EXHIBIT 10.4

 

 

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SECURED LIQUIDITY NOTE MORTGAGE WAREHOUSE PROGRAM

 

 

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SECURITY AGREEMENT

 

 

between

 

 

VON KARMAN FUNDING LLC

 

 

and

 

 

DEUTSCHE BANK TRUST COMPANY AMERICAS

 

 

as Collateral Agent

 

 

dated as of September 5, 2003

 

 

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TABLE OF CONTENTS

 

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ARTICLE I    

 

DEFINITIONS

        1    

Section 1.01

   Definitions    1

ARTICLE II    

 

OBLIGATIONS SECURED

   1    

Section 2.01

   Obligations Secured Hereby    1

ARTICLE III    

  REPRESENTATIONS AND WARRANTIES; COMPANY AGENTS AND DEPOSITARY AGENTS;
COVENANTS    2    

Section 3.01

   Representations and Warranties of the Company    2    

Section 3.02

   Additional Representations and Warranties of the Company    6    

Section 3.03

   Company Agents and Depositary Agents    6    

Section 3.04

   Representations and Warranties of the Collateral Agent    7    

Section 3.05

   Covenants of the Company    7

ARTICLE IV    

 

SECURED LIQUIDITY NOTES

   14    

Section 4.01

   Conditions to Effectiveness    14    

Section 4.02

   Issuance of Secured Liquidity Notes    17    

Section 4.03

   Conditions Precedent to Issuance of Secured Liquidity Notes    17    

Section 4.04

   Conversion to Extended Notes    19    

Section 4.05

   Proceeds    19    

Section 4.06

   Calculation of Extended Note Interest    19    

Section 4.07

   Payment of Extended Note Interest    21    

Section 4.08

   Payment of Senior Note Principal    21    

Section 4.09

   Program Size    22

ARTICLE V    

 

ASSIGNMENT

        22    

Section 5.01

   Assignment    22    

Section 5.02

   Application of Assigned Collateral    24    

Section 5.03

   Performance of Agreements    25    

Section 5.04

   Amendments; Waivers    26    

Section 5.05

   Location of Records    26    

Section 5.06

   Notice of Default under Program Documents    26    

Section 5.07

   Custody of Program Documents    26    

Section 5.08

   Delivery of Assigned Collateral Including Eligible Investments    26

 

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TABLE OF CONTENTS

(continued)

 

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Section 5.09

   Deliveries of Mortgage Loans    27    

Section 5.10

   No Liability    27

ARTICLE VI

 

COLLATERAL ACCOUNT; RESERVE FUND; PAYMENT OF ALLOCATED EXPENSES

   27    

Section 6.01

   Establishment of Collateral Account    27    

Section 6.02

   Assignment of Collateral Account    28    

Section 6.03

   Withdrawals and Transfers from the Collateral Account, Reserve Fund    28    

Section 6.04

   Eligible Investments    32    

Section 6.05

   Reserve Fund, Market Value Reserve Account    32    

Section 6.06

   Payment of Allocated Expenses    35    

Section 6.07

   Market Value Events    35

ARTICLE VII

 

DEFAULT

        36    

Section 7.01

   Events of Default    36    

Section 7.02

   Rights of the Collateral Agent Upon Default    38    

Section 7.03

   Realization upon Collateral; Remedies    39    

Section 7.04

   Waiver of Stays, etc    40

ARTICLE VIII

 

ADDITIONAL COLLATERAL DISPOSITION PROVISIONS

   40    

Section 8.01

   Disposition of Mortgage Loans    40    

Section 8.02

   Release of Security Interest    41    

Section 8.03

   Termination Event Auction    41

ARTICLE IX

 

THE COLLATERAL AGENT

   41    

Section 9.01

   Appointment and Powers of Collateral Agent    41    

Section 9.02

   Successor Collateral Agent    43    

Section 9.03

   Qualifications of Collateral Agent; Collateral Account    44    

Section 9.04

   Instructions    45    

Section 9.05

   Duties of Collateral Agent    45

ARTICLE X

 

AMENDMENTS, MODIFICATIONS, WAIVERS AND CONSENTS

   45    

Section 10.01

   Execution of Amendments, etc    45

ARTICLE XI

 

MISCELLANEOUS

        45    

Section 11.01

   Sale of Certain Collateral    45

 

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Section 11.02

   Further Assurances    46    

Section 11.03

   No Waiver; Cumulative Remedies    46    

Section 11.04

   Notices, etc    46    

Section 11.05

   Fees, Costs and Expenses, etc    47    

Section 11.06

   Collateral Agent Appointed Attorney-in-Fact    48    

Section 11.07

   Termination    48    

Section 11.08

   Successors and Assigns; Benefit of Agreement    48    

Section 11.09

   GOVERNING LAW; CONSENT TO JURISDICTION; WAIVER OF JURY TRIAL    48    

Section 11.10

   Execution in Counterparts    49    

Section 11.11

   Section Headings    49    

Section 11.12

   Non-petition Covenant    49    

Section 11.13

   Severability    49    

Section 11.14

   Entire Agreement    50    

Section 11.15

   Limited Recourse to the Company    50    

Section 11.16

   No Recourse    50    

Section 11.17

   Third Party Beneficiary    50

EXHIBIT A

       Certification of Satisfaction of Conditions Precedent    50

 

 

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EXHIBIT 10.4

 

SECURITY AGREEMENT

 

SECURITY AGREEMENT (the “Security Agreement”), dated as of September 5, 2003,
between VON KARMAN FUNDING LLC (the “Company”), and DEUTSCHE BANK TRUST COMPANY
AMERICAS, as Collateral Agent (the “Collateral Agent”).

 

W I T N E S S E T H:

 

WHEREAS, the Company is entering into this Security Agreement with the
Collateral Agent for the purpose of, among other things, providing for the
issuance of Secured Liquidity Notes and securing and providing for the repayment
of all amounts at any time and from time to time owing by the Company to the
Collateral Agent, the Swap Counterparty, the holders of the Secured Liquidity
Notes (including the Depositary as provided in Section 2(b)(ii) of the
Depositary Agreement), and the holders of the Extended Notes (such Persons,
collectively, the “Secured Parties” and each, a “Secured Party”);

 

NOW, THEREFORE, in consideration of the foregoing premises and the mutual
covenants expressed herein, it is hereby agreed by and among the Company and the
Collateral Agent as follows:

 

ARTICLE I

 

DEFINITIONS

 

Section 1.01 Definitions. For all purposes of this Security Agreement, except as
otherwise expressly provided herein or unless the context otherwise requires,
capitalized terms not otherwise defined herein shall have the meanings assigned
to such terms in the Definitions List attached hereto as Schedule I (the
“Definitions List”). All other capitalized terms used herein shall have the
meanings specified herein.

 

ARTICLE II

 

OBLIGATIONS SECURED

 

Section 2.01 Obligations Secured Hereby. (a) This Security Agreement is made to
provide for and secure repayment of the indebtedness and liabilities of the
Company (such indebtedness and liabilities being herein called the
“Obligations”) specified in paragraph (b).

 

(a) Following an Event of Default, all payments or proceeds with respect to the
Assigned Collateral and any amounts on deposit in the Collateral Account shall
be applied by the Collateral Agent in the following order:

 

First, the repayment of amounts advanced, incurred or expended (including fees
and expenses of agents and counsel) by the Collateral Agent or the Custodian, up
to a maximum amount of $25,000;

 

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Second, the payment of all amounts due and owing to the Swap Counterparty under
the Total Return Swap;

 

Third, the payment, pro rata, of all indebtedness (including interest thereon),
whether absolute, fixed or contingent, at any time and from time to time due and
owing by the Company to the holders from time to time of the outstanding Secured
Liquidity Notes and Extended Notes;

 

Fourth, the payment of all Reimbursable Expenses; provided, that Reimbursable
Expenses shall be calculated without regard to the limitation imposed by the
Maximum Indemnity Amount;

 

Fifth, the payment of any unreimbursed Monthly Advance and Servicing Advance
with respect to any Mortgage Loan which has been sold, up to a maximum amount of
the sale proceeds; and

 

Sixth, any amounts remaining shall be paid to the Servicer.

 

ARTICLE III

 

REPRESENTATIONS AND WARRANTIES;

COMPANY AGENTS AND DEPOSITARY AGENTS; COVENANTS

 

Section 3.01 Representations and Warranties of the Company. The Company hereby
represents and warrants, for the benefit of the Collateral Agent and the other
Secured Parties, as follows as of the date hereof:

 

(a) Existence and Power. The Company (a) is a limited liability company duly
formed, validly existing and in good standing under the laws of the State of
Delaware, (b) prior to the initial issuance of any Secured Liquidity Notes
hereunder, will be duly qualified to do business as a foreign limited liability
company and in good standing under the laws of each jurisdiction where the
character of its property, the nature of its business or the performance of its
obligations make such qualification necessary, (c) has all limited liability
company powers and all material governmental licenses, authorizations, consents
and approvals required to carry on its business as now conducted and for
purposes of the transactions contemplated by this Security Agreement and the
other Program Documents, and (d) has been engaged in no business or other
activities, other than relating to its own formation.

 

(b) Limited Liability Company and Governmental Authorization. The execution,
delivery and performance by the Company of this Security Agreement and the other
Program Documents to which it is a party (a) is within the Company’s limited
liability company powers, has been duly authorized by all necessary limited
liability company action, (b) requires no action by or in respect of, or filing
with, any governmental body, agency or official which has not been obtained and
(c) does not contravene, or constitute a default under, any provision of
applicable law or regulation or of the certificate of formation or the limited
liability company agreement of the Company or of any law or governmental
regulation, rule, contract, agreement, judgment, injunction, order, decree or
other instrument binding upon the Company or any of its Assets or result in the
creation or imposition of any Lien on any Asset of the Company, except

 

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for Liens created by this Security Agreement or the other Program Documents.
This Security Agreement and each of the other Program Documents to which the
Company is a party have been executed and delivered by a duly authorized
signatory of the Company.

 

(c) Binding Effect. This Security Agreement and each other Program Document, and
each Secured Liquidity Note when executed and delivered in accordance with the
Depositary Agreement, is a legal, valid and binding obligation of the Company
enforceable against the Company in accordance with its terms (except as such
enforceability may be limited by applicable bankruptcy, insolvency, fraudulent
conveyance, reorganization, moratorium and other similar laws affecting
creditors’ rights generally or by general equitable principles, whether
considered in a proceeding at law or in equity, including without limitation (i)
the possible unavailability of specific performance, injunctive relief or any
other equitable remedy, (ii) concepts of materiality, reasonableness, good faith
and fair dealing, and (iii) that certain remedial or procedural provisions
contained in this Security Agreement may be limited or rendered unenforceable by
applicable law, but such limitations do not make the remedies and procedures
that are afforded to the Collateral Agent inadequate for the practical
realization of the substantive benefits purported to be provided by this
Security Agreement).

 

(d) Financial Information; Financial Condition. All balance sheets, all
statements of operations, of shareholders’ equity and of cash flow, and other
financial data (other than projections) which have been or shall hereafter be
furnished by the Company to the Collateral Agent and the Rating Agencies
pursuant to Section 3.05(c) have been and will be prepared in accordance with
GAAP (to the extent applicable) and do and will present fairly the financial
condition of the entities involved as of the dates thereof and the results of
their operations for the periods covered thereby, subject, in the case of all
unaudited statements, to normal year-end adjustments and lack of footnotes and
presentation items.

 

(e) Litigation. Other than as disclosed in the most recent 10-K and 10-Q filings
with the Securities Exchange Commission by New Century Financial Corporation,
there is no action, suit or proceeding pending against or, to the knowledge of
the Company, threatened against or affecting the Company or its Assets before
any court or arbitrator or any Governmental Authority with respect to which
there is a reasonable possibility of an adverse decision that could materially
adversely affect the financial position, results of operations, business,
properties, performance, prospects or condition (financial or otherwise) of the
Company or which in any manner draws into question the validity or
enforceability of this Security Agreement or any other Program Document or the
ability of the Company to perform its obligations hereunder or thereunder.

 

(f) Compliance with ERISA. Each member of the ERISA Group has fulfilled its
obligations under the minimum funding standards of ERISA and the Internal
Revenue Code with respect to each Benefit Plan and is in compliance in all
material respects with the presently applicable provisions of ERISA and the
Internal Revenue Code with respect to each Benefit Plan. No member of the ERISA
Group has (i) sought a waiver of the minimum funding standard under Section 412
of the Internal Revenue Code in respect of any Benefit Plan, (ii) failed to make
any contribution or payment to any Benefit Plan or Multiemployer Plan or in
respect of any Benefit Arrangement, or made any amendment to any Benefit Plan or
Benefit Arrangement, which in any such case has resulted or could reasonably be
expected to result in the imposition of

 

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a Lien or the posting of a bond or other security under ERISA or the Internal
Revenue Code or (iii) incurred any liability under Title IV of ERISA other than
a liability to the PBGC for premiums under Section 4007 of ERISA.

 

(g) Tax Filings and Expenses. The Company has filed all Federal, state and local
tax returns and all other tax returns which, to the knowledge of the Company,
are required to be filed (whether informational returns or not), and has paid
all taxes due, if any, pursuant to said returns or pursuant to any assessment
received by the Company, except such taxes, if any, as are being contested in
good faith and for which adequate reserves have been set aside on its books. The
Company has paid all fees and expenses required to be paid by it in connection
with the conduct of its business, the maintenance of its existence and its
qualification as a foreign limited liability company authorized to do business
in each State in which it is required to so qualify, except where the failure to
pay any such fees and expenses is not reasonably likely to have a material
adverse effect.

 

(h) Full Disclosure. All certificates, reports, statements, documents and other
information furnished to the Collateral Agent by or on behalf of the Company
pursuant to any provision of this Security Agreement or any Program Document, or
in connection with or pursuant to any amendment or modification of, or waiver
under, this Security Agreement or any Program Document, shall, at the time the
same are so furnished, be complete and correct to the extent necessary to give
the Collateral Agent true and accurate knowledge of the subject matter thereof
in all material respects, and the furnishing of the same to the Collateral Agent
shall constitute a representation and warranty by the Company made on the date
the same are furnished to the Collateral Agent to the effect specified herein.

 

(i) Investment Company Act; Trust Indenture Act; Securities Act; The Company is
not, and is not controlled by, an “investment company” within the meaning of,
and is not required to register as an “investment company” under, the Investment
Company Act. It is not necessary in connection with the offer, issuance and sale
of the Senior Notes under the circumstances contemplated in this Security
Agreement to register any security under the Securities Act or to qualify any
indenture under the Trust Indenture Act.

 

(j) Regulations T, U and X. The proceeds of the Senior Notes will not be used to
purchase or carry any “margin stock” (as defined or used in the regulations of
the Board of Governors of the Federal Reserve System, including Regulations T, U
and X thereof). The Company is not engaged in the business of extending credit
for the purpose of purchasing or carrying any margin stock.

 

(k) No Consent. No consent, action by or in respect of, approval or other
authorization of, or registration, declaration or filing with, any Governmental
Authority or other Person is required for the valid execution and delivery of
this Security Agreement or for the performance of any of the Company’s
obligations hereunder or under any other Program Document other than such
consents, approvals, authorizations, registrations, declarations or filings as
shall have been obtained by the Company prior to the date hereof or as
contemplated in Section 3.01(n).

 

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(l) Solvency. Both before and after giving effect to the transactions
contemplated by this Security Agreement and the other Program Documents, the
Company is solvent within the meaning of the Bankruptcy Code and the Company is
not the subject of any voluntary or involuntary case or proceeding seeking
liquidation, reorganization or other relief with respect to itself or its debts
under any bankruptcy or insolvency law and no Event of Bankruptcy has occurred
with respect to the Company.

 

(m) Subsidiary. The Company has no subsidiaries and owns no capital stock of, or
other interest in, any other Person, and during the term of this Security
Agreement, the Company shall not acquire or otherwise come to have one or more
subsidiaries without the prior consent of the Collateral Agent (on behalf of the
holders of the Senior Notes).

 

(n) Security Interests.

 

(i) All action necessary (including the filing of UCC-1 financing statements for
the Collateral Agent’s Lien for the benefit of the Secured Parties) to protect,
perfect, and maintain the first-priority status of, the Collateral Agent’s
security interest in the Collateral now in existence and hereafter acquired or
created hereby has been duly and effectively taken.

 

(ii) No security agreement, financing statement, equivalent security or lien
instrument or continuation statement listing the Company as debtor covering all
or any part of the Collateral is on file or of record in any jurisdiction,
except such as may have been filed, recorded or made by the Company in favor of
the Collateral Agent on behalf of the Secured Parties in connection with this
Security Agreement.

 

(iii) This Security Agreement creates a valid and continuing Lien on the
Collateral in favor of the Collateral Agent on behalf of the Secured Parties,
which Lien is prior to all other Liens (other than Permitted Liens and as
otherwise permitted in this Security Agreement), and is enforceable as such as
against creditors of and purchasers from the Company in accordance with its
terms, except as such enforceability may be limited by bankruptcy, insolvency,
fraudulent conveyance, reorganization, moratorium and other similar laws
affecting creditors’ rights generally or by general equitable principles,
whether considered in a proceeding at law or in equity and by an implied
covenant of good faith and fair dealing. All action necessary to perfect such
prior security interest has been duly taken.

 

(iv) The Company’s principal place of business and chief executive office shall
be at: 18400 Von Karman, Suite 1000, Irvine, CA 92612-1514. The Company does not
transact, and has not transacted, business under any other name. The Company’s
exact legal name is the name set forth for it on the signature page below.

 

(v) All authorizations in this Security Agreement for the Collateral Agent to
endorse checks, instruments and securities and to execute, deliver and file
financing statements, continuation statements, security agreements and other
instruments with respect to the Collateral are powers coupled with an interest
and are irrevocable.

 

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(vi) The representations and warranties contained in Schedule III hereof are
incorporated herein by reference as though they were fully stated herein.

 

(o) Offering Memorandum. No offering memorandum or information circular used by
the Company in connection with the offer or sale of the Senior Notes contains
any untrue statement of a material fact or omits to state any material fact
necessary in order to make the statements therein, in the light of the
circumstances under which they are made, not misleading.

 

(p) Non-Existence of Other Agreements. As of the date of the issuance of the
first Secured Liquidity Notes, other than as permitted by Section 3.05(w) hereof
(i) the Company is not a party to any contract or agreement of any kind or
nature and (ii) the Company is not subject to any obligations or liabilities of
any kind or nature in favor of any third party, including, without limitation,
Contingent Obligations.

 

(q) Eligible Mortgage Loans. Based upon the representation of the Seller in the
Mortgage Loan Purchase and Servicing Agreement, each Mortgage Loan purchased by
the Company is an Eligible Loan.

 

(r) Other Representations. All representations and warranties of the Company
made in each Program Document to which it is a party are true and correct and
are repeated herein as though fully set forth herein.

 

(s) Special Purpose Entity. The Company is a special purpose entity formed
exclusively to enter into the Program Documents and the transactions
contemplated thereby or incident thereto.

 

Section 3.02 Additional Representations and Warranties of the Company. The
Company represents and warrants to the Collateral Agent and the other Secured
Parties that:

 

(a) (i) At the date of each deposit of Deposited Funds in the Collateral
Account, the Company was, is or will then be the lawful owner of, and had, has
or will then have good title to, such Deposited Funds free and clear of all
Liens except the lien and security interest granted pursuant to this Security
Agreement in favor of the Collateral Agent; and (ii) the Company is and will be
the lawful owner of, and has and will have beneficial ownership of, all Assigned
Collateral, free and clear of all Liens except the lien and security interest
granted pursuant to this Security Agreement in favor of the Collateral Agent.

 

(b) The Company will warrant and defend the Collateral Agent’s right, title and
interest in and to the Collateral, for the benefit of the Collateral Agent and
the Secured Parties and the income, distributions and proceeds thereof against
the claims and demands of all Persons whomsoever.

 

Section 3.03 Company Agents and Depositary Agents. (a) With the delivery of this
Security Agreement, the Company is furnishing to the Collateral Agent, and from
time to time thereafter may furnish to the Collateral Agent, a certificate
(hereinafter called a “Company Incumbency Certificate”) of an authorized
signatory of the Company certifying the incumbency and specimen signatures of
officers and agents (such officers and agents being hereinafter called

 

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the “Company Agents”) of the Company authorized to act, and to give instructions
and notices, on behalf of the Company hereunder. Until the Collateral Agent
receives a subsequent Company Incumbency Certificate, or unless a Trust Officer
of the Collateral Agent shall have actual knowledge of the lack of authority of
any individual, the Collateral Agent shall be entitled conclusively to rely on
the last such Company Incumbency Certificate delivered to it for purposes of
determining the authorized Company Agents.

 

(b)    The Collateral Agent acknowledges that each of the Persons specified in
Section 3(e) of the Depositary Agreement shall be deemed to be an authorized
“Authenticating Agent” and “Designated Representative” for purposes hereof.

 

Section 3.04    Representations and Warranties of the Collateral Agent.  The
Collateral Agent represents and warrants to the Company and the Secured Parties
that it has been duly organized and is validly existing and in good standing
under the laws of the State of New York and that this Security Agreement has
been duly authorized, executed and delivered by it.

 

Section 3.05    Covenants of the Company.

 

(a)    Payment of Senior Notes.  The Company shall pay the principal of (and
premium, if any) and interest on the Senior Notes pursuant to the provisions of
this Security Agreement. Principal and interest shall be considered paid on the
date due to the extent that the Collateral Agent holds on that date money
designated for and sufficient to pay the principal and interest then due.

 

(b)    Maintenance of Office or Agency.  The Company will maintain an office or
agency (which may be an office of the Collateral Agent or Depositary) where
Senior Notes may be surrendered for registration of transfer or exchange, where
notices and demands to or upon the Company in respect of the Senior Notes and
this Security Agreement may be served, and where, at any time when the Company
is obligated to make a payment of principal and premium upon the Senior Notes,
the Senior Notes may be surrendered for payment. The Company will give prompt
written notice to the Collateral Agent of the location, and any change in the
location, of such office or agency. If at any time the Company shall fail to
maintain any such required office or agency or shall fail to furnish the
Collateral Agent with the address thereof, such presentations and surrenders may
be made or served at the offices of the Collateral Agent’s agent, C/O DTC
Transfer Agent Services, 55 Water Street, Jeanette Park Entrance, New York, NY
10005.

 

The Company may also from time to time designate one or more other offices or
agencies where the Senior Notes may be presented or surrendered for any or all
such purposes and may from time to time rescind such designations. The Company
will give prompt written notice to the Collateral Agent of any such designation
or rescission and of any change in the location of any such other office or
agency.

 

(c)    Information.  The Company will:

 

(i)    promptly provide the Collateral Agent, the Swap Counterparty and the
Rating Agencies with all financial and operational information with respect to
the Program Documents or the Company as the Collateral Agent may reasonably
request;

 

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and will promptly provide the Rating Agencies, the Collateral Agent, the Swap
Counterparty, the SLN Placement Agents and the Depositary with all statements
delivered under the Total Return Swap, this Security Agreement and the Mortgage
Loan Purchase and Servicing Agreement;

 

(ii)    deliver to the Collateral Agent and the Swap Counterparty, if and when
any member of the ERISA Group (i) gives or is required to give notice to the
PBGC of any “reportable event” (as defined in Section 4043 of ERISA) with
respect to any Benefit Plan which might constitute grounds for a termination of
such Benefit Plan under Title IV of ERISA, or knows that the plan administrator
of any Benefit Plan has given or is required to give notice of any such
reportable event, a copy of the notice of such reportable event given or
required to be given to the PBGC; (ii) receives notice of complete or partial
withdrawal liability under Title IV of ERISA or notice that any Multiemployer
Plan is in reorganization, is insolvent or has been terminated, a copy of such
notice; (iii) receives notice from the PBGC under Title IV of ERISA of an intent
to terminate, impose liability (other than for premiums under Section 4007 of
ERISA) in respect of, or appoint a trustee to administer any Benefit Plan, a
copy of such notice; (iv) applies for a waiver of the minimum funding standard
under Section 412 of the Internal Revenue Code, a copy of such application; (v)
gives notice of intent to terminate any Benefit Plan under Section 4041(c) of
ERISA, a copy of such notice and other information filed with the PBGC; (vi)
gives notice of withdrawal from any Benefit Plan pursuant to Section 4063 of
ERISA, a copy of such notice; or (vii) fails to make any payment or contribution
to any Benefit Plan or Multiemployer Plan or in respect of any Benefit
Arrangement or makes any amendment to any Benefit Plan or Benefit Arrangement
which has resulted or could result in the imposition of a Lien or the posting of
a bond or other security, a certificate of the Manager setting forth details as
to such occurrence and action, if any, which the Company or applicable member of
the ERISA Group is required or proposes to take;

 

(iii)    provide the Collateral Agent, on behalf of the holders of the Senior
Notes, and the Swap Counterparty with access to the books and records of the
Company, and the books and records of the Servicer, the Custodian, the
Depositary and the Collateral Agent relating to the assets of the Company,
without charge, but only (i) upon the reasonable request of the Swap
Counterparty or the Collateral Agent (acting at the direction of the Required
Senior Noteholders) (for which purpose one Business Day shall be deemed
reasonable during the occurrence and continuation of an Event of Default), (ii)
during normal business hours, (iii) subject to the relevant party’s normal
security and confidentiality procedures and (iv) at offices designated by the
relevant party;

 

(iv)    provide the Rating Agencies, the Collateral Agent, the Swap
Counterparty, the SLN Placement Agents, the Depositary and the Collateral Agent
with any information that it may have with respect to an Event of Default
hereunder or provide notice to the Collateral Agent of any default or event of
default under any other agreement between the Company and any of the Seller, the
Servicer, the Depositary, the Swap Counterparty, or the Collateral Agent as
promptly as practicable after the Company becomes aware of the occurrence of any
Event of Default or other default or event of default;

 

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(v)    promptly furnish to the Collateral Agent (on behalf of the holders of the
Senior Notes), the Swap Counterparty and the SLN Placement Agents after receipt
thereof copies of all written communications received from the Rating Agencies
with respect to the Senior Notes;

 

(vi)    promptly upon its knowledge thereof give notice to the Collateral Agent
(on behalf of the holders of the Senior Notes), the Swap Counterparty and the
Rating Agencies of the existence of any litigation against the Company;

 

(vii)    give prompt notice to the Collateral Agent (on behalf of the holders of
the Senior Notes), the Swap Counterparty, the Rating Agencies and the SLN
Placement Agents of any material change to the articles of incorporation or
by-laws of the Seller; and

 

(viii)    provide, on or prior to June 30 of each year, to the Collateral Agent,
the SLN Placement Agents and the Swap Counterparty a certificate of the Company
certifying that the ratings assigned by the Rating Agencies in respect of any
outstanding Senior Notes have not been withdrawn or downgraded since the date
hereof.

 

Delivery of such reports, information and documents to the Collateral Agent, the
Custodian or the Depositary under this section is for informational purposes
only and each recipient’s receipt of such shall not constitute constructive
notice of any information contained therein or determinable from information
contained therein, including the Company’s compliance with any of its covenants.

 

(d)    Payment of Obligations.  The Company will pay and discharge in a timely
manner in accordance with the terms of the Program Documents, at or before
maturity, all of its respective material obligations and liabilities, including,
without limitation, tax liabilities and other governmental claims, except where
the same may be contested in good faith by appropriate proceedings, will
maintain, in accordance with GAAP, reserves as appropriate for the accrual of
any of the same, and will comply in all material respects with its obligations
in the Program Documents.

 

(e)    Conduct of Business and Maintenance of Existence.  The Company will
maintain its existence as a limited liability company validly existing and in
good standing under the laws of the State of Delaware and duly qualified as a
foreign limited liability company licensed under the laws of each state in which
the failure to so qualify would have a material adverse effect on the business
and operations of the Company.

 

(f)    Compliance with Laws.  The Company will comply in all respects with all
Requirements of Law and all applicable laws, ordinances, rules, regulations, and
requirements of Governmental Authorities (including, without limitation, ERISA
and the rules and regulations thereunder) except where the necessity of
compliance therewith is contested in good faith by appropriate proceedings and
where such noncompliance would not materially and adversely affect the
condition, financial or otherwise, operations, performance, properties or
prospects of the Company or its ability to carry out the transactions
contemplated in this Security Agreement

 

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and each other Program Document; provided, however, such noncompliance will not
result in a Lien (other than a Permitted Lien) on any Assets of the Company.

 

(g)    Inspection of Property, Books and Records.  The Company will keep proper
books of record and account in which full, true and correct entries shall be
made of all dealings and transactions in relation to its Assets, business and
activities in accordance with GAAP; and will permit the Collateral Agent and its
agents and representatives to visit and inspect any of its properties, to
examine and make abstracts from any of its books and records and to discuss its
affairs, finances and accounts with its representatives, employees and
independent public accountants, all at such reasonable times upon reasonable
notice and as often as may reasonably be requested.

 

(h)    Compliance with Program Documents.  The Company will perform and comply
with each and every obligation, covenant and agreement required to be performed
or observed by it in or pursuant to this Security Agreement and each other
Program Document to which it is a party and will not take any action which would
permit any party to have the right to refuse to perform any of its respective
obligations under any Program Document.

 

(i)    Notice of Defaults.

 

(i)    Promptly upon becoming aware of any Potential Event of Default or Event
of Default under this Security Agreement, the Company shall give the Collateral
Agent, the Swap Counterparty, any SLN Placement Agent, the Depositary and the
Rating Agencies notice thereof, together with a certificate of the Company
setting forth the details thereof and any action with respect thereto taken or
contemplated to be taken by the Company.

 

(ii)    Promptly upon becoming aware of any default under any Program Document
other than this Security Agreement, the Company shall give the Collateral Agent,
any SLN Placement Agent, the Swap Counterparty, the Depositary, and the Rating
Agencies notice thereof.

 

(j)    Notice of Material Proceedings.  Promptly upon becoming aware thereof,
the Company shall give the Collateral Agent, the Swap Counterparty and the
Rating Agencies written notice of the commencement or existence of any
proceeding by or before any Governmental Authority against or affecting the
Company which is reasonably likely to have a material adverse effect on the
business, condition (financial or otherwise), results of operations, properties
or performance of the Company or the ability of the Company to perform its
obligations under this Security Agreement or under any other Program Document to
which it is a party.

 

(k)    Further Requests.  The Company will promptly furnish to the Depositary,
the Collateral Agent, the Swap Counterparty and the Rating Agencies such other
information as, and in such form as the Swap Counterparty, the Depositary, the
Collateral Agent or the Rating Agencies may reasonably request in connection
with the transactions contemplated hereby.

 

(l)    Further Assurances.

 

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(i)    The Company shall do such further acts and things, and execute and
deliver to the Depositary, the Collateral Agent, the Swap Counterparty and the
Secured Parties such additional assignments, agreements, powers and instruments,
as the Depositary, the Collateral Agent, the Swap Counterparty or the Required
Senior Noteholders reasonably determine to be necessary to carry into effect the
purposes of this Security Agreement or the other Program Documents or to better
assure and confirm unto the Depositary, the Collateral Agent or the Secured
Parties their rights, powers and remedies hereunder including, without
limitation, the filing of any financing statement, amendment statement or
continuation statement under the UCC in effect in any jurisdiction with respect
to the liens and security interests granted hereby. The Company also hereby
acknowledges that the Collateral Agent has the right but not the obligation to
file any such financing statement, amendment statement or continuation statement
without further authorization of the Company to the extent permitted by
applicable law. If any amount payable under or in connection with any of the
Collateral shall be or become evidenced by any promissory note, chattel paper or
other instrument, such note, chattel paper or instrument shall be deemed to be
held in trust and immediately pledged and physically delivered to the Collateral
Agent hereunder, and shall, subject to the rights of any Person in whose favor a
prior Lien has been perfected, be duly endorsed in a manner satisfactory to the
Collateral Agent and delivered to the Collateral Agent promptly. Without
limiting the generality of the foregoing provisions of this Section 3.05(1), the
Company shall take all actions that are required to maintain the security
interest of the Collateral Agent on behalf of the Secured Parties in the
Collateral pledged pursuant to this Security Agreement as a perfected security
interest subject to no prior Liens, including, without limitation, filing all
UCC financing statements, continuation statements and amendments thereto
necessary to achieve the foregoing. The Company further agrees that it will not,
without Rating Agency Confirmation and the prior written consent of the
Collateral Agent and the Swap Counterparty, exercise any right, remedy, power or
privilege available to it with respect to any obligor under the Collateral, take
any action to compel or secure performance or observance by any obligor of its
obligations to the Company, or give any consent, request, notice, direction,
approval, extension or waiver with respect to any obligor, except as otherwise
expressly permitted by the Program Documents. Notwithstanding anything herein to
the contrary, the Collateral Agent shall be under no obligation to file or
prepare any financing statement or continuation statement or to take any action
or to execute any further documents or instruments in order to create, preserve,
or perfect the security interest granted herein, such obligations being solely
the obligations of the Company.

 

(ii)    The Company will warrant and defend the Collateral Agent’s right, title
and interest in and to the Collateral and the income, distributions and proceeds
thereof, for the benefit of the Collateral Agent on behalf of the Secured
Parties, against the claims and demands of all Persons whomsoever.

 

(iii)    The Company will provide to the Collateral Agent and the Swap
Counterparty, no more frequently than on each anniversary of the date of this
Agreement, an Opinion of Counsel to the effect that no UCC financing or
continuation statements are required to be filed with respect to any of the
Collateral in which a security interest may be perfected by the filing of UCC
financing statements.

 

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(m)    Certain Documents.    The Company will not take any action that would
permit (i) the Seller or the Servicer to refuse to perform any of their
respective obligations under the Program Documents or (ii) the Depositary to
refuse to perform its obligations under any Program Documents to which it is a
party. The Company will not terminate the SLN Placement Agent Agreement or the
Depositary Agreement before entering into a secured liquidity note placement
agreement or depositary agreement, as the case may be, which is substantially
similar to the SLN Placement Agent Agreement or the Depositary Agreement, as the
case may be.

 

(n)    Liens.  The Company will not create, incur, assume or permit to exist any
Lien upon any of its Assets (including the Collateral), other than (i) Liens in
favor of the Collateral Agent for the benefit of the Secured Parties, (ii)
Permitted Liens, (iii) Liens permitted under the Program Documents and (iv)
liabilities for services supplied or furnished to the Company (including
reasonable accountants’ and attorneys’ fees); provided, that the aggregate
amount of the liabilities described in subpart (iv) shall not exceed $500,000 at
any one time outstanding.

 

(o)    Other Indebtedness.  The Company will not create, assume, incur, suffer
to exist or otherwise become or remain liable in respect of any Indebtedness
other than (i) Indebtedness hereunder and (ii) Indebtedness permitted under any
other Program Document.

 

(p)    Mergers.  The Company will not merge or consolidate with or into any
other Person.

 

(q)    Sales of Assets.  The Company will not sell, lease, transfer, liquidate
or otherwise dispose of any Assets, except as contemplated by the Program
Documents.

 

(r)    Capital Expenditures.  The Company will not make any expenditure (by
long-term or operating lease or otherwise) for, or otherwise own, capital assets
(both realty and personalty).

 

(s)    Dividends.  The Company shall not make any distributions to any holders
of its securities without the consent of the Swap Counterparty and the
Collateral Agent, acting at the direction of the Required Senior Noteholders
except as provided under the Program Documents.

 

(t)    Name; Principal Office.  The Company will neither (a) change the location
of its organization, chief executive office or principal place of business
(within the meaning of the applicable UCC) without sixty (60) days’ prior
written notice to the Depositary and the Collateral Agent nor (b) change its
name without prior written notice to the Depositary and the Collateral Agent
sufficient to allow it to make all filings (including filings of financing
statements on form UCC-1) and recordings necessary to maintain the perfection of
the interest of the Collateral Agent on behalf of the Secured Parties in the
Collateral pursuant to this Security Agreement. In the event that the Company
desires to so change its office or change its name, the Company will make any
required filings and prior to actually changing its office or its name the
Company will deliver to the Collateral Agent, the Swap Counterparty and the
Depositary (i) an Officer’s Certificate and (except with respect to a change of
the location of the Company’s chief executive office or principal place of
business to a new location in the same county) an Opinion

 

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of Counsel confirming that all required filings have been made to continue the
perfected interest of the Collateral Agent on behalf of the Secured Parties in
the Collateral in respect of the new office or new name of the Company and (ii)
copies of all such required filings with the filing information duly noted
thereon by the office in which such filings were made.

 

(u)    Organizational Documents.  The Company will not amend any of its
organizational documents, including its certificate of formation or limited
liability company agreement, unless, prior to such amendment, each Rating Agency
confirms that after such amendment the Rating Agency Confirmation Condition will
be met and the Collateral Agent and the Swap Counterparty consent to such
amendment.

 

(v)    Investments.  The Company will not make, incur, or suffer to exist any
loan, advance, guarantee, extension of credit or other investment in any Person
other than pursuant to the Program Documents and with respect to Eligible
Investments and, in addition, without limiting the generality of the foregoing,
the Company will not direct the Collateral Agent to make any Eligible
Investments on the Company’s behalf that would have the effect of causing the
Company to be an “investment company” within the meaning of the Investment
Company Act.

 

(w)    No Other Agreements.  The Company will not (a) enter into or be a party
to any agreement or instrument other than any Program Document, agreements
entered into in the ordinary course of its business or documents and agreements
incidental thereto or (b) except as provided for in Section 10.01, amend, modify
or waive any provision of any Program Document to which it is a party, or (c)
give any approval or consent or permission provided for in any Program Document.

 

(x)    Other Business.  The Company will not engage in any business or
enterprise or enter into any transaction other than (i) as contemplated by the
Program Documents or (ii) activities related to or incidental to any of the
foregoing.

 

(y)    Secured Liquidity Notes.  The Company shall not issue Secured Liquidity
Notes to the Seller, any Affiliate of the Seller or any trust or other entity to
which the Seller or any Affiliate of the Seller is a depositor or service
bearing interest (or at a discount) in excess of a commercially reasonable rate.

 

(z)    Rule 144A Information Requirement.  For so long as any of the Senior
Notes remain outstanding and are “restricted securities” within the meaning of
Rule 144(a)(3) under the Securities Act, the Company covenants and agrees that
it shall, during any period in which it is not subject to Section 13 or 15(d)
under the Exchange Act, make available to any holder of Senior Notes in
connection with any sale thereof and any prospective purchaser of Senior Notes
from such holder of Senior Notes in each case upon request, the information
specified in, and meeting the requirements of, Rule 144A(d)(4) under the
Securities Act.

 

(aa)    Use of Proceeds of Senior Notes.  The Company shall use the proceeds of
Senior Notes solely for one or more of the following purposes: (a) to pay the
Company’s Obligations when due, in accordance with this Security Agreement; and
(b) to acquire Eligible Loans from the Seller.

 

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(bb)    Program Document Information.  The Company shall, or shall cause the
Seller or Servicer to, provide the Collateral Agent and the Swap Counterparty
with copies of all reports, notices, statements and certificates delivered under
the Program Documents, and any other information that the Collateral Agent or
the Swap Counterparty shall reasonably request. Delivery of such reports,
notices, information and documents to the Collateral Agent under this section
and Section 3.05(z) is for informational purposes only and the Collateral
Agent’s receipt of such shall not constitute constructive notice of any
information contained therein or determinable from information contained
therein, including the Company’s compliance with any of its covenants.

 

(cc)    Non-Petition Agreement.  The Company shall cause each party to the
Program Documents and each party to any other document incidental or related to
any Program Document, to covenant and agree that it shall not, prior to the date
which is one year and one day (or if longer, the applicable preference period
then in effect) after the payment in full of the latest maturing Senior Note,
acquiesce, petition or otherwise, directly or indirectly, invoke or cause the
Company to invoke the process of any governmental authority for the purpose of
commencing or sustaining a case against the Company under any federal or state
bankruptcy, insolvency or similar law or appointing a receiver, liquidator,
assignee, trustee, custodian, sequestrator or other similar official of the
Company or any substantial part of its property or ordering the winding up or
liquidation of the affairs of the Company.

 

ARTICLE IV

 

SECURED LIQUIDITY NOTES

 

Section 4.01    Conditions to Effectiveness.  The ability of the Company to
issue Secured Liquidity Notes shall commence on the first day (the “Effective
Date”) on which all of the following conditions have been satisfied (or waived
in accordance with this Security Agreement):

 

(a)    Depositary Agreement.  The Company and the Depositary shall have executed
and delivered the Depositary Agreement, which shall be in full force and effect,
and the Collateral Agent shall have received a fully executed counterpart
thereof.

 

(b)    Mortgage Loan Purchase and Servicing Agreement.  The Seller and the
Company shall have executed and delivered the Mortgage Loan Purchase and
Servicing Agreement, which shall be in full force and effect, and the Collateral
Agent shall have received a photocopy of a fully executed counterpart thereof.

 

(c)    Structuring Fee.  The structuring fee of the Calculation Agent, as
separately agreed between the Issuer and the Calculation Agent, and the fees and
expenses of counsel to the Calculation Agent and the Swap Counterparty shall
have been paid on or prior to the Effective Date.

 

(d)    LLC Agreement.  The initial member and the special member shall have
executed and delivered the LLC Agreement, and the Collateral Agent shall have
received a fully executed copy thereof, which shall be in full force and effect.
A copy of each closing document delivered to the Company under the LLC Agreement
shall have been delivered to the Collateral Agent.

 

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(e)    Security Agreement.  The Company and the Collateral Agent shall have
executed and delivered this Security Agreement, which shall be in full force and
effect, and the Collateral Agent shall have received a fully executed
counterpart thereof.

 

(f)    Custodial Agreement.  The Company, the Seller, the Collateral Agent and
the Custodian shall have executed and delivered the Custodial Agreement, which
shall be in full force and effect, and the Collateral Agent shall have received
a fully executed counterpart thereof.

 

(g)    SLN Placement Agent Agreement.  The Company and the SLN Placement Agents
shall have executed and delivered the SLN Placement Agent Agreement in respect
of the Secured Liquidity Notes, which shall be in full force and effect, and the
Collateral Agent shall have received a fully executed counterpart thereof.

 

(h)    No Event of Default or Servicer Event of Default.  No Event of Default or
Servicer Event of Default shall have occurred and be continuing on the Effective
Date nor will any Event of Default or Servicer Event of Default result from the
consummation of the initial issuance of Secured Liquidity Notes on such date.

 

(i)    Representations and Warranties.  All representations and warranties of
(i) the Company contained in this Security Agreement and in the other Program
Documents or in any document, certificate or financial or other statement
delivered in connection herewith or therewith, (ii) the Servicer contained in
the Servicer Documents, and (iii) the Seller contained in the Seller Documents
shall be true and correct in all material respects and with the same force and
effect as though such representations and warranties had been made as of the
Effective Date.

 

(j)    Opinions of Counsel.  The Collateral Agent shall have received signed
opinions, addressed to the Collateral Agent from Mayer, Brown, Rowe & Maw LLP,
special counsel to the Seller and the Company, and an opinion of counsel for the
Swap Counterparty, as to such matters as the Collateral Agent may reasonably
request. The Collateral Agent shall have also received a copy, addressed to the
Collateral Agent or if not addressed to the Collateral Agent, then the
Collateral Agent shall have received a letter stating that the Collateral Agent
shall be entitled to rely thereon, of each opinion delivered to the Rating
Agencies in connection with the rating of the Secured Liquidity Notes.

 

(k)    Closing Certificates.  The Collateral Agent shall have received a
certificate dated the date hereof and executed by the chairman of the board,
vice chairman of the board, president, the Manager, any vice president,
secretary, treasurer, assistant secretary or any assistant treasurer (or a
Person with a delegation of authority from any such officer) of (i) the Company
stating that all of the conditions with respect to the Company specified in
Section 4.01 are then satisfied, (ii) the Servicer stating that the conditions
with respect to the Servicer specified in Section 4.01 are then satisfied, and
(iii) the Seller stating that the conditions with respect to the Seller
specified in Section 4.01 are then satisfied.

 

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(l)    Filings, etc.  All filings (including, without limitation, pursuant to
the UCC) and recordings shall have been accomplished with respect to this
Security Agreement in such jurisdictions as may be required by law to establish,
perfect, protect and preserve the rights, titles, interests, remedies, powers,
privileges, first priority liens and security interests of the Collateral Agent
in the Collateral covered by this Security Agreement and any giving of notice or
the taking of any other action to such end (whether similar or dissimilar)
required by law shall have been given or taken (it being understood that no
filings of Assignments of Mortgages relating to the Mortgage Loans purchased by
the Company will generally be required). On or prior to the Effective Date, the
Collateral Agent shall have received satisfactory evidence as to any such
filing, recording, registration, giving of notice or other action so taken or
made.

 

(m)    Company Documents.  The Collateral Agent shall have received copies of
the organizational documents of the Company and the Seller, Board of Directors
resolutions or similar authorizing resolutions of the Company and the Seller in
respect of the Program Documents and the Mortgage Loan Purchase and Servicing
Agreement, as applicable, and incumbency certificates of the Company and the
Seller, all certified by appropriate authorities.

 

(n)    Bank Accounts.  The Collateral Account, the Collection Account, the
Allocated Expense Account and the Secured Liquidity Note Account shall have been
established.

 

(o)    [reserved]

 

(p)    Secured Liquidity Notes Ratings.  The Secured Liquidity Notes shall have
been rated “A-l+” by S&P and “P-1” by Moody’s, the Collateral Agent shall have
received a copy of each letter evidencing any such rating and such ratings shall
continue in full force and effect on the Effective Date.

 

(q)    Other Instruments and Documents.  The Collateral Agent shall have
received such other instruments and documents as the Collateral Agent may have
reasonably requested, and all instruments and documents delivered pursuant to
this Section 4.01 shall be reasonably satisfactory in form and substance to the
Collateral Agent.

 

(r)    Fees.  The fees and expenses of the Depositary, the Custodian and the
Collateral Agent, and the fees and expenses of their counsel, and the up-front
fees payable to the Rating Agencies, shall have been paid on or prior to the
Effective Date.

 

(s)    Effective Date.  The Company shall have given notice to the Collateral
Agent and the Depositary of the Effective Date, in the form of a certificate in
the form of Exhibit A hereto.

 

(t)    Total Return Swap.  The Company and the Swap Counterparty shall have
executed and delivered the Total Return Swap, which shall be in full force and
effect, and the Collateral Agent shall have received a fully executed
counterpart thereof. No Additional Termination Event (as defined in the Total
Return Swap) shall have occurred and be continuing.

 

(u)    Reserve Fund.  The Collateral Agent shall have received evidence not
later than the date on which the Company first purchases a Mortgage Loan under
the Mortgage Loan Purchase and Servicing Agreement that the Reserve Fund has
been established and funded in an amount equal to the Initial Required Reserve
Fund Amount.

 

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(v) Back-Up Servicer. The Back-Up Servicer shall have entered into the Back-Up
Servicer Agreement.

 

Section 4.02 Issuance of Secured Liquidity Notes. The issuance and payment
provisions of the Secured Liquidity Notes, to the extent not covered in this
Security Agreement, will be as set forth in the Depositary Agreement.

 

(a) The Company shall have the right to issue or deliver Classes of Secured
Liquidity Notes from time to time on and after the Effective Date, unless (i)
any condition precedent specified in Section 4.03 with respect to the issuance
of Classes of Secured Liquidity Notes has not been satisfied or waived or (ii)
the issuance of Classes of Secured Liquidity Notes is prohibited by the
provisions of Section 4.02(c) hereof. If any of the events described in clauses
(i) and (ii) of the immediately preceding sentence has occurred, then the
Company shall not direct the Collateral Agent or the Depositary to issue or
deliver Classes of Secured Liquidity Notes.

 

(b) The Company agrees that each note constituting Secured Liquidity Notes shall
(i) be in the form attached to the Depositary Agreement and be completed in
accordance with this Security Agreement and the Depositary Agreement, (ii) be
dated the date of issuance thereof, (iii) be made payable to the order of a
named payee or bearer, (iv) be in a face amount (if issued on a discount basis)
or a principal amount (if issued on an interest-bearing basis) of $250,000 or an
integral multiple of $1,000 in excess thereof and (v) be exempt from or sold in
a transaction exempt from the registration requirements of the Securities Act.
Subject to the provisions of the Depositary Agreement, all Secured Liquidity
Notes shall be delivered and issued against payment therefor in collected funds
which are immediately available on the date of issuance, and otherwise in
accordance with the terms of this Security Agreement and the Depositary
Agreement.

 

(c) In the event that (i) an injunction suspending the issuance of Secured
Liquidity Notes shall have been issued or proceedings therefor shall have been
initiated by the Securities and Exchange Commission, (ii) the Company or any
other Person shall have been found in a judicial or administrative proceeding to
have violated the Securities Act in connection with the issuance of the Secured
Liquidity Notes, or (iii) the Company or the SLN Placement Agents shall have
filed a registration statement with the Securities and Exchange Commission
seeking to register the Secured Liquidity Notes under the Securities Act, then,
in any such event, the Company shall not thereafter issue or sell any Secured
Liquidity Notes. The Company shall give the Collateral Agent, the SLN Placement
Agents, the Depositary, the Swap Counterparty and the Rating Agencies notice of
any of the events described in this Section 4.02(c).

 

Section 4.03 Conditions Precedent to Issuance of Secured Liquidity Notes. The
right of the Company to issue Secured Liquidity Notes is subject to the
conditions that at the time of each such issuance and after giving effect
thereto:

 

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(a) Ratings. The Secured Liquidity Notes shall be rated “A-1+” by S&P, and “P-1”
by Moody’s.

 

(b) No Event of Default. No event of default under any Program Document and no
Event of Default and no Termination Event shall have occurred and be continuing
and the Company shall have made a determination that no event of default under
any Program Document and no Event of Default will result from the issuance of
such Secured Liquidity Notes.

 

(c) Representations and Warranties. All representations and warranties of the
Company contained in this Security Agreement and in the other Program Documents
or in any document, certificate or financial or other statement delivered in
connection herewith or therewith shall be true and correct in all material
respects with the same force and effect as though such representations and
warranties had been made on and as of the day of such issuance.

 

(d) Accounts. The Reserve Accounts, the Collateral Account, the Collection
Account, the Extended Notes Distribution Account and the Secured Liquidity Note
Account, and any funds on deposit in, or otherwise to the credit of, the Reserve
Accounts, Collateral Account, the Collection Account, the Extended Notes
Distribution Account and the Secured Liquidity Note Account shall not be subject
to any writ, order, stay, judgment, warrant of attachment or execution or
similar process.

 

(e) Borrowing Base. After giving effect to such issuance of Secured Liquidity
Notes on such day, the payment of Secured Liquidity Notes maturing or matured on
such day, the payment of outstanding Extended Notes on such day, and the
purchase of additional Mortgage Loans on such day, the Credits Outstanding on
such day will not exceed the sum of (A) the excess of the Outstanding Purchase
Price of Mortgage Loans over the Outstanding Purchase Price of any Defaulted
Loans owned by the Company on such day, (B) the Capitalized Interest Component
on such day, and (C) any cash and Eligible Investments in the Collateral Account
held by the Company on such day (to the extent not included in the definition of
Credits Outstanding). At no time shall the aggregate principal amount of the
Secured Liquidity Notes then outstanding be greater than the Program Size.

 

(f) Downgrade. No downgrade, qualification or withdrawal of the long-term
unsecured debt rating of the Swap Counterparty below “AA-” by S&P, “Aa3” by
Moody’s or, if rated by Fitch, “AA-” by Fitch or of its short-term unsecured
debt rating below “A-1+” by S&P, “P-1” by Moody’s or, if rated by Fitch, “F1+”
by Fitch shall have occurred and be continuing.

 

(g) Mortgage Loans Purchased. The aggregate amount of all Mortgage Loans
purchased and held by the Company at any given time does not, and will not,
exceed the maximum amount set forth in the Mortgage Loan Purchase and Servicing
Agreement.

 

(h) Mortgage Loans Sold. The Company shall be in compliance with the Portfolio
Aging Limitations, the Portfolio Criteria and the Wet Funded Loan Limitation (as
such terms are defined in the Mortgage Loan Purchase and Servicing Agreement).

 

(i) SLN Maturity. Each Secured Liquidity Note has an Expected Maturity that is
not more than one hundred and eighty (180) calendar days after its issuance date
and a Final Maturity that is one hundred and eighty (180) calendar days after
its Expected Maturity.

 

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(j) No Extended Notes. No Extended Notes are outstanding unless after giving
effect to such new issuance of Secured Liquidity Notes sufficient funds will be
available to fully repay (x) all outstanding Extended Notes and (y) all Secured
Liquidity Notes maturing on such date.

 

The Company hereby agrees that each issuance of Secured Liquidity Notes
constitutes a representation and warranty by the Company that the conditions
specified above are then satisfied and will be satisfied immediately after
giving effect thereto.

 

Section 4.04 Conversion to Extended Notes. (a) Upon the failure of any Class of
Secured Liquidity Notes to be fully paid on its Expected Maturity, without any
notice or other further action by any Person, the Company shall be deemed to
have advised the Clearing Agency that such Class of Secured Liquidity Notes has
been converted, as of such Expected Maturity, to a Class of Extended Notes.

 

(b) Upon any such conversion with respect to any Class of Secured Liquidity
Notes, the Collateral Agent shall notify the Depositary of such conversion to a
Class of Extended Notes. The initial aggregate principal amount of each Class of
Extended Notes deemed issued upon conversion of the related Class of Secured
Liquidity Notes shall be equal to the aggregate face amount of such Class of
Secured Liquidity Notes (or, in the case of Secured Liquidity Notes issued on an
interest bearing basis, the aggregate principal and accrued interest of such
Class of Secured Liquidity Notes). The Company shall provide written notice to
the Rating Agencies and the Swap Counterparty of any conversion of a Class of
Secured Liquidity Notes to a Class of Extended Notes.

 

Section 4.05 Proceeds. The proceeds of Secured Liquidity Notes shall be used by
the Company only to (i) acquire Mortgage Loans, (ii) pay matured and maturing
Secured Liquidity Notes, including interest and/or discount thereon, (iii) pay
outstanding Extended Notes, including interest thereon, in accordance with the
terms of the Program Documents, and (iv) make payments in accordance with
Sections 2.01 and 6.03 hereof.

 

Section 4.06 Calculation of Extended Note Interest. (a) For purposes of
calculating the Extended Note Rate for each Class of Extended Notes, the Company
hereby appoints the Collateral Agent as the Extended Note Calculation Agent. The
Extended Note Calculation Agent may be removed by the Company at any time. If
the Extended Note Calculation Agent is unable or unwilling to act as such or is
removed by the Company, or if the Extended Note Calculation Agent fails to
determine the Extended Note Rate for each Class of Extended Notes and the
Aggregate Extended Note Monthly Interest for any Interest Period, the Company
will promptly appoint as a replacement Extended Note Calculation Agent a leading
bank which is engaged in transactions in Eurodollar deposits in the
international Eurodollar market. The Extended Note Calculation Agent may not
resign its duties without a successor having been duly appointed by the Company.

 

(b) LIBOR shall be determined by the Extended Note Calculation Agent in
accordance with the following provisions:

 

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(i) On the second Business Day prior to the commencement of the applicable
Interest Period (or, in the case of the initial Interest Period, on the related
Expected Maturity) (each such day, a “LIBOR Determination Date”), “LIBOR” shall
equal the rate, as obtained by the Extended Note Calculation Agent, for
one-month Eurodollar deposits which appears on Telerate Page 3750 (as defined in
the publication “2000 ISDA Definitions” published by the International Swaps and
Derivatives Association, Inc.) or such other page as may replace Telerate Page
3750, as it relates to U.S. dollars, as of 11:00 a.m. (London time) on such
LIBOR Determination Date.

 

(ii) If, on any LIBOR Determination Date, such rate does not appear on Telerate
Page 3750, the Extended Note Calculation Agent shall determine the arithmetic
mean of the offered quotations of the Reference Banks to leading banks in the
London interbank market for one-month Eurodollar deposits in an amount
determined by the Extended Note Calculation Agent by reference to requests for
quotations as of approximately 11:00 a.m. (London time) on the LIBOR
Determination Date made by the Extended Note Calculation Agent to the Reference
Banks. If, on any LIBOR Determination Date, at least two of the Reference Banks
provide such quotations, LIBOR shall equal such arithmetic mean of such
quotations. If, on any LIBOR Determination Date, only one or none of the
Reference Banks provide such quotations, LIBOR shall be deemed to be the
arithmetic mean of the offered quotations that leading banks in The City of New
York selected by the Extended Note Calculation Agent are quoting on the relevant
LIBOR Determination Date for one-month Eurodollar deposits in an amount
determined by the Extended Note Calculation Agent by reference to the principal
London offices of leading banks in the London interbank market; provided,
however, that if the Extended Note Calculation Agent is required but is unable
to determine a rate in accordance with at least one of the procedures provided
above, “LIBOR” shall be LIBOR as determined on the previous LIBOR Determination
Date. As used herein, “Reference Banks” means four major banks in the London
interbank market selected by the Extended Note Calculation Agent.

 

As soon as possible after 11:00 a.m. (London time) on each LIBOR Determination
Date, but in no event later than 11:00 a.m. (London time) on the Business Day
immediately following each LIBOR Determination Date, the Extended Note
Calculation Agent will cause the Extended Note Rate for the next Interest Period
and the applicable Aggregate Extended Note Monthly Interest for such Interest
Period payable in respect of the Extended Notes on the related Distribution Date
to be given to the Company, the Depositary and any paying agent. The Extended
Note Calculation Agent will also specify to the Company and the Depositary the
quotations upon which the Extended Note Rate is based, and in any event the
Extended Note Calculation Agent shall notify the Company before 5:00 p.m.
(London time) on each LIBOR Determination Date that either: (i) it has
determined or is in the process of determining the Extended Note Rate and the
applicable Aggregate Extended Note Monthly Interest or (ii) it has not
determined and is not in the process of determining the Extended Note Rate and
the applicable Aggregate Extended Note Monthly Interest, together with its
reasons therefor. For the sole purpose of calculating the Extended Note Rate,
“Business Day” shall be any day on which dealings in deposits in U.S. dollars
are transacted in the London interbank market.

 

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Section 4.07 Payment of Extended Note Interest. (a) The discount representing
interest on each Secured Liquidity Note will be payable pursuant to the terms of
the Depositary Agreement on the related Expected Maturity or redemption date (if
such Secured Liquidity Note is redeemed prior to such Expected Maturity in
accordance with Section 7.02 hereof) with funds provided therefor pursuant to
Section 6.03 of this Security Agreement; provided, however, that if such funds
provided under this Security Agreement are insufficient to repay the face amount
of all outstanding Secured Liquidity Notes having the same Expected Maturity on
such Expected Maturity, then no interest will be paid in respect of such Classes
on such date and such Classes shall thereupon be converted into Extended Notes
pursuant to Section 4.04 hereof. With respect to the payment of interest on the
Extended Notes, on each Distribution Date commencing with the second
Distribution Date following such Expected Maturity, the Collateral Agent, in
accordance with a certificate or other statement based upon the Servicer Report,
shall withdraw the amounts required to be withdrawn from the Collateral Account
and deposit such amounts in the Extended Notes Distribution Account, maintained
with the Depositary, pursuant to this Section 4.07 in respect of all funds
available for such Interest Period and allocated to the holders of the Extended
Notes pursuant to Section 6.03(b) of this Security Agreement.

 

On each Determination Date, the Collateral Agent shall notify the Depositary and
the Servicer in writing as to the amount to be withdrawn and paid pursuant to
this Section 4.07 from the Collateral Account to the extent funds are
anticipated to be available and allocable to the Extended Notes in respect of
(x) first, an amount equal to Extended Note Monthly Interest for the related
Interest Period and (y) second, an amount equal to the amount of any unpaid
Extended Note Shortfall as of the preceding Distribution Date (together with any
accrued interest on such Extended Note Shortfall). If the amounts described in
this Section 4.07 are not sufficient to pay Extended Note Monthly Interest on
any Distribution Date, payments of interest to the holders of Extended Notes
will be reduced on a pro rata basis by the amount of such deficiency. The
aggregate amount, if any, of such deficiency on any Distribution Date shall be
referred to as the “Extended Note Shortfall.” Interest shall accrue on the
Extended Note Shortfall at the Extended Note Rate. On each Distribution Date,
the Collateral Agent shall withdraw the amounts described in this Section 4.07
from the Collateral Account and deposit such amounts in the Extended Notes
Distribution Account.

 

Section 4.08 Payment of Senior Note Principal. The principal in respect of each
Secured Liquidity Note will be payable pursuant to the terms of the Depositary
Agreement on the related Expected Maturity or redemption date (if such Secured
Liquidity Note is redeemed prior to such Expected Maturity in accordance with
Section 7.02 hereof) with funds provided therefor pursuant to Section 6.03 of
this Security Agreement; provided, however, that if such funds provided under
this Security Agreement are insufficient to repay the face amount of all
outstanding Secured Liquidity Notes having the same Expected Maturity on such
Expected Maturity, then no principal will be paid in respect of such Classes on
such date and such Classes shall thereupon be converted into Extended Notes
pursuant to Section 4.04 hereof; provided, further, the principal in respect of
the Secured Liquidity Notes may only be paid if no Extended Notes would be
outstanding after giving effect to all payments made on such date. The principal
in respect of any Extended Note (x) upon at least five Business Days’ notice to
DTC, the Depositary and the Collateral Agent, may be paid in whole, but not in
part, on any day at the option of the Company to the extent of available
principal payments on the Mortgage Loans, sale proceeds in respect of the
Mortgage Loans, payments to the Company under the Total Return

 

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Swap in respect of the Mortgage Loans and proceeds from the issuance of new
Classes of Secured Liquidity Notes, provided that after giving effect to all
payments made on such date no outstanding Class of Extended Notes has the same
or an earlier Final Maturity and (y) unless earlier redeemed, will be repaid in
full on the Final Maturity of such Extended Note. With respect to each Class of
Extended Notes, on the applicable principal payment date, in accordance with a
certificate or other statement based upon the related report generated by the
Servicer, the Collateral Agent shall withdraw the amount set forth therein as
principal payable in respect of the applicable Class of Extended Notes from the
Collateral Account and deposit such amount in the Extended Notes Distribution
Account maintained with the Depositary, to be paid to the holders of the
applicable Class of Extended Notes on such date. On the Determination Date prior
to the related Final Maturity, the Collateral Agent shall notify the Servicer in
writing as to the amount of remaining principal outstanding in respect of the
applicable Class of Extended Notes. On each Final Maturity, in accordance with
the related Servicer Report, the Collateral Agent shall withdraw such amount of
remaining principal in respect of the applicable Class of Extended Notes from
the Collateral Account and deposit such amount in the Extended Notes
Distribution Account maintained with the Depositary, to be paid to the holders
of the applicable Class of Extended Notes. The remaining entire principal amount
(plus accrued interest thereon) of all Extended Notes of a Class shall be due
and payable on the applicable Final Maturity.

 

Section 4.09 Program Size. The Company may, with the consent of the Swap
Counterparty and the Collateral Agent, increase the Program Size; provided,
however, that no increase in the Program Size may be made unless after giving
effect to such increase (i) the maximum aggregate notional amount of the Total
Return Swap shall be at least equal to the Program Size and (ii) the Company
shall obtain written confirmation from each of the Rating Agencies that such
increase shall not cause the reduction or withdrawal of any rating on the Senior
Notes.

 

ARTICLE V

 

ASSIGNMENT

 

Section 5.01 Assignment. In order to secure and to provide for the repayment of
the Obligations, the Company hereby assigns, conveys, transfers, delivers and
sets over unto the Collateral Agent for the benefit of the Secured Parties and
hereby grants to the Collateral Agent for the benefit of each Secured Party a
security interest in, control over, and lien on all of the following, including,
without limitation, all accounts, money, chattel paper, securities, instruments,
documents, deposit accounts, certificates of deposit, letters of credit, letter
of credit rights, advices of credit, banker’s acceptances, uncertificated
securities, securities accounts, security entitlements, investment property,
general intangibles, contract rights, goods and other property consisting of,
arising from or relating to the following (all of the following indicated in (i)
through (v) being referred to as the “Assigned Collateral”):

 

(i) all right, title and interest of the Company in, to and under the Mortgage
Loans (including the contents of the Mortgage Loan Files) purchased by the
Company from time to time pursuant to the Mortgage Loan Purchase and Servicing
Agreement, including without limitation, all monies due and to become due to the
Company under or in connection with such Mortgage Loans, all dividends,
earnings, income, rents, issues,

 

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profits or other distributions of cash or other property in respect of such
Mortgage Loans and all rights, remedies, powers, privileges and claims of the
Company, as holder of such Mortgage Loans, against (i) the Seller under or with
respect to the Mortgage Loan Purchase and Servicing Agreement (whether arising
pursuant to the terms of the Mortgage Loan Purchase and Servicing Agreement or
otherwise available to the Company at law or in equity), and (ii) the Servicer
under or with respect to the Mortgage Loan Purchase and Servicing Agreement
(whether arising pursuant to the terms of the Mortgage Loan Purchase and
Servicing Agreement or otherwise available to the Company at law or in equity),
including, without limitation, the rights of the Company to enforce the Mortgage
Loan Purchase and Servicing Agreement and the respective obligations of the
Seller and the Servicer thereunder and to give or withhold any and all consents,
requests, notices, directions, approvals, extensions or waivers under or with
respect to the Mortgage Loan Purchase and Servicing Agreement or the respective
obligations of the Seller or the Servicer thereunder to the same extent as the
Company could but for the assignment and security interest granted to the
Collateral Agent in this Section 5.01;

 

(ii) all right, title and interest of the Company in, to and under the Program
Documents, including, without limitation, all monies due and to become due to
the Company thereunder or in connection therewith, whether payable as fees,
expenses, costs, indemnities, insurance recoveries, damages for the breach of
any of the Program Documents or otherwise, and all rights, remedies, powers,
privileges and claims of the Company under or with respect to the Program
Documents (whether arising pursuant to the terms of the Program Documents or
otherwise available to the Company at law or in equity), including, without
limitation, the rights of the Company to enforce the Program Documents and to
give or withhold any and all consents, requests, notices, directions, approvals,
extensions or waivers under or with respect to the Program Documents to the same
extent as the Company could but for the assignment and security interest granted
to the Collateral Agent in this Section 5.01;

 

(iii) all right, title and interest of the Company in and to (x) monies on
deposit in, or securities, financial assets, investment property or other assets
credited to, (A) the Reserve Accounts, (B) the Allocated Expenses Account, (C)
any account maintained pursuant to the Depositary Agreement and (D) the
Collection Account (other than interest earned on amounts deposited therein) and
any other accounts maintained pursuant to the Mortgage Loan Purchase and
Servicing Agreement (excluding any escrow accounts maintained for obligors under
the Mortgage Loans) or this Security Agreement, (y) all Eligible Investments
held by the Company and (z) all cash held by the Company;

 

(iv) all additional property that may from time to time hereafter be subjected
to the grant and pledge hereof by the Company or by anyone on its behalf,
including the deposit with the Collateral Agent of additional monies by the
Company; and

 

(v) all proceeds of any of the foregoing.

 

Notwithstanding the assignment and security interest so granted to the
Collateral Agent, the Company shall nevertheless be permitted, subject to the
provisions of Sections 5.03

 

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and 5.04 and of Article VII hereof, to give all consents, requests, notices,
directions, approvals, extensions or waivers, if any, which are required to be
given by the Company by the specific terms of the Mortgage Loan Purchase and
Servicing Agreement and the Program Documents and the assignment and security
interest so granted to the Collateral Agent shall not relieve the Company from
the performance of any term, covenant, condition or agreement on the Company’s
part to be performed or observed under or in connection with the Mortgage Loan
Purchase and Servicing Agreement and the Program Documents, or from any
liability to the Seller or Servicer, or impose any obligation on the Collateral
Agent or the Secured Parties to perform or observe any such term, covenant,
condition or agreement on the Company’s part to be so performed or observed or
impose any liability on the Collateral Agent or the Secured Parties for any act
or omission on the part of the Company relative thereto or from any breach of
any representation or warranty on the part of the Company contained in the
Mortgage Loan Purchase and Servicing Agreement or the Program Documents, or made
in connection therewith.

 

Section 5.02 Application of Assigned Collateral. The Company hereby acknowledges
and agrees that, until this Security Agreement is terminated, all monies and
other cash proceeds due and to become due to the Company under or in connection
with the Assigned Collateral shall be paid directly to the Collateral Agent and
that the Company agrees if any such monies or other cash proceeds shall be
received by the Company, such monies and other cash proceeds will not be
commingled by the Company with any of its other funds or property, but will be
held separate and apart therefrom and shall be held in trust by the Company for,
and promptly paid over to, the Collateral Agent. Unless and until an Event of
Default shall have occurred and be continuing, and provided the Collateral
Account or any funds on deposit in, or otherwise to the credit of, the
Collateral Account are not then subject to any writ, order, judgment, warrant of
attachment, execution or similar process, all monies and other cash proceeds
received by the Collateral Agent pursuant to this Article shall be deposited in
the Collateral Account for application as provided in Section 6.03 hereof. All
monies and other cash proceeds held or deposited in the Collateral Account after
the occurrence and during the continuance of an Event of Default and all monies
and other cash proceeds received by the Collateral Agent pursuant to this
Article V while the Collateral Account or any funds on deposit in, or otherwise
to the credit of, the Collateral Account are subject to any writ, order,
judgment, warrant of attachment, execution or similar process, shall be applied
by the Collateral Agent to the payment or repayment in full of all outstanding
Obligations, whether or not then due, in the order of priority specified in
Section 2.01 hereof; provided, however, that any monies or other cash proceeds
remaining after the payment or repayment in full of all outstanding Obligations
shall be paid to the Servicer.

 

For purposes of determining the application to be made of such monies and other
cash proceeds to the Servicer pursuant to clause Fifth of Section 2.01(b)
hereof, the Collateral Agent may rely exclusively upon a certificate or other
statement (a copy of which shall also be provided to the Company) of the
Servicer as to the amount then owing to the Servicer. For purposes of
determining the application to be made of such monies and other cash proceeds to
any holder of any Secured Liquidity Notes pursuant to clause Third of Section
2.01(b) hereof, the Collateral Agent may rely exclusively upon a certificate or
other statement (a copy of which shall also be provided to the Company) of the
Depositary as to the amount then owing to such holder. For purposes of
determining the application to be made of such monies and other cash proceeds to
any holder of any Extended Notes pursuant to clause Third of Section 2.01(b)
hereof,

 

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the Collateral Agent may rely exclusively on a certificate or other statement (a
copy of which shall also be provided to the Company) of the Depositary as to the
amount then owing to such holder. For purposes of determining the application to
be made of such monies and other cash proceeds to the Swap Counterparty pursuant
to clauses Second of Section 2.01(b) hereof, the Collateral Agent may rely
exclusively upon a certificate or other statement (a copy of which shall also be
provided to the Company) of the Servicer, acting as Calculation Agent under the
Total Return Swap, as to the amount then owing to the Swap Counterparty. Any
application to be made by the Collateral Agent of such monies and other cash
proceeds pursuant to clause First or Fourth of Section 2.01(b) hereof may be
made upon the Collateral Agent’s or the Custodian’s certificate or statement
delivered to the Company setting forth in reasonable detail the nature of the
Collateral Agent’s or the Custodian’s claim and the amount owing to the
Collateral Agent or the Custodian on account thereof.

 

The Collateral Agent shall not be liable for any application of the monies and
other cash proceeds received by the Collateral Agent pursuant to this Article V
made in accordance with any certificate or direction delivered pursuant to this
Section 5.02; provided, however, that no application of the monies and other
cash proceeds received by the Collateral Agent pursuant to this Article V in
accordance with any certificate delivered pursuant to this Section 5.02 shall be
deemed to restrict or limit the right of the Company to contest with the
purported obligee its respective liability in respect of the amount set forth in
such certificate.

 

Section 5.03 Performance of Agreements. Promptly, whether or not following a
request from the Collateral Agent to do so, and in any event at the Company’s
own expense, the Company agrees (a) to take all such lawful action as the
Collateral Agent may reasonably request to compel or secure the performance and
observance by (i) the Seller or the Servicer of its obligations to the Company
under or in connection with the Mortgage Loan Purchase and Servicing Agreement
in accordance with the terms thereof, and (ii) any party to any Program Document
in accordance with the terms thereof, and (b) to exercise any and all rights,
remedies, powers and privileges lawfully available to the Company (i) under or
in connection with the Mortgage Loan Purchase and Servicing Agreement and (ii)
under or in connection with any Program Document, in every case to the extent
and in the manner directed by the Collateral Agent, including, without
limitation, the transmission of notices of default on the part of the Seller or
the Servicer or any party to any Program Document and the institution of legal
or administrative actions or proceedings to compel or secure performance by the
Seller or the Servicer or any party to any Program Document of their respective
obligations. Subject to Section 7.02, the Company further agrees that it will
not, without the prior written consent of the Collateral Agent (on behalf of the
holders of the Senior Notes) and the Swap Counterparty, (a) exercise any right,
remedy, power or privilege available to it under or in connection with the
Mortgage Loan Purchase and Servicing Agreement, (b) take any action to compel or
secure performance or observance by (i) the Seller or the Servicer of its
obligations to the Company under or in connection with the Mortgage Loan
Purchase and Servicing Agreement or (ii) any party to any Program Document, or
(c) give any consent, request, notice, direction, approval, extension or waiver
to the Seller or the Servicer under the Mortgage Loan Purchase and Servicing
Agreement not required to be exercised, taken, observed or given by the Company
pursuant to the terms of the Mortgage Loan Purchase and Servicing Agreement.

 

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Section 5.04 Amendments; Waivers. Without intending in any manner to derogate
from the absolute nature of the assignment granted to the Collateral Agent by
this Security Agreement or the rights of the Collateral Agent hereunder, the
Company agrees that it will not without Rating Agency Confirmation and the prior
written consent of the Collateral Agent and the Swap Counterparty, agree to
amend, modify, supplement, terminate, waive or surrender (x) the terms of the
Custodial Agreement or (y) the definition of “Assigned Collateral”, or assign
its rights under any of the Program Documents or agree to any amendment,
modification, supplement, termination, except as provided in Section 8.02 or
10.01 hereof, or surrender which would result in the release of any security
interest granted in the Assigned Collateral, the Collateral Account or the
Deposited Funds. If any such amendment, modification, supplement or waiver, as
applicable, shall be so consented to by the required consenting parties, the
Company agrees, promptly following a request by the required consenting parties
to do so, to prepare, execute and deliver, in its own name and at its own
expense, such agreements, instruments, consents and other documents as the
required consenting parties may deem necessary or appropriate in the
circumstances. Upon provision of such direction by the required consenting
parties, the Collateral Agent shall also execute and deliver any such
agreements, instruments, consents and other documents. The Company shall give
prior notice of any amendment to each of the Rating Agencies.

 

Section 5.05 Location of Records. The Company hereby covenants and agrees that
its chief place of business and chief executive office, and the place where its
records pertaining to the Assigned Collateral will be kept, shall at all times
be located in the offices of Von Karman Funding LLC, whose address is: 18400 Von
Karman, Suite 1000, Irvine, CA 92612-1514.

 

Section 5.06 Notice of Default under Program Documents. The Company agrees, at
its own expense, to give the Collateral Agent, the Depositary, the SLN Placement
Agents, the Swap Counterparty and the Rating Agencies as soon as practicable
(and in no event more than two Business Days thereafter) written notice of each
default coming to the Company’s attention on the part of any Person, and of such
Person’s obligations under or in respect of the Program Documents.

 

Section 5.07 Custody of Program Documents. Simultaneously with the execution and
delivery by the Company of this Security Agreement, the Company is delivering to
the Collateral Agent a counterpart of each Program Document currently in effect,
which at all times shall be retained in the custody and possession of the
Collateral Agent until the termination of this Security Agreement.

 

Section 5.08 Delivery of Assigned Collateral Including Eligible Investments. All
certificates representing or evidencing the Assigned Collateral (other than
Mortgage Loans), including, without limitation Eligible Investments, from time
to time shall be delivered to and held by or on behalf of the Collateral Agent
pursuant hereto and shall, in the case of Assigned Collateral (other than
Mortgage Loans), be in suitable form for transfer by delivery, or shall be
accompanied by duly executed instruments of transfer or assignment in blank, all
in form and substance satisfactory to the Collateral Agent. The Collateral Agent
may appoint agents for the purpose of holding Eligible Investments.

 

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Section 5.09    Deliveries of Mortgage Loans.  Each Mortgage Note, Mortgage and
Assignment of Mortgage in respect of each Mortgage Loan purchased by the Company
from time to time shall be delivered to and held by the Custodian in accordance
with Sections 2 and 4 of the Custodial Agreement.

 

Section 5.10    No Liability.  Neither the Collateral Agent, nor any director,
officer, employee, agent or stockholder of the Collateral Agent, shall be liable
for any action taken or omitted to be taken by it or them relative to any of the
Collateral, except for its or their own gross negligence, bad faith or willful
misconduct, and the Collateral Agent shall not be liable for any action or
omission to act with respect to the Collateral (or any part thereof) on the part
of any agent, nominee, custodian or attorney of the Collateral Agent appointed
with reasonable care.

 

ARTICLE VI

 

COLLATERAL ACCOUNT;

RESERVE FUND; PAYMENT OF ALLOCATED EXPENSES

 

Section 6.01    Establishment of Collateral Account.  For purposes of this
Security Agreement and the Depositary Agreement, the Collateral Agent shall at
all times during the term of this Security Agreement maintain in the State of
New York, a special purpose, segregated, non-interest bearing trust account in
the name of and under the control of the Collateral Agent on behalf of the
Secured Parties as a general collateral account (said account being herein
called the “Collateral Account” and being identified as Account No. 38432). The
operation of the Collateral Account shall be governed by this Article VI.

 

It is understood and agreed by the Company, the Collateral Agent and the
Depositary that there shall be deposited in the Collateral Account the following
monies, cash and proceeds, to the extent the next following two paragraphs do
not specify to the contrary: (a) the net proceeds from the sale of Secured
Liquidity Notes payable to the Company pursuant to the Depositary Agreement, to
the extent not required to repay advances made by the Depositary in accordance
with the Depositary Agreement, maturing Secured Liquidity Notes or outstanding
Extended Notes on the date of issuance of such Secured Liquidity Notes, whether
or not presented to the Depositary for payment, and to the extent not maintained
in the Secured Liquidity Note Account pursuant to the terms of the Depositary
Agreement, (b) all monies received by the Collateral Agent pursuant to this
Security Agreement and required by the terms hereof to be deposited by or on
behalf of the Company in the Collateral Account (including, without limitation,
interest on the Eligible Investments), (c) all monies received by or on behalf
of the Company under the Mortgage Loan Purchase and Servicing Agreement, (d) all
monies received by or on behalf of the Company as proceeds from the sale of
Mortgage Loans and payments of the repurchase price of any Mortgage Loan, (e)
all monies required to be transferred to the Collateral Account from the
Collection Account, including principal and interest payments on Mortgage Loans,
(f) all monies received by or on behalf of the Company under the Total Return
Swap, and (g) any and all monies at any time and from time to time received by
or on behalf of the Company, and required by the terms of this Security
Agreement, or any related document to be deposited in the Collateral Account.

 

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The Collateral Agent shall have complete dominion and control over the
Collateral Account, and the Company hereby agrees that only the Collateral Agent
may make withdrawals from the Collateral Account; provided, however, that the
Company and the Depositary may request withdrawals from the Collateral Account
in accordance with the terms of Section 6.03 hereof.

 

Except for the Collateral Account, the Reserve Fund, the Collection Account, the
Allocated Expenses Account, the Secured Liquidity Note Account, the Extended
Notes Distribution Account, and the Market Value Reserve Account, the Company
agrees that it will not open or maintain a bank account with any Person. The
Collateral Agent shall give the Company and the Depositary immediate notice if
the Collateral Account, the Market Value Reserve Account, the Reserve Fund, the
Collection Account, the Allocated Expenses Account, the Secured Liquidity Note
Account, or any Deposited Funds become subject to any writ, order, judgment,
warrant of attachment, execution or similar process to which it has notice. The
Collateral Agent shall have no right of set-off against amounts on deposit in
the Collateral Account, the Reserve Fund, the Allocated Expenses Account or the
Market Value Reserve Account, and shall have no right to impose a lien on the
any such account other than on behalf of the Secured Parties.

 

Section 6.02    Assignment of Collateral Account.  In order to secure and to
provide for the repayment of the Obligations, the Company hereby assigns,
pledges, transfers and sets over unto the Collateral Agent for the benefit of
the Secured Parties, and hereby grants the Collateral Agent for the benefit of
the Secured Parties a security interest in the Collateral Account, and all
checks, instruments, notes, documents, securities, securities entitlements,
other investment property or funds at any time and from time to time on deposit
in or otherwise to the credit of the such account or otherwise held by the
Collateral Agent and all dividends, earnings, income, rents, issues, profits or
other distributions of cash or other property in respect of such checks,
instruments, documents, notes, securities, security entitlements, other
investment property or funds and all proceeds thereof (all such checks,
instruments, documents, notes, securities, security entitlements, other
investment property, funds and dividends, earnings, income, rents, issues,
profits or other distributions of cash or other property in respect of such
checks, instruments, documents, notes, securities, security entitlements, other
investment property or funds and all proceeds being herein called the “Deposited
Funds”) and all claims of the Company in and to Deposited Funds. Throughout the
term of this Security Agreement, the Collateral Agent shall be a pledgee in
possession and control of the Deposited Funds and shall have the sole and
exclusive right to endorse any check or any other instrument or security
presented for deposit in the Collateral Account and to withdraw or order a
transfer of Deposited Funds from the Collateral Account, subject to the
provisions of Section 6.03, and the Company hereby appoints the Collateral Agent
the true and lawful attorney of the Company, with full power of substitution,
for the purpose of such endorsement or making any such withdrawal or ordering
any such transfer of Deposited Funds from such account, which appointment is
coupled with an interest and is irrevocable.

 

Section 6.03    Withdrawals and Transfers from the Collateral Account, Reserve
Fund.  (a) It is understood that so long as no Event of Default shall have
occurred and then be continuing, the Company (by a Company Agent) with respect
to clauses (i), (iv) and (v) below, and the Depositary (by a Designated
Representative) with respect to clauses (ii) and (iii) below,

 

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shall each have the right on any given day (other than a Payment Date) to
instruct the Collateral Agent to withdraw, or order the transfer of, Deposited
Funds (other than funds deposited into the Collateral Account for a Payment Date
pursuant to Section 4.6(c) of the Mortgage Loan Purchase and Servicing
Agreement) (first to the extent of the funds originally deposited in the
Collateral Account, then to the extent of the funds originally deposited in the
Collection Account and, thereafter, from the remaining proceeds) from the
Collateral Account for the following purposes in the following order of
priority:

 

(i)    to the payment of any amounts due and owing to the Swap Counterparty in
respect of an Interim Payment Date under the Total Return Swap in respect of
sales of Mortgage Loans;

 

(ii)    provided no Extended Notes would be outstanding after giving effect to
all payments made on such date, pro rata, to the payment to the Secured
Liquidity Note Account for the payment of amounts in respect of the Principal
Component of any Classes of Secured Liquidity Notes with an Expected Maturity on
such date (but only to the extent that such holders of Secured Liquidity Notes
cannot be paid, in accordance with the terms of the Program Documents, from the
proceeds derived through the issuance of additional Classes of Secured Liquidity
Notes);

 

(iii)    if such date is the Final Maturity for any Extended Notes, pro rata to
the payment of the principal and accrued and unpaid interest on such Extended
Notes;

 

(iv)    at the option of the Company, upon at least five (5) Business Days’
notice to DTC, the Depositary and the Collateral Agent, to the payment of
principal and accrued and unpaid interest on any Extended Note, provided such
Extended Note is paid in full on such date and after giving effect to all
payments made on such date, no outstanding Class of Extended Notes has the same
or an earlier Final Maturity than the Final Maturity of the Extended Notes being
prepaid pursuant to this clause (iv);

 

(v)    unless an Extended Note Amortization Event, Termination Event or Event of
Default would be continuing after giving effect to all payments made on such
date, to the payment of all remaining Deposited Funds to the Company to purchase
additional Mortgage Loans;

 

provided, however, no withdrawals from the Collateral Account shall be made on
any day for the purposes set forth in clause (v) above unless, after giving
effect to the issuance of Secured Liquidity Notes on such day, the payment of
Secured Liquidity Notes maturing or matured on such day, the payment of
outstanding Extended Notes on such day, and the purchase of additional Mortgage
Loans on such day, the Credits Outstanding on such day would not exceed the sum
of (A) the excess of the Outstanding Purchase Price of Mortgage Loans over the
Outstanding Purchase Price of any Defaulted Loans owned by the Company on such
day, (B) the Capitalized Interest Component on such day, and (C) any cash and
Eligible Investments in the Collateral Account held by the Company on such day
(to the extent not included in the definition of Credits Outstanding).

 

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Any instruction delivered by the Company or the Depositary pursuant to the
provisions of the foregoing paragraph of this Section 6.03(a) shall be effective
upon receipt of written instructions from a Company Agent or, with respect to
clauses (ii) and (iii) above, a Designated Representative.

 

The Collateral Agent shall promptly comply with any such approved instructions
made by the Company or the Depositary in accordance with the provisions of the
foregoing paragraphs of this Section 6.03(a); provided, that any withdrawal and
transfer pursuant to an instruction received prior to 2:00 p.m. (New York City
time) on any day shall be made on such day.

 

Upon the occurrence and during the continuance of an Event of Default, all
rights of the Company and the Depositary to request the Collateral Agent to
withdraw, or order the transfer of, Deposited Funds from the Collateral Account
shall cease, and the Collateral Agent shall appropriate and apply the Deposited
Funds then, or at any time thereafter, on deposit in the Collateral Account, in
accordance with the provisions of Section 7.02.

 

(b)    It is understood that so long as no Event of Default shall have occurred
and then be continuing, the Company (by a Company Agent) with respect to each
clause below, and the Depositary (by a Designated Representative) with respect
to clauses (ii) and (iii) below, shall each have the right on any Payment Date
to instruct the Collateral Agent to withdraw, or order the transfer of,
Deposited Funds (first to the extent of the funds originally deposited in the
Collateral Account, then to the extent of the funds originally deposited in the
Collection Account and, thereafter, from the remaining proceeds) from the
Collateral Account for the following purposes in the following order of
priority:

 

(i)    to the payment of any amounts due and owing to the Swap Counterparty
under the Total Return Swap;

 

(ii)    pro rata (x) provided no Extended Notes would be outstanding after
giving effect to all payments made on such date, to the payment to the Secured
Liquidity Note Account for the payment of amounts in respect of the Interest
Component of the Secured Liquidity Notes (including any shortfall interest), and
(y) to the payment of any interest due on any Extended Notes in accordance with
this Security Agreement and the Depositary Agreement (including any shortfall
interest);

 

(iii)    pro rata (x) provided no Extended Notes would be outstanding after
giving effect to all payments made on such date, to the payment to the Secured
Liquidity Note Account for the payment of amounts in respect of the Principal
Component of any Classes of Secured Liquidity Notes with an Expected Maturity on
such date (but only to the extent that such holders of Secured Liquidity Notes
cannot be paid, in accordance with the terms of the Program Documents, from the
proceeds derived through the issuance of additional Classes of Secured Liquidity
Notes), (y) to the payment of principal in respect of any outstanding Class of
Extended Notes if such day is the Final Maturity for such Extended Notes and (z)
at the option of the Company, for the payment of principal and accrued interest
on any unpaid Extended Note; provided such Extended Note is paid in full on such
date and after giving effect to all payments made on such

 

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date, no outstanding Class of Extended Notes has the same or an earlier Final
Maturity than the Final Maturity of the Extended Notes being prepaid pursuant to
this clause (z);

 

(iv)    to the payment of all unpaid Reimbursable Expenses; provided, that
Reimbursable Expenses shall not be paid with any amounts withdrawn from the
Reserve Accounts and deposited in the Collateral Account;

 

(v)    subject to Section 4.25 of the Mortgage Loan Purchase and Servicing
Agreement, to the payment of any unreimbursed Monthly Advance and Servicing
Advance with respect to any Mortgage Loan which has been sold, to the extent of
sale proceeds;

 

(vi)    to fund any increase in the amount on deposit in the Reserve Fund up to
the Required Reserve Fund Amount;

 

(vii)    to the payment of all unpaid Reimbursable Expenses not paid under (iv)
above; provided, that for purposes of this clause (vii), Reimbursable Expenses
(x) shall be calculated without regard to the limitation imposed by the Maximum
Indemnity Amount, and (y) shall not be paid with any amounts withdrawn from the
Reserve Accounts and deposited in the Collateral Account;

 

(viii)    so long as no Extended Note Amortization Event, Termination Event or
Event of Default has occurred and is continuing, to the payment of all remaining
Deposited Funds to the Company to purchase additional Mortgage Loans;

 

provided, however, no withdrawals from the Collateral Account shall be made on
any day for the purposes set forth in clauses (iv) through (vii) above unless,
after giving effect to the issuance of Secured Liquidity Notes on such day, the
payment of Secured Liquidity Notes maturing or matured on such day, the payment
of outstanding Extended Notes on such day, and the purchase of additional
Mortgage Loans on such day, the Credits Outstanding on such day, would not
exceed the sum of (A) the excess of the Outstanding Purchase Price of Mortgage
Loans over the Outstanding Purchase Price of any Defaulted Loans owned by the
Company on such day, (B) the Capitalized Interest Component on such day, and (C)
any cash and Eligible Investments in the Collateral Account held by the Company
on such day (to the extent not included in the definition of Credits
Outstanding).

 

Any instruction delivered by the Company or the Depositary pursuant to the
provisions of the foregoing paragraph of this Section 6.03(b) shall be effective
upon receipt of written instructions from a Company Agent or, with respect to
clauses (ii) and (iii) above, a Designated Representative.

 

The Collateral Agent shall promptly comply with any such approved instructions
made by the Company or the Depositary in accordance with the provisions of the
foregoing paragraphs of this Section 6.03(b); provided, that any withdrawal and
transfer pursuant to an instruction received prior to 2:00 p.m. (New York City
time) on any day shall be made on such day.

 

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Upon the occurrence and during the continuance of an Event of Default, all
rights of the Company and the Depositary to request the Collateral Agent to
withdraw, or order the transfer of, Deposited Funds from the Collateral Account
shall cease, and the Collateral Agent shall appropriate and apply the Deposited
Funds then, or at any time thereafter, on deposit in the Collateral Account, in
accordance with the provisions of Section 7.02.

 

Section 6.04    Eligible Investments.  (a) Monies held in the Collateral Account
shall be invested and the proceeds of investments shall be reinvested by the
Collateral Agent in Eligible Investments pursuant to the written direction of
the Servicer prior to the occurrence and continuation of an Event of Default.
The Collateral Agent shall not be responsible or liable for any loss resulting
from the investment performance of any investment or reinvestment of monies held
in the Collateral Account or any other account maintained by the Collateral
Agent for the purposes of this Security Agreement in Eligible Investments. The
Collateral Agent from time to time shall provide the Company with statements of
account relative to the Collateral Account or any other account maintained by
the Collateral Agent for the purposes of this Security Agreement in accordance
with the Collateral Agent’s customary practices. The parties recognize that the
statements of account to be provided by the Collateral Agent pursuant to the
immediately preceding sentence shall be derived from information to be supplied
by the institution or institutions maintaining such accounts; and the Collateral
Agent shall not be required to prepare any statements of account containing
information which cannot be so derived and shall not be responsible for the
correctness or accuracy of the information received by it.

 

(a)    Prior to the occurrence and continuation of an Event of Default, monies
held in the Collateral Account shall be invested at the direction of the
Servicer in Eligible Investments having maturities of no greater than one day;
provided, that if there is no Secured Liquidity Note or Extended Note then
outstanding, monies held in the Collateral Account shall be invested in Eligible
Investments either payable on demand or having maturities of no greater than the
earlier of thirty (30) days or the next following Payment Date. All such
Eligible Investments shall be made in the name of, and shall be payable to, the
Collateral Agent. If any Event of Default shall have occurred and be continuing,
monies held in the Collateral Account shall be invested in the Default
Investment.

 

(b)    The Collateral Agent or its Affiliates are permitted to receive
additional compensation that could be deemed to be in the Collateral Agent’s
economic self-interest for (i) serving as investment advisor with respect to
certain of the Eligible Investments where it is retained by the Servicer to
perform that role; or as administrator, shareholder, servicing agent, custodian
or sub-custodian with respect to certain Eligible Investments (provided that
nothing in the foregoing shall entitle the Collateral Agent to seek or recover
such compensation from the Servicer, the Company or any other party to the
Program Documents), (ii) using Affiliates to effect transactions in certain
Eligible Investments, and (iii) effecting transactions in certain Eligible
Investments. The Collateral Agent does not guarantee the performance of any
Eligible Investment.

 

Section 6.05    Reserve Fund, Market Value Reserve Account.  (a) The Collateral
Agent shall establish and maintain, in the name of the Collateral Agent, for the
benefit of the Secured Parties, with an Eligible Institution, (i) a segregated,
non-interest bearing trust account (the “Reserve Fund”), and (ii) a segregated,
non-interest bearing trust account (the “Market

 

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Value Reserve Account”, and together with the Reserve Fund, the “Reserve
Accounts”), each bearing a designation clearly indicating that the funds
deposited therein are held for the benefit of the Secured Parties. The Reserve
Accounts shall at all times be Eligible Accounts. The Reserve Accounts shall
initially be established with the Collateral Agent. An initial deposit shall be
made in the Reserve Fund by the Company in the amount of the Initial Required
Reserve Fund Amount not later than the date on which the Company first purchases
Mortgage Loans under the Mortgage Loan Purchase and Servicing Agreement. At the
Company’s option, there may be deposited in the Market Value Reserve Account
from time to time in accordance with the procedures set forth in Section 6.07
hereof, the Market Value Reserve Deposit (if any). The Collateral Agent shall
possess all right, title and interest in all funds on deposit from time to time
in the Reserve Accounts and in all proceeds thereof. The Reserve Accounts shall
be under the sole dominion and control of the Collateral Agent for the benefit
of the Secured Parties. If, at any time, the institution holding the Reserve
Accounts ceases to be an Eligible Institution, the Collateral Agent shall within
five Business Days establish a new set of Reserve Accounts meeting the
conditions specified above with an Eligible Institution and shall transfer or
cause to be transferred any cash and/or any investments to such new Reserve
Accounts. The Collateral Agent, at the direction of the Company, shall make
deposits to and withdrawals from the Reserve Accounts in the amounts and at the
times set forth in this Security Agreement. All withdrawals from the Reserve
Accounts shall be made in the priority set forth below.

 

(b)    Prior to the occurrence and continuation of an Event of Default, funds on
deposit in the Reserve Accounts shall be invested at the direction of the
Servicer by the Collateral Agent in Eligible Investments. Funds on deposit in
the Reserve Accounts on any Payment Date, after giving effect to any withdrawals
from the Reserve Accounts on such Payment Date, shall be invested in such
investments that will mature so that such funds will be available for withdrawal
on or prior to the following Payment Date; provided, however, the Company shall
instruct the Collateral Agent to allow for Eligible Investments to mature on a
daily basis sufficient to fund anticipated withdrawals from the Reserve Accounts
under subsection (c) below in respect of Interim Payment Date losses on the sale
of Defaulted Loans and Delinquent Loans. No Eligible Investment shall be
disposed of prior to its maturity. The proceeds of any such investments shall be
invested in such investments that will be payable on demand or mature so that
such funds will be available for withdrawal on or prior to the Payment Date
immediately following the date of such investment. If any Event of Default shall
have occurred and be continuing, monies held in the Reserve Accounts shall be
invested in the Default Investment. The Collateral Agent shall maintain or cause
to be maintained by another Eligible Institution for the benefit of the Secured
Parties possession or control of the negotiable instruments or securities, if
any, evidencing such Eligible Investments. On each Payment Date, all interest
and earnings (net of losses and investment expenses) on funds on deposit in the
Reserve Fund shall be deposited into the Reserve Fund until the amount on
deposit in the Reserve Fund equals the Required Reserve Fund Amount. On each
Payment Date, all interest and earnings (net of losses and investment expenses)
on funds on deposit in the Market Value Reserve Account shall be deposited into
the Market Value Reserve Account until the amount on deposit in the Market Value
Reserve Account equals the Market Value Requirement. On each Payment Date, after
giving effect to the withdrawals from the Collateral Account pursuant to Section
6.03(b) hereof, the Collateral Agent shall pay any amounts on deposit in the
Reserve Fund in excess of the Required Reserve Fund Amount, and any amounts on
deposit in the Market Value Reserve Account in excess of the Market Value
Requirement to the Company.

 

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(c)    The Collateral Agent, acting in accordance with the written directions of
the Servicer, shall on each Interim Payment Date:

 

(i)    withdraw from the Market Value Reserve Account an amount equal to the
lesser of (x) the Adjusted Partial Termination Payment (if such amount is a
positive number), and (y) the Available Amount (exclusive of unmatured Eligible
Investments) in the Market Value Reserve Account; and

 

(ii)    if the Available Amount in the Market Value Reserve Account shall be
insufficient to pay the Adjusted Partial Termination Payment (if such amount is
a positive number), withdraw from the Reserve Fund an amount equal to the lesser
of (x) the positive excess of the Adjusted Partial Termination Payment over the
amount withdrawn pursuant to (i) above, and (y) the Available Amount (exclusive
of unmatured Eligible Investments) in the Reserve Fund,

 

and deposit such amounts into the Collateral Account; provided, that such
amounts may not be used to pay Reimbursable Expenses.

 

(d)    On each Payment Date, the Company, in accordance with the instructions
set forth in the Servicer Report delivered to the Collateral Agent, shall
calculate (i) the amount (the “Required Draw Amount”) equal to the aggregate
amount of the Monthly Payments due but unpaid in respect of any Delinquent Loans
or Defaulted Loans for which no Monthly Advances have been paid by the Servicer,
and (ii) the Available Amount in the Reserve Fund available to pay such amounts
as specified below in this Section 6.05(d). In the event that for any Payment
Date the Required Draw Amount is greater than zero, the Company shall give
written notice to the Collateral Agent of such positive Required Draw Amount on
the related Payment Date. On the Payment Date, the Required Draw Amount, if any,
up to the Available Amount in the Reserve Fund, shall be withdrawn by the
Collateral Agent from the Reserve Fund, deposited into the Collateral Account,
and applied to pay shortfalls in amounts payable under Section 6.03(b)(ii) and
(v); provided, that the Required Draw Amount shall not be used to pay
Reimbursable Expenses.

 

(e)    If any Event of Default shall have occurred and be continuing, at the
direction of the Collateral Agent on behalf of the Secured Parties, any amounts
remaining in the Reserve Accounts shall be applied to the payment of the
Obligations in the order of priority set forth in Section 2.01 hereof.

 

(f)    Upon the payment in full of all amounts owing to the Secured Liquidity
Note holders, the Extended Note holders and the Swap Counterparty, the
Collateral Agent, acting in accordance with the instructions of the Servicer,
shall withdraw from the Reserve Accounts and pay to the Company all amounts, if
any, held in the Reserve Accounts, and the Reserve Accounts shall be deemed to
have terminated for all purposes of this Security Agreement.

 

(g)    Without limitation of (b) above, on delivery to the Collateral Agent of a
Market Value Reserve Release Notice and a request from the Company for release
and withdrawal of an amount of funds from the Market Value Reserve Account, such
amount not to be in excess of the amount authorized by the Calculation Agent set
forth in the Market Value

 

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Reserve Release Notice, the Collateral Agent shall release from the Market Value
Reserve Account, free and clear of any lien arising hereunder or otherwise for
the benefit of any of the Secured Parties, and permit the Company to withdraw
the amount of funds then on deposit in the Market Value Reserve Account as may
be requested by the Company pursuant to this clause (g).

 

Section 6.06    Payment of Allocated Expenses.  The Collateral Agent shall
establish and maintain, in the name of the Company, for the benefit of the
Company, with an Eligible Institution a segregated trust account (the “Allocated
Expenses Account”) bearing a designation clearly indicating that the funds
deposited therein are held for the benefit of the Company. The Allocated
Expenses Account shall initially be established with the Collateral Agent. The
Collateral Agent shall possess all right, title and interest in all funds on
deposit from time to time in the Allocated Expenses Account and in all proceeds
thereof. The Allocated Expenses Account shall be under the sole dominion and
control of the Collateral Agent for the benefit of the Company. If, at any time,
the institution holding the Allocated Expenses Account ceases to be an Eligible
Institution, the Collateral Agent shall within five Business Days establish a
new Allocated Expenses Account meeting the conditions specified above with an
Eligible Institution and shall transfer or cause to be transferred any cash
and/or any investments to such new Allocated Expenses Account. On each Payment
Date prior to giving effect to the payments pursuant to Section 6.03(b) hereof,
the Collateral Agent, acting at the written direction of the Servicer, shall,
from the amount of net interest collections on Mortgage Loans and Eligible
Investments, make a deposit to the Allocated Expenses Account in the amount set
forth in the Servicer Report received from the Servicer as the Allocated
Expenses to be due and owing on such Payment Date; provided, however, that the
sum of the aggregate Allocated Expenses paid during any calendar year shall
never exceed the Budget Expense Limit. Allocated Expenses for any given calendar
year in excess of the Budget Expense Limit shall accrue unpaid and,
subsequently, shall be paid, if at all, from amounts included in the Budget
Expense Limit for any subsequent calendar year as the Swap Counterparty and the
Company may agree. The Collateral Agent, at the direction of the Company, shall
make withdrawals from the Allocated Expenses Account in the amounts and at the
times set forth in written payment instructions received from the Company. Upon
the termination of this Agreement and the payment in full of all Allocated
Expenses, the Allocated Expenses Account shall be deemed to have terminated for
all purposes.

 

Section 6.07    Market Value Events.  (a) The Calculation Agent may, from time
to time, perform such calculations as it needs to determine whether or not a
Market Value Event shall have occurred and be continuing. Promptly upon
determination that a Market Value Event shall have occurred and be continuing,
the Calculation Agent shall deliver a notice (a “Market Value Event Notice”) to
the Company, the SLN Placement Agents, the Swap Counterparty and the Collateral
Agent, which notice shall: (i) set forth that a Market Value Event has occurred
and is continuing, (ii) attach copies of the data and calculations pursuant to
which it has made the said determination, and (iii) calculate the Market Value
Event Collateral Deposit necessary to ensure that the Market Value Requirement
is satisfied. The Calculation Agent may also deliver a Market Value Event Notice
requiring an increase in the Market Value Event Collateral Deposit if such
increase is required to satisfy the Market Value Requirement.

 

(b)    Within one (1) Business Day of receipt of a Market Value Event Notice,
the Company may, at its option, deliver to the Collateral Agent for deposit into
the Market Value Reserve Account, an amount equal to the Market Value Event
Collateral Deposit, or the increase

 

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thereof, as specified in such notice. In the event of a manifest error in the
Market Value Event Notice, or if the Company in good faith disputes the data,
calculations, or statements of the Calculation Agent in any Market Value Event
Notice, the Company and the Calculation Agent shall negotiate in good faith to
correct such error (including by rendering a Market Value Reserve Release
Notice, as defined in clause (c) below, where such notice is appropriate) or
resolve such dispute.

 

(c) If the Company shall have delivered to the Collateral Agent for deposit into
the Market Value Reserve Account the funds referred to in (b) above, the
Calculation Agent shall prepare and deliver to the Company and to the Collateral
Agent a report (the “Market Value Review”) setting forth its calculations
whether or not the Market Value Event shall be continuing. The Market Value
Review shall be delivered no less frequently than the same day of each month as,
and following delivery of, a Market Value Event Notice, and shall be delivered
more frequently or sooner if reasonably requested by the Company in writing,
provided that, the Calculation Agent shall have at least three (3) Business Days
following a request by the Company, in which to prepare and deliver a Market
Value Review. If the Market Value Review provides that a Market Value Event
shall no longer be continuing, the Calculation Agent shall simultaneously
therewith deliver a notice (the “Market Value Reserve Release Notice”) to the
Company and the Collateral Agent authorizing the release and withdrawal from the
Market Value Reserve Account such amount of the funds then on deposit therein as
shall may be withdrawn without breaching the Market Value Requirement.

 

ARTICLE VII

 

DEFAULT

 

Section 7.01 Events of Default. Each of the following events shall constitute an
event of default under this Security Agreement with respect to the Senior Notes
(each, an “Event of Default”):

 

(a) Failure on the part of the Seller or the Servicer (i) to make any payment or
deposit on the date required under the Mortgage Loan Purchase and Servicing
Agreement (on or before five (5) Business Days after the date such payment or
deposit is required to be made); provided, however, that no grace period shall
apply for purchase obligations in respect of a breach of the covenant in Section
3.5(c) of the Mortgage Loan Purchase and Servicing Agreement or (ii) to observe
or perform in any material respect any other material covenants or agreements of
the Seller or the Servicer under the Mortgage Loan Purchase and Servicing
Agreement which failure in the case of clause (ii) continues unremedied for a
period of thirty (30) days after written notice;

 

(b) Any representation or warranty made by the Seller pursuant to Section 3.1 of
the Mortgage Loan Purchase and Servicing Agreement proves to have been incorrect
in any material respect when made, and, if such representation or warranty is
correctable, which continues to be incorrect in any material respect for a
period of thirty (30) days after written notice;

 

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(c) The Company defaults in the payment of any interest on any Senior Note when
the same becomes due and payable;

 

(d) The Company defaults in the payment of any principal or premium on any
Senior Note when the same becomes due and payable;

 

(e) The Company fails to comply with any of its other agreements or covenants
in, or provisions of, the Senior Notes or this Security Agreement and the
failure to so comply materially and adversely affects the interests of the
Senior Noteholders or the Swap Counterparty and continues to materially and
adversely affect the interests of the Senior Noteholders for a period of thirty
(30) days after the earlier of (i) the date on which the Company obtains
knowledge thereof or (ii) the date on which written notice of such failure,
requiring the same to be remedied, shall have been given to the Company by the
Collateral Agent or to the Company and the Collateral Agent by the Required
Senior Noteholders or the Swap Counterparty;

 

(f) The occurrence of an Event of Bankruptcy with respect to the Company, the
Seller, NC Capital Corporation or New Century Financial Corporation;

 

(g) The Company shall have become an “investment company” or shall have become
under the “control” of an “investment company” under the Investment Company Act;

 

(h) Any representation or warranty or statement made or deemed made by the
Company in this Security Agreement or in any other Program Document or in any
written certificates or statement made or entered into in connection herewith or
therewith shall prove to have been incorrect when made in any material respect,
and, if such representation, warranty or statement is capable of being
corrected, continues to be incorrect in any material respect for a period of
thirty (30) days after the Company shall have actual knowledge thereof, or shall
have received written notice of such incorrect representation, warranty or
statement;

 

(i) Failure by the Company to observe or perform any covenant or agreement
contained in any Program Document and not constituting an Event of Default under
any other clause of this Section 7.01 and the continuance of such failure for
thirty (30) days after the Company shall have actual knowledge thereof, or shall
have received written notice of such failure;

 

(j) A Servicer Event of Default not constituting an Event of Default under any
other clause of this Section 7.01 shall have occurred and be continuing and such
default shall not have been cured or the Company shall not have replaced such
Servicer in accordance with Section 10.1 of the Mortgage Loan Purchase and
Servicing Agreement for a period of sixty (60) days after the Company has
notified the Collateral Agent of such Servicer Event of Default;

 

(k) The Company shall not be in compliance with Sections 3, 5.2 and 7.3 of the
LLC Agreement in any material respect and such noncompliance shall continue for
a period of thirty (30) days after the Company receives notice or has actual
knowledge of such noncompliance;

 

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(l) (i) This Security Agreement, or (ii) the Total Return Swap, shall cease, for
any reason, to be in full force and effect in accordance with their respective
terms;

 

(m) The Total Return Swap shall cease, for any reason, to be in a maximum
notional amount equal to the Program Size;

 

(n) Funds on deposit in (i) the Reserve Fund shall be more than $200,000 below
the Required Reserve Fund Amount for three (3) Business Days or more; or (ii)
the Reserve Fund shall be less than the Required Reserve Fund Amount by less
than $200,000 for more than one (1) Business Day after the Payment Date next
following the date on which the funds on deposit in the Reserve Fund fell below
the Required Reserve Fund Amount; or (iii) the Market Value Reserve Account
shall be more than $200,000 below the Market Value Requirement for three (3)
Business Days or more (except where one or more Market Value Event Notices is
the subject of diligent and good faith dispute as contemplated by Section
6.07(b));

 

(o) [reserved];

 

(p) The failure of the Company to maintain an agreement (in substantially the
form of Exhibit B to the Mortgage Loan Purchase and Servicing Agreement) with a
Rated Bidder to the effect that such Rated Bidder agrees to submit a binding bid
for all non-Delinquent Loans and non-Defaulted Loans in a Termination Event
Auction and, in the case of a withdrawal or reduction of the rating assigned to
the Rated Bidder below “P-1” by Moody’s, such failure continues for a period of
thirty (30) days or more;

 

(q) The failure of any Swap Counterparty to pay amounts due and owing under a
Total Return Swap; or

 

(r) The occurrence of a termination event under clause (g), (h) (i), (o) or (q)
of Section 11.2 of the Mortgage Loan Purchase and Servicing Agreement.

 

Section 7.02 Rights of the Collateral Agent Upon Default. If an Event of Default
described in clause (f), (m), (n), (p), of Section 7.01 hereof shall have
occurred and be continuing, or if an Event of Default specified in any other
clause of Section 7.01 hereof shall have occurred and be continuing and the
Controlling Class shall have given the Collateral Agent written instructions to
such effect, the Collateral Agent shall, by written notice to the Company, the
holders of the Notes and the Depositary (with a copy to each SLN Placement
Agent), (w) declare the principal and premium (if applicable) of and accrued or
accreted interest in respect of the Senior Notes to be, whereupon the same shall
become, forthwith due and payable without presentment, demand, protest or
further notice of any kind, all of which are hereby expressly waived by the
Company, anything contained herein or in any Senior Note to the contrary
notwithstanding, (x) instruct the Company to cease purchasing Mortgage Loans and
the Company and the Depositary to cease issuing Secured Liquidity Notes, (y)
notify the Servicer, the Seller and the Swap Counterparty that an Event of
Default has occurred, and (z) appropriate and apply the Deposited Funds then, or
at any time thereafter, on deposit in the Collateral Account to the payment in
full of all outstanding Obligations, whether or not then due, in order of
priority specified in Section 2.01 hereof; provided, that the Collateral Agent
shall comply with

 

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the requirements of Section 4.05 hereof; provided, further, that if such Event
of Default is not an Event of Default described in clause (c) or (d) of Section
7.01 hereof, or an Event of Default described in clause (f) of Section 7.01
hereof with respect to the Company, and so long as the Collateral Agent has not
disposed of or sold all of the Assigned Collateral pursuant to Section 7.03
hereof, the amounts to be distributed pursuant to clauses Second and Third of
Section 2.01(b) hereof shall be distributed, in that order, prior to the amounts
to be distributed pursuant to clause First of Section 2.01(b) hereof. Any
amounts obtained by the Collateral Agent on account of or as a result of the
exercise by the Collateral Agent of any right of offset or banker’s lien or
right of attachment or garnishment with respect to any funds at any time and
from time to time on deposit in, or otherwise to the credit of, the Collateral
Account, shall be held by the Collateral Agent as additional collateral security
for the repayment of the Obligations and shall be applied as provided in
Sections 2.01, 5.02 and 6.03 hereof.

 

If any Event of Default shall have occurred and be continuing, the Collateral
Agent may, subject to Section 9.01 and at the direction (which direction shall
be in writing) of the Controlling Class shall, exercise all rights, remedies,
powers, privileges and claims of the Company under the Mortgage Loan Purchase
and Servicing Agreement or any Program Document, including the right to give any
consent, request, notice, direction, approval, extension or waiver under the
Mortgage Loan Purchase and Servicing Agreement or any Program Document, and any
right of the Company to take such action shall be suspended.

 

Except as provided in Section 7.03, no holder of a Secured Liquidity Note or an
Extended Note shall have any right to require the Collateral Agent to take or
fail to take any action under this Security Agreement.

 

Section 7.03 Realization upon Collateral; Remedies. If any Event of Default
specified in Section 7.01 hereof shall have occurred and be continuing, the
Collateral Agent may, and at the direction (which direction shall be in writing)
of the Controlling Class shall, exercise any rights and remedies available to it
under applicable law, including taking possession of the Collateral and leasing,
assigning, optioning, discounting, disposing of or selling the whole, or from
time to time any part of, the Collateral by private or public sale or sales in
such order or otherwise in such manner as the Collateral Agent may reasonably
elect in its sole discretion; provided, that any such sale shall be conducted in
a commercially reasonable manner; provided further, that from and after the date
of an Event of Default, in the event of a sale or disposition of a Defaulted
Loan, a Delinquent Loan or a portfolio of Defaulted Loans and/or Delinquent
Loans, the Collateral Agent shall comply with the procedures for conducting a
Termination Event Auction as set forth in Section 11.2 of the Mortgage Loan
Purchase and Servicing Agreement.

 

The Collateral Agent shall have, with respect to the Collateral, in addition to
any other rights and remedies which may be available to it at law or in equity
or pursuant to this Security Agreement or any other contract or agreement, all
rights and remedies of a secured party under any applicable version of the UCC
of the relevant jurisdictions relating to the Collateral, and it is expressly
agreed that if the Collateral Agent should proceed to dispose of, utilize or
sell the Collateral, or any part thereof, in accordance with the provisions of
relevant versions of the UCC, ten Business Days’ notice by the Collateral Agent
to the Company shall be deemed to be reasonable notice under any such provision
requiring such notice.

 

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The Company hereby expressly agrees that no notice of any sale or disposition of
any Eligible Investments need be given. Any sale or other disposition of
Collateral by the Collateral Agent may be made on such commercially reasonable
terms as it may choose, without assuming any credit risk and without any
obligation to advertise or give notice of any kind other than that necessary
under applicable law. The Collateral Agent shall incur no liability as a result
of the sale of the Collateral, or any part thereof, at any private or public
sale conducted in accordance with this Security Agreement. The Collateral Agent,
the Swap Counterparty, the Calculation Agent, or the holders of the Senior Notes
may buy any Collateral at any public sale conducted in accordance with this
Security Agreement free of any right or equity of redemption of the Company,
which right or equity is hereby waived or released.

 

The Collateral Agent’s sole duty with respect to the custody, safekeeping and
physical preservation of the Collateral in its possession shall be to deal with
it in the same manner as the Collateral Agent deals with similar property for
its accounts generally, subject to Section 9-207 of the UCC. Neither the
Collateral Agent nor any of its directors, officers, employees or agents shall
be liable for failure to demand, collect or realize upon all or any part of the
Collateral or for any delay in doing so or shall be under any obligation to sell
or otherwise dispose of any Collateral, provided that it has acted in accordance
with the instructions of the Secured Parties and in compliance with applicable
law and this Security Agreement.

 

Section 7.04 Waiver of Stays, etc. To the full extent that the Company may
lawfully so agree, the Company agrees that it will not at any time plead, claim
or take the benefit of any appraisement, valuation, stay, extension, moratorium
or redemption law now or hereafter in force to prevent or delay the enforcement
of this Security Agreement in accordance with its terms or the absolute sale of
any portion of or all of the Assigned Collateral in accordance with this
Security Agreement or the possession thereof by any purchaser at any sale under
and in compliance with this Security Agreement, and the Company, for itself and
all who may claim under the Company, as far as the Company now or hereafter
lawfully may do so, hereby waives the benefit of all such laws.

 

ARTICLE VIII

 

ADDITIONAL COLLATERAL DISPOSITION PROVISIONS

 

Section 8.01 Disposition of Mortgage Loans. (a) Upon two Business Days’ notice
to the Collateral Agent, the Servicer may arrange for the sale of one or more
Mortgage Loans and the Custodian in accordance with the Custodial Agreement
shall deliver each Mortgage Note, Mortgage and Assignment of Mortgage in respect
of each Mortgage Loan being sold to the purchaser on a delivery versus payment
basis, or, in the case of a whole-loan sale against delivery of a duly executed
bailee letter (which payment shall be made directly to the Collateral Account in
accordance with Section 4.6(b) of the Mortgage Loan Purchase and Servicing
Agreement). The Collateral Agent shall deposit all payments received by it from
the Servicer in connection with the sale from time to time of Mortgage Loans
into the Collateral Account.

 

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(b) The Servicer shall arrange for sales of Mortgage Loans owned by the Company
to allow compliance with Section 4.03(h) hereof and Section 4.1(a)(i) of the
Mortgage Loan Purchase and Servicing Agreement.

 

Section 8.02 Release of Security Interest. Any reduction in the amounts on
deposit in the Reserve Fund and the sale or disposition of any Mortgage Loans in
accordance with Section 8.01 shall result in a release of the security interest
in such reduction amount and such Mortgage Loans granted pursuant to Section
5.01(i) and (iii) hereof. In the case of any sale or disposition of Mortgage
Loans by the Company, the security interest granted hereunder in such Mortgage
Loans shall be released concurrent with such sale or disposition. The remaining
portion of the amounts on deposit in the Reserve Fund and Mortgage Loans not
sold or otherwise disposed of shall remain subject to this Security Agreement in
all respects.

 

Section 8.03 Termination Event Auction. In the event a Termination Event under
the Mortgage Loan Purchase and Servicing Agreement requires that a Termination
Event Auction be conducted pursuant to Section 11.2 of the Mortgage Loan
Purchase and Servicing Agreement, the Collateral Agent hereby agrees to perform,
on behalf of the Secured Parties, those actions which it is called upon to
perform in such Section 11.2.

 

ARTICLE IX

 

THE COLLATERAL AGENT

 

Section 9.01 Appointment and Powers of Collateral Agent. The Secured Parties
hereby appoint the Collateral Agent to take such action and to exercise such
rights, remedies, powers and privileges hereunder as are specifically authorized
to be exercised by the Collateral Agent by the terms hereof, together with such
rights, remedies, powers and privileges as are reasonably incidental thereto.
The Collateral Agent may execute any of its duties as agent hereunder by or
through agents, nominees, attorneys, Affiliates or employees and shall be
entitled to retain experts (including counsel which may be counsel to the
Company) and to act in reliance upon the advice of such experts concerning all
matters pertaining to the agencies hereby created and its duties hereunder, and
shall not be liable for any action taken or omitted to be taken by it in good
faith in accordance with the advice of such experts selected by it. The
relationship between the Collateral Agent and each Secured Party is that of
agent and principal only, and nothing herein shall be deemed to constitute the
Collateral Agent a trustee for any Secured Party or impose on the Collateral
Agent any obligations other than those for which express provision is made
herein. Holders of the Secured Liquidity Notes, by their acceptance of their
Secured Liquidity Notes (or a beneficial interest therein), and holders of the
Extended Notes, by their acceptance of their Extended Notes, consent to the
appointment of the Collateral Agent or any successor Collateral Agent hereunder.

 

Except as required by the specific terms of this Security Agreement, the
Collateral Agent shall have no duty (of a fiduciary nature or otherwise) to
exercise any right, power, remedy or privilege granted to it hereby, or to take
any affirmative action hereunder, unless directed to do so by the Required
Senior Noteholders (and shall be fully protected in acting or refraining from
acting pursuant to such directions or lack of directions which shall be binding
on the Secured Parties), and shall not, except as expressly provided herein,
without the prior

 

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approval of the Required Senior Noteholders, consent to any material departure
by the Company from the terms hereof or of any other agreement or instrument
relating to the Assigned Collateral, waive any default on the part of the
Company under the terms hereof or under the Assigned Collateral or amend,
modify, supplement or terminate, or agree to any surrender of, this Security
Agreement or the Assigned Collateral, the Collateral Account or the Deposited
Funds, except as expressly provided herein; provided, that the foregoing
limitation on the authority of the Collateral Agent is for the benefit of the
Secured Parties and shall not impose any obligation on the Company to
investigate or inquire into the authority of the Collateral Agent in any
circumstances, and the Company shall be fully protected in carrying out any
request, direction or instruction made or given to the Company by the Collateral
Agent in the exercise of any right, power, remedy or privilege granted to the
Collateral Agent hereby, receiving or acting upon any consent or waiver granted
to the Company hereunder by the Collateral Agent, or entering into any amendment
or modification of, or supplement to, this Security Agreement, and the Company
shall not be subject to the claims of any Secured Party by reason of the lack of
authority of the Collateral Agent to take any such action nor shall the lack of
authority on the part of the Collateral Agent in any circumstances give rise to
any claim on the part of the Company against such Secured Party; provided
further, that the Collateral Agent shall not be required to take any action
which is contrary to this Security Agreement or any other agreement or
instrument relating to the Assigned Collateral or applicable law.

 

Neither the Collateral Agent, nor any of its respective directors, officers,
employees, Affiliates or agents, shall be liable to any Secured Party or the
Company for any action taken or omitted to be taken by it or them hereunder, or
in connection herewith, except for its own gross negligence, bad faith or
willful misconduct; nor shall the Collateral Agent be responsible to any other
Secured Party for the validity, effectiveness, value, sufficiency or
enforceability against the Company of this Security Agreement or any other
document furnished pursuant hereto or in connection herewith, or of the
Collateral (or any part thereof). In no event shall the Collateral Agent be
liable for special, indirect or consequential loss or damage of any kind
whatsoever (including, but not limited to lost profits). Without limiting the
generality of the foregoing, the Collateral Agent (i) makes no warranty or
representation to any Secured Party (other than as set forth in Section 3.04)
and shall not be responsible to any Secured Party for any statements, warranties
or representations made in or in connection with this Security Agreement or any
other document relating to the Collateral, and (ii) shall not have any duty,
except as expressly provided herein, to ascertain or to inquire as to the
performance or observance of any of the terms, covenants or conditions of this
Security Agreement, any other Program Document or any other agreements or
instruments relating to the Collateral on the part of any party hereto or
thereto or to inspect any books and records relating to the Collateral.

 

The Collateral Agent shall be entitled to conclusively rely, and shall be fully
protected in such reliance, on any communication, direction, instrument,
resolution, certificate, affidavit, paper or other document reasonably believed
by it to be genuine and correct and to have been signed or sent by the proper
Person or Persons. The Collateral Agent shall be entitled to assume that no
Event of Default hereunder shall have occurred and be continuing, unless a Trust
Officer of the Collateral Agent charged by the Collateral Agent with the
administration of any of its obligations under this Security Agreement or with
knowledge of and familiarity with the Collateral Agent’s obligations under this
Security Agreement has actual knowledge thereof or the Collateral Agent has
received written notice from the Secured Parties or the Company that

 

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they consider that such an Event of Default has occurred and is continuing and
specifying the nature thereof. The Collateral Agent shall be fully justified in
failing or refusing to take any action under this Security Agreement upon the
advice of counsel or unless the Collateral Agent shall be indemnified to its
satisfaction against any and all liability and expense which may be incurred by
it by reason of taking or continuing to take any such action. Nothing herein
shall require the Collateral Agent to risk or expend its own funds, or to make
advances. The Collateral Agent may accept deposits from, lend money to and
generally engage in any kind of business with the Company and its Affiliates as
if it were not the agent of the Secured Parties.

 

The Collateral Agent may consult with counsel, and the advice of such counsel or
any opinion of counsel as to matters of law shall be full and complete
authorization and protection to such extent in respect of any action taken,
suffered or omitted by it hereunder in good faith and in reliance thereon. The
Collateral Agent may execute any of the trusts or powers hereunder or perform
any duties hereunder either directly or by or through agents or Affiliates. The
Assigned Collateral held by the Collateral Agent in trust hereunder need not be
segregated from other collateral except to the extent required by law or the
specific provisions hereof. The Collateral Agent shall be under no obligation to
invest money received by it hereunder and shall have no liability for interest
on any such money. The Collateral Agent shall not be responsible for recording,
re-recording, filing or re-filing this Security Agreement, or any amendment
hereto or any financing statement or continuation statement.

 

The Collateral Agent shall be under no obligation to exercise any of the trusts
or powers vested in it by this Security Agreement or to make any investigation
of matters arising hereunder or to institute, conduct or defend any litigation
hereunder or in relation hereto at the request, order or direction of any of the
Secured Parties, pursuant to the provisions of this Security Agreement, unless
such Secured Parties shall have offered to the Collateral Agent reasonable
security or indemnity satisfactory to it against the costs, expenses and
liabilities which may be incurred therein or thereby; the Collateral Agent shall
not be required to expend or risk its own funds or otherwise incur any financial
liability in the performance of any of its duties hereunder, or in the exercise
of any of its rights or powers, if it shall have reasonable grounds for
believing that repayment of such funds or adequate indemnity against such risk
or liability is not reasonably assured to it.

 

The Collateral Agent hereby acknowledges that it has been notified of the terms
of Section 4.25 of the Mortgage Loan Purchase and Servicing Agreement, and is
hereby specifically authorized and directed by the Secured Parties to comply
with any notice submitted to it regarding reimbursement of Monthly Advances
and/or Servicing Advances to an Advancing Person (as defined in that Section)
(or nominee), as contemplated by and given in compliance with that Section.

 

Section 9.02 Successor Collateral Agent. The Collateral Agent acting hereunder
at any time may resign by an instrument in writing addressed and delivered to
the Company and the Depositary, and may be removed at any time with or without
cause by an instrument in writing duly executed by or on behalf of the Company.
Subject to the provisions of Section 9.03 hereof, the Company shall have the
right to appoint a successor to the Collateral Agent upon any such resignation
or removal by an instrument of substitution complying with the requirements of
applicable law, or in the absence of any such requirements, without other

 

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formality than appointment and designation in writing; provided, however, that
no such appointment shall be effective until receipt of written consent of the
Swap Counterparty and written confirmation from the Rating Agencies that such
appointment would not result in the reduction or withdrawal of its then current
rating, if any, of the Secured Liquidity Notes or Extended Notes. Upon the
making and acceptance of such appointment, the execution and delivery by such
successor Collateral Agent of a ratifying instrument pursuant to which such
successor Collateral Agent agrees to assume the duties and obligations imposed
on the Collateral Agent by the terms of this Security Agreement, and the
delivery to such successor Collateral Agent of the Assigned Collateral, any
Deposited Funds and documents and instruments then held by the retiring
Collateral Agent, such successor Collateral Agent shall thereupon succeed to and
become vested with all the estate, rights, powers, remedies, privileges,
immunities, indemnities, duties and obligations hereby granted to or conferred
or imposed upon the Collateral Agent named herein, and one such appointment and
designation shall not exhaust the right to appoint and designate further
successor Collateral Agents hereunder. No Collateral Agent shall be discharged
from its duties or obligations hereunder until the Assigned Collateral, any
Deposited Funds and documents and instruments then held by such Collateral Agent
shall have been transferred or delivered to the successor Collateral Agent,
until all Deposited Funds held in the Collateral Account (if maintained with the
retiring Collateral Agent) shall have been transferred to a new Collateral
Account, and until such retiring Collateral Agent shall have executed and
delivered to the successor Collateral Agent appropriate instruments substituting
such successor Collateral Agent as attorney-in-fact of the Company for purposes
of this Security Agreement and assigning the retiring Collateral Agent’s
security or other interest in the Assigned Collateral, the Collateral Account,
the Deposited Funds and Eligible Investments to the successor Collateral Agent.
If no successor Collateral Agent shall be appointed, as aforesaid, or if
appointed, shall not have accepted its appointment, within thirty (30) days
after resignation or removal of the retiring Collateral Agent, then, subject to
the provisions of Section 9.03 hereof, the Collateral Agent may at the expense
of the Company petition a court of competent jurisdiction to appoint a successor
Collateral Agent. Each such successor Collateral Agent shall provide the Company
with its address and telephone and telecopier numbers to be used for purposes of
Section 11.04 hereof, in a notice complying with the terms of said Section.
Notwithstanding the resignation or removal of any Collateral Agent hereunder,
the provisions of this Article IX shall continue to inure to the benefit of such
Collateral Agent in respect of any action taken or omitted to be taken by such
Collateral Agent in its capacity as such while it was Collateral Agent under
this Security Agreement.

 

Any corporation into which the Collateral Agent may be merged or converted or
with which it may be consolidated, or any corporation resulting from any merger,
conversion or consolidation to which the Collateral Agent shall be a party, or
any corporation succeeding to the business of the Collateral Agent as a result
of any of the foregoing shall be the successor of the Collateral Agent hereunder
without the execution or filing of any paper with any party hereto or any
further act on the part of any of the parties hereto except where an instrument
of transfer or succession is required by law to effect such succession, anything
herein to the contrary notwithstanding.

 

Section 9.03 Qualifications of Collateral Agent; Collateral Account. (a) Any
Collateral Agent at any time acting hereunder must at all times be a commercial
bank or trust company having its principal office in the District of Columbia or
one of the States located in the

 

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United States, be authorized to accept deposits and offer checking account
facilities, have capital and surplus of at least $100,000,000 and have a
long-term unsecured debt rating from each of Moody’s and S&P and, if rated by
Fitch, Fitch in one of its generic credit rating categories which signifies
investment grade.

 

(b) The Collateral Account, if not held by the Collateral Agent, shall be held
by a commercial bank or trust company meeting the qualifications of the
Collateral Agent set forth in Section 9.03(a). The Collateral Account shall at
all times be an Eligible Account.

 

Section 9.04 Instructions. In any instance in which the Collateral Agent is
permitted to take action hereunder or under the Program Documents, the
Collateral Agent shall, except as expressly provided herein, act in accordance
with the written instructions received, if any, from the Controlling Class.

 

Section 9.05 Duties of Collateral Agent. The Collateral Agent shall have no duty
to monitor the Servicer nor any liability for the actions or inactions of the
Servicer, provided that nothing in this Section 9.05 shall excuse the Collateral
Agent from performing its obligations under this Agreement.

 

ARTICLE X

 

AMENDMENTS, MODIFICATIONS,

WAIVERS AND CONSENTS

 

Section 10.01 Execution of Amendments, etc. No amendment, modification,
supplement, termination or waiver of or to any provision of this Security
Agreement, nor any consent to any departure by the Company from any provision of
this Security Agreement, shall be effective unless such amendment, modification,
supplement, termination or waiver shall be in writing and signed by or on behalf
of the Swap Counterparty, the Collateral Agent and the Company; and Rating
Agency Confirmation with respect to such action shall have been given. Any
waiver of any provision of this Security Agreement, and any consent to any
departure by the Company from the terms of any provision of this Security
Agreement, shall be effective (i) only in the specific instance and for the
specific purpose for which given and (ii) after the Company has provided prior
notice thereof to the Rating Agencies. No notice to or demand upon the Company
in any instance hereunder shall entitle the Company to any other or further
notice or demand in similar or other circumstances.

 

ARTICLE XI

 

MISCELLANEOUS

 

Section 11.01 Sale of Certain Collateral. The Company recognizes that the
Collateral Agent may be unable to effect a public sale of the Assigned
Collateral by reason of certain prohibitions contained in the Securities Act and
applicable state securities laws, and instead may resort to one or more private
sales of the Assigned Collateral to a restricted group of purchasers who will be
obliged to agree, among other things, to acquire such security for their own
account for investment and not with a view to the distribution or resale
thereof. The

 

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Company acknowledges and agrees that any such private sale or sales may result
in prices and other terms less favorable to the seller than if the disposition
were made pursuant to a public sale and, notwithstanding such circumstances,
agrees that any such private sale or sales made in an otherwise commercially
reasonable manner shall not be deemed commercially unreasonable solely because
of the private nature of such sale or sales. The Collateral Agent is hereby
authorized to use the services of the Calculation Agent, or an investment bank,
in connection with any such sale. The Collateral Agent and the Secured Parties
shall be under no obligation to delay a sale of any of the Assigned Collateral
for the period of time necessary to permit the issuer of any securities to
register them for public sale under the Securities Act or under applicable state
securities laws, even if such issuers would agree to do so.

 

Section 11.02 Further Assurances. The Company agrees that it will join with the
Collateral Agent in executing and, at its own expense, filing and re-filing such
financing statements, amendments thereto, continuation statements and other
documents (including this Security Agreement) in such offices as may be
necessary or appropriate and wherever required in order to perfect and preserve
the rights and interests granted to the Collateral Agent hereby, and hereby
authorizes the Collateral Agent to arrange for the filing of financing
statements and amendments thereto and continuation statements relative to all or
any part thereof without further authorization of the Company where permitted by
law, and agrees to do such further acts and things, and to execute and deliver
to the Collateral Agent such additional assignments, agreements, powers and
instruments, as are necessary to carry into effect the purposes of this Security
Agreement or to better assure and confirm unto the Collateral Agent its rights,
powers and remedies hereunder (including as the Collateral Agent or the Swap
Counterparty may request). Notwithstanding the foregoing, the Collateral Agent
shall have no obligation in respect of the filing, re-filing, recording or
monitoring of any financing statements, amendments thereto, or continuation
statements, or of any other similar document or instrument relating to the
security interest granted herein.

 

Section 11.03 No Waiver; Cumulative Remedies. No failure on the part of the
Collateral Agent to exercise, and no delay on the part of the Collateral Agent
in exercising, any right, power or remedy hereunder shall operate as a waiver
thereof, nor shall any single or partial exercise of any such right, power or
remedy by the Collateral Agent preclude any other or further exercise thereof or
the exercise of any other right, power or remedy. All remedies hereunder are
cumulative and are not exclusive of any other remedies that may be available to
the Collateral Agent, whether at law, in equity or otherwise.

 

Section 11.04 Notices, etc. Except where telephonic instructions or notices are
authorized herein to be given, all notices, demands, instructions and other
communications required or permitted to be given to or made upon any party
hereto shall be in writing (including by facsimile transmission) and shall be
personally delivered or sent by guaranteed overnight delivery or by facsimile
transmission (to be followed by personal or guaranteed overnight delivery) and
shall be deemed to be given for purposes of this Security Agreement on the date
that such writing is received by the intended recipient thereof in accordance
with the provisions of this Section 11.04. Unless otherwise specified in a
notice sent or delivered in accordance with the foregoing provisions of this
Section 11.04, notices, demands, instructions and other communications in
writing shall be given to or made upon the parties at their respective addresses
(or to their respective telecopy numbers) indicated in Schedule II hereto, and,
in the

 

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case of telephonic instructions or notices, by calling the telephone number or
numbers indicated for such party in Schedule II hereto.

 

Section 11.05 Fees, Costs and Expenses, etc. The Company shall pay the
Collateral Agent such fees for its services as shall be agreed upon by the
Company and the Collateral Agent, provided however that the annual fees (which
shall not include extraordinary fees) shall not exceed 0.01% per annum on the
weighted average Outstanding Program Amount. Subject to Section 2.01, Section
6.03 and Section 6.06, the Company hereby agrees to (a) pay or reimburse the
Collateral Agent for all of its reasonable out-of-pocket costs and expenses
incurred in connection with the preparation and execution of, and any amendment,
supplement or modification to, this Security Agreement and any other documents
prepared in connection herewith or therewith, and the consummation of the
transactions contemplated hereby and thereby, including, without limitation, the
reasonable fees and disbursements of counsel to the Collateral Agent, (b)
reimburse the Collateral Agent for all reasonable out-of-pocket costs and
expenses (excluding expenses solely attributable to internal overhead) incurred
by the Collateral Agent in connection with the enforcement of or preservation of
any rights under this Security Agreement, (c) pay, indemnify, and hold the
Collateral Agent harmless from any and all recording and filing fees and any and
all liabilities with respect to, or resulting from any delay in paying stamp and
other documentary taxes, if any, which may be payable or determined to be
payable in connection with the execution and delivery of, or consummation of any
of the transactions contemplated by, or any amendment, supplement or
modification of, or any waiver or consent under or in respect of, this Security
Agreement, and any such other documents, and (d) indemnify and hold harmless the
Collateral Agent and its officers, directors, employees and agents against any
and all liabilities, losses, damages, costs and expenses of any kind, including,
without limitation, the reasonable fees and disbursements of counsel, which may
be incurred by the Collateral Agent, relating to or arising out of this Security
Agreement or under the Program Documents, or by the Collateral Agent relating to
or arising out of the enforcement of this Security Agreement or the preservation
of any of its rights to the Assigned Collateral, the Collateral Account or any
Deposited Funds; provided, that the Collateral Agent shall not have the right to
be indemnified hereunder for its own gross negligence, bad faith or willful
misconduct as determined by a court of competent jurisdiction. If the Company
shall fail to do any act or thing which it has covenanted to do hereunder or any
representation or warranty on the part of the Company contained herein or
repeated and reaffirmed herein shall be breached, the Collateral Agent may, with
the consent of the Controlling Class (but shall not be obligated to), do the
same or cause it to be done or remedy any such breach, and may expend its funds
for such purpose. Any and all amounts so expended by the Collateral Agent shall
be repayable to it by the Company. Subject to Section 2.01, Section 6.03 and
Section 6.06, amounts payable to the Collateral Agent shall be paid as follows:
(A) if the Collateral Agent provides the Company with notice of such amounts on
or before the last Business Day of the calendar month in which such amount
arose, the Company shall pay such amounts on the Payment Date occurring in the
immediately succeeding calendar month and (B) if the Collateral Agent provides
such notice after the last Business Day of the calendar month in which such
amount arose, the Company shall pay such amounts on the Payment Date occurring
in the calendar month after the month in which the demand was made. The
obligations of the Company under this Section 11.05 shall survive the
resignation or removal of the Collateral Agent and the termination of this
Security Agreement and the discharge of the other obligations of the Company
hereunder.

 

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Section 11.06 Collateral Agent Appointed Attorney-in-Fact. The Company hereby
appoints the Collateral Agent its attorney-in-fact, with full power of
substitution, for the purpose of taking such action and executing agreements,
instruments and other documents, in the name of the Company, as the Collateral
Agent, the Swap Counterparty or the holders of the Senior Notes may deem
necessary or advisable to accomplish the purposes hereof, which appointment is
coupled with an interest and is irrevocable.

 

Section 11.07 Termination. Except as expressly otherwise provided herein, this
Security Agreement, and the assignments, pledges and security interests created
or granted hereby, shall terminate when (a) all Obligations shall have been
fully paid and satisfied, and (b) all Notes shall have been fully paid and
satisfied, at which time the Collateral Agent shall, at the written request of
the Company, reassign (without recourse upon, or any warranty whatsoever by, the
Collateral Agent), and deliver to the Company all Assigned Collateral and
documents then in the custody or possession of the Collateral Agent and, if so
requested by the Company, shall execute and deliver to the Company for filing in
each office in which any financing statement relative to the Assigned Collateral
or the agreements relating thereto or any part thereof shall have been filed, a
termination statement under the UCC releasing the Collateral Agent’s interest
therein, and such other documents and instruments as the Company may reasonably
request, all without recourse upon or warranty whatsoever by, the Collateral
Agent, and at the cost and expense of the Company.

 

The Company and the Collateral Agent hereby agree that, if any Deposited Funds
remain on deposit in the Collateral Account after the payment in full of all of
the Obligations, such amounts shall, at the written request of the Company, be
released by the Collateral Agent and paid to the Servicer.

 

Section 11.08 Successors and Assigns; Benefit of Agreement. This Security
Agreement shall be binding upon and inure to the benefit of the Company and the
Secured Parties and their respective successors and assigns; provided, however,
that the Company may not assign any of its rights or obligations hereunder
except with the prior written consent of the Collateral Agent (on behalf of the
holders of the Senior Notes), the Swap Counterparty and each of the Rating
Agencies. This Security Agreement shall also inure to the benefit of the holders
of the Notes, which are hereby expressly declared to be third party
beneficiaries hereof. Subject to the foregoing, no Person not a party to this
Security Agreement shall be deemed to be a third party beneficiary hereof nor
shall any Person be empowered to enforce the provisions of this Security
Agreement, except as set forth in the preceding sentence, or in Section 11.17,
and to the extent such Person becomes a permitted successor or assign hereunder.

 

Section 11.09 GOVERNING LAW; CONSENT TO JURISDICTION; WAIVER OF JURY TRIAL. THIS
SECURITY AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE
LAWS OF THE STATE OF NEW YORK. EACH PARTY HERETO HEREBY SUBMITS TO THE
NONEXCLUSIVE JURISDICTION OF THE UNITED STATES DISTRICT COURT FOR THE SOUTHERN
DISTRICT OF NEW YORK AND OF ANY NEW YORK STATE COURT SITTING IN NEW YORK CITY
FOR PURPOSES OF ALL LEGAL PROCEEDINGS ARISING OUT OF OR RELATING TO THIS
AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY. EACH PARTY HERETO

 

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IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY LAW, ANY OBJECTION WHICH
IT MAY NOW OR HEREAFTER HAVE TO THE LAYING OF THE VENUE OF ANY SUCH PROCEEDING
BROUGHT IN SUCH A COURT AND ANY CLAIM THAT ANY SUCH PROCEEDING BROUGHT IN SUCH A
COURT HAS BEEN BROUGHT IN AN INCONVENIENT FORUM. EACH PARTY HERETO HEREBY
CONSENTS TO PROCESS BEING SERVED IN ANY SUIT, ACTION OR PROCEEDING WITH RESPECT
TO THIS SECURITY AGREEMENT OR ANY DOCUMENT DELIVERED PURSUANT HERETO BY THE
MAILING OF A COPY THEREOF BY REGISTERED OR CERTIFIED MAIL, POSTAGE PREPAID,
RETURN RECEIPT REQUESTED, TO ITS RESPECTIVE ADDRESS SPECIFIED AT THE TIME FOR
NOTICES UNDER THIS SECURITY AGREEMENT OR TO ANY OTHER ADDRESS OF WHICH IT SHALL
HAVE GIVEN WRITTEN NOTICE TO THE OTHER PARTIES. THE FOREGOING SHALL NOT LIMIT
THE ABILITY OF ANY PARTY HERETO TO BRING SUIT IN THE COURTS OF ANY JURISDICTION.

 

EACH OF THE PARTIES HEREBY IRREVOCABLY WAIVES ANY AND ALL RIGHT TO A TRIAL BY
JURY WITH RESPECT TO ANY LEGAL PROCEEDING ARISING OUT OF OR RELATING TO THIS
SECURITY AGREEMENT OR ANY TRANSACTION CONTEMPLATED HEREBY.

 

Section 11.10 Execution in Counterparts. This Security Agreement may be executed
in any number of counterparts and by different parties hereto on separate
counterparts, each of which counterparts, when so executed and delivered, shall
be deemed to be an original and all of which counterparts, taken together, shall
constitute one and the same Security Agreement.

 

Section 11.11 Section Headings. Section headings used in this Security Agreement
are for convenience only and shall not affect the construction of this Security
Agreement.

 

Section 11.12 Non-petition Covenant. Notwithstanding any prior termination of
this Security Agreement, the Collateral Agent as such shall not, prior to the
date which is one year and one day after the payment in full of the last rated
obligation of the Company including but not limited to the last Secured
Liquidity Note and Extended Note outstanding, acquiesce, petition or otherwise,
directly or indirectly, invoke or cause the Company to invoke the process of any
governmental authority for the purpose of commencing or sustaining a case
against the Company under any Federal or state bankruptcy, insolvency or similar
law or appointing a receiver, liquidator, assignee, trustee, custodian,
sequestrator or other similar official of the Company or any substantial part of
its property or ordering the winding up or liquidation of the affairs of the
Company. This Section 11.12 shall survive the termination of this Security
Agreement.

 

Section 11.13 Severability. In case one or more of the provisions contained in
this Security Agreement shall be or shall be deemed to be invalid, illegal or
unenforceable in any respect, the validity, legality and enforceability of the
remaining provisions contained herein shall not in any way be affected or
impaired thereby. If any provision of this Security Agreement shall be or shall
be deemed to be illegal, invalid or unenforceable under the

 

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applicable laws and regulations of one jurisdiction, such provision shall not
thereby be rendered illegal, invalid or unenforceable in any other jurisdiction.

 

Section 11.14 Entire Agreement. This Security Agreement constitutes the entire
agreement between the parties hereto with respect to the matters covered hereby
and supersedes all prior agreements and understandings with respect to such
matters between the parties.

 

Section 11.15 Limited Recourse to the Company. Notwithstanding anything to the
contrary contained herein, all Obligations of the Company shall be payable by
the Company only to the extent of funds available therefor under Sections 2.01
6.03, and 6.06, and, to the extent such funds are not available or are
insufficient for the payment thereof, shall not constitute a claim, as defined
under Section 101 of the Bankruptcy Code, against the Company to the extent of
such unavailability or insufficiency until such time as the Company has assets
sufficient to pay such prior deficiency. This Section 11.15 shall survive the
termination of this Security Agreement.

 

Section 11.16 No Recourse. The obligations of the Company hereunder are solely
the obligations of the Company and no recourse shall be had with respect to this
Security Agreement, any of the obligations of the Company hereunder or for the
payment of any fee or other amount payable hereunder or for any claim based on,
arising out of or relating to any provision of this Security Agreement against
any employee, officer, settlor, Affiliate, agent or servant of the Company. This
Section 11.16 shall survive the termination of this Security Agreement.

 

Section 11.17 Third Party Beneficiary.

 

The parties hereto agree that the Swap Counterparty shall be an express third
party beneficiary of this Security Agreement, and entitled to enforce any rights
granted to it hereunder, except to the extent of its rights as a Secured Party
(which rights shall be enforced by the Collateral Agent on its behalf).

 

 

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IN WITNESS WHEREOF, the parties hereto have caused this Security Agreement to be
executed by their respective officers or agents thereunto duly authorized, as of
the date first above written.

 

VON KARMAN FUNDING LLC By:  New Century Mortgage Corporation, as Manager By:  
/s/    PATRICK FLANAGAN          

--------------------------------------------------------------------------------

Name:

Title:

 

Patrick Flanagan

President

 

DEUTSCHE BANK TRUST COMPANY AMERICAS,

as Collateral Agent

By:   /s/    STACY M. COULON          

--------------------------------------------------------------------------------

Name:

Title:

 

Stacy M. Coulon

Vice President

 

 

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Schedule I

 

 

 

Definitions List

 

 

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SCHEDULE I

TO THE

SECURITY AGREEMENT

 

DEFINITIONS LIST

 

For all purposes of this Security Agreement, except as otherwise expressly
provided herein or unless the context otherwise requires, capitalized terms not
otherwise defined herein shall have the meanings assigned to such terms in the
Mortgage Loan Purchase and Servicing Agreement (the “Mortgage Loan Purchase and
Servicing Agreement”), dated as of September 5, 2003, among Von Karman Funding
LLC (the “Company”), and New Century Mortgage Corporation, as seller and
servicer (in its capacity as a seller, the “Seller”, and in its capacity as
servicer, the “Servicer”).

 

“Adjusted Partial Termination Payment” means, as of any Interim Payment Date,
the amount by which the aggregate Outstanding Purchase Price of all Mortgage
Loans sold on such Interim Payment Date exceeds the aggregate cash proceeds of
the sales of such Mortgage Loans (without regard to amounts otherwise payable by
the Swap Counterparty under the Total Return Swap).

 

“Affiliate” means, with respect to a Person, any other Person which directly or
indirectly through one or more intermediaries controls, is controlled by or is
under common control with, such Person. The term “control” means the possession,
directly or indirectly, of the power to direct or cause the direction of the
management and policies of the relevant Person.

 

“Aggregate Extended Note Monthly Interest” means, with respect to all Classes of
Extended Notes, the sum of all Extended Note Monthly Interest.

 

“Allocated Expenses” means the Company’s expenses (other than Reimbursable
Expenses), including, without limitation, the Swap Fee Spread, Rating Agencies
fees and expenses, Manager fees and expenses, Depositary fees and expenses,
Servicing Fees and expenses, Collateral Agent fees and expenses, Custodian fees
and expenses, due diligence fees (such due diligence fees not to exceed $15,000
in any quarter) and other anticipated costs and fees; provided, however, that in
no event may the cumulative amount of Allocated Expenses in any calendar year
exceed the Budget Expense Limit.

 

“Allocated Expenses Account” shall have the meaning specified in Section 6.06 of
the Security Agreement.

 

“Assets” means any interest of any kind in any assets or property of any kind
tangible or intangible, real, personal or mixed, now owned or hereafter acquired
by the Company or such other Person as the context may require.

 

“Assigned Collateral” has the meaning specified in Section 5.01 of the Security
Agreement.

 

“Assignment of Mortgage” shall have the meaning specified in the Mortgage Loan
Purchase and Servicing Agreement.

 

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“Authenticating Representative” shall have the meaning specified in Section
3.03(b) of the Security Agreement.

 

“Authorized Officer” means as to the Company, any authorized employee or agent
of the Manager.

 

“Available Amount” shall mean on any day, in relation to the Market Value
Reserve Account or the Reserve Fund, as the case may be, the aggregate amount on
deposit in the Market Value Reserve Account or the Reserve Fund as of such day.

 

“Back-Up Servicer” means Ocwen Federal Bank FSB.

 

“Back-Up Servicer Agreement” means the Backup Servicing Agreement by and between
Ocwen Federal Bank FSB and the Company, as such agreement may be amended,
modified or restated from time to time with the consent of the Controlling
Class.

 

“Bankruptcy Code” means The Bankruptcy Reform Act of 1978, as amended from time
to time, and as codified as 11 U.S.C. Section 101 et seq.

 

“Benefit Arrangement” means at any time an employee benefit plan within the
meaning of Section 3(3) of ERISA which is not a Benefit Plan or a Multiemployer
Plan and which is maintained or otherwise contributed to by any member of the
ERISA Group.

 

“Benefit Plan” means (i) an employee benefit plan as defined in Section 3(3) of
ERISA and which is subject to Title I of ERISA, (ii) a “Plan” as defined in
Section 4975 of the Code and which is subject to Section 4975 of the Code or
(iii) an entity deemed to be investing the “plan assets” (within the meaning of
29 C.F.R. Section 2510.3-101 or otherwise under ERISA) of any such employee
benefit plan or plan, including without limitation an insurance company general
account.

 

“Budget Expense Limit” shall mean $15,000,000 or such other amount as the Swap
Counterparty and the Company may agree to in writing from time to time.

 

“Business Day” means any day other than (i) Saturday and Sunday or (ii) a day on
which banking institutions or foreign exchange markets in New York City are
authorized or required by law, regulation or executive order to be closed for
business.

 

“Calculation Agent” means Citigroup Global Markets Inc.

 

“Calculation Period” shall have the meaning specified in the Total Return Swap.

 

“Cash Collateral Event” any one or more of the following: (i) the Seller and
Purchaser, on a consolidated basis, shall have a Tangible Net Worth not less
than (a) the greater of (1) $250,000,000, and (2) seventy-five percent (75%) of
their consolidated Tangible Net Worth as of December 31, 2002, plus, (b) ninety
percent (90%) of all capital contributions made during the fiscal year ended on
December 31, 2003, plus, (c) fifty percent (50%) of positive year-to-date net
income for such Persons, (ii) the Tangible Net Worth of New Century Financial
Corporation shall be less than (a) the greater of (1) $275,000,000, and (2)
seventy-five percent

 

2

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(75%) of its Tangible Net Worth as at December 31, 2002, plus, (b) ninety
percent (90%) of all capital contributions made during the fiscal year ended on
December 31, 2003, plus, (c) fifty percent (50%) of positive year-to-date net
income for such Person, minus, (d) the dollar value of all repurchases of common
stock in New Century Financial Corporation by New Century Financial Corporation,
in an amount not to exceed the lesser of: (i) the dollar equivalent of
repurchases of 1,800,000 shares (or share equivalents in the case of stock
splits/reverse splits), or (ii) $40,000,000, (iii) the Seller and the Purchaser,
on a consolidated basis, shall have a ratio of Total Indebtedness to Tangible
Net Worth greater than 10:1, measured on the last day of each fiscal quarter of
the Seller and the Purchaser, (iv) New Century Financial Corporation shall have
a ratio of Total Indebtedness to Tangible Net Worth not greater than 10:1,
measured on the last day of each of its fiscal quarters, or (v) the Seller and
Purchaser, together with New Century Financial Corporation on a consolidated
basis, shall have Liquidity in an amount equal to not less than $80,000,000.

 

“Capitalized Interest Component” means, as of any date of determination, the
Principal Component of Secured Liquidity Notes which represents capitalized
interest on Secured Liquidity Notes which matured after the immediately
preceding Payment Date.

 

“Class” has the meaning given in the Mortgage Loan Purchase and Servicing
Agreement.

 

“Clearing Agency” means an organization registered as a “clearing agency”
pursuant to Section 17A of the Exchange Act or any successor provision thereto
or Euroclear and Cedel. The initial Clearing Agency shall be DTC.

 

“Closing Date” means September 5, 2003.

 

“Collateral” shall mean the Assigned Collateral, the Collateral Account and the
Deposited Funds.

 

“Collateral Account” means the Eligible Account maintained by the Collateral
Agent as more fully described in Section 6.01 of the Security Agreement.

 

“Collateral Agent” means Deutsche Bank Trust Company Americas, not in its
individual capacity but solely as Collateral Agent under the Security Agreement,
or any successor Collateral Agent under the Security Agreement.

 

“Collection Account” shall mean the collection account established pursuant to
Section 4.5 of the Mortgage Loan Purchase and Servicing Agreement and maintained
by the Servicer.

 

“Collections” means all payments on the Collateral.

 

“Company” or “Issuer” or “Purchaser” means Von Karman Funding LLC, a Delaware
limited liability company, as issuer of the Notes.

 

“Company Agent” has the meaning set forth in Section 3.03(a) of the Security
Agreement.

 

3

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“Company Incumbency Certificate” shall have the meaning specified in Section
3.03(a) of the Security Agreement.

 

“Contingent Obligation”, as applied to any Person, means any direct or indirect
liability, contingent or otherwise, of that Person (a) with respect to any
indebtedness, lease, dividend, letter of credit or other obligation of another
if the primary purpose or intent thereof by the Person incurring the Contingent
Obligation is to provide assurance to the obligee of such obligation of another
that such obligation of another will be paid or discharged, or that any
agreements relating thereto will be complied with, or that the holders of such
obligation will be protected (in whole or in part) against loss in respect
thereof or (b) under any letter of credit issued for the account of that Person
or for which that Person is otherwise liable for reimbursement thereof.
“Contingent Obligation” shall include (a) the direct or indirect guarantee,
endorsement (otherwise than for collection or deposit in the ordinary course of
business), co-making, discounting with recourse or sale with recourse by such
Person of the obligation of another and (b) any liability of such Person for the
obligations of another through any agreement (contingent or otherwise) (i) to
purchase, repurchase or otherwise acquire such obligation or any security
therefor, or to provide funds for the payment or discharge of such obligation
(whether in the form of loans, advances, stock purchases, capital contributions
or otherwise), (ii) to maintain the solvency of any balance sheet item, level of
income or financial condition of another or (iii) to make take-or-pay or similar
payments if required regardless of non-performance by any other party or parties
to an agreement, if in the case of any agreement described under sub-clause (i)
or (ii) of this sentence the primary purpose or intent thereof is as described
in the preceding sentence. The amount of any Contingent Obligation shall be
equal to the amount of the obligation so guaranteed or otherwise supported.

 

“Controlling Class” shall mean the Swap Counterparty unless it is in default
under one or more of the Program Documents to which it is a party (including
without limitation, the Mortgage Loan Purchase and Servicing Agreement), in
which case the “Controlling Class” shall be the Required Senior Noteholders.

 

“Corporate Trust Office” shall mean, with respect to the Collateral Agent, the
principal office of the Collateral Agent at which at any particular time its
corporate trust business shall be administered which office at the date of the
execution of the Security Agreement is located at 60 Wall Street, MS NYC
60-2606, New York, NY 10005, Attention: Commercial Paper Group, or at any other
time at such other address as the Collateral Agent may designate from time to
time by notice to the Noteholders and the Company.

 

“Credits Outstanding” means, as of the close of business on any day (1) the
Principal Component of all outstanding Secured Liquidity Notes, plus (2) the
aggregate principal amount of outstanding Extended Notes, minus (3) the
Deposited Funds then on deposit in the Collateral Account and allocable to the
payment of Principal Component or principal amount of Secured Liquidity Notes
and Extended Notes outstanding, except to the extent that such funds are then
subject to any writ, order, stay, judgment, warrant of attachment or execution
or similar process.

 

4

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“Custodial Agreement” means the Custodial Agreement, dated as of September 5,
2003, entered into among the Seller, the Company, the Collateral Agent and the
Custodian, as the same may at any time be amended, modified or supplemented.

 

“Custodian” means Deutsche Bank National Trust Company, not in its individual
capacity but solely as Custodian under the Custodial Agreement, or any successor
Custodian under the Custodial Agreement.

 

“Default Investment” means a money market fund whose investments are limited to
obligations issued by, or the full and timely payment of principal of and
interest on which is fully guaranteed by, the United States of America or any
agency or instrumentality thereof (which agency or instrumentality is backed by
the full faith and credit of the United States of America), deposits into which
are available on demand or no later than the next following Business Day.

 

“Defaulted Loan” has the meaning set forth in the Mortgage Loan Purchase and
Servicing Agreement.

 

“Definitions List” means this Definitions List, as amended or modified from time
to time.

 

“Delinquent Loan” has the meaning set forth in the Mortgage Loan Purchase and
Servicing Agreement.

 

“Depositary” means Deutsche Bank Trust Company Americas, not in its individual
capacity but solely as Depositary under the Depositary Agreement, or any
successor Depositary under the Depositary Agreement.

 

“Depositary Agreement” means the Depositary Agreement, dated as of September 5,
2003, entered into by the Company and the Depositary, as the same may at any
time be amended, modified or supplemented.

 

“Depositary Incumbency Certificate” shall have the meaning specified in Section
3.03(b) of the Security Agreement.

 

“Deposited Funds” has the meaning specified in Section 6.02 of the Security
Agreement.

 

“Designated Representative” shall have the meaning specified in Section 3.03(b)
of the Security Agreement.

 

“Determination Date” means the 24th day of each month, or if such day is not a
Business Day, the preceding Business Day.

 

“Distressed Termination Event” has the meaning set forth in the Mortgage Loan
Purchase and Servicing Agreement.

 

5

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“Distribution Date” means (i) after the conversion of any Class of Secured
Liquidity Notes to a Class of Extended Notes and until such Extended Notes are
paid in full, the 25th day of each calendar month (or if such day is not a
Business Day, the next following Business Day), (ii) each Final Maturity of each
Class of Extended Notes outstanding, and (iii) each date that Extended Notes are
redeemed.

 

“Dollar” and the symbol “$” mean the lawful currency of the United States.

 

“DTC” means The Depository Trust Company.

 

“Due Date” has the meaning set forth in the Mortgage Loan Purchase and Servicing
Agreement.

 

“Effective Date” has the meaning specified in Section 4.01 of the Security
Agreement.

 

“Eligible Account” shall mean either (i) a segregated, non-interest bearing
trust account or (ii) a demand trust account with a bank having short-term debt
ratings of “A-1+” by S&P, “P-1” by Moody’s and, if rated by Fitch, “F1+” by
Fitch. In either case, the Collateral Agent on behalf of the Secured Parties
shall at all times be (x) the “entitlement holder” (within the meaning of
Section 8-102(a) of the New York UCC) to the extent that the Collateral Account
is a “securities account” (within the meaning of Section 8-501(a) of the New
York UCC), or (ii) the “customer” (within the meaning of Section 4-104 of the
New York UCC), to the extent that the Collateral Account shall be a “deposit
account” (within the meaning of Section 9-102(a) of the New York UCC).

 

“Eligible Institution” shall mean (i) Deutsche Bank National Trust Company
(while it shall satisfy any one of requirements set forth in (ii), (iii), or the
proviso below), or (ii) any depositary institution, the deposits in which are
insured by the Federal Deposit Insurance Corporation and which at all times has
a short-term unsecured debt rating of “A-1+” by S&P, “P-1” by Moody’s and, if
rated by Fitch, “F1+” by Fitch or (iii) a depositary institution acceptable to
the Rating Agencies; provided, however, that an institution which shall have
corporate trust powers and which maintains any account hereunder as a fully
segregated trust account with the trust department of such institution shall not
be required to meet the foregoing rating requirements, and need only at all
times have a long-term unsecured debt rating of at least “Baa3” by Moody’s so
long as Moody’s is rating any of the Notes.

 

“Eligible Investments” shall have the meaning set forth in the Mortgage Loan
Purchase and Servicing Agreement.

 

“Eligible Loan” shall have the meaning set forth in the Mortgage Loan Purchase
and Servicing Agreement.

 

“ERISA” means the Employee Retirement Income Security Act of 1974, as amended,
and any successor statute of similar import, in each case as in effect from time
to time. References to sections of ERISA also refer to any successor sections.

 

6

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“ERISA Group” means the Company and all members of a controlled group of
corporations and all trades or businesses (whether or not incorporated) under
common control which, together with the Company, are treated as a single
employer under Section 414 of the Internal Revenue Code.

 

“Event of Bankruptcy” shall be deemed to have occurred with respect to a Person
if:

 

(a) such Person shall become insolvent or admit in writing its inability to pay
its debts as they come due, or the commencement by such Person of a voluntary
case under the federal bankruptcy laws, as now or hereafter in effect, or any
other present or future federal or state bankruptcy, insolvency or similar law,
or the consent by such Person to the appointment of or taking possession by a
receiver, liquidator, assignee, trustee, custodian, sequestrator or other
similar official of such Person or of any substantial part of its property or
the making by such Person of an assignment for the benefit of creditors or the
failure by such Person generally to pay its debts as such debts become due or
the taking of action by such Person in furtherance of any of the foregoing; or

 

(b) an involuntary petition or an involuntary proceeding shall have been filed
or commenced against such Person under the federal bankruptcy laws, as now or
hereafter in effect, or any other present or future federal or state bankruptcy
laws, as now or hereafter in effect, or any other present or future federal or
state bankruptcy, insolvency or similar law, or seeking the appointment of a
receiver, liquidator, assignee, trustee, custodian, sequestrator or other
similar official of such Person or of any substantial part of its property, or
seeking the winding up or liquidation of the affairs of such Person and such
petition or proceeding shall not have been dismissed for a period of thirty (30)
days (in the case of the Company), or sixty (60) days (in any other case), or an
order or decree for relief against such Person shall be entered in any such
proceeding; or

 

(c) the board of directors of such Person (if such Person is a corporation or
similar entity) shall vote to implement any of the actions set forth in clause
(b) above.

 

“Event of Default” with respect to the Senior Notes, has the meaning specified
in Section 7.01 of the Security Agreement.

 

“Excess Spread” for each Remittance Period means the amount equal to the
difference between (A) and (B), where (A) equals the aggregate amount of
interest and any penalties (including prepayment penalties) paid on the Mortgage
Notes during such Remittance Period, and where (B) equals the Issuer Funding
Cost for such Remittance Period, plus the Allocated Expenses for such Remittance
Period, plus the Reimbursable Expenses for such Remittance Period.

 

“Exchange Act” means the Securities Exchange Act of 1934, as amended.

 

“Expected Maturity” means, with respect to each Class of Secured Liquidity
Notes, the expected maturity date of such Class, which date shall be between one
(1) and one hundred and eighty (180) days from the date of issuance of such
Class, as set forth in the related

 

7

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instructions from the Company Agent delivered in accordance with Section 4 of
the Depositary Agreement.

 

“Extended Note Amortization Event” shall have the meaning set forth in the
Mortgage Loan Purchase and Servicing Agreement.

 

“Extended Note Calculation Agent” means the Collateral Agent.

 

“Extended Note Monthly Interest” means, with respect to each Class of Extended
Notes and each Distribution Date, interest distributions with respect to such
Class of Extended Notes equal to the product of (i) the outstanding principal
amount of such Class of Extended Notes on the preceding Distribution Date (or in
the case of the first Distribution Date occurring after the related Expected
Maturity, such Expected Maturity) (after giving effect to all distributions and
allocations made on such preceding Distribution Date), (ii) the Extended Note
Rate for the related Interest Period and (iii) the actual number of days in such
Interest Period divided by three hundred and sixty (360).

 

“Extended Note Rate” means, for each Distribution Date, One-Month LIBOR plus
0.25% per annum.

 

“Extended Note Shortfall” has the meaning specified in Section 4.07 of the
Security Agreement.

 

“Extended Notes” means any one of the Extended Notes, resulting from the
conversion of a Secured Liquidity Note to an Extended Note pursuant to Section
4.04 of the Security Agreement.

 

“Extended Notes Distribution” has the meaning set forth in the Depositary
Agreement.

 

“Extended Notes Distribution Account” has the meaning set forth in Section 2 of
the Depositary Agreement.

 

“Final Maturity” means, with respect to each Class of Extended Notes, the date
which is 180 days following the Expected Maturity of such Class.

 

“Fitch” means Fitch, Inc.

 

“GAAP” means generally accepted accounting principles set forth in the
statements and pronouncements of the Financial Accounting Standards Board and
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants or in such other statements by such
other entity as may be approved by a significant segment of the accounting
industry.

 

“Governmental Authority” means any Federal, state, local or foreign court or
governmental department, commission, board, bureau, agency, authority,
instrumentality or regulatory body.

 

8

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“Holder” means the holder of a Note.

 

“Indebtedness” shall have the meaning set forth in the Mortgage Loan Purchase
and Servicing Agreement.

 

“Initial Purchase Price” shall have the meaning set forth in the Mortgage Loan
Purchase and Servicing Agreement.

 

“Initial Required Reserve Fund Amount” is defined in the Side Letter.

 

“Interest Component” means, with respect to Secured Liquidity Notes outstanding
at any time, the sum of (a) the portion of the face amount of outstanding
Secured Liquidity Notes issued on a discount basis representing the discount
incurred in respect thereof and (b) the amount of interest that would accrue
from the date of issuance to the Expected Maturity in respect of outstanding
Secured Liquidity Notes issued on an interest-bearing basis.

 

“Interest Period” means with respect to each Class of Extended Notes (i)
initially, the period from and including the Expected Maturity to but excluding
the second Distribution Date following such Expected Maturity and (ii)
thereafter, the period from and including the immediately preceding Distribution
Date to and including the day immediately preceding such Distribution Date;
provided, however, in the case of the final payment of an Extended Note, the
Interest Period shall end on and include the day immediately preceding the date
on which such Extended Note is paid in full.

 

“Interim Payment Date” shall have the meaning set forth in the Total Return
Swap.

 

“Internal Revenue Code” or “Code” means the Internal Revenue Code of 1986, as
amended, reformed or otherwise modified from time to time, and any successor
statute of similar import, in each case as in effect from time to time.
References to sections of the Code also refer to any successor sections.

 

“Investment Company Act” means the Investment Company Act of 1940, as amended.

 

“Issuer Funding Cost” has the meaning given in the Total Return Swap.

 

“LIBOR” has the meaning specified in Section 4.06 of the Security Agreement.

 

“LIBOR Determination Date” has the meaning specified in Section 4.06 of the
Security Agreement.

 

“Lien” means, when used with respect to any Person, any interest in any real or
personal property, asset or other right held, owned or being purchased or
acquired by such Person which secures payment or performance of any obligation,
and shall include any mortgage, lien, pledge, encumbrance, charge, retained
security title of a conditional vendor or lessor, or other security interest of
any kind, whether arising under a security agreement, mortgage, lease, deed of
trust, chattel mortgage, assignment, pledge, retention or security title,

 

9

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financing or similar statement, or notice or arising as a matter of law,
judicial process or otherwise.

 

“Liquidity” shall have the meaning set forth in the Mortgage Loan Purchase and
Servicing Agreement.

 

“LLC Agreement” means the amended and restated limited liability company
agreement of the Company dated as of September 5, 2003, as the same may at any
time be amended, modified or supplemented.

 

“Loan Rate” shall have the meaning set forth in the Mortgage Loan Purchase and
Servicing Agreement.

 

“Loan Termination Date” means each day on which a deposit is made into the
Collateral Account in respect of Terminated Loans.

 

“Manager” means New Century Mortgage Corporation.

 

“Market Value” shall have the meaning given in the Mortgage Loan Purchase and
Servicing Agreement.

 

“Market Value Event” as of any applicable date, shall mean an event or condition
where the aggregate Market Value (as designated by the Calculation Agent) of all
the Eligible Loans then owned by the Purchaser decreases by more than one
percent (1%) from the aggregate Market Value of such Eligible Loans as
designated by the Calculation Agent at the time such Eligible Loans were
purchased by the Purchaser.

 

“Market Value Event Notice” has the meaning given in Section 6.07(a).

 

“Market Value Requirement” shall mean an amount such that the sum of (x) the
Market Value Reserve Deposit and (y) the Market Value (as designated by the
Calculation Agent) of all Eligible Loans then owned by the Purchaser is equal to
or greater than ninety-nine percent (99%) of the Market Value of such Eligible
Loans as designated by the Calculation Agent at the time such Eligible Loans
were purchased by the Purchaser.

 

“Market Value Reserve Account” shall have the meaning specified in Section 6.05
of the Security Agreement.

 

“Market Value Reserve Deposit” shall mean an amount in immediately available
funds, not less than $1,000,000.

 

“Market Value Reserve Release Notice” shall have the meaning specified in
Section 6.07(c) of the Security Agreement.

 

“Market Value Review” shall have the meaning specified in Section 6.07(c) of the
Security Agreement.

 

10

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“Maximum Indemnity Amount” for any calendar year shall mean the product of the
Program Size and 20 basis points.

 

“Monthly Advance” has the meaning set forth in the Mortgage Loan Purchase and
Servicing Agreement.

 

“Monthly Payment” has the meaning set forth in the Mortgage Loan Purchase and
Servicing Agreement.

 

“Moody’s” means Moody’s Investors Service, Inc.

 

“Mortgage” shall have the meaning specified in the Mortgage Loan Purchase and
Servicing Agreement.

 

“Mortgage Loan” means each mortgage loan listed on any Mortgage Loan Schedule
annexed to any Transfer Supplement (as such terms are defined in the Mortgage
Loan Purchase and Servicing Agreement).

 

“Mortgage Loan File” shall have the meaning specified in the Mortgage Loan
Purchase and Servicing Agreement.

 

“Mortgage Loan Purchase and Servicing Agreement” means the Mortgage Loan
Purchase and Servicing Agreement, dated as of September 5, 2003, among the
Company, and the Seller and Servicer, as the same may at any time be amended,
modified or supplemented.

 

“Mortgage Note” shall have the meaning specified in the Mortgage Loan Purchase
and Servicing Agreement.

 

“Multiemployer Plan” means at any time an employee pension benefit plan within
the meaning of Section 4001(a)(3) of ERISA to which any member of the ERISA
Group is then making or accruing an obligation to make contributions or has
within the preceding five plan years made contributions, including for these
purposes any Person which ceased to be a member of the ERISA Group during such
five year period.

 

“Noteholder” means the holder of a Note.

 

“Notes” means, collectively, the Senior Notes.

 

“Obligations” has the meaning specified in Section 2.01 of the Security
Agreement.

 

“Officer’s Certificate” means a certificate signed by an Authorized Officer of
the Company.

 

“Opinion of Counsel” means a written opinion from legal counsel who is
acceptable to the Collateral Agent. The counsel may be an employee of or counsel
to the Company, unless the Required Senior Noteholders or the Swap Counterparty
shall notify the Collateral Agent in writing of objection thereto.

 

11

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“Outstanding Program Amount” shall have the meaning set forth in the Mortgage
Loan Purchase and Servicing Agreement.

 

“Outstanding Purchase Price” shall have the meaning set forth in the Mortgage
Loan Purchase and Servicing Agreement.

 

“Partial Termination” means the termination of a portion of the Total Return
Swap in accordance with Section 5 thereof.

 

“Payment Date” means the 25th day of each calendar month (or if any such day is
not a Business Day, the next following Business Day), commencing October 25,
2003.

 

“PBGC” means the Pension Benefit Guaranty Corporation or any entity succeeding
to all or any of its functions under ERISA.

 

“Permitted Liens” means (i) Liens for current taxes not delinquent or for taxes
being contested in good faith and by appropriate proceedings, and with respect
to which adequate reserves have been established, and are being maintained, in
accordance with GAAP, (ii) mechanics’, materialmen’s, landlords’, warehousemen’s
and carrier’s Liens, and other Liens imposed by law, securing obligations
arising in the ordinary course of business that are not more than thirty days
past due or are being contested in good faith and by appropriate proceedings and
with respect to which adequate reserves have been established, and are being
maintained, in accordance with GAAP and (iii) the Liens in favor of the
Collateral Agent pursuant to the Security Agreement.

 

“Person” means and includes an individual, a partnership, a corporation, a joint
stock company, a limited liability company, an unincorporated association, a
joint venture or other entity or a government or an agency or political
subdivision or instrumentality thereof.

 

“Potential Event of Default” means any occurrence or event which, with the
giving of notice, the passage of time or both, would constitute an Event of
Default.

 

“Principal Component” means (a) the issue price of Secured Liquidity Notes
issued on a discount basis and (b) the principal amount of Secured Liquidity
Notes issued on an interest-bearing basis.

 

“Priority of Payments” means the priority of payments set forth in Section 2.01
or Section 6.03, as applicable, of the Security Agreement.

 

“Program Documents” means and includes the Security Agreement, the Custodial
Agreement, the Mortgage Loan Purchase and Servicing Agreement, the LLC
Agreement, the Depositary Agreement, the Total Return Swap, the Rated Bidder
Letter and the SLN Placement Agent Agreement.

 

“Program Size” means $2,000,000,000 (as such limit may be increased or decreased
in accordance with the Program Documents).

 

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“Qualified Institution” means a depositary institution or trust company (which
may include the Collateral Agent) organized under the laws of the United States
of America or any one of the states thereof or the District of Columbia;
provided, however, that at all times such depositary institution or trust
company is a member of the FDIC and has (i) from S&P a long-term indebtedness
rating not lower than “AA-“ and a short-term indebtedness rating of “A-l+”, from
Moody’s a long-term indebtedness rating not lower than “A2” and a short-term
indebtedness rating of “P-1”, and from Fitch a long-term indebtedness rating not
lower than “AA-“ and a short-term indebtedness rating of “F1+”, or (ii) such
other rating which satisfies the Rating Agency Confirmation Condition.

 

“Rated Bidder” has the meaning set forth in the Mortgage Loan Purchase and
Servicing Agreement.

 

“Rated Bidder Letter” means the letter entered into pursuant to Section 11.2 of
the Mortgage Loan Purchase and Servicing Agreement.

 

“Rating Agencies” shall have the meaning set forth in the Mortgage Loan Purchase
and Servicing Agreement.

 

“Rating Agency Confirmation” and “Rating Agency Confirmation Condition” mean,
with respect to any action, that each Rating Agency shall have notified the
Company, the Collateral Agent and the Depositary in writing that such action
will not result in a reduction or withdrawal of the rating (in effect
immediately before the taking of such action) of any outstanding Senior Notes
with respect to which it is a Rating Agency and, with respect to the issuance of
Senior Notes, “Rating Agency Confirmation” and “Rating Agency Confirmation
Condition” also mean, in addition to the above, that each Rating Agency that is
referred to in the Security Agreement as being required to deliver its rating
with respect to such Notes shall have notified the Company, the Collateral Agent
and the Depositary in writing that such rating has been issued by such Rating
Agency.

 

“Reference Banks” has the meaning specified in Section 4.06 of the Security
Agreement.

 

“Reimbursable Expenses” shall mean an amount equal to any costs and expenses
related to indemnities, tax gross up or other similar items, SLN Placement Agent
indemnity, Collateral Agent indemnity, Custodian indemnity, Depositary indemnity
and any extraordinary expenses; provided, however, that, on an annualized basis,
Reimbursable Expenses may not exceed the Maximum Indemnity Amount.

 

“Remittance Period” means with respect to the 24th day of each calendar month
(or if such day is not a Business Day, the preceding Business Day), the calendar
month immediately preceding such day.

 

“Required Draw Amount” shall have the meaning specified in Section 6.05(d).

 

“Required Senior Noteholders” means Senior Noteholders holding in excess of
fifty percent (50%) of the aggregate principal amount of all Senior Notes voting
as a single class

 

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(excluding, for the purposes of making the foregoing calculations, any Senior
Notes held by the Company or the Servicer or any Affiliate of the Company or the
Servicer).

 

“Required Reserve Fund Amount” is defined in the Side Letter.

 

“Requirements of Law” means, with respect to any Person or any of its property,
the certificate of incorporation or articles of association and by-laws or other
organizational or governing documents of such Person or any of its property, and
any law, treaty, rule or regulation, or determination of any arbitrator or
Governmental Authority, in each case applicable to or binding upon such Person
or any of its property or to which such Person or any of its property is
subject, whether Federal, state or local (including, without limitation, usury
laws, the Federal Truth in Lending Act and retail installment sales acts).

 

“Reserve Accounts” means the Reserve Fund and the Market Value Reserve Account.

 

“Reserve Fund” means the fund established by the Company pursuant to Section
6.05 of the Security Agreement.

 

“S&P” means Standard & Poor’s Ratings Service, a division of The McGraw-Hill
Companies, Inc.

 

“Secured Liquidity Note Account” has the meaning set forth in Section 2 of the
Depositary Agreement.

 

“Secured Liquidity Notes” means any one of the Secured Liquidity Notes, executed
from time to time by the Company and authenticated by or on behalf of the
Depositary, substantially in the form of Exhibit A or Exhibit B to the
Depositary Agreement.

 

“Secured Parties” is defined in the recitals to the Security Agreement.

 

“Securities Act” means the Securities Act of 1933, as amended.

 

“Security Agreement” means the Security Agreement, dated as of September 5,
2003, between the Company and the Collateral Agent, as the same may at any time
be amended, modified or supplemented.

 

“Seller” means New Century Mortgage Corporation.

 

“Seller Documents” means the Mortgage Loan Purchase and Servicing Agreement and
the Custodial Agreement.

 

“Senior Noteholder” means the holder of a Senior Note.

 

“Senior Notes” means, collectively, the Secured Liquidity Notes and the Extended
Notes.

 

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“Series” means the Secured Liquidity Notes and Extended Notes (such Secured
Liquidity Notes and Extended Notes taken together as one series).

 

“Servicer” means New Century Mortgage Corporation, as Servicer under the
Mortgage Loan Purchase and Servicing Agreement, or any successor Servicer
appointed under the Mortgage Loan Purchase and Servicing Agreement.

 

“Servicer Documents” means the Mortgage Loan Purchase and Servicing Agreement
and any written certificates, statements or instruments delivered by the
Servicer to the Company pursuant thereto from and after the Closing Date.

 

“Servicer Event of Default” means a “Servicer Event of Default” as defined in
Section 10.1 of the Mortgage Loan Purchase and Servicing Agreement.

 

“Servicer Report” has the meaning set forth in the Mortgage Loan Purchase and
Servicing Agreement.

 

“Servicing Advances” shall have the meaning set forth in the Mortgage Loan
Purchase and Servicing Agreement.

 

“Servicing Fee” has the meaning set forth in the Mortgage Loan Purchase and
Servicing Agreement.

 

“SLN Extension Event” means with respect to any Secured Liquidity Note, such
Secured Liquidity Note is not paid in full on its Expected Maturity and, as a
result, such Secured Liquidity Note is converted to an Extended Note pursuant to
Section 4.04 of the Security Agreement.

 

“SLN Placement Agent” means Citigroup Markets Inc., Banc of America Securities
LLC, and such others as may be appointed by the Company from time to time, each
as a SLN Placement Agent pursuant to the SLN Placement Agent Agreement.

 

“SLN Placement Agent Agreement” means the private placement agreement, dated as
of the Closing Date, among the SLN Placement Agents, the Servicer and the
Company, as the same may at any time be amended, modified or supplemented.

 

“Subsidiary” means, with respect to any Person, any corporation or other entity
of which securities or other ownership interests having ordinary voting power to
elect a majority of the board of directors or other persons performing similar
functions are at the time directly or indirectly owned by such Person.

 

“Swap Counterparty” shall have the meaning set forth in the Mortgage Loan
Purchase and Servicing Agreement.

 

“Tangible Net Worth” shall have the meaning set forth in the Mortgage Loan
Purchase and Servicing Agreement.

 

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“Terminated Loan” has the meaning set forth in the Mortgage Loan Purchase and
Servicing Agreement.

 

“Termination Event” has the meaning set forth in the Mortgage Loan Purchase and
Servicing Agreement.

 

“Termination Event Auction” has the meaning set forth in the Mortgage Loan
Purchase and Servicing Agreement.

 

“Total Indebtedness” shall have the meaning set forth in the Mortgage Loan
Purchase and Servicing Agreement.

 

“Total Return Swap” shall have the meaning set forth in the Mortgage Loan
Purchase and Servicing Agreement.

 

“Trust Indenture Act” means the Trust Indenture Act of 1939, as amended.

 

“Trust Officer” means, in relation to the Collateral Agent, any trust officer,
Director, Managing Director, Associate, Vice President or Assistant Vice
President, or any other officer customarily performing functions similar to
those performed by the person who at the time shall be such officer and is
assigned to its Corporate Trust office, or to whom any corporate trust matter is
referred because of his or her knowledge of and familiarity with a particular
subject, or any successor thereto responsible for the administration of the
Security Agreement.

 

“UCC” means the Uniform Commercial Code as in effect from time to time in the
specified jurisdiction.

 

“United States” or “U.S.” means the United States of America, its fifty States
and the District of Columbia.

 

“U.S. Government Obligations” means direct obligations of the United States of
America, or any agency or instrumentality thereof for the payment of which the
full faith and credit of the United States of America is pledged as to full and
timely payment of such obligations.

 

“U.S. Person” shall have the meaning under Regulation S under the Securities
Act.

 

“written” or “in writing” means any form of written communication, including,
without limitation, by means of telex, telecopier device, computer, telegraph or
cable.

 

16

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Schedule II

 

Addresses For Notices

 

VON KARMAN FUNDING LLC

C/O New Century Mortgage Corporation,

as Manager

18400 Von Karman, Suite 1000

Irvine, CA 92612-1514

Attn: Kevin Cloyd (business contact)

General Counsel (legal contact)

Phone: (949) 440-7030

Fax: (949) 440-7033

 

DEUTSCHE BANK TRUST COMPANY AMERICAS

60 Wall Street

Mail Stop NYC 60-2606

New York, NY 10005

Attention: Commercial Paper

Telecopy No.: (212) 797-8604

Telephone No.: (212) 250-5906

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Schedule III

 

Perfection Representations, Warranties and Covenants

 

In addition to the representations, warranties and covenants contained in the
Mortgage Loan Purchase and Servicing Agreement and the Security Agreement, to
induce the Collateral Agent to enter into the Security Agreement, the Issuer
hereby represents, warrants, and covenants to the Collateral Agent as to itself
as follows, on the Closing Date and on each applicable Closing Date thereafter:

 

General

 

1. The Security Agreement creates a valid and continuing security interest (as
defined in the applicable UCC) in the Collateral and the Collateral Account in
favor of the Collateral Agent for the benefit of the Secured Parties, which
security interest is prior to all other Liens, and is enforceable as such
against creditors of and purchasers from the Issuer.

 

2. The Collateral and the Collateral Account constitute “accounts,” “general
intangibles,” “instruments,” and “investment property,” within the meaning of
the UCC as in effect in the State of New York.

 

3. The Reserve Fund, the Collateral Account, the Collection Account, the
Extended Notes Distribution Account, the Allocated Expenses Account, the Market
Value Collateral Account, and the Secured Liquidity Note Account and all
sub-accounts thereof, constitute either a deposit account or a securities
account.

 

4. All of the Collateral and the Collateral Account that constitute security
entitlements have been and will be credited to one of the Securities Accounts
(as defined below). The securities intermediary for each Securities Account has
agreed to treat all assets credited to the Securities Accounts as “financial
assets” within the meaning of the applicable UCC.

 

Creation

 

5. The Issuer owns and has good and marketable title to the Collateral and the
Collateral Account free and clear of any Lien, claim or encumbrance of any
Person, excepting only liens for taxes, assessments or similar governmental
charges or levies incurred in the ordinary course of business that are not yet
due and payable or as to which any applicable grace period shall not have
expired, or that are being contested in good faith by proper proceedings and for
which adequate reserves have been established, but only so long as foreclosure
with respect to such a lien is not imminent and the use and value of the
property to which the Lien attaches is not impaired during the pendency of such
proceeding.

 

6. The Issuer has received all consents and approvals required by the terms of
the Collateral and the Collateral Account that constitute instruments or
security entitlements to grant to the Collateral Agent a security interest in
all of its interest and rights in the Collateral and the Collateral Account
hereunder.

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Perfection

 

7. The Issuer has caused or will have caused, within ten days after the
effective date of the Security Agreement, the filing of all appropriate
financing statements in the proper filing office in the appropriate
jurisdictions under applicable law in order to perfect the security interest in
the Collateral and the Collateral Account granted from the Issuer to the
Collateral Agent (for the benefit of the Secured Parties) hereunder.

 

8. With respect to the Collateral and the Collateral Account that constitute
instruments, the Servicer, holding for the benefit of the Issuer and the
Collateral Agent, has in its possession the original copies of such instruments
that constitute or evidence the Collateral and the Collateral Account, and the
Issuer has caused, or will have caused within ten days after the effective date
of the Security Agreement, the filing of financing statements against the Issuer
in favor of the Collateral Agent in connection herewith describing such
Collateral and the Collateral Account and containing a statement that: “A
purchase of or security interest in any collateral described in this financing
statement will violate the rights of the Collateral Agent.”

 

9. With respect to the Reserve Accounts, the Collateral Account, the Collection
Account, the Allocated Expenses Account, the Extended Notes Distribution Account
and the Secured Liquidity Note Account or any sub-accounts thereof that
constitute securities accounts or security entitlements (the “Securities
Accounts”), the Issuer has delivered to the Collateral Agent a fully executed
agreement pursuant to which the securities intermediary has agreed to comply
with all instructions originated by the Collateral Agent relating to the
Securities Accounts without further consent by the Issuer.

 

Priority

 

10. Other than the transfer of the Mortgage Loans to the Issuer under the
Mortgage Loan Purchase and Servicing Agreement and the security interest granted
to the Collateral Agent pursuant to the Security Agreement, neither the Issuer
nor the Seller has pledged, assigned, sold, granted a security interest in, or
otherwise conveyed any of the Mortgage Loans or Collateral, as applicable, or
the Reserve Accounts, the Collateral Account, the Collection Account, the
Extended Notes Distribution Account, the Allocated Expenses Account and the
Secured Liquidity Note Account, or any sub-account thereof. Neither the Issuer
nor the Seller has authorized the filing of, or is aware of any financing
statements against the Issuer or the Seller that include a description of
collateral covering the Mortgage Loans or the Collateral, as applicable, or the
Reserve Accounts, the Collateral Account, the Collection Account, the Extended
Notes Distribution Account, the Allocated Expenses Account and the Secured
Liquidity Note Account, or any sub-account thereof other than any financing
statement relating to the security interest granted to the Collateral Agent
hereunder, the security interest granted to the Issuer under the Mortgage Loan
Purchase and Servicing Agreement, or that has been terminated.

 

11. The Issuer is not aware of any judgment, ERISA or tax lien filings against
either the Issuer or the Seller.

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12. None of the instruments that constitute or evidence the Collateral or
Collateral Account has any marks or notations indicating that they have been
pledged, assigned or otherwise conveyed to any Person other than the Collateral
Agent hereunder or to the Issuer pursuant to the Mortgage Loan Purchase and
Servicing Agreement.

 

13. None of the Reserve Accounts, the Collateral Account, the Collection
Account, the Extended Notes Distribution Account, the Allocated Expenses Account
and the Secured Liquidity Note Account, or any sub-account thereof, is in the
name of any person other than the Collateral Agent. The Issuer has not consented
to the securities intermediary of any of the Securities Accounts to comply with
entitlement orders of any person other than the Collateral Agent.

 

14. Survival of Perfection Representations. Notwithstanding any other provision
of the Mortgage Loan Purchase and Servicing Agreement and the Security Agreement
or any other Program Document, the Perfection Representations contained in this
Schedule shall be continuing, and remain in full force and effect
(notwithstanding any termination of the Program Documents or any replacement of
the Servicer or termination of the Servicer’s rights to act as such) until such
time as all Obligations under the Security Agreement have been finally and fully
paid and performed.

 

15. No Waiver. The parties to the Security Agreement: (i) shall not, without
obtaining a confirmation of the then-current rating of all outstanding Series of
Notes, waive any of the Perfection Representations; and (ii) shall provide the
Ratings Agencies and the Swap Counterparty with prompt written notice of any
breach of the Perfection Representations, and shall not, without obtaining a
confirmation of the then-current rating of all outstanding Classes of Notes (as
determined after any adjustment or withdrawal of the ratings following notice of
such breach) waive a breach of any of the Perfection Representations.

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Exhibit A

 

Certification of Satisfaction of Conditions

 

TO: Deutsche Bank Trust Company Americas

60 Wall Street

Mail Stop NYC 60-2606

New York, NY 10005

Attention: Commercial Paper

 

FROM: Von Karman Funding LLC, as Issuer:

 

Re: Security Agreement, dated as of September 5, 2003, by and between Von Karman
Funding LLC, and Deutsche Bank Trust Company Americas (the “Security
Agreement”). Capitalized terms used herein shall have the meanings provided in
the Security Agreement.

 

The Company hereby certifies that all of the conditions precedent set forth in
Section 4.01 of the Security Agreement have been satisfied, and that the
Effective Date of the Security Agreement is the date of this certificate, as set
forth below.

 

VON KARMAN FUNDING LLC, AS ISSUER By:  

New Century Mortgage Corporation,

as Manager

 

By:      

--------------------------------------------------------------------------------

   

Name:

Title:

DATED: September             , 2003