustee shall sell the Underlying Securities to the bidder offering the highest price or to bidders where the combination of their bids results in the highest aggregate price. If the Indenture Trustee does not receive any bids or a combination of bids for any of the related Underlying Securities that individually or in the aggregate are equal to or greater than the Minimum Bid Price, the Guarantor shall either (i) direct the Indenture Trustee to accept the highest bid (or combination of bids), or (ii) offer a counter bid at least equal to the highest bid (or combination of bids) in exchange for the related Underlying Securities and any other property of the related Trust Estate. In addition, in connection with the exercise by a Majority Certificateholder of its early termination option or the exercise by the Optional Purchaser of its option to purchase the Underlying Securities, to the extent that all of the holders of the related Owner Trust Certificates cannot agree on the fair market value of the related Underlying Securities, the Indenture Trustee shall conduct an auction in accordance with the Auction Procedures and as provided in the Indenture. The Indenture Trustee may elect to conduct any auction required under the Indenture through an agent. If, after the exercise of its commercially reasonable efforts, the Indenture Trustee is unable to engage an agent to conduct any such auction, the Indenture Trustee shall, in lieu of such auction, solicit blind bids for the related Underlying Securities from all holders of the related Owner Trust Certificates and shall sell such Underlying Securities in accordance with the Auction Procedures and the Indenture.
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THE UNDERLYING SECURITIES All of the information contained herein with respect to the Underlying Securities is based solely on the Underlying Offering Documents and the Underlying Agreements. Additional information relating to the Underlying Securities can be obtained from the Underlying Distribution Reports. None of the Issuer, the Seller, the Guarantor, the Initial Purchasers, the Owner Trustee, the Administrator or the Indenture Trustee in any of its related capacities makes any representation or warranty as to the accuracy or completeness of the information in the Underlying Offering Documents, the Underlying Agreements or the Underlying Distribution Reports. Prospective investors are advised to carefully review all such information and to consider the limited nature of such available information when evaluating the suitability of any investment in the Offered Notes. General The Trust will include approximately 126 Underlying Securities that were previously issued in connection with 112 separate securitizations. Series I contains 102 Underlying Securities that were previously issued in 92 separate securitizations, and Series II contains 24 Underlying Securities that were previously issued in 20 separate securitizations. The Underlying Securities were owned by the Corporate Credit Union for which the NCUA Board has been appointed liquidating agent. Each Underlying Security was previously issued in connection with the Underlying Transactions identified on the table captioned The Underlying Securities in this Memorandum. For additional information regarding the Underlying Securities, please see the Underlying Offering Documents, Underlying Agreements and Underlying Distribution Reports. Credit Enhancement on the Underlying Securities Many of the Underlying Securities are senior in right of distribution to certain more subordinate classes of securities issued in the related Underlying Transaction, to the extent described in the related Underlying Offering Documents. In addition, losses on the Underlying Mortgage Loans will be allocated to certain of such subordinate classes of securities before they are allocated to the related Underlying Security, to the extent described in the related Underlying Offering Documents. With respect to certain Underlying Transactions, the amount of overcollateralization and/or subordination has been depleted or exhausted. For a further description of the credit enhancement with respect to each Underlying Security, see Description of the Certificates or similar heading in each Underlying Offering Document and the Underlying Distribution Reports. Early Termination and Call Rights With respect to certain Underlying Transactions, the party described in the related Underlying Agreement may purchase all of the related Underlying Mortgage Loans or related Underlying Securities, as applicable, after the aggregate principal balance of the related Underlying Mortgage Loans is generally less than 10% (or such other percentage as set forth in the Underlying Agreement) of the aggregate principal balance of the related Underlying Mortgage Loans as of the Underlying Cut-off Date as set forth in the Underlying Agreement. In addition, in certain Underlying Transactions, the party described in the related Underlying Agreement may sell the related Underlying Security in an auction to third party investors prior to a date specified in the related Underlying Agreement. If in any Underlying Transaction an optional purchase of the Underlying Mortgage Loans or the Underlying Securities is exercised, or if the Underlying Securities are sold to third party investors in an auction, the related Underlying Security will receive its final distribution or a payment of purchase price, which will result in an accelerated payment of principal to the related Offered Notes and therefore may affect the yield to investors in such Offered Notes and reduce the weighted average lives of such Offered Notes.
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NCUA Investigations Since late 2009, the NCUA has been conducting a number of formal investigations relating to whether violations of laws or regulations have occurred in connection with the offer and sale of various asset-backed securities to various credit unions, including the Corporate Credit Union. In connection with those investigations, the NCUA issued a number of subpoenas to various sponsors and underwriters seeking documentation with respect to specified asset-backed securities sold to the Corporate Credit Union, as well as other credit unions. These underwriters include some of the Initial Purchasers and Selling Group Members (as set forth on the cover page of this Memorandum), and certain of the Underlying Securities were the subject of one or more of these subpoenas. In October 2010, in connection with these investigations, the NCUA requested that various potential defendants, including potentially these Initial Purchasers and Selling Group Members, enter into separate tolling agreements to suspend for a period of time the running of any statutes of limitations that apply to potential claims including claims under federal and state securities laws, with respect to specified asset-backed securities sold to various credit unions. Certain of the Underlying Securities are the subject of tolling agreements with one or more potential defendants. It is not known at this time whether specific legal claims will be asserted by the NCUA in respect of the Underlying Securities, or whether litigation will be commenced. Any damages or other amounts recovered by the NCUA in connection with any such claims will not be part of the Trust Estate and will not be used to make payments on the Offered Notes. Any such recoveries will benefit the Seller exclusively. For additional information on any Underlying Security, investors should carefully review (i) the related Underlying Offering Documents and Underlying Agreement, and (ii) the related Underlying Distribution Reports. Any information set forth or referred to in this Memorandum (including the documents located at www.structuredfn.com) with respect to the Underlying Securities or the Underlying Mortgage Loans has been obtained from the related Underlying Offering Documents and the Underlying Agreement or the related Underlying Distribution Reports and has not been independently verified by the Issuer, the Seller, the Guarantor, the Initial Purchasers, the Owner Trustee, the Administrator or the Indenture Trustee in any of its related capacities. THE UNDERLYING MORTGAGE LOANS All of the information contained herein with respect to the Underlying Mortgage Loans is based solely on (i) information contained in the Underlying Offering Documents and Underlying Agreements, (ii) information obtained from the Underlying Distribution Reports, or (iii) information obtained from publicly available sources. None of the Issuer, the Seller, the Guarantor, the Initial Purchasers, the Owner Trustee, the Administrator or the Indenture Trustee in any of its related capacities makes any representation or warranty as to the accuracy or completeness of the information in the Underlying Offering Documents, the Underlying Agreements, the Underlying Distribution Reports or publicly available sources. Prospective investors are advised to carefully review all such information and to consider the limited nature of such available information when evaluating the suitability of any investment in the Offered Notes. Origination and Underwriting With respect to each Underlying Transaction, each Underlying Mortgage Loan was originated with credit, appraisal and underwriting guidelines applied by the related Underlying Originator to evaluate the prospective borrowers credit standing and repayment ability and the value and adequacy of the property as collateral, and some of the underwriting policies may be described in the related Underlying Offering Documents. Certain of the Underlying Mortgage Loans were originated based on stated, reduced or no documentation regarding a borrowers income and/or assets. In addition, the Underlying Originators underwriting standards generally allow for exceptions with compensating factors. These factors, however, may not be adequate to compensate for the exception to the Underlying Originators underwriting standards. Selected Underlying Mortgage Loan Data Certain characteristics of the Underlying Mortgage Loans as of the Underlying Cut-off Date for each Underlying Transaction are described in the related Underlying Offering Documents under the heading Description of the Mortgage Pool or similar heading. The information set forth therein may no longer be representative of the 30
characteristics of such Underlying Mortgage Loans as of the date hereof and no assurance can be given that the information set forth therein was accurate or complete as of the date thereof. Additional information regarding the Underlying Mortgage Loans can be found in the Underlying Distribution Reports. The Underlying Servicers and Underlying Originators Since the date of issuance of the related Underlying Securities, the financial condition of the Underlying Servicers and Underlying Originators (or the applicable party that has loan repurchase obligations with respect to breaches of loan representations and warranties under the related Underlying Agreement) may have worsened due to market conditions and may continue to deteriorate. Some Underlying Originators and Underlying Servicers may have been acquired, gone out of business or been subject to a bankruptcy or receivership or may be insolvent. In addition, it is possible that servicing of the Underlying Mortgage Loans may have transferred from the Underlying Servicer to a different servicer. For further information regarding the potential impact of the financial condition of the Underlying Servicers, see Risk FactorsLimited Information Regarding the Underlying Originators and Underlying Servicers and Noncompliance by Underlying Servicers and Sub-Servicers in this Memorandum. Certain Underlying Servicers and Underlying Originators for each Underlying Transaction are further described in the related Underlying Offering Documents. With respect to each Underlying Transaction, information about the servicing of the Underlying Mortgage Loans and certain Underlying Servicers may be found under Servicing of Mortgage Loans or a similar heading in the related Underlying Offering Documents. With respect to each Underlying Transaction, information about the origination of the Underlying Mortgage Loans and certain Underlying Originators may be found under Mortgage Loan Origination or a similar heading in the related Underlying Offering Documents. No assurance can be made that information about any of the Underlying Servicers or Underlying Originators as of the dates of the related Underlying Offering Documents was accurate or complete or remains accurate and complete as of the date hereof. NATIONAL CREDIT UNION ADMINISTRATION Pursuant to the Trust Agreement and the Note Purchase Agreement, the NCUA Board in its capacity as liquidating agent of the Corporate Credit Union, will sell the Underlying Securities to the Issuer for deposit into the related Trust Estate in exchange for the Owner Trust Certificates and cash proceeds from the sale of the Offered Notes. The NCUA, in its capacity as an Agency of the Executive Branch of the United States, to administer the FCU Act (as defined below). will act as Guarantor under the Guaranty. See Description of the Guaranty in this Memorandum. Congress enacted the Federal Credit Union Act, as amended (the FCU Act), in 1934 to promote thrift among credit union members and to create a source of credit for provident and productive purposes. In 1970, Congress created the NCUA as an agency of the Executive Branch of the United States. The NCUA is under the management of the NCUA Board, which consists of three members appointed by the President and confirmed by the Senate. Under the FCU Act, the NCUA is responsible for chartering and supervising, and insuring the deposits of, federal credit unions; supervising, and insuring the deposits of, certain state-chartered credit unions; and administering the National Credit Union Share Insurance Fund, which insures the member deposits of all federal credit unions and the state-chartered credit unions referenced above (collectively, Federally-insured Credit Unions). Among its supervisory responsibilities under the FCU Act, the NCUA Board is authorized to place a distressed Federally-insured Credit Union into conservatorship and to appoint itself conservator. The FCU Act also authorizes the NCUA Board to place a distressed or insolvent Federally-insured Credit Union into liquidation and to appoint itself liquidating agent. In its capacity as conservator or liquidating agent, the NCUA Board succeeds to all rights, titles, powers and privileges of the Federally-insured Credit Union, its members, officers or directors with respect to the institution and its assets. When the NCUA Board functions as liquidating agent, it is further authorized to, among other powers, take over the assets of and operate the Federally-insured Credit Union with all the powers of the members, directors and officers; conduct the Federally-insured Credit Unions business; collect all obligations and money due the Federallyinsured Credit Union; and preserve and conserve the assets and property of the Federally-insured Credit Union. In 31
addition, the FCU Act authorizes the liquidating agent to perform all functions consistent with its appointment, to exercise all powers specifically granted it by law, and to exercise such incidental powers as are necessary to carry out its statutory duties. The principal office of the NCUA is located at 1775 Duke St., Alexandria, VA 22314. THE ISSUER NCUA Guaranteed Notes Trust 2010-R1 is a statutory trust created under the laws of the State of Delaware pursuant to the Trust Agreement for purposes of the transactions described in this Memorandum. The Trust Agreement constitutes the governing instrument under the laws of the State of Delaware relating to statutory trusts. Beneficial ownership of the Issuer will be evidenced by the Owner Trust Certificates. The Owner Trust Certificates may only be transferred in accordance with the terms of the Trust Agreement. After its creation, the Issuer generally will not engage in any activity other than to (i) acquire, hold, manage and dispose of the Trust Estates, (ii) pursuant to the Indenture, assign, grant, transfer, pledge and convey the Underlying Securities, (iii) issue and sell the Offered Notes and the Owner Trust Certificates, (iii) pay the organizational, start-up and transactional expenses of the Trust, (iv) hold, manage and distribute to the related Certificateholders, pursuant to the Trust Agreement, any portion of the Underlying Securities released from the lien of, and remitted to, the Trust pursuant to the Indenture and any other Trust Estate pursuant to the terms of the Trust Agreement, (v) enter into and perform its obligations under the agreements to which it is to be a party, (vi) if directed by the Majority Certificateholder of a Series, sell the related Trust Estates subsequent to the discharge of the Indenture, all for the benefit of the holders of the related Owner Trust Certificates, (vii) conduct the affairs of the Trust so that the Offered Notes are treated as indebtedness for federal income tax purposes pursuant to the Indenture, (viii) make payments on the Offered Notes and distributions on the Owner Trust Certificates and make payments to the Guarantor in accordance with the Guaranty, (ix) engage in those activities, including entering into agreements, that are necessary, suitable or convenient to accomplish the foregoing or are incidental thereto or connected therewith, and (x) subject to compliance with the agreements to which it is to be a party, engage in such other activities as may be required in connection with conservation of the Trust Estates and the making of payments to the Certificateholders and the Noteholders. The Issuers principal offices are in Wilmington, Delaware, in care of Wells Fargo Delaware Trust Company, N.A., as Owner Trustee, at the address listed below under The Owner Trustee. THE INDENTURE TRUSTEE The Bank of New York Mellon will act as the Indenture Trustee under the Indenture. The Bank of New York Mellon will also initially act as Certificate Paying Agent and Certificate Registrar under the Trust Agreement and the Administrator under the Administration Agreement. The Bank of New York Mellon is a New York banking corporation. The address of the corporate trust office of The Bank of New York Mellon is (i) for purposes other than transfer exchange or surrender for final payment, 101 Barclay Street, Floor 4W, New York, New York 10286 and (ii) for purposes of transfer, exchange and surrender for final payment, 2001 Bryan Street, 9th Floor, Dallas, Texas 75201, Attention: Transfer UnitNCUA Trust 2010-R1, or another address that the Indenture Trustee may designate from time to time. The Bank of New York Mellon has been, and currently is, serving as indenture trustee and trustee for numerous securitization transactions and programs involving pools of mortgages and resecuritizations involving securities backed by pools of mortgage loans. The Seller and the Initial Purchaser and their affiliates have, and may in the future have, other banking relationships in the ordinary course of business with the Indenture Trustee. Under the terms of the Indenture, the Indenture Trustee is responsible for securities administration, which includes distribution calculations and the preparation of monthly distribution reports. The Indenture Trustee is also responsible for the preparation and filing of any required tax and information returns on behalf of the Issuer.
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The compensation to be paid to The Bank of New York Mellon for performing its obligations as Indenture Trustee, Certificate Paying Agent, Certificate Registrar and Administrator will be $0.00. Under the Indenture and the Trust Agreement, The Bank of New York Mellons material duties will be (i) to authenticate and deliver the Securities; (ii) to maintain a note register and certificate register; (iii) to calculate and make the required payments and distributions to Securityholders on each Payment Date; (iv) to prepare and make available to Securityholders the monthly distribution reports and any other reports required to be delivered by the Indenture Trustee; (v) to send a notice to holders of the Offered Notes when the remaining related Note Principal Balance is to be paid on a specified Payment Date; (vi) to perform certain tax administration services for the Issuer, and (vii) to communicate with investors with respect to the Offered Notes. In performing the obligations set forth in clauses (iii) and (iv) above, the Indenture Trustee shall rely on the Underlying Distribution Reports, and will perform all obligations set forth above solely to the extent provided in the Indenture and the Trust Agreement. The Bank of New York Mellon may delegate certain of its duties as provided in the Trust Agreement, the Indenture and the Administration Agreement but The Bank of New York Mellon will remain obligated and liable for the performance of such duties under the relevant agreement notwithstanding any such delegation. If The Bank of New York Mellon resigns or is removed as the Indenture Trustee, it will also be removed as the Certificate Paying Agent and the Certificate Registrar and the Administrator (unless the sole reason for The Bank of New York Mellons resignation as Administrator is due to a conflict between its duties as Administrator and its duties as Indenture Trustee, in which case The Bank of New York Mellon may assign its obligations as Administrator to a third party with the consent of the Issuer and the Guarantor and continue to serve as Indenture Trustee). The Indenture Trustee will use all reasonable efforts in accordance with the Indenture to collect all distributions due with respect to the Underlying Securities. Pending distributions to Noteholders, the Indenture Trustee shall invest such collections as provided in the Indenture. With respect to distributions on the Underlying Securities for any Underlying Distribution Date, the Indenture Trustee may conclusively rely on the related Underlying Distribution Reports and, only if the Underlying Distribution Reports are insufficient or incorrect on their face, on information available on Bloomberg L.P.s websites or a comparable alternative, unless the Indenture Trustee was negligent in ascertaining the pertinent facts or information, and the Indenture Trustee will have no obligation to recompute, recalculate or verify any information in such source. With respect to all calculations and reports for which information on the Underlying Securities is necessary, the Indenture Trustee may rely, and will have no liability in so relying, on the Underlying Distribution Reports and, only if the Underlying Distribution Reports are insufficient or incorrect on their face, on information available on Bloomberg L.P.s websites or a comparable alternative accessible in electronic format, unless the Indenture Trustee was negligent in ascertaining the pertinent facts or information. THE OWNER TRUSTEE Wells Fargo Delaware Trust Company, N.A. will act as the Owner Trustee under the Trust Agreement. Wells Fargo Delaware Trust Company, National Association ("Wells Fargo") is the Owner Trustee under the Trust Agreement. Wells Fargo is a national banking association and a wholly-owned subsidiary of Wells Fargo & Company. A diversified financial services company, Wells Fargo & Company is a U.S. bank holding company with approximately $1.3 trillion in assets and 282,000 employees as of June 30, 2010. Those numbers are the result of the merger on December 31, 2008 of Wachovia Corporation into Wells Fargo & Company. The resulting institution provides banking, insurance, trust, mortgage and consumer finance services throughout the United States and internationally. Wells Fargo maintains a principal corporate trust office located at 919 North Market St., Suite 1600, Wilmington, Delaware 19801. Wells Fargo has served as owner trustee in numerous asset-backed securities transactions involving mortgage and mortgage related receivables.
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Other than the above two paragraphs, Wells Fargo has not participated in the preparation of, and is not responsible for, any other information contained in this Memorandum. The compensation to be paid to the Owner Trustee for performing its obligations under the Trust Agreement in respect of each Trust Estate will be the Owner Trustee Fee for the related Series. Neither the Owner Trustee nor any director, officer or employee of the Owner Trustee will be under any liability to the Issuer or the Securityholders for any action taken or for refraining from the taking of any action in good faith pursuant to the Trust Agreement or for errors in judgment; provided that none of the Owner Trustee or any director, officer or employee thereof will be protected against any liability that would otherwise be imposed by reason of acts or omissions that constitute bad faith, gross negligence or willful misconduct in the performance of obligations and duties under the Trust Agreement. The Owner Trustee has not participated in the preparation of this Memorandum and has assumed no responsibility for its contents. The Owner Trustees sole duties and liabilities with respect to the Securities are limited to the express duties and liabilities of the Owner Trustee as set forth in the Trust Agreement. All persons into which the Owner Trustee may be merged or with which it may be consolidated or any person resulting from such merger or consolidation will be the successor of the Owner Trustee under the Trust Agreement. THE ADMINISTRATOR The Issuer has entered into an administration agreement dated the Closing Date (the Administration Agreement) with The Bank of New York Mellon, as Administrator, pursuant to which The Bank of New York Mellon will (without relieving the Issuer from liability therefor) perform certain specified duties of the Issuer and the Owner Trustee set forth in the Indenture and the Trust Agreement. DESCRIPTION OF THE GUARANTY The following summary describes certain provisions of the Guaranty. The summary does not purport to be complete and is subject to, and is qualified in its entirety by reference to, the provisions of the Guaranty. Investors may, upon written request, obtain a copy of the Guaranty from the Indenture Trustee. Pursuant to the Guaranty, the Guarantor will fully and unconditionally guarantee (i) the due and punctual payment on each Payment Date of all Accrued Interest on each class of Offered Notes in accordance with the Indenture, and (ii) the due and punctual payment of the Note Principal Balance of each class of Offered Notes when due and payable in accordance with the terms of the Indenture, whether at stated maturity, by acceleration or otherwise (collectively, and together with the payment obligation described in the next sentence, the Guaranteed Obligations). With respect to each Series of Offered Notes and each Payment Date, if the Issuer is unable to pay any portion of a principal or interest payment that is then due, including any principal payment with respect to any portion of a Parity Payment for such Offered Notes from related Available Funds as described under Description of the Offered NotesPrincipal Payments Due to the Allocation of Losses, the Guarantor will pay such portion of that principal or interest payment. Any payment of principal, including payment of a Parity Payment, whether made from Available Funds or by the Guarantor, will reduce the Note Principal Balance of such Offered Notes. The Guaranty is backed by the full faith and credit of the United States. Under the terms of the Guaranty, the Indenture Trustee shall provide notice to the Guarantor within two business days after the Last Underlying Distribution Date prior to a Payment Date if any payment is required to be paid under the Guaranty with respect to such Payment Date, and the amount of such payment, with respect to any class of Offered Notes. All payments to be made by the Guarantor pursuant to any such notice by the Indenture Trustee will be made on the business day immediately preceding the applicable Payment Date. Any payment that is required to be made under the Guaranty that is not paid on the applicable Payment Date shall bear interest at the applicable Note Rate from such Payment Date to, but not including, the date on which such payment is actually made by the Guarantor. The Guarantor will receive a fee (the Guaranty Fee), payable monthly on each Payment Date, for its guaranty of each class of Offered Notes. The Guaranty Fee for the Senior I-A Notes will be equal to one-twelfth of 0.35%, multiplied by the Note Principal Balance of the Senior I-A Notes as of the day immediately preceding such Payment Date; provided, however, with respect to the first Payment Date, the Guaranty Fee for the Senior I-A Notes will be equal to approximately $223,222.22. The Guaranty Fee for the Senior II-A Notes will be equal to one34
twelfth of 0.35%, multiplied by the Note Principal Balance of the Senior II-A Notes as of the day immediately preceding such Payment Date; provided, however, with respect to the first Payment Date, the Guaranty Fee for the Senior II-A Notes will be equal to approximately $38,553.47. Under the terms of the Guaranty, with respect to any Payment Date and each Series, the Issuer has agreed to (i) reimburse the Guarantor for all payments made with respect to the Offered Notes by the Guarantor under the Guaranty, (ii) pay interest on any unpaid reimbursement payments under clause (i) at an interest rate equal to the applicable Note Rate, and (iii) reimburse the Guarantor for all reasonable out-of-pocket expenses, disbursements and advances incurred or made by the Guarantor with respect to the Guaranty (the amounts set forth in clauses (i), (ii) and (iii) in the aggregate for any such Payment Date and each Series, the Reimbursement Amount), all in accordance with the priority of payments described under Description of the Offered NotesAllocation of Available Funds. The Guaranty will remain in full force and effect with respect to the Guarantor until the earliest of indefeasible satisfaction and payment in full of the Guaranteed Obligations and the termination or cancellation of the Offered Notes in accordance with their terms. The Indenture Trustee has the right to enforce the Guaranty on behalf of the holders of the Offered Notes, and any holder of the Offered Notes may institute a legal proceeding directly against the Guarantor to enforce its rights under the Guaranty without first instituting a legal proceeding against the Indenture Trustee, the Issuer or any other person. DESCRIPTION OF THE INDENTURE The following summary describes certain provisions of the Indenture. The summary does not purport to be complete and is subject to, and is qualified in its entirety by reference to, the provisions of the Indenture. Investors may, upon written request, obtain a copy of the Indenture from the Indenture Trustee. Certain Covenants For so long as the Offered Notes are outstanding, except in connection with the consummation of one of the transactions contemplated by the following sentence, the Issuer may not liquidate or dissolve and must maintain its continued existence. The Issuer also may not consolidate or merge with or into any other person or, except as described herein, convey or transfer its properties and assets substantially as an entirety without the consent of the Guarantor and holders of Offered Notes representing not less than 66-2/3% of the aggregate Note Principal Balance of the Offered Notes and unless (i) the person (if other than the Issuer) formed or surviving such merger or consolidation or acquiring such assets will have expressly assumed, by supplemental indenture pursuant to the Indenture, the due and punctual payment of principal of and interest on all Offered Notes and the performance of every applicable covenant of the Indenture to be performed by the Issuer, (ii) immediately after giving effect to such transaction, no default or Event of Default will have occurred and be continuing, and (iii) the Indenture Trustee has received from the Issuer an officers certificate and an opinion of counsel, each to the effect that, among other things, such transaction will not have any material adverse tax consequence to the Issuer or any Noteholder and that such transaction complies with the foregoing requirements. The Issuer may not incur, assume, have outstanding or guarantee any indebtedness other than the Offered Notes issued pursuant to the Indenture. Rights and Duties of the Indenture Trustee Except during the continuance of an Event of Default known to a responsible officer of the Indenture Trustee, the Indenture Trustee undertakes to perform such duties and only such duties as are specifically set forth in the Indenture, and no implied covenants or obligations will be read into the Indenture against the Indenture Trustee. The Indenture Trustee may, in the absence of bad faith on its part, conclusively rely, as to the truth of the statements and the correctness of the opinions expressed therein, upon certificates or opinions furnished to the
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Indenture Trustee and conforming to the requirements of the Indenture; but in the case of any such certificates or opinions that by any provision of the Indenture are specifically required to be furnished to the Indenture Trustee, the Indenture Trustee will be under a duty to examine the same to determine whether or not they conform on their face to the requirements of the Indenture. In case an Event of Default known to a responsible officer of the Indenture Trustee with respect to the Offered Notes has occurred and is continuing, the Indenture Trustee will exercise such of the rights and powers vested in it by the Indenture, and use the same degree of care and skill in their exercise, as a prudent person would exercise or use under the circumstances in the conduct of his own affairs. In connection with the Indenture, the Indenture Trustee may request and rely and will be protected in acting or refraining from acting upon any resolution, certificate, statement, instrument, opinion, report, notice, request, direction, consent, order or other paper or document believed by it to be genuine and to have been signed or presented by the proper party or parties. Whenever in the administration of the Indenture the Indenture Trustee deems it desirable that a matter be proved or established prior to taking, suffering or omitting any action thereunder, the Indenture Trustee (unless other evidence is specifically prescribed in the Indenture) may, in the absence of bad faith on its part, rely upon an officers certificate. The Indenture Trustee may consult with counsel and the written advice of such counsel or any opinion of counsel rendered thereby will be full and complete authorization and protection in respect of any action taken, suffered or omitted by it thereunder in good faith and in reliance thereon. The Indenture Trustee will be under no obligation to exercise any of the rights or powers vested in it by the Indenture at the request or direction of any of the Noteholders pursuant to the Indenture, unless such Noteholders have offered to the Indenture Trustee security or indemnity satisfactory to it against the costs, expenses and liabilities that might be incurred by it in compliance with such request or direction. The Indenture Trustee will not be bound to make any investigation into the facts or matters stated in any resolution, certificate, statement, instrument, opinion, report, notice, request, direction, consent, order, bond, debenture, note, coupon, other evidence of indebtedness or other paper or document, but the Indenture Trustee, in its discretion, may make such further inquiry or investigation into such facts or matters as it may see fit, and, if the Indenture Trustee determines to make such further inquiry or investigation, it will be entitled to examine the books, records and premises of the Issuer, personally or by agent or attorney. The Indenture Trustee may execute any of the trusts or powers under the Indenture or perform any duties thereunder either directly or by or through agents or attorneys of the Indenture Trustee. The Indenture Trustee will not be liable for the acts or omissions of its agents or attorneys so long as the Indenture Trustee chose such persons with due care. The Note Accounts General. The Indenture Trustee will be required to establish and maintain a separate Note Account for each Series of Notes. Amounts on deposit in each Note Account shall be invested by the Indenture Trustee at the written direction of the Seller, in investments that mature no later than one business day prior to each Payment Date. In the event that on any Payment Date the Seller fails to provide written investment instructions to the Indenture Trustee, the Indenture Trustee shall invest such amounts in the permitted investment, if any, specified by the Seller in its last written investment instructions. In the absence of such written investment instructions, such amounts shall remain uninvested. Each Note Account will be established in such manner and/or with such a depository as is specified in the Indenture. Deposits. The Indenture Trustee will be required to deposit or cause to be deposited in the related Note Account, upon receipt, all payments and other collections received on or in respect of the related Underlying Securities subsequent to the Closing Date. Withdrawals. The Indenture Trustee may make withdrawals from each Note Account for any of the following purposes (the order set forth below not constituting an order of priority for such withdrawals): (i) on each Payment Date, (a) to pay to the related Noteholders payments of interest on and principal of the related Offered Notes to the extent of related Available Funds, (b) to make payments to the Guarantor, and (c) to pay to the Certificate Paying Agent, for distribution to the holders of the related Owner Trust Certificates, distributions on the related Owner Trust Certificates to the extent of related Available Funds; 36
(ii) to pay itself and other parties related fees and amounts to cover certain legal expenses and liability incurred thereby resulting from legal actions as described under Indemnification in this Memorandum, which amounts shall be reimbursable as Extraordinary Trust Expenses (subject to the manner and order of priority set forth in the Indenture); (iii) to pay for (or to reimburse itself for) the advice of counsel, the cost of certain opinions of counsel, the cost of recording or filing any document and certain other related Extraordinary Trust Expenses (subject to the manner and order of priority set forth in the Indenture) relating to the related Offered Notes, the Indenture, the Administration Agreement or the Trust Agreement; (iv) (v) to withdraw any amounts deposited in such Note Account in error; and to clear and terminate such Note Account upon the termination of the Indenture.
Events of Default The Indenture provides that any of the following will constitute an Event of Default under the Indenture: (i) any failure of the Issuer to pay all interest on and principal of any Offered Note in a Series in full by its Final Scheduled Payment Date from related Available Funds; (ii) any default in the observance or performance of any covenant or agreement by the Issuer made in the Indenture (other than a covenant or agreement, a default in the observance or performance of which is specifically dealt with elsewhere in the Indenture), which default continues unremedied for a period of 60 days after there has been given, by registered or certified mail, to the Issuer and the Indenture Trustee by the Indenture Trustee or to the Issuer and the Indenture Trustee by the Noteholders holding at least 25% of the aggregate Note Principal Balance of the outstanding Offered Notes affected thereby, a written notice specifying such default and requiring it to be remedied and stating that such notice is a Notice of Default under the Indenture; or (iii) the entry by a court having jurisdiction over the Issuer of a decree or order for relief in respect of the Issuer in an involuntary case or proceeding under any applicable federal or state delinquency, bankruptcy, insolvency, reorganization or other similar law or a decree or order adjudicating the Issuer as bankrupt or insolvent, or approving as properly filed a petition seeking reorganization, arrangement, adjustment, liquidation, dissolution or composition of or in respect of or for the Issuer under any applicable federal or state law, or appointing a custodian, receiver, liquidator, assignee, trustee, sequestrator or other similar official of the Issuer or of any substantial part of the Issuers property, or ordering the winding up or liquidation of the Issuers affairs, and the continuance of any such decree or order for relief or any such other decree or order not stayed or dismissed and in effect for a period of more than ninety (90) consecutive days or if such decree or order has been stayed, a period of more than sixty (60) days has passed following the expiration of the stay if such decree or order has not been vacated; or (iv) the commencement by the Owner Trustee or the Administrator on behalf of the Issuer of a voluntary case or proceeding under any applicable federal or state delinquency, bankruptcy, insolvency, reorganization or other similar law or of any other case or proceeding adjudicating the Issuer as bankrupt or insolvent, or the consent by the Issuer to the entry of a decree or order for relief in respect of the Issuer in an involuntary case or proceeding under any applicable federal or state bankruptcy, insolvency, reorganization or other similar law or to the commencement of any bankruptcy or insolvency case or proceeding against the Issuer, or the filing by the Owner Trustee or the Administrator on behalf of the Issuer of a petition or answer or consent seeking reorganization or relief under any applicable federal or state law, or the consent by the Owner Trustee or the Administrator on behalf of the Issuer to the filing of such petition or to the appointment of or taking possession by a custodian, receiver, liquidator, assignee, trustee, sequestrator or similar official of or for the Issuer or of any substantial part of the Issuers property, or the making by the Owner Trustee or the Administrator on behalf of the Issuer of an assignment of any of the Issuers property for the benefit of creditors, or the admission by the Owner Trustee or the Administrator on behalf of the Issuer in writing of the Issuers inability to pay its debts generally as they become due, or the taking of corporate action by the Owner Trustee or the Administrator on behalf of the Issuer in furtherance of any of the actions above in this clause; or
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(v) the impairment of the validity or effectiveness of the Indenture or any grant thereunder, or the subordination or, except as permitted under the Indenture, termination or discharge of the lien thereof, or any creation of any lien, charge, security interest, mortgage or other encumbrance with respect to any part of the related Trust Estate or any interest in or proceeds of such Trust Estate, or the failure of the lien of the Indenture to constitute a valid first priority security interest in the related Trust Estate; provided that, if such impairment, subordination, the creation of such lien, or the failure of the lien on such Trust Estate to constitute such a security interest will be susceptible to cure, no Event of Default will arise until the continuation of any such default unremedied for a period of thirty (30) days after receipt of notice thereof; or (vi) a breach of the representations and warranties of the Issuer contained in the Indenture, that the Issuer is duly authorized under applicable law and under the Trust Agreement to create and issue the Offered Notes, to execute and deliver the Indenture, the other documents to which it is a party and all instruments included in each Trust Estate that the Issuer has executed and delivered, and that all corporate action and governmental consents, authorizations and approvals necessary or required therefor have been duly and effectively taken or obtained, the Offered Notes, when issued, will be valid and legally binding obligations of the Issuer enforceable in accordance with their terms, immediately prior to its grant of each Trust Estate provided for in the Indenture, it had good title to, and was the sole owner of, the Underlying Securities, free and clear of any pledge, lien, encumbrance or security interest, the Indenture Trustee has a valid and enforceable first priority security interest in each Trust Estate, subject only to exceptions permitted by the Indenture, and the Indenture is not required to be qualified under the Trust Indenture Act of 1939 and that the Issuer is not required to be registered as an Investment Company under the Investment Company Act of 1940, as amended (the Investment Company Act). Notwithstanding the foregoing, there shall not be deemed to be an Event of Default under the Indenture that would permit or result in the acceleration of any amounts due under the Indenture if such an Event of Default is due solely to the failure of the Issuer to make timely payment of amounts due under the Indenture, provided that the Guarantor is making required payments in accordance with the Guaranty. Following an Event of Default known to a responsible officer of the Indenture Trustee, the Indenture Trustee, with the consent of the Guarantor and at the direction of the Noteholders representing a majority of the Note Principal Balance of the related Series of Offered Notes, will declare such Offered Notes to be immediately due and payable; provided, however, with respect to the Event of Default described in clauses (iii) and (iv) of the definition of Event of Default, such Offered Notes shall automatically become immediately due and payable without declaration; and, in connection with such acceleration, the Indenture Trustee will liquidate the related Underlying Securities in the manner directed by such Noteholders and the Guarantor. Such declaration may be rescinded only by the Noteholders representing a majority of the Note Principal Balance of such Offered Notes and with the consent of the Guarantor. In the event the Note Principal Balance of any class of Offered Notes is declared due and payable, as described above, and the related Underlying Securities are sold, the net proceeds from such sale will be applied in the manner and order of priority described under Description of the Offered NotesAllocation of Available Funds. Such net proceeds may be insufficient to pay the related Noteholders the full unpaid principal amount of their Offered Notes. However, any remaining unpaid principal amount will be paid to the related Noteholders in accordance with the Guaranty. The Indenture Trustee will not be deemed to have knowledge of any Event of Default (or of any event that, with notice or lapse of time or both, would constitute an Event of Default) described in clauses (ii) through (vi) of the definition of Event of Default unless the Indenture Trustee has received written notice thereof in the manner set forth in the Indenture or an officer in the Indenture Trustees corporate trust department has actual knowledge thereof. Subject to the provisions of the Indenture relating to the duties of the Indenture Trustee, if an Event of Default has occurred and is continuing, the Indenture Trustee will not be under any obligation to exercise any of the rights or powers under the Indenture at the request or direction of any of the Noteholders and with the consent of the Guarantor, unless such Noteholders have offered to the Indenture Trustee security or indemnity satisfactory to it; provided that such indemnity must be provided by the Issuer in the case of an Event of Default under clauses (ii) and (iii) of the definition of Event of Default. Subject to such provisions for indemnification and certain limitations contained in the Indenture, the holders of a majority of the Note Principal Balance of the related Offered Notes, with the consent of the Guarantor, will have the right to direct the time, method and place of conducting any proceeding 38
for any remedy available to the Indenture Trustee or exercising any trust or power conferred on the Indenture Trustee on behalf of or with respect to the related Offered Notes. In addition, the holders of a majority of the Note Principal Balance of the related Series of Offered Notes may, with the consent of the Guarantor, in certain cases, waive any default with respect to such Offered Notes, except a default in payment of the entire principal amount of any Offered Note on its Final Scheduled Payment Date or in respect of a covenant or provision that cannot be modified without the consent of all related Noteholders. No Noteholder has any right to institute any proceedings with respect to the Indenture, unless (i) the Guarantor has consented to such action, (ii) such Noteholder has previously given written notice to the Indenture Trustee of a continuing Event of Default, (iii) the Noteholders of more than 50% of the Note Principal Balance of the related Series of Offered Notes have made written request to the Indenture Trustee to institute proceedings in respect of such Event of Default in its own name as Indenture Trustee thereunder and no direction inconsistent therewith has been given by such Noteholders within 30 days of such written request, (iv) such Noteholder or Noteholders have offered to the Indenture Trustee adequate indemnity or security satisfactory to the Indenture Trustee against the costs and expenses and liabilities to be incurred in compliance with such request, provided that such indemnity will be provided by the Issuer as an Extraordinary Trust Expense in the case of an Event of Default described in clauses (ii) and (iii) of the definition of Event of Default, (v) the Indenture Trustee for 30 days after its receipt of such notice, request and offer of indemnity has failed to institute any such proceedings, and (vi) an Event of Default has occurred and is continuing. Each Noteholder will be deemed, by the acceptance of its Offered Note, to have agreed not to file, or join in filing, any petition in bankruptcy or commence any similar proceeding in respect of the Issuer. For a description of the subrogation and other rights of the Guarantor, including those with respect to an Event of Default, see Rights of the Guarantor below. Resignation and Removal of the Indenture Trustee The Indenture Trustee may resign at any time, in which event the Issuer will be obligated to appoint a successor indenture trustee as set forth in the Indenture. The Issuer, as set forth in the Indenture, may also, with the consent of the Guarantor, remove the Indenture Trustee if (i) the Indenture Trustee ceases to be eligible to continue as such under the Indenture, (ii) the Indenture Trustee becomes insolvent, or (iii) a receiver or public official takes charge of the Indenture Trustee or its property. In the case of any such removal of the Indenture Trustee, the Issuer will be obligated to appoint a successor indenture trustee with the consent of the Guarantor. The Guarantor or the holders of more than 50% of the Note Principal Balance of each Series of Offered Notes may remove the Indenture Trustee and appoint a successor indenture trustee at any time. Any resignation or removal of the Indenture Trustee and appointment of a successor indenture trustee will not become effective until acceptance of the appointment by the successor indenture trustee. For a description of the subrogation and other rights of the Guarantor, including those with respect to removal of the Indenture Trustee, see Rights of the Guarantor below. Co-Indenture Trustees and Separate Indenture Trustees For the purpose of meeting the legal requirements of certain local jurisdictions, the Indenture Trustee will have the power to appoint co-trustees or separate trustees of all or any part of each Trust Estate. In the event of such appointment, all rights, powers, duties and obligations conferred or imposed upon the Indenture Trustee by the Issuer will be conferred or imposed upon the Indenture Trustee and each such separate trustee or co-trustee jointly or, in any jurisdiction in which the Indenture Trustee is incompetent or unqualified to perform certain acts, singly upon such separate trustee or co-trustee who will exercise and perform such rights, powers, duties and obligations solely at the directions of the Indenture Trustee. The Indenture Trustee may also appoint agents to perform any of the responsibilities of the Indenture Trustee, which agents will have all of the rights, powers, duties and obligations of the Indenture Trustee conferred on them by such appointment; provided that the Indenture Trustee will remain obligated and liable for the performance of such responsibilities under the Indenture notwithstanding any such appointments. Any such co-trustee or separate trustee may be compensated only out of the related Indenture Trustee Fee and will be entitled to be reimbursed for any expenses or Liabilities to the same extent as the Indenture Trustee. 39
Indemnification The Bank of New York Mellon in all of its capacities under the Indenture, the Trust Agreement, the Administration Agreement or any other transaction documents or certificates executed in connection with this transaction (collectively, the Transaction Documents), and any director, officer, employee or agent thereof, will be indemnified and held harmless by the Issuer against any losses (excluding loss of profits), liabilities, damages, taxes, claims, actions, suits, judgments, costs, indemnity obligations or expenses, including the compensation and the expenses and disbursements of its agents and counsel (but excluding any overhead, general or administrative expenses incurred or made by such party) (collectively, the Liabilities) incurred by, imposed on or asserted against such party in connection with (i) the performance of its duties and obligations or the exercise of its rights under each of the Transaction Documents, or (ii) any claim or legal action or any pending or threatened claim or legal action arising out of or in connection with the acceptance or administration of its obligations and duties under each of the Transaction Documents, in either such case other than any Liabilities incurred solely by reason of acts or omissions that constitute willful misfeasance, bad faith or negligence of such party. Modification of the Indenture Modifications of and amendments to the Indenture may be made by the Issuer and the Indenture Trustee, with the consent of the Guarantor and Noteholders of not less than 66-2/3% of the aggregate Note Principal Balance of the Offered Notes for the purpose of adding any provisions to or changing in any manner or eliminating any of the provisions of the Indenture or of modifying in any manner the rights of the Noteholders under the Indenture; provided that, no such supplemental indenture will, without the consent of the Noteholders of 100% of the Note Principal Balance of the Offered Notes affected thereby, among other things, (i) change the Final Scheduled Payment Date or the Payment Date of any principal of or interest on any Offered Note, (ii) authorize the Indenture Trustee to agree to delay the timing of, or reduce the payments to be made on, the Underlying Securities, (iii) reduce the Note Principal Balance of, or interest on, any Offered Note, (iv) change the coin or currency in which any Offered Note or any interest thereon is payable, (v) impair the right to institute suit for the enforcement of any payment on or with respect to any Offered Note on or after its Final Scheduled Payment Date, (vi) reduce the percentage of the then aggregate Note Principal Balance of the Offered Notes, the consent of the related Noteholders of which is required for modification or amendment of the Indenture or for waiver of compliance with certain provisions of the Indenture or for waiver of certain defaults, (vii) reduce the requirements contained in the Indenture for voting with respect to the Offered Notes, (viii) change any obligation of the Issuer or the Owner Trustee to maintain an office or agency in the places and for the purposes required by the Indenture, (ix) modify provisions for payment on the Offered Notes, or (x) deprive any Noteholder of the benefit of the security interest in the related Trust Estate except as otherwise provided in the Indenture. The Issuer and the Indenture Trustee may also amend the Indenture, with the consent of the Guarantor, but without obtaining the consent of Noteholders, to (i) convey, transfer, assign, mortgage or pledge any property to the Indenture Trustee, so long as the interests of the Noteholders and the Guarantor would not be adversely affected, (ii) correct any manifestly incorrect description, or amplify the description, of any property subject to the lien of the Indenture, (iii) modify the Indenture as required by applicable law, so long as the interests of the Securityholders and the Guarantor would not be adversely affected, (iv) add to the covenants of the Issuer for the benefit of the Securityholders and the Guarantor or to surrender any right or power herein conferred upon the Issuer, (v) add any additional Events of Default, provided such action shall not adversely affect the interests of the Noteholders or the Guarantor, (vi) evidence and provide for the acceptance of appointment hereunder by a successor Indenture Trustee, (vii) (a) correct any typographical error, or (b) cure any mistake, including, without limitation, conforming the Indenture to the final version of this Memorandum, or (viii) make or amend any other provisions with respect to matters or questions arising under the Indenture that are not inconsistent with the provisions hereof, so long as the interests of the Securityholders and the Guarantor would not be materially adversely affected. Any such amendment pursuant to clauses (i), (iii), (v) and (viii) above will require (x) an opinion of counsel delivered to the Indenture Trustee and the Owner Trustee concluding that the amendment will not adversely affect or materially adversely affect, as the case may be, the interests of any Noteholder or Securityholder, as applicable, or the Guarantor, or (y) written or electronic notice to the Issuer and the Indenture Trustee from the Rating Agencies (or verbal confirmation from the Rating Agencies as evidenced by a certificate of the Issuer) that such action will not result in the reduction or withdrawal of the rating of any Offered Note. Any such amendment 40
pursuant to clause (vii)(b) above will require an officers certificate of the Seller identifying the mistake, stating that the amendment is needed to correct the mistake and describing the basis for such conclusion. The Indenture Trustee shall not enter into and the Guarantor will not be entitled to consent to an amendment to the Indenture without having first received an opinion of counsel to the effect that such amendment (i) will not result in the imposition of any tax on the Issuer pursuant to the Code, and (ii) will not result in a significant modification of the Offered Notes under Treasury Regulation Section 1.1001-3 or adversely affect the status of the Offered Notes as indebtedness for federal income tax purposes. Prior to entering into any modification or amendment of the Indenture, the Indenture Trustee shall have received an opinion of counsel (not at the expense of the Indenture Trustee) to the effect that such modification or amendment is authorized or permitted under the Indenture and all conditions precedent under the Indenture to entering into such modification or amendment have been satisfied. Rights of the Guarantor Unless otherwise consented to in writing by the Guarantor, none of the Issuer nor any holder of the Offered Notes may take any of the following actions: (i) amend, modify, alter or supplement the terms of any of the Guaranteed Obligations, the Indenture, the Trust Agreement, any Offered Note or any Owner Trust Certificate; (ii) release the Issuer or any other person liable in any manner for the payment or collection of the Guaranteed Obligations; or (iii) exercise, or refrain from exercising, any rights against the Issuer or any other person; however, any such action taken with the written consent of the Guarantor shall not discharge the Guarantor from its obligations under the Guaranty. If and to the extent the Guarantor makes any payment to the holders of the Offered Notes pursuant to the Guaranty, the Guarantor will be subrogated to all of the rights of such holders with respect to any claim to which such payment relates to the extent of such payment and in the manner and order of priority for reimbursement of such payment as described under Description of the Offered NotesAllocation of Available Funds, including all rights of such holders under the Indenture upon or with respect to an Event of Default. Such holders will be deemed to have assigned to the Guarantor any and all claims they may have against the Issuer, the Indenture Trustee or others. Upon the request of the Guarantor, such holders will be required to execute written assignments of such claims. The holders of each Series of Offered Notes agree that, upon the Guarantor making a payment under the Guaranty with respect to a Series of Offered Notes and until such time as the Guarantor has been reimbursed for all such payments in full, the Guarantor shall be treated by the Indenture Trustee in all of its related capacities, the Administrator, the Owner Trustee and the Issuer as if the Guarantor were the holder of all of such Series of Offered Notes for the purpose of the giving of any consent, the making of any direction or the exercise of any voting or other control rights otherwise given to the holders of such Series of Offered Notes thereunder without any further consent of the holders of such Series of Offered Notes, and the holders of each Series of Offered Notes agree that they will not exercise any of such rights without the prior written consent of the Guarantor. Governing Law The Indenture and the Offered Notes provide that they will be governed by and construed in accordance with the law of the State of New York (excluding any conflict of laws rule or principle that might refer the governance or the construction of the Indenture or the Offered Notes to the law of another jurisdiction). Satisfaction and Discharge of the Indenture The Indenture will be discharged (except with respect to certain continuing rights specified in the Indenture) when (a)(i) all of the Offered Notes other than Offered Notes that have been mutilated, lost or stolen and have been replaced or paid, and Offered Notes for which money has been deposited in trust for the full payment thereof (and thereafter repaid to the Issuer or discharged from such trust), as provided in the Indenture have been delivered to the Indenture Trustee for cancellation, or (ii) the Offered Notes not previously canceled by the
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Indenture Trustee have become, or, on the next Payment Date, will become due and payable or called for redemption and the Issuer or the Guarantor, as applicable, has deposited with the Indenture Trustee an amount sufficient to repay all of the Offered Notes, (b) the Issuer has paid all other amounts payable under the Indenture, and (c) the Issuer has delivered to the Indenture Trustee an officers certificate stating that all the conditions precedent provided in the Indenture relating to its discharge have been complied with. At its option, the Majority Certificateholder for each Series may, subject to certain conditions provided in the Indenture and the Trust Agreement, purchase the related Underlying Securities at the purchase price described in this Memorandum on any Payment Date following the Payment Date on which the aggregate principal balance of the related Underlying Securities (as reduced in respect of any related Implied Writedown Amount) is less than or equal to 10% of the aggregate principal balance of such Underlying Securities (as reduced in respect of any related Implied Writedown Amount) immediately following distributions made on such Underlying Securities on the related Underlying Distribution Date in September 2010, thereby discharging the lien of the Indenture with respect to such Underlying Securities. If a Majority Certificateholder exercises its right to purchase the related Underlying Securities, the related Offered Notes outstanding at that time will be retired earlier than would otherwise be the case. See Description of the Offered NotesEarly Termination in this Memorandum. DESCRIPTION OF THE TRUST AGREEMENT The following summary describes certain provisions of the Trust Agreement. The summary does not purport to be complete and is subject to, and is qualified in its entirety by reference to, the provisions of the Trust Agreement. Investors may, upon written request, obtain a copy of the Trust Agreement from the Indenture Trustee. Formation of the Trust; Activities The Issuer is a statutory trust created or to be created under the laws of the State of Delaware pursuant to the Trust Agreement for transactions described herein. The Seller will transfer the Underlying Securities and other items of each Trust Estate to the Issuer pursuant to the Trust Agreement. The Issuer will have the power and authority, and the Owner Trustee, on behalf of the Issuer, will be authorized (i) to execute and deliver the Trust Agreement and all other agreements, documents, instruments and certificates contemplated to be executed and delivered by the Issuer pursuant to the Trust Agreement and, pursuant to the terms of the Indenture, to execute, issue and deliver to the Indenture Trustee for authentication the Offered Notes in the form provided to the Owner Trustee by the Seller and to deliver the Offered Notes to, or in accordance with the direction of, the Seller; (ii) to execute and deliver the Owner Trust Certificates to, or upon the order of, the Seller; (iii) as and to the extent provided in the Indenture, to pledge each of the Trust Estates as security for repayment of the related Offered Notes and, in connection therewith, to deliver (or cause to be delivered) to the Indenture Trustee each of the documents and instruments contemplated by the granting clause of the Indenture; (iv) to take whatever action is required to be taken by the Issuer by the terms of, and exercise its rights and perform its duties under, each of the documents, agreements, instruments and certificates referred to in clauses (i) through (iii) above as set forth in such documents, agreements, instruments and certificates, and (v) subject to the terms of the Trust Agreement, to take such other action in connection with the foregoing as the Certificateholders, the Seller or Administrator may from time to time direct. After its formation, the Issuer will not engage in any business or activities other than in connection with, or relating to, the purposes specified in the previous paragraph. The operations of the Issuer will be conducted in accordance with the following standards: (i) the Issuer will observe all procedures required by the Trust Agreement;
(ii) pursuant to the Trust Agreement and the Administration Agreement, certain business and affairs of the Issuer will be managed by or under the direction of the Owner Trustee. Except as otherwise expressly provided
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in the Trust Agreement and the Administration Agreement, neither the Seller nor any of its affiliates will have authority to act for, or to assume any obligation or responsibility on behalf of, the Issuer; (iii) the Issuer will keep correct and complete books and records of accounts of the Issuer, separate from those of the Seller or any subsidiary or affiliate of the Seller. Any agreements and other instruments will be continuously maintained as official records of the Issuer; (iv) each of the Seller and the Issuer will provide for its own operating expenses and liabilities from its own funds. General overhead and administrative expenses of the Issuer will not be charged or otherwise allocated to the Seller or its affiliates (except indirectly, insofar as the Seller or such affiliates own the Owner Trust Certificates) and such expenses of the Seller or its affiliates will not be charged or otherwise allocated to the Issuer; (v) the Issuer will conduct its business under names or tradenames so as not to mislead others as to the identity of the Issuer. Without limiting the generality of the foregoing, all oral and written communications, including letters, invoices, contracts, statements and applications, will be made solely in the name of the Issuer if related to the Issuer; (vi) there will be no guaranties made by the Issuer with respect to obligations of the Seller or its affiliates. There will not be any indebtedness relating to borrowings or loans between the Issuer and the Seller or its affiliates; (vii) the Issuer will act solely in its name and through its or the Owner Trustees or Administrators duly authorized officers or agents in the conduct of its business. The Issuer will not operate or purport to operate as an integrated, single economic unit with respect to the Seller or any other affiliated or unaffiliated entity; seek or obtain credit or incur any obligation to any third party based upon the assets of the Seller or its affiliates; or induce any such third party to reasonably rely on the creditworthiness of the Seller or any other affiliated or unaffiliated entity; (viii) the Issuer will maintain its principal place of business in the State of Delaware;
(ix) the Issuer and the Seller will keep separate from each other their respective funds and other assets and will not commingle such funds and other assets with those of any other entity; (x) if and to the extent applicable, the Issuer will prepare financial statements that are separate from those of the Seller or any other entity; and (xi) the Issuer will not engage in any transaction with an affiliate on any terms other than would be obtained in an arms-length transaction with a non-affiliate. The Certificate Accounts The Certificate Paying Agent will be required (i) to establish a separate non-interest bearing trust account for each class of Owner Trust Certificates (each, a Certificate Account) to be held in trust by the Certificate Paying Agent for the benefit of the holders of the related Owner Trust Certificates. Pursuant to the Trust Agreement, the Certificate Paying Agent may, from time to time, withdraw funds from the related Certificate Account for the following reasons: (i) to reimburse the Owner Trustee for expenses and other liabilities incurred by and reimbursable to the Owner Trustee pursuant to the Trust Agreement (in accordance with priorities set forth for payment of Extraordinary Trust Expenses under Description of the Offered NotesAllocation of Available Funds in this Memorandum) and to pay or make reasonable provision for the payment of all other liabilities of the Issuer; (ii) to make distributions on the related class of Owner Trust Certificates in the amounts and in the manner provided for in the Trust Agreement;
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(iii)
to clear and terminate such Certificate Account upon the termination of the Trust Agreement; and
(iv) to return to the Indenture Trustee any amounts deposited in such Certificate Account that were remitted by the Indenture Trustee to the Certificate Paying Agent in error. Indemnification of Owner Trustee Pursuant to the Trust Agreement, the Trust shall indemnify the Owner Trustee out of the related Trust Estate and hold the Owner Trustee harmless from and defend against any and all Liabilities which may at any time be imposed on, incurred by, or asserted against, the Owner Trustee in any way relating to or arising out of the Trust Agreement, the Trust Estates, the administration of the Trust Estates or the action or inaction of the Owner Trustee; except to the extent that such Liabilities arise out of or result from (i) the Owner Trustees willful misconduct, gross negligence or bad faith or (ii) any inaccuracy of a representation or warranty of the Owner Trustee. Termination In no event will the Issuer be dissolved or terminated until the Offered Notes have been paid in full and the lien on each Trust Estate created by the Indenture has been released. The Issuer may be dissolved at any time after the Indenture has been discharged in accordance with the terms thereof. With respect to each Series, the Majority Certificateholder will be responsible for directing the Owner Trustee to take all required actions in connection with liquidating and winding up the related Trust Estate of the Issuer. YIELD, PREPAYMENT AND MATURITY CONSIDERATIONS General The rate and timing of payments and the yields to maturity of the Offered Notes will be affected by the rate and timing of distributions on, and the allocation of realized losses to, the related Underlying Securities, which in turn is affected by the rate and timing of payments of principal and losses on the related Underlying Mortgage Loans. The rate of principal payments on the Underlying Mortgage Loans will in turn be affected by the amortization schedules of the Underlying Mortgage Loans, any modification to the payment terms and the outstanding principal balance of the Underlying Mortgage Loan and by the rate of principal prepayments thereon (including, for this purpose, prepayments resulting from refinancing, short sales, liquidations of the Underlying Mortgage Loans due to defaults, casualties or condemnations and repurchases by the related originator or others). The weighted average life and yield to maturity of each class of Offered Notes will also be influenced by the amount of overcollateralization and the amount of excess interest generated by the related Underlying Securities and applied in reduction of the Note Principal Balance of such Offered Notes. The level of this excess cashflow available on any Payment Date to be applied in reduction of the Note Principal Balance of the Offered Notes will be influenced by the following factors, among others: (i) the overcollateralization level provided by the related Underlying Securities at such time, i.e., the extent to which interest on the related Underlying Securities is accruing on a higher principal balance than the Note Principal Balance of such Offered Notes; and (ii) the amount of losses allocated to the Underlying Securities.
To the extent that greater amounts of excess cashflow are paid in reduction of the Note Principal Balance of a class of Offered Notes, the weighted average life thereof can be expected to shorten. No assurance, however, can be given as to the amount of excess cashflow available to be paid to the Offered Notes at any time or in the aggregate. See Description of the Offered NotesCredit Enhancement and Description of the Offered Notes Principal Payments Due to the Allocation of Losses in this Memorandum.
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On each Payment Date with respect to each Series of Offered Notes, the Issuer will be required to make a principal payment to the holders of such Offered Notes in an amount equal to the related Parity Payment, if any, in each case in reduction of the Note Principal Balance thereof. If the Issuer is unable to pay any portion of such principal payment for a Series of Offered Notes from related Available Funds, the Guarantor will pay such portion of that principal payment pursuant to the Guaranty. Any principal payment may affect the yield to maturity and reduce the weighted average life of the related Offered Notes. See Description of the Offered NotesPrincipal Payments Due to the Allocation of Losses and Description of the Guaranty in this Memorandum. The rate of principal payments (including prepayments) on pools of residential mortgage loans may vary significantly over time and may be influenced by a variety of economic, geographic, social and other factors, including mortgagors net equity in the mortgaged properties, unemployment, changes in mortgagors housing needs, job transfers and servicing decisions. In general, if prevailing interest rates were to fall significantly below the mortgage rates on the Underlying Mortgage Loans, the Underlying Mortgage Loans could be subject to higher prepayment rates than if prevailing interest rates were to remain at or above the mortgage rates on the Underlying Mortgage Loans. Conversely, if prevailing interest rates were to rise significantly, the rate of prepayments on the Underlying Mortgage Loans would generally be expected to decrease. The timing of changes in the rate of principal payments on the Underlying Mortgage Loans may significantly affect an investors actual yield to maturity, even if the average rate of principal payments is consistent with such investors expectation. In general, the earlier a principal payment on the Underlying Mortgage Loans occurs, the greater the effect of such principal payment on an investors yield to maturity. The effect on an investors yield of principal payments occurring at a rate higher (or lower) than the rate anticipated by the investor during the period immediately following the issuance of the Offered Notes may not be offset by a subsequent like decrease (or increase) in the rate of principal payments. The yield to maturity of any Offered Note will also be sensitive to distributions on and losses allocated to the related Underlying Securities, which in turn is sensitive to defaults on the related Underlying Mortgage Loans. Any loss allocated to the Underlying Securities may reduce the amount of overcollateralization with respect to the related Offered Notes and may result in a principal payment that will reduce the Note Principal Balance of such Offered Notes as described in this Memorandum. If a purchaser of an Offered Note calculates its anticipated yield based on an assumed rate of default and amount of losses with respect to the related Underlying Mortgage Loans that is lower than the default rate and the amount of losses actually incurred, its actual yield to maturity may be lower than that so calculated. In general, the earlier a loss occurs, the greater is the effect on an investors yield to maturity. There can be no assurance as to the delinquency, foreclosure, modification or loss experience with respect to the Underlying Mortgage Loans or any Underlying Securities. Weighted Average Lives and Yield Sensitivity of the Offered Notes The weighted average life of any of the Offered Notes 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 the Offered Notes. Because it is expected that there will be prepayments and defaults on the Underlying Mortgage Loans, the actual weighted average lives of the Underlying Securities are expected to vary substantially from the weighted average remaining terms to stated maturity of the Underlying Mortgage Loans. Prepayments are commonly measured relative to a prepayment standard or model. The model used in this Memorandum assumes constant prepayment rates (CPR) of 0%, 5%, 10%, 15%, 20% and 25% on the Underlying Mortgage Loans as set forth in the tables set forth on Schedule I (the Decrement Tables). CPR is a prepayment assumption that represents a constant assumed rate of prepayment each month relative to the then outstanding principal balance of a pool of mortgage loans for the life of such mortgage loans. The model is for illustrative purposes only and does not purport to be either an historical description of the prepayment experience of any pool of mortgage loans or a prediction of the anticipated rate of prepayment of any mortgage loans, including the Underlying Mortgage Loans. The Decrement Tables were prepared on the basis of the assumptions in the following paragraph. There are certain differences between the mortgage loan characteristics included in such assumptions and the characteristics of the actual Underlying Mortgage Loans. Any such discrepancy may have an effect upon the percentages of initial 45
Note Principal Balance outstanding and weighted average lives of the Offered Notes set forth in the Decrement Tables. In addition, since the Underlying Mortgage Loans have characteristics that differ from those assumed in preparing the tables captioned Percent of Initial Note Principal Balance Outstanding, payments of principal may be made earlier or later than indicated in such tables. The information in the Decrement Tables set forth in Schedule I of this Memorandum has been prepared on the basis of the following assumptions (collectively, the Structuring Assumptions): (i) the Underlying Mortgage Loans prepay at the specified constant percentages of CPR;
(ii) scheduled monthly payments on the Underlying Mortgage Loans are received on the first day of each month commencing in October 2010 and prepayments, including 30 days of interest, are received on the last day of each month, beginning in September 2010; (iii) no defaults, delinquencies or shortfalls in the payment of principal and interest on the Underlying Mortgage Loans are experienced; (iv) the Deposited Underlying Security Principal Balances as of the Closing Date are as set forth on pages iv - viii of this Memorandum and no Implied Writedown Amounts have been applied in reduction of the Deposited Underlying Security Principal Balances as of September 25, 2010; (v) distributions in respect of the Underlying Securities are made as described in the Underlying Offering Documents; (vi) distributions in respect of the Underlying Securities are made on the 25th day of each month, beginning in October 2010; (vii) payments in respect of the Offered Notes are made on the fourth day of each month, beginning in November 2010, and there is no reinvestment income; (viii) the Closing Date is October 22, 2010;
(ix) optional termination of the applicable portion of the Underlying Trusts does not occur as provided therefor under the related Underlying Offering Documents; (x) Securities; (xi) no payments are made pursuant to financial guaranties related to the Underlying no Extraordinary Trust Expenses will be incurred;
(xii) the margin on the Senior I-A Notes is equal to 0.50%, and the Note Rate on the Senior IIA Notes is equal to 2.00%; (xiii) with respect to each Underlying Mortgage Loan that is an adjustable rate mortgage loan, periodic caps and lifetime caps are applied; (xiv) (xv) (xvi) no early termination right is exercised; the amount on deposit in each Expense Reserve Fund is $0.00; the Indenture Trustee Fee is $0.00 and the Owner Trustee Fee is $0.00;
(xvii) the Underlying Securities subject to a mandatory auction will receive principal equal to 100% of the outstanding principal balance of such Underlying Securities on the underlying auction distribution date; and
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(xviii) the index for each of the Underlying Mortgage Loans is described in the related Underlying Offering Documents and is as follows: One-Year CMT remains constant at 0.207%; ThreeYear CMT remains constant at 0.663%; COFI remains constant at 1.713%; LAMA remains constant at 0.348%; One-Month LIBOR remains constant at 0.256%; Six-Month LIBOR remains constant at 0.458%; One-Year LIBOR remains constant at 0.782%; One-Year MTA remains constant at 0.348%; Prime Rate remains constant at 3.250%. Nothing contained in the Structuring Assumptions should be construed as a representation that the Underlying Mortgage Loans will perform in accordance with the Structuring Assumptions or that they will not experience delinquencies or losses. The tables (the Sensitivity Tables) set forth in Schedule II of this Memorandum for each class of Offered Notes represent (i) the weighted average life of such class of Offered Notes assuming certain CPR and constant percentages of constant default rate (CDR) scenarios, and (ii) the percentage of principal to be paid under the Guaranty to such class of Offered Notes assuming certain CPR and CDR scenarios. The Sensitivity Tables set forth in Schedule II of this Memorandum have been prepared on the basis of the Structuring Assumptions and the following additional assumptions: (i) (ii) the Underlying Mortgage Loans default at the specified constant percentages of CDR; there is a zero month lag between the occurrence of default and the realization of a loss;
(iii) loss severity upon realization of a loss is equal to (a) with respect to the Series I Underlying Mortgage Loans, 70% of the outstanding principal amount, and (b) with respect to the Series II Underlying Mortgage Loans, 85% of the outstanding principal amount; (iv) interest rates on the Underlying Mortgage Loans are reduced by 0.25%; and
(v) with respect to the Percentage of Principal Paid Through Parity Payments tables, the final payment does not include any Parity Payments. CDR represents a constant assumed rate of payment default each month relative to the then outstanding principal balance of a pool of mortgage loans. CDR does not purport to be either an historical description of the default experience of any pool of mortgage loans or a prediction of the anticipated rate of defaults on any pool of mortgage loans. The rate and extent of actual defaults and losses experienced on the related Underlying Mortgage Loans are likely to differ from those assumed and may differ significantly. A default rate of 1.0% CDR assumes a default in the payment of the then outstanding performing balance of a pool of mortgage loans at an annual rate of 1.0% which remains in effect through the remaining lives of such pool of mortgage loans. Further, it is unlikely the Underlying Mortgage Loans will incur realized losses at any specified percentage of CDR or incur realized losses at a constant Loss Severity Percentage. The additional assumptions described above relating to the Sensitivity Tables, including the assumed levels of CDR, were developed in part by reference to Barclays Capitals internal research model, which uses loan-level performance data regarding the Underlying Mortgage Loans to generate projected prepayment, default, and loss severity vectors for each of the related Underlying Securities under a variety of scenarios. Various scenarios were considered in developing these assumptions, including different combinations of variables relating to home price appreciation, unemployment, interest rate and loan modifications. The Underlying Mortgage Loans and the Underlying Securities will not perform in accordance with the Structuring Assumptions because the Underlying Mortgage Loans have characteristics that do not conform to those assumed in the Structuring Assumptions and because the Underlying Mortgage Loans will not behave as assumed in the Structuring Assumptions. In particular, it is expected that there will be shortfalls in payments, delinquencies and defaults with respect to a substantial portion of the Underlying Mortgage Loans. Discrepancies between assumed and actual characteristics and performance underscore the hypothetical nature of the tables in Schedules I and II
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attached hereto, which are provided only to give a general sense of the sensitivity of the Note Principal Balances, the yields to maturity and the weighted average lives of the Offered Notes under varying prepayment and default scenarios. Any such discrepancy may have an effect upon the percentages of the initial Note Principal Balance outstanding (and the weighted average lives) of the Offered Notes set forth in the tables in Schedule I attached hereto. In addition, the Underlying Mortgage Loans will not experience prepayments at any constant rate or at any other specified rate and the Underlying Mortgage Loans will not behave in any uniform manner. The Underlying Mortgage Loans have different interest rates and different maturities and will be influenced unevenly by various factors. IRS CIRCULAR 230 NOTICE TO CERTAIN FEDERAL INCOME TAX CONSEQUENCES AND ERISA CONSIDERATIONS To ensure compliance with Internal Revenue Service Circular 230, Noteholders are hereby notified that: (i) any discussion of U.S. federal tax issues in this Memorandum is not intended or written by us to be relied upon, and cannot be relied upon by Noteholders for the purpose of avoiding penalties that may be imposed on Noteholders under the Code; (ii) such discussion is written in connection with the promotion or marketing of the transactions or matters addressed herein; and (iii) Noteholders should seek advice based on their particular circumstances from an independent tax advisor. CERTAIN FEDERAL INCOME TAX CONSEQUENCES General The following is a general discussion of the anticipated material federal income tax consequences of the purchase, ownership and disposition of the Offered Notes. This discussion is directed solely to Noteholders that hold the Offered Notes as capital assets within the meaning of Section 1221 of the Code and does not purport to discuss all federal income tax consequences that may be applicable to particular categories of investors, some of which (such as banks, insurance companies, tax-exempt investors and foreign investors) may be subject to special rules. Further, the authorities on which this discussion, and the opinion referred to below, rely are subject to change or differing interpretations, which could apply retroactively. Prospective investors should note that no rulings have been or will be sought from the Internal Revenue Service (IRS) with respect to any of the federal income tax consequences discussed below, and no assurance can be given that the IRS will not take contrary positions. For purposes of the tax discussion below, (i) references to a Noteholder or a holder are to the beneficial owner of an Offered Note, as the context requires, (ii) references to a Certificate are to a Series I Owner Trust Certificate or Series II Owner Trust Certificate, as the context requires, (iii) references to a Certificateholder or a holder are to the beneficial owner of a Certificate, as the context requires, (iv) references to the Series I Trust Estate are to the portion of the Trust containing the Series I Underlying Securities and related assets, (v) references to the Series II Trust Estate are to the portion of the Trust containing the Series II Underlying Securities and related assets, and (vi) references to a Trust Estate are to the Series I Trust Estate or the Series II Trust Estate, as the context requires. Each of the Indenture Trustee, the Owner Trustee, the Noteholders, the Certificateholders, the Issuer and the Guarantor will agree not to take any action that would result in a Trust Estate being classified as a taxable mortgage pool as defined in Section 7701(i) of the Code. Taxpayers and preparers of tax returns should be aware that under applicable Treasury regulations a provider of advice on specific issues of law is not considered an income tax return preparer unless the advice (i) is given with respect to events that have occurred at the time the advice is rendered and is not given with respect to the consequences of contemplated actions, and (ii) is directly relevant to the determination of an entry on a tax return. Accordingly, taxpayers should consult their tax advisors and tax return preparers regarding the preparation of any item on a tax return, even where the anticipated tax treatment has been discussed in this Memorandum. In addition to the federal income tax consequences described herein, potential investors should consider any foreign, state and local tax consequences of the purchase, ownership and disposition of the Offered Notes. See State and Other Tax Consequences in this Memorandum. Noteholders are advised to consult their tax advisors concerning the federal, state, local, foreign or other tax consequences to them of the purchase, ownership and disposition of the Offered Notes.
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Upon the issuance of the Offered Notes, Stradley Ronon Stevens & Young, LLP, counsel to the Seller and the Guarantor, will deliver its opinion generally to the effect that, assuming compliance with the Indenture, Trust Agreement and certain related documents, and based in part on the facts set forth in this Memorandum and certain additional information and representations, for federal income tax purposes, (i) each class of Offered Notes will be characterized as indebtedness to a Noteholder other than the owner of the related Certificates and not as ownership interests in the related Trust Estate, and (ii) the related Trust Estate will not be classified as a taxable mortgage pool as defined in Section 7701(i) of the Code, as an association taxable as a corporation or as a publicly-traded partnership as defined in Section 7704 of the Code that is taxable as a corporation. Under the Trust Agreement, each holder of a Certificate will agree to treat (i) such Certificate as evidencing a beneficial ownership interest in the related Trust Estate, and (ii) the related Trust Estate as a grantor trust for federal income tax purposes under subpart E, part I of subchapter J of chapter 1 of the Code. Under the Indenture, each holder of an Offered Note will agree to treat such Offered Note as indebtedness for federal, state and local income and franchise tax purposes. The following discussion assumes that the Offered Notes are properly treated as debt for federal tax purposes and is based in part on the rules governing original issue discount that are set forth in Sections 1271-1273 and 1275 of the Code and in the Treasury regulations issued under the Code (the OID Regulations). Status as Real Property Loans Offered Notes held by a domestic building and loan association will not constitute loans . . . secured by an interest in real property within the meaning of Section 7701(a)(19)(C)(v) of the Code. Offered Notes held by a real estate investment trust will not constitute real estate assets within the meaning of Section 856(c)(4)(A) of the Code and interest on Offered Notes will not be considered interest on obligations secured by mortgages on real property within the meaning of Section 856(c)(3)(B) of the Code. In addition, the Offered Notes will not be qualified mortgages within the meaning of Section 860G(a)(3) of the Code. Interest and Original Issue Discount For federal income tax purposes, the Offered Notes may be issued with original issue discount. The following discussion applies only to Offered Notes that are issued with more than a de minimis amount of original issue discount. Any holders of the Offered Notes issued with original issue discount generally will be required to include original issue discount in income as it accrues, in accordance with the method described below, in advance of the receipt of the cash attributable to such income. In addition, Section 1272(a)(6) of the Code provides special rules applicable to any Offered Notes issued with original issue discount. The OID Regulations do not adequately address certain issues relevant to, and in some instances provide that they are not applicable to, securities such as the Offered Notes. Section 1272(a)(6) of the Code requires that a prepayment assumption (the Prepayment Assumption) be used with respect to the collateral underlying debt instruments in computing the accrual of original issue discount if payments under such debt instruments may be accelerated by reason of prepayments of other obligations securing such debt instruments, and that adjustments be made in the amount and rate of accrual of such discount to reflect differences between the actual prepayment rate and the Prepayment Assumption. The Prepayment Assumption is to be determined in a manner prescribed in Treasury regulations; however, no such Treasury regulations have been issued. The Conference Committee Report (the Committee Report) of the Tax Reform Act of 1986 indicates that the regulations will provide that the Prepayment Assumption used with respect to an Offered Note must be the same as that used in pricing the initial offering of such Offered Note. The Prepayment Assumption that will be used for tax information reporting purposes will be 9% CPR for the Series I Notes and 4% CPR for the Series II Notes; however, no representation is made that such Prepayment Assumptions were actually used to price the Offered Notes or that guidance from the IRS would not require the use of other prepayment assumptions. No representation is made that an Offered Note will prepay at any particular speed. Original issue discount will be considered to be de minimis if the original issue discount is less than 0.25% of the stated redemption price at maturity of the Offered Note multiplied by the number of complete years to maturity. In the case of original issue discount on obligations payable in installments, the OID Regulations refer to the weighted average maturity of obligations, presumably taking into account the Prepayment Assumption. 49
The original issue discount on an Offered Note will be the excess of its stated redemption price at maturity over its issue price. The issue price of Offered Notes will be the first cash price at which a substantial amount of Offered Notes is sold (excluding sales to bond houses, brokers and underwriters). If less than a substantial amount of Offered Notes is sold for cash on or prior to the Closing Date, the issue price for the Offered Notes will be treated as the fair market value of the Offered Notes on the Closing Date. Under the OID Regulations, the stated redemption price of an Offered Note is equal to the total of all payments to be made on such Offered Note other than qualified stated interest. Qualified stated interest must be, among other things, unconditionally payable at least annually (during the entire term of the instrument) at a single fixed rate, or at a qualified floating rate, an objective rate, a combination of a single fixed rate and one or more qualified floating rates or one qualified inverse floating rate, or a combination of qualified floating rates that does not operate in a manner that accelerates or defers interest payments on such Offered Note. The portion of original issue discount that accrues in any accrual period (which severally must end on each Payment Date) will equal any excess of (i) the sum of (a) the present value, as of the end of the accrual period, of any payments remaining to be made on the Offered Note, if any, in future periods, and (b) the payments made on such Offered Note during the accrual period of amounts included in the stated redemption price, over (ii) the adjusted issue price of such Offered Note at the beginning of the accrual period. The present value of the remaining payments referred to in the preceding sentence will be calculated (i) assuming that payments on the Offered Note will be received in future periods based on the Prepayment Assumption, (ii) using a discount rate equal to the original yield to maturity of the Offered Note, and (iii) taking into account events (including actual prepayments) that have occurred before the close of the accrual period. For these purposes, the original yield to maturity of the Offered Note will be calculated based on its issue price and assuming that payments on the Offered Note will be made in all accrual periods based on the Prepayment Assumption. The adjusted issue price of an Offered Note at the beginning of any accrual period will equal the issue price of such Offered Note, increased by the aggregate amount of original issue discount that accrued with respect to such Offered Note in prior accrual periods and reduced by the amount of any payments made on such Offered Note in prior accrual periods of amounts included in the stated redemption price. The original issue discount accruing during any accrual period, computed as described above, will be allocated ratably to each day during the accrual period to determine the daily portion of original issue discount for such day. A subsequent purchaser of an Offered Note that purchases such Offered Note at a cost (excluding any portion of the cost attributable to accrued qualified stated interest) less than its remaining stated redemption price will also be required to include in gross income the daily portions of any original issue discount with respect to such Offered Note. However, each such daily portion may be reduced, if such cost is in excess of its adjusted issue price. This reduction will be in proportion to the ratio such excess bears to the aggregate original issue discount remaining to be accrued on such Offered Note. The adjusted issue price of an Offered Note on any given day equals the sum of (i) the adjusted issue price (or, in the case of the first accrual period, the issue price) of such Offered Note at the beginning of the accrual period that includes such day, and (ii) the daily portions of original issue discount for all days during such accrual period prior to such day. Noteholders are advised to consult their tax advisors concerning the source of income on the Offered Notes for federal income tax purposes as U.S. or foreign source income. Market Discount A Noteholder that purchases the Offered Notes at a market discount, that is at a purchase price less than its remaining stated principal amount (or in the case of an Offered Note issued with original issue discount, at a purchase price less than its adjusted issue price) by more than a de minimis amount, will recognize gain upon receipt of each payment representing stated redemption price. Such a Noteholder generally will be required to allocate the portion of each such payment representing stated redemption price first to accrued market discount not previously included in income and to recognize ordinary income to that extent. The holder of an Offered Note may elect to include market discount in income currently as it accrues rather than including it on a deferred basis in accordance with the foregoing. The election, if made, will apply to all market discount notes acquired by the Noteholder on or after the first day of the first taxable year to which such election applies. In addition, the OID Regulations permit the holder of an Offered Note to elect to accrue all interest, discount (including de minimis market or original issue 50
discount) and premium in income as interest, based on a constant yield method. If such an election were made with respect to an Offered Note with market discount, the Noteholder would be deemed to have made an election to include current market discount in income with respect to all other debt instruments having market discount that the Noteholder acquires during the taxable year of the election or thereafter and, possibly, previously acquired instruments. Similarly, a Noteholder that made this election for an Offered Note that is acquired at a premium would be deemed to have made an election to amortize the premium with respect to all debt instruments having amortizable premium that the Noteholder owns or acquires. See Premium below. Each of these elections to accrue interest, discount and premium with respect to an Offered Note on a constant yield method or as interest would be irrevocable. Market discount will be considered to be de minimis if the market discount is less than 0.25% of the remaining stated redemption price of the Offered Note multiplied by the number of complete years to maturity remaining after the date of its purchase. In interpreting a similar rule with respect to original issue discount on obligations payable in installments, the OID Regulations refer to the weighted average maturity of obligations, and it is likely that the same rule will be applied with respect to market discount, presumably taking into account the Prepayment Assumption. Section 1276(b)(3) of the Code specifically authorizes the Treasury to issue regulations providing for the method for accruing market discount on debt instruments, the principal of which is payable in more than one installment. Until regulations are issued by the Treasury, certain rules described in the Committee Report apply. The Committee Report indicates that in each accrual period market discount on Offered Notes should accrue, at the Noteholders option as follows: (i) on the basis of a constant yield method, (ii) in the case of an Offered Note issued without original issue discount, in an amount that bears the same ratio to the total remaining market discount as the stated interest paid in the accrual period bears to the total amount of stated interest remaining to be paid on the Offered Notes as of the beginning of the accrual period, or (iii) in the case of an Offered Note issued with original issue discount, in an amount that bears the same ratio to the total remaining market discount as the original issue discount accrued in the accrual period bears to the total original issue discount remaining on the Offered Note at the beginning of the accrual period. Moreover, the Prepayment Assumption that would be used in calculating the accrual of original issue discount is also used in calculating the accrual of market discount. Because the regulations referred to in this paragraph have not been issued, it is not possible to predict what effect the regulations might have on the tax treatment of an Offered Note purchased at a discount in the secondary market. Since the Offered Notes provide for monthly payments throughout their term, the effect of these rules may be to require market discount to be includible in income at a rate that is not significantly slower than the rate at which the discount would accrue if it were original issue discount. Moreover, in any event a holder of an Offered Note generally will be required to treat a portion of any gain on the sale or exchange of the Offered Note as ordinary income to the extent of the market discount accrued to the date of disposition under one of the foregoing methods, less any accrued market discount previously reported as ordinary income. Further, a holder of an Offered Note may be required to defer a portion of its interest deductions for the taxable year attributable to any indebtedness incurred or continued to purchase or carry an Offered Note purchased with more than a de minimis amount of market discount. Any deferred interest expense would not exceed the market discount that accrues during the taxable year and is, in general, allowed as a deduction not later than the year in which the market discount is includible in income. If the holder elects to include market discount in income currently as it accrues on all market discount instruments acquired by the holder in that taxable year or thereafter, the interest deferral rule described above will not apply. Premium An Offered Note purchased at a cost (excluding any portion of the cost attributable to accrued qualified stated interest) greater than its remaining stated redemption price will be considered to be purchased at a premium. The holder of that Offered Note may elect under Section 171 of the Code to amortize the premium under the constant yield method over the remaining term of the Offered Note. If made, the election will apply to all debt instruments having amortizable premium that the holder owns or subsequently acquires. Amortizable premium will be treated as an offset to interest income on the related Offered Note, rather than as a separate interest deduction. The OID Regulations also permit holders of Offered Notes to elect to include all interest, discount and premium in 51
income based on a constant yield method, further treating the Noteholder as having made the election to amortize premium generally. See Market Discount above. The Committee Report states that the same rules that apply to accrual of market discount (which rules may require use of a prepayment assumption in accruing market discount with respect to Offered Notes without regard to whether the Offered Notes have original issue discount) would also apply in amortizing premium under Section 171 of the Code. Sales of Offered Notes If an Offered Note is sold, the selling Noteholder will recognize gain or loss equal to the difference between the amount realized on the sale and its adjusted basis in the Offered Note (which is defined above). Except as provided in the following three paragraphs, any the gain or loss will be capital gain or loss if the Offered Note is held as a capital asset (generally, property held for investment) within the meaning of Section 1221 of the Code. Gain recognized on the sale of an Offered Note by a seller who purchased the Offered Note at a market discount will be taxable as ordinary income in an amount not exceeding the portion of the discount that accrued during the period the Offered Note was held by the holder, reduced by any market discount included in income under the rules described above under Market Discount and Premium. A portion of any gain from the sale of an Offered Note that might otherwise be capital gain may be treated as ordinary income to the extent that the Offered Note is held as part of a conversion transaction within the meaning of Section 1258 of the Code. A conversion transaction generally is one in which the taxpayer has taken two or more positions in the same or similar property that reduce or eliminate market risk, if substantially all of the taxpayers return is attributable to the time value of the taxpayers net investment in the transaction. The amount of gain so realized in a conversion transaction that is recharacterized as ordinary income generally will not exceed the amount of interest that would have accrued on the taxpayers net investment at 120% of the appropriate applicable Federal rate (which rate is computed and published monthly by the IRS) at the time the taxpayer enters into the conversion transaction, subject to appropriate reduction for prior inclusion of interest and other ordinary income items from the transaction. Finally, a taxpayer may elect to have net capital gain taxed at ordinary income rates rather than capital gains rates in order to include the net capital gain in total net investment income for the taxable year, for purposes of the rule that limits the deduction of interest on indebtedness incurred to purchase or carry property held for investment to a taxpayers net investment income. Backup Withholding and Information Reporting Payments of interest and principal, as well as payments of proceeds from the sale of Offered Notes, may be subject to backup withholding tax under Section 3406 of the Code if recipients of the payments fail to furnish to the payor certain information, including their taxpayer identification numbers, or otherwise fail to establish an exemption from the tax. Any amounts deducted and withheld from a distribution to a recipient would be allowed as a credit against the recipients federal income tax. Furthermore, certain penalties may be imposed by the IRS on a recipient of payments that is required to supply information but that does not do so in the proper manner. The Indenture Trustee on behalf of the Trust Estates will report to Noteholders and to the IRS for each calendar year the amount of any reportable payments during the year and the amount of any tax withheld on payments on the Offered Notes. Foreign Investors in Offered Notes A Noteholder that is not a United States person (as defined below) and is not subject to federal income tax as a result of any direct or indirect connection to the United States in addition to its ownership of an Offered Note will not be subject to United States federal income or withholding tax in respect of a distribution on an Offered Note, provided that the holder complies to the extent necessary with certain identification requirements (including delivery of a statement, signed by the Noteholder under penalties of perjury, certifying that such Noteholder is not a United States person and providing the name and address of such Noteholder). This statement is generally made on
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IRS Form W-8BEN and must be updated whenever required information has changed or within 3 calendar years after the statement is first delivered. For these purposes, United States person means a citizen or resident of the United States, a corporation, partnership or other entity created or organized in, or under the laws of, the United States or any political subdivision thereof (except, in the case of a partnership, to the extent provided in regulations) or an estate whose income is subject to United States federal income tax regardless of its source, or 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 the authority to control all substantial decisions of the trust. To the extent prescribed in regulations by the Secretary of the Treasury, a trust that was in existence on August 20, 1996 (other than a trust treated as owned by the grantor under subpart E, part I of subchapter J of chapter 1 of the Code) and that was treated as a United States person on August 19, 1996, may elect to continue to be treated as a United States person notwithstanding the previous sentence. It is possible that the IRS may assert that the foregoing tax exemption should not apply with respect to an Offered Note held by an owner of the related Certificate. If the holder does not qualify for exemption, distributions of interest, including distributions in respect of accrued original issue discount, to such holder may be subject to a tax rate of 30%, subject to reduction under any applicable tax treaty. Special rules apply to partnerships, estates and trusts, and, in certain circumstances, certifications as to foreign status and other matters may be required to be provided by partners and beneficiaries thereof. In addition, in certain circumstances, the foregoing rules will not apply to exempt a United States shareholder of a controlled foreign corporation from taxation on such United States shareholders allocable portion of the interest income received by such controlled foreign corporation. Prospective investors are urged to consult their tax advisors regarding the procedures for obtaining an exemption from withholding or reporting under the withholding, backup withholding and information reporting rules described above. STATE AND OTHER TAX CONSEQUENCES In addition to the federal income tax consequences described under Certain Federal Income Tax Consequences in this Memorandum, potential investors should consider the state, local and other tax consequences of the acquisition, ownership, and disposition of the Offered Notes offered hereunder. State tax law may differ substantially from the corresponding federal tax law, and the discussion above does not purport to describe any aspect of the tax laws of any state or other jurisdiction. Therefore, prospective investors should consult their own tax advisors with respect to the various tax consequences of investments in the Offered Notes offered hereunder. ERISA CONSIDERATIONS Sections 404 and 406 of ERISA and Section 4975 of the Code impose fiduciary and prohibited transaction restrictions on the activities of employee benefit plans (as defined in Section 3(3) of ERISA) and certain other retirement plans and arrangements discussed in Section 4975(e)(1) of the Code and on various other retirement plans and arrangements, including bank collective investment funds and insurance company general and separate accounts in which such plans are invested (together referred to as Plans). Some employee benefit plans, including governmental plans (as defined in Section 3(32) of ERISA), and, if no election has been made under Section 410(d) of the Code, church plans (as defined in Section 3(33) of ERISA), are not subject to the ERISA requirements. Accordingly, assets of these plans may be invested without regard to the ERISA considerations described below, subject to the provisions of other applicable federal, state and local law. Any such plan that is qualified and exempt from taxation under Sections 401(a) and 501(a) of the Code, however, is subject to the prohibited transaction rules set forth in Section 503 of the Code. ERISA generally imposes on Plan fiduciaries general fiduciary requirements, including the duties of investment prudence and diversification and the requirement that a Plans investments be made in accordance with the documents governing the Plan. Any person who has discretionary authority or control with respect to the management or disposition of a Plans assets (referred to as Plan Assets) and any person who provides investment advice with respect to Plan Assets for a fee is a fiduciary of the investing Plan. If the Underlying Securities and
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other assets included in the Trust Estate were to constitute Plan Assets, then any party exercising management or discretionary control with respect to those Plan Assets may be deemed to be a Plan fiduciary and be subject to the fiduciary responsibility provisions of ERISA and the prohibited transaction provisions of ERISA and Section 4975 of the Code with respect to any investing Plan. In addition, the acquisition or holding of securities by or on behalf of a Plan or with Plan Assets, as well as the operation of the Issuer, may constitute or involve a prohibited transaction under ERISA and the Code, unless a statutory or administrative exemption is available. Further, ERISA prohibits Plans to which it applies from engaging in prohibited transactions under Section 406 of ERISA, and Section 4975 of the Code imposes excise taxes with respect to transactions described in Section 4975 of the Code. These transactions described in ERISA and the Code prohibit a broad range of transactions involving Plan Assets and persons, called parties in interest and disqualified persons under ERISA and the Code, respectively, unless a statutory or administrative exemption is available. Some transactions involving the Issuer might be deemed to constitute prohibited transactions under ERISA and the Code with respect to a Plan that purchases the Offered Notes if the Underlying Securities and other assets included in the related Trust Estate are deemed to be assets of the Plan. The U.S. Department of Labor has promulgated regulations (29 C.F.R. 2510.3-101), modified by Section 3(42) of ERISA (Plan Asset Regulation), concerning whether or not a Plans assets would be deemed to include an interest in the underlying assets of an entity, including a trust fund, for purposes of applying the general fiduciary responsibility provisions of ERISA and the prohibited transaction provisions of ERISA and the Code. Under the Plan Asset Regulation, generally, when a plan acquires an equity interest in another entity (such as the trust fund), the underlying assets of that entity may be considered to be Plan Assets unless an exception applies. Exceptions contained in the U.S. Department of Labor regulations provide that Plan Assets will not include an undivided interest in each asset of an entity in which the Plan makes an equity investment if (i) the entity is an operating company, (ii) the equity investment made by the Plan is either a publicly-offered security that is widely held, both as defined in the U.S. Department of Labor regulations, or a security issued by an investment company registered under the Investment Company Act, or (iii) benefit plan investors do not own 25% or more in value of any class of equity securities issued by the entity. Under the Plan Asset Regulation, Plan Assets will be deemed to include an interest in the instrument evidencing the equity interest of a Plan as well as an interest in the underlying assets of the entity in which a Plan acquires an interest (such as the Underlying Securities and other assets included in the related Trust Estate). In addition, the purchase, sale and holding of the Offered Notes by or on behalf of a Plan could be considered to give rise to a prohibited transaction if the Seller, the Indenture Trustee or any of their respective affiliates is or becomes a party in interest or disqualified person with respect to the Plan. Although there is no authority directly on point, the Issuer believes that, at the date of this Memorandum, the Offered Notes should be treated as indebtedness without substantial equity features for purposes of the Plan Asset Regulation. A prospective transferee of an Offered Note or any interest therein who is a Plan trustee or is acting on behalf of a Plan or a plan subject to any federal, state or local law materially similar to Section 406 of ERISA or Section 4975 of the Code (Similar Law), or is using Plan Assets to effect such transfer, is required to provide written confirmation (or, in the case of any Offered Note transferred in book-entry form, will be deemed to have confirmed) that such transferee agrees to treat such Offered Note as indebtedness without substantial equity features for purposes of the Plan Asset Regulation and that the acquisition and holding of such Offered Note will not give rise to a non-exempt prohibited transaction under Section 406 of ERISA or Section 4975 of the Code or any similar provision of Similar Law. Any purchaser of an Owner Trust Certificate is required to provide written confirmation that it is not a Plan, a Plan trustee or acting on behalf of a Plan or a plan subject to any Similar Law. Any fiduciary or other investor of a Plan or Plan Assets or other plan that proposes to acquire or hold an Offered Note on behalf of or with Plan Assets of any Plan should consult with its counsel with respect to the application of the fiduciary responsibility provisions of ERISA and the prohibited transaction provisions of ERISA and the Code (and, in the case of non-ERISA plans and arrangements, any additional federal, state or local law considerations) before making the proposed investment. The sale of the Offered Notes to a Plan or other plan is in no respect a representation by the Seller, the Issuer, the Owner Trustee, the Administrator or the Indenture Trustee in any of its related capacities, that such an
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investment meets all relevant legal requirements with respect to investments by plans generally or any particular plan or that such an investment is appropriate for plans generally or any particular plan. PLAN OF DISTRIBUTION Subject to the terms and conditions set forth in the Note Purchase Agreement, dated the Closing Date (the Note Purchase Agreement), between the Seller and the Initial Purchasers, the Seller has agreed to sell, and the Initial Purchasers have agreed to purchase, the agreed upon allocated portion of the Offered Notes. Each Initial Purchaser has agreed to use its reasonable best efforts to identify investors, and will be obligated to purchase from the Seller only the agreed upon allocated portion of the Offered Notes for which such Initial Purchaser has entered into contracts of sale with investors, to the extent described below and as further set forth in the Note Purchase Agreement. The Offered Notes are exempted securities under Section 3(a)(2) of the Securities Act and are exempted securities under Section 3(a)(12)(A)(i) of the Exchange Act. Placement of the Offered Notes by the Initial Purchasers may be effected from time to time in one or more negotiated transactions, or otherwise, at varying prices to be determined at the time of sale. Any profit on the resale of the Offered Notes by an Initial Purchaser may be deemed to be discounts and commissions paid to such Initial Purchaser under the Securities Act. The Offered Notes are offered subject to receipt and acceptance by each Initial Purchaser, to prior sale and to such Initial Purchasers right to reject any order in whole or in part and to withdraw, cancel or modify the offer without notice. It is expected that delivery of the Offered Notes will be made through the facilities of DTC, on or about the Closing Date. RATINGS It is a condition to the issuance of the Offered Notes that they receive the ratings of AAA/Aaa from at least two of Standard & Poors, Moodys and Fitch. A security rating is not a recommendation to buy, sell or hold securities and may be subject to revision or withdrawal at any time by the assigning rating organization. Each security rating should be evaluated independently of any other security rating. In the event the ratings initially assigned to the Offered Notes are subsequently lowered for any reason, no person or entity is obligated to provide any additional credit support or credit enhancement with respect to the Offered Notes. The Issuer has not requested that any rating agency rate the Offered Notes other than as stated above. However, there can be no assurance as to whether any other rating agency will rate the Offered Notes or, if it does, what rating would be assigned by that rating agency. A rating on the Offered Notes by another rating agency, if assigned at all, may be lower than the ratings assigned to the Offered Notes as stated above. The fees paid by the Issuer to the Rating Agencies at closing include a fee for ongoing surveillance by the Rating Agencies for so long as any Offered Notes are outstanding. However, the Rating Agencies will monitor their ratings as they deem appropriate, and may, in their discretion, modify, withdraw, suspend or revoke all or part of their ratings at any time. SECONDARY MARKET AND ADDITIONAL INFORMATION There is currently no secondary market for the Offered Notes and there can be no assurance that a secondary market for the Offered Notes will develop or, if it does develop, that it will continue. The Initial Purchasers may make a secondary market in the Offered Notes, but the Initial Purchasers have no obligation to do so. The primary source of information available to investors concerning the Offered Notes will be the monthly statements made available to Noteholders as set forth in the Indenture, which will include information as to the
55
outstanding Note Principal Balance of the Offered Notes and the outstanding aggregate principal balance of the Underlying Securities and the status of the applicable form of credit enhancement for the Underlying Securities. There can be no assurance that any additional information regarding the Offered Notes will be available to Noteholders. In addition, neither the Seller nor any Initial Purchaser is aware of any source through which price information about the Offered Notes will be generally available to Noteholders on an ongoing basis. The limited nature of such information regarding the Offered Notes available to Noteholders may adversely affect the liquidity of the Offered Notes, even if a secondary market for the Offered Notes becomes available. LEGAL MATTERS Certain legal matters relating to the Offered Notes will be passed upon for the Seller and the Guarantor by Stradley Ronon Stevens & Young, LLP, Philadelphia, Pennsylvania, and for the Initial Purchasers by SNR Denton US LLP, New York, New York. LEGAL INVESTMENT The Offered Notes will not constitute mortgage related securities for purposes of SMMEA. However, the Offered Notes have the benefit of the Guaranty, which is backed by the full faith and credit of the United States. Investors should consult their own legal advisors regarding applicable investment restrictions and the effect of any restrictions on the liquidity of the Offered Notes prior to investing in the Offered Notes. The appropriate characterization of the Offered Notes under various legal investment restrictions, and thus the ability of investors subject to these restrictions to purchase the Offered Notes, is subject to significant interpretive uncertainties. Institutions whose investment activities are subject to review by certain regulatory authorities may be or may become subject to restrictions on investment in the Offered Notes, and such restrictions may be retroactively imposed. The Federal Financial Institutions Examination Council, the Federal Deposit Insurance Corporation, the Office of the Comptroller of the Currency, the Board of Governors of the Federal Reserve System, the Office of Thrift Supervision and the National Credit Union Administration have adopted guidelines, and have proposed policies, regarding the suitability of investments in various types of derivative mortgage-backed securities, including securities such as the Offered Notes. Neither the Seller nor the Initial Purchasers make any representations as to the proper characterization of the Offered Notes for legal investment or other purposes, or as to the ability of particular investors to purchase the Offered Notes under the applicable legal investment restrictions. These uncertainties may adversely affect the liquidity of the Offered Notes. Accordingly, all institutions whose investment activities are subject to legal investment laws and regulations, regulatory capital requirements or review by regulatory authorities should consult with their own legal advisors in determining whether and to what extent the Offered Notes constitute legal investments or are subject to investment, capital or other restrictions.
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Schedule I{ TC "Schedule I Decrement Tables" \f C \l "4" } Decrement Tables Percentage of Initial Note Principal Balance Outstanding at the Respective Percentages of CPR Set Forth Below 0% Payment Date Initial Percentage.. October 4, 2011............... October 4, 2012............... October 4, 2013............... October 4, 2014............... October 4, 2015............... October 4, 2016............... October 4, 2017............... October 4, 2018............... October 4, 2019............... October 4, 2020............... Weighted Average Life to Maturity (in years)(1)..........
(1)
5%
Senior I-A Notes 10% 15%
20%
25%
100 96 86 83 80 78 76 73 69 65 0 7.83
100 89 75 68 61 55 49 43 37 31 0 5.68
100 83 64 53 43 35 27 20 14 9 0 3.97
100 76 53 39 28 19 11 6 1 0 0 2.79
100 68 43 27 15 7 2 0 0 0 0 2.09
100 61 34 17 6 0 0 0 0 0 0 1.64
The weighted average life of a class of Notes is determined by (i) multiplying the amount of each distribution in reduction of the Note Principal Balance by the number of years from the date of the issuance of such class of Notes to the related Payment Date, (ii) adding the results, and (iii) dividing the sum by the initial Note Principal Balance of that class of Notes.
Percentage of Initial Note Principal Balance Outstanding at the Respective Percentages of CPR Set Forth Below 0% Payment Date Initial Percentage .................. October 4, 2011 .................... October 4, 2012 .................... October 4, 2013 .................... October 4, 2014 .................... October 4, 2015 .................... October 4, 2016 .................... October 4, 2017 .................... October 4, 2018 .................... October 4, 2019 .................... October 4, 2020 .................... Weighted Average Life to Maturity (in years)(1)..........
(1)
5%
Senior II-A Notes 10% 15%
20%
25%
100 90 80 71 61 51 39 28 18 8 0 4.95
100 80 63 47 34 23 13 3 0 0 0 3.11
100 70 48 34 19 6 0 0 0 0 0 2.23
100 61 40 22 6 0 0 0 0 0 0 1.73
100 53 31 11 0 0 0 0 0 0 0 1.41
100 47 23 4 0 0 0 0 0 0 0 1.18
The weighted average life of a class of Notes is determined by (i) multiplying the amount of each distribution in reduction of the Note Principal Balance by the number of years from the date of the issuance of such class of Notes to the related Payment Date, (ii) adding the results, and (iii) dividing the sum by the initial Note Principal Balance of that class of Notes.
I-1
Schedule II{ TC "Schedule II Yield Sensitivity Tables" \f C \l "4" } Yield Sensitivity Tables Weighted Average Life - Senior I-A Notes 0% CPR 2.5% CDR 7.5% CDR 12.5% CDR 7.06 6.14 5.35 7.5% CPR 4.30 3.96 3.67 15% CPR 2.61 2.57 2.52
Percentage of Principal Paid Through Parity Payments - Senior I-A Notes 0% CPR 2.5% CDR 7.5% CDR 12.5% CDR 0.00% 2.22% 13.50% 7.5% CPR 0.00% 0.00% 4.88% 15% CPR 0.00% 0.00% 0.00%
Percentage of Principal Paid at Final Scheduled Payment Date - Senior I-A Notes 0% CPR 2.5% CDR 7.5% CDR 12.5% CDR 47.90% 30.82% 19.40% 7.5% CPR 9.78% 9.80% 7.47% 15% CPR 0.00% 0.00% 2.16%
Weighted Average Life - Senior II-A Notes 0% CPR 5% CDR 10% CDR 15% CDR 4.24 4.61 4.23 4% CPR 2.89 3.40 3.41 8% CPR 2.14 2.51 2.82
Percentage of Principal Paid Through Parity Payments - Senior II-A Notes 0% CPR 5% CDR 10% CDR 15% CDR 0.0% 0.0% 15.27% 4% CPR 0.0% 0.0% 9.82% 8% CPR 0.0% 0.0% 5.33%
Percentage of Principal Paid at Final Scheduled Payment Date - Senior II-A Notes 0% CPR 5% CDR 10% CDR 15% CDR 6.93% 19.99% 12.77% 4% CPR 0.00% 8.68% 8.45% 8% CPR 0.00% 0.01% 5.99%
II-1

NCUA NGN 2010-R1 - Final Prelim Offering Memorandum

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NCUA NGN 2010-R1 - Final Prelim Offering Memorandum

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NCUA NGN 2010-R1 - Final Prelim Offering Memorandum

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Subject to Completion, Amendment or Other Change, Dated October 13, 2010

NCUA GUARANTEED NOTES

(Lead Manager and Bookrunner) J.P. Morgan (Co-manager)

Wells Fargo Securities (Co-manager)

The date of this Memorandum is October [_], 2010

THE SECURITIES Initial Note Principal Balance1

Note Rate Offered Notes

Expected Initial Rating

THE UNDERLYING SECURITIES

TABLE OF CONTENTS Caption Page

Final Scheduled Payment Date ...............

Senior I-A Notes 10% 15%

Senior II-A Notes 10% 15%

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