AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 10, 1999
REGISTRATION NO. 333-[ ]
- -----------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------------
SAMCO MORTGAGE SECURITIES CORP.
------------------------------------------------------
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 13-4058702
------------------------------- -------------------
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
245 Park Avenue
New York, New York 10167
(212) 272-2000
-------------------------------------------------------------
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING
AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
----------------------
Mr. Samuel Molinaro
Treasurer
SAMCO Mortgage Securities Corp.
245 Park Avenue
New York, New York 10167
(212) 272-2000
---------------------------------------------------------
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
COPIES TO:
Richard F. Kadlick, Esq.
Skadden, Arps, Slate, Meagher & Flom LLP
919 Third Avenue
New York, New York 10022
----------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALES TO THE PUBLIC:
From time to time after the effective date of this Registration Statement.
----------------------
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the
following box. [ ]
If any of the securities being registered on this Form are to be
offered on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933, other than securities offered only in connection
with dividend or interest reinvestment plans, check the following box. |X|
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the
following box and list the Securities Act registration statement number of
the earlier effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box. [ ]
----------------------
CALCULATION OF REGISTRATION FEE(1)
<TABLE>
<CAPTION>
TITLE OF EACH CLASS OF PROPOSED PROPOSED MAXIMUM
SECURITIES TO BE AMOUNT TO BE MAXIMUM OFFERING AGGREGATE AMOUNT OF
REGISTERED REGISTERED PRICE PER UNIT OFFERING PRICE(2) REGISTRATION FEE
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shared Appreciation Mortgage
Pass-Through Certificates........ $1,000,000 100% $1,000,000 $278.00
</TABLE>
(1) This Registration Statement also registers an indeterminate amount of
securities to be sold by Bear, Stearns & Co. Inc. in secondary market
transactions, where required.
(2) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(a), exclusive of accrued interest, if any, on the
Shared Appreciation Mortgage Pass-Through Certificates.
----------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE
OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE
REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT
THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE
WITH SECTION 8(a) OF THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION
STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.
- -----------------------------------------------------------------------------
Prospectus Supplement To Prospectus dated [ ], [1999]
SAMCO Mortgage Securities Corp.
Depositor
[ ] Trust [1999]-[ ]
SHARED APPRECIATION MORTGAGE PASS-THROUGH
CERTIFICATES, SERIES [1999]-[ ]
$[ ]
Consider carefully the risk factors beginning on page S-[ ] in this
prospectus supplement and page [ ] in the prospectus.
The certificates will represent inter ests only in the trust created for
Series [1999]-[ ] and will not repre sent interests in or obligations of
SAMCO Mortgage Securities Corp., Bear, Stearns & Co. Inc. or any of their
affiliates.
This prospectus supplement may be used to offer and sell the offered
certificates only if accompanied by the prospectus.
The [ ] Trust [1999]-[ ] will issue [ ] classes of offered certificates.
Each class of offered certificates will receive distributions of interest,
principal or both. The table on page S-[ ] of this prospectus supplement
contains a list of the classes of offered certificates, including the
principal balance, interest rate and certain special characteristics of
each class.
Offered Certificates
Total principal amount $[ ]
First payment date [ ], [1999]
Interest and/or principal paid [Monthly] (25th)
Last possible payment date [ ], 20[ ]
[The [ ] Trust [1999]-[ ] will also issue [ ] classes of certificates that
will not be offered by this prospectus supplement. The total principal
amount of the private certificates is $[ ]. These private certificates
[other than the class [ ] certificates] are subordinated to the offered
certificates and provide credit enhancement for the offered certificates.]
The underwriter listed below will offer the offered certificates at varying
prices to be determined at the time of sale. The proceeds to SAMCO Mortgage
Securities Corp. from the sale of the offered certificates will be
approximately [ ]% of the principal balance of the offered certificates
plus accrued interest, before deducting $[ ] in expenses. The underwriter's
commission will be the difference between the price it pays to SAMCO
Mortgage Securities Corp. for the offered certificates and the amount that
it receives from the sale of the offered certificates to the public. SAMCO
Mortgage Securities Corp. has agreed to indemnify the underwriter against
certain liabilities.
Neither the SEC nor any state securities commission has approved or
disapproved of the certificates or determined if this prospectus supplement
or the prospectus is accurate or complete. Any representation to the
contrary is a criminal offense.
Underwriter
Bear, Stearns & Co. Inc.
[ ], [1999]
Important Notice about Information Presented in this
Prospectus Supplement and the Accompanying Prospectus
We provide information to you about the offered certificates in two
separate documents that progressively provide more detail: (a) the
accompanying prospectus, which provides general information, some of which
may not apply to your series of certificates and (b) this prospectus
supplement, which describes the specific terms of your series of
certificates.
If the terms of your certificates vary between this prospectus
supplement and the accompanying prospectus, you should rely on the
information in this prospectus supplement.
We include cross-references in this prospectus supplement and the
accompanying prospectus to captions in these materials where you can find
further related discussions. The following table of contents and the table
of contents included in the accompanying prospectus provide the pages on
which these captions are located.
SAMCO Mortgage Securities Corp.'s principal offices are located at 245
Park Avenue, New York, New York 10167 and its telephone number is (212)
272-2000.
Table of Contents
Important Notice about Information Presented in this
Prospectus Supplement and the Accompanying
Prospectus...............................................................S-2
Summary Information......................................................S-4
Risk Factors.............................................................S-8
The Trust................................................................S-9
Description of the SAM Pools.............................................S-9
General..............................................................S-9
The Sellers/Originators.............................................S-12
Description of the Certificates.........................................S-12
Book-Entry Registration.............................................S-12
Definitive Certificates.............................................S-13
Exchangeable Certificates...........................................S-14
Advances............................................................S-14
Distributions of Interest...........................................S-14
Distributions of Principal..........................................S-14
Subordination and Allocation of Losses..............................S-14
The Class R Certificates............................................S-15
Available Distribution Amount.......................................S-15
Last Scheduled Distribution to Certificateholders...................S-16
The Master Servicer.................................................S-17
The Servicer........................................................S-17
Servicing Compensation, Retained Yield and
Payment of Expenses.................................................S-17
Optional Termination of the Trust...................................S-18
Yield, Appreciation and Prepayment
Considerations......................................................S-18
Yield Considerations with Respect to the
Adjustable Strip Certificates.......................................S-22
Yield Considerations with Respect to the
Appreciation Certificate............................................S-23
Residual Certificate Yield Considerations...........................S-24
Additional Information..............................................S-24
The Pooling and Servicing Agreement and Sale and
Servicing Agreement.....................................................S-25
General.............................................................S-25
Representations and Warranties......................................S-25
Credit Enhancements.....................................................S-25
The Pool Insurance Policy...........................................S-25
The Special Hazard [Insurance Policy]
[Reserve Fund] [Letter of Credit]...................................S-26
The SAM Repurchase [Reserve Fund] [Letter of
Credit] [Bond]......................................................S-27
The Bankruptcy [Reserve Fund] [Letter of Credit]
[Bond]..............................................................S-27
Certain Legal Investment Aspects........................................S-28
ERISA Considerations....................................................S-28
Certain Federal Income Tax Consequences.................................S-28
Method of Distribution..................................................S-29
Legal Matters...........................................................S-30
Certificate Ratings.....................................................S-30
Index of Terms for Prospectus Supplement................................S-31
Summary Information
The following summary highlights selected information from this
document and does not contain all of the information that you need to
consider in making your investment decision. To understand all of the terms
of the offered certificates, read carefully this entire document and the
accompanying prospectus.
This summary provides an overview of certain calculations, cash flows
and other information to aid your understanding and is qualified by the
full description of these calculations, cash flows and other information in
this prospectus supplement and the accompanying prospectus.
WHAT YOU OWN
Your certificates represent ownership of a portion of the Trust. The Trust
contains a pool of shared appreciation mortgage loans secured by
residential properties with original terms to maturity of not more than [ ]
years and certain other assets, as described under "The Trust" in this
prospectus supplement.
The offered certificates represent interests only in the assets of the
Trust. All payments to you will come only from the amounts received in
connection with those assets.
Information about the Mortgage Pools
The mortgage pool consists of approximately [ ] shared appreciation
mortgage loans with an aggregate principal balance as of [ ], [1999] of
approximately $[ ]. The principal balance of the individual shared
appreciation mortgage loans at origination ranged from a minimum of
approximately $[ ] to a maximum of approximately $[ ], with an average
principal balance of approximately $[ ]. The shared appreciation mortgage
loans have a weighted average remaining term to maturity of approximately
[ ] months as of [ ], [1999]. At origination, the shared appreciation
mortgage loans had [fixed][adjustable] interest rates ranging from [ ]% to
[ ]% and a weighted average [fixed] interest rate of [ ]% and a weighted
average appreciation share of [ ]%. The index used to compute stated
interest on the SAMs is [ ]. The margins range from [ ]% to [ ]%. [other
relevant adjustable rate characteristics] The range of appreciation shares
is from [ ]% to [ ]%. The shared appreciation mortgage loans are described
in the prospectus as [mortgage subsidy][equity release] shared appreciation
mortgage loans.
[For a further description of the shared appreciation mortgage loans, see
"Description of the SAM Pools" in this prospectus supplement.]
THE OFFERED CERTIFICATES
SAMCO Mortgage Securities Corp. will deposit the shared appreciation
mortgage loans into the Trust. SAMCO Mortgage Securities Corp. created the
Trust for the purpose of issuing the Shared Appreciation Mortgage
Pass-Through Certificates, Series [1999]-[ ]. [The approximate initial
class principal balance, certificate interest rate and type of each class
of the offered certificates will be as follows:
Approximate Annual
Initial Class Certificate
Principal Interest
Class Balance Rate Type
- ------- --------------- ------------ -------
*
* The class [ ] certificates are appreciation
certificates.]
[In addition to the offered certificates, the Trust will issue the [ ]
Certificates. [These private certificates are subordinated to the offered
certificates and provide credit enhancement for the offered certificates.]
[The [ ] Certificates are not being offered by this prospectus supplement.]
Initial Principal Balance of the Certificates
The aggregate principal balance of the certificates issued by the Trust is
approximately $[ ], subject to an upward or downward variance of no more
than 5%. [The appreciation certificates do not have a principal amount but
have a notional amount of approximately $[ ].]
DISTRIBUTIONS ON THE OFFERED CERTIFICATES
Priority of Distributions
The first distribution date will be [ ], [1999]. Thereafter, distributions
will be made on the 25th day of each month, or if such 25th day is not a
business day, on the next business day. [description of priority of
interest and principal distributions among the certificates]
Distributions of Interest
General. On each distribution date, monthly distributions of interest will
be made to each class of offered certificates entitled to interest to the
extent of available funds.
[The amount of interest each class of certificates accrues each month will
equal 1/12th of the annual certificate interest rate for that class of
certificates multiplied by the related class principal balance or class
notional amount, as applicable.] [additional description of allocation of
interest among classes, as applicable]
[Additional interest will be paid to holders of appreciation certificates
at the maturity of the shared appreciation mortgage loans.] [additional
description of allocation of additional interest to appreciation
certificate]
[Compensating Interest and Interest Shortfalls. When mortgagors make
prepayments in full, they need not pay a full month's interest. Instead,
they are required to pay interest only to the date of such prepayment. The
[Master Servicer][Servicer] [will/will not] pay compensating interest to
the certificateholders to compensate certificateholders for the shortfall
in interest this causes.]
Distributions of Principal
The certificateholders will receive the principal that the mortgagors pay
on the shared appreciation mortgage loans in the Trust. [additional
description of allocation of principal among the classes of certificates,
as applicable]
ALLOCATION OF LOSSES
The [Master Servicer][Servicer] will realize a loss to the trust when it
receives all amounts that it expects to recover from any shared
appreciation mortgage loan and that amount is less than the outstanding
principal balance of such loan and accrued and unpaid interest, including
additional interest, on such balance. Losses will be allocated to the
certificates by deducting such losses from the principal balance of the
certificates without making any payments to the certificateholders.
[description of subordination features, as applicable, and method of
allocation of losses on the shared appreciation mortgage loans among the
certificates]
CREDIT ENHANCEMENTS
[description of credit enhancements (including subordination), if any]
ADVANCES
[description of obligation, if any, of [Master Servicer][Servicer][Originator]
[Seller], to make advances to cover shortfalls in payments due on shared
appreciation mortgage loans and/or to make servicing advances]
YIELD, APPRECIATION AND PREPAYMENT CONSIDERATIONS
The yield to maturity of each class of certificates will depend upon, among
other things:
o the price at which such certificates are purchased;
o the applicable certificate interest rate, if any;
o in the case of appreciation certificates, the amount of appreciation of
the mortgaged properties that secure the shared appreciation mortgage
loans; and
o the rate of prepayments on the shared appreciation mortgage loans.
A higher than anticipated rate of prepayments would reduce the aggregate
principal balance of the shared appreciation mortgage loans more quickly
than expected, thereby reducing the aggregate stated interest payments with
respect to such shared appreciation mortgage loans. Therefore, a higher
rate of principal prepayments could result in a lower than expected yield
to maturity on classes of certificates purchased at a premium. Conversely,
a lower than anticipated rate of principal prepayments could result in a
lower than expected yield to maturity on classes of certificates purchased
at a discount since payments of principal with respect to the shared
appreciation mortgage loans would occur later than anticipated.
A higher than anticipated rate of prepayments would reduce the aggregate
principal balance of the shared appreciation mortgage loans more quickly
than expected and such reduction could also have the effect of reducing the
opportunity for the rate of increase in the value of the related mortgaged
properties to increase. Though the value of a mortgaged property is
unpredictable and may in fact decrease from time to time, a net increase in
the value of a mortgaged property will likely occur in the case of a shared
appreciation mortgage loan that remains outstanding for a long period of
time. In addition, a mortgagor may choose to prepay a shared appreciation
mortgage loan at a time when real estate values are declining in order to
minimize the amount of appreciation payments. In such instances, a higher
rate of principal prepayments would result in a lower than expected yield
to maturity on the class or classes of certificates entitled to such
additional interest payments, which are defined generally as appreciation
certificates.
Further, the level of appreciation of the mortgaged properties underlying
the shared appreciation mortgaged properties in your Trust and, to a much
lesser degree, the rate of change of the index used for calculating the
indexed additional interest for any shared appreciation mortgage loan that
is repurchased from your Trust for, or such certificates will affect the
yield earned by holders of, the appreciation certificates. The level of
appreciation of the mortgaged properties underlying the shared appreciation
mortgage loans may be affected by a variety of factors, including but not
limited to:
o economic conditions in the area where the mortgaged property is
located;
o the general level of inflation and unemployment in the economy;
o the general level of liquidity in the economy; and
o more specifically the level of liquidity in the residential mortgage
market.
You should be aware that if you hold appreciation certificates their yield
may be low, zero or negative, and you should be prepared for the
possibility that you could lose your entire investment in the appreciation
certificates that you have purchased.
Certain classes of certificates will be especially sensitive to the rate of
prepayments and/or the rate of appreciation on the underlying mortgaged
properties. For a discussion of special yield, prepayment and appreciation
certificate considerations applicable to these classes of certificates, see
"Risk Factors" and "Description of the Certificates--Yield, Appreciation
and Prepayment Considerations" in this prospectus supplement.
BOOK-ENTRY REGISTRATION
[In general, the [ ] certificates will be available only in book-entry form
through the facilities of [The Depository Trust Company]. See "Description
of the Certificates --Book-Entry Registration" in this prospectus
supplement.]
DENOMINATIONS
SAMCO Mortgage Securities Corp. is offering the class [ ] certificates in
minimum denominations of $1,000 and increments of $1.00 in excess thereof
and the class [ ] certificates in minimum denominations of $25,000 and
increments of $1.00 in excess thereof.
RATINGS
This prospectus supplement requires that the offered certificates receive
ratings from [ ] to [ ]. The ratings on the offered certificates address
the likelihood that the holders of offered certificates will receive all
distributions to which they are entitled on the underlying shared
appreciation mortgage loans. They do not address the likely actual rate of
prepayments or appreciation of the underlying mortgaged properties. Such
rate of prepayments or appreciation, if different than originally
anticipated, could adversely affect the yield realized by holders of the
offered certificates or cause certificateholders to fail to recover their
initial investments.
LEGAL INVESTMENT
As of the date of their issuance, the offered certificates [, other than
the class [ ] certificates,] will constitute "mortgage related securities"
for purposes of the Secondary Mortgage Market Enhancement Act of 1984. See
"Certain Legal Investment Aspects" in this prospectus supplement for
important information concerning possible restrictions on ownership of the
offered certificates by regulated institutions. Investors should consult
their own legal advisors in determining whether and to what extent the
offered certificates constitute legal investments for such investors.
ERISA CONSIDERATIONS
Subject to important considerations described under "ERISA Considerations"
in this prospectus supplement and in the accompanying prospectus, the [ ]
Certificates may be eligible for purchase by persons investing assets of
employee benefit plans or individual retirement accounts.
TAX STATUS
For federal income tax purposes, SAMCO Mortgage Securities Corp. will cause
an election to be made to treat a portion of the Trust as a real estate
mortgage investment conduit. The certificates, other than the residual
certificates and the appreciation certificates, will represent ownership of
regular interests in the REMIC. Such certificates will generally be treated
as representing ownership of debt for federal income tax purposes.
Certificateholders will be required to include in income all interest and
original issue discount on such certificates in accordance with the accrual
method of accounting regardless of the certificateholders' usual methods of
accounting. For federal income tax purposes, the residual certificates will
be the residual interest in the Trust.
[The tax treatment of the appreciation certificates is unclear. The trustee
intends to treat the appreciation certificates as "stripped coupons" that
are properly accounted for as contingent payment debt.]
[If interests in the offered certificates are issued through a grantor
trust or a financial asset securitization investment trust, disclosure of
the applicable federal income tax consequences will be provided.]
For further information regarding the federal income tax consequences of
investing in the offered certificates, including important information
regarding the tax treatment of the residual certificates, see "Certain
Federal Income Tax Consequences" in this prospectus supplement and in the
accompanying prospectus.
Risk Factors
The offered certificates, including, but not limited to, the
appreciation certificates, are not suitable investments for all investors.
In particular, no investor should purchase any class of offered
certificates unless the investor understands and is able to bear the
prepayment, appreciation of the underlying mortgaged properties, credit,
liquidity and market risks associated with that class.
The offered certificates are complex securities and it is important
that each investor possess, either alone or together with an investment
advisor, the expertise necessary to evaluate the information contained in
this prospectus supplement and the accompanying prospectus in the context
of that investor's financial situation.
[discussion, as applicable, of risk factors, including prepayment risk,
legal risks associated with the origination of SAMs, the risk of investing
in the appreciation certificates which represent interests in the
appreciation of the mortgaged properties, subordination and allocation of
losses among the certificates, adjustable-rate shared appreciation
interest-only or principal-only certificates, book-entry system of
registration and federal income tax consequences]
The Trust
The primary assets in the [ ] Trust [1999]-[ ] (the "Trust") will
consist of SAMs secured by one-to four-family residential properties [or
certificates of interest or participations therein]. The Trust will also
include:
(a) [Primary Insurance Policies;]
[(b)] [the Pool Insurance Policy issued by [ ] and
other insurance policies related to the SAMs;]
[(c)] [an Advance Claims Endorsement][covering up to a specified
amount of certain losses arising from special hazards, certain SAM
repurchase defaults by the [Master Servicer][Servicer] and
Mortgagor bankruptcy;]
[(d)] [a Special Hazard] [Reserve Fund] [Letter of
Credit][Certificate Insurance][Insurance Policy];
[(e)] [a SAM Repurchase] [Reserve Fund] [Letter of Credit] [Bond];
[(f)] [a Bankruptcy] [Reserve Fund] [Letter of Credit] [Bond]; and
[(g)] [a Fraud][Bond]
[(h)] property which secured a SAM and which is acquired by
foreclosure or by deed in lieu of foreclosure after the Cut-Off
Date, and
[(i)] amounts held from time to time in an account or accounts
established by the [Master] Servicer.
The SAMs will be assigned to the Trustee, together with all principal and
interest due on the SAMs [other than the Retained Yield] after the Cut-Off
Date. The Trustee will, concurrently with such assignment, authenticate and
deliver the Certificates. Each SAM will be identified in a schedule
appearing as an exhibit to the Pooling Agreement (the "Loan Schedule")
which will specify with respect to each SAM, among other things, the
original principal balance and the outstanding principal balance as of the
close of business on the Cut-Off Date, the term of the Mortgage Note and
the Stated Interest Rate and the Appreciation Share, whether such SAM is a
Mortgage Subsidy SAM or Equity Release SAM, the stated maturity of each SAM
and various material information about each Mortgagor.
Description of the SAM Pools
General
The SAM Pools will consist of SAMs having an [approximate] aggregate
principal balance outstanding as of [ ], [1999] (the "Cut-Off
Date"), after deducting payments due on or before such date. Certain of the
risks of loss on the SAMs will be covered up to specified limits by the
following:
(a) [Primary Insurance Policies;]
[(b)] [a Pool Insurance Policy;]
[(c)] [an Advance Claims Endorsement;]
[(d)] [a Special Hazard] [Reserve Fund] [Letter of Credit]
[Insurance Policy];
[(e)] [a SAM Repurchase] [Reserve Fund] [Letter of Credit] [Bond];
[(f)] [a Bankruptcy] [Reserve Fund] [Letter of Credit] [Bond]; and
[(g)] [a Fraud][Bond].
See "Credit Enhancements" herein and "Description of Credit
Enhancements" in the Prospectus.
The SAMs are secured by shared appreciation first mortgages or first
deeds of trust or other similar security instruments creating first liens
[or their equivalent] on one- to four-family residential properties, which
may include detached homes, duplexes, townhouses, condominiums, individual
units in planned unit developments and other attached dwelling units which
are part of buildings consisting of more than four units (the "Mortgaged
Property"). The SAMs will have the additional characteristics described
below and in the Prospectus. All of the SAMs will generally be acquired by
SAMCO Mortgage Securities Corp. (the "Depositor") from Bear Stearns
Mortgage Capital Corporation ("BSMCC"). BSMCC acquired the SAMs from [list
Originators/Sellers] pursuant to certain Sale and Servicing Agreements. The
SAMs in each SAM Pool will be originated by "Originators" and purchased
from lending institutions which meet the requirements set forth in the
attached prospectus (the "Prospectus") (such institutions, "Sellers").
[All of the SAMs will be screened and underwritten in accordance with
standards set forth in the Prospectus.] Each SAM will have been originated
during the period from [ ] through [ ], [1999]. Each of the SAMs will have
an original term to maturity of [ ] to [30] years. [The SAM will begin
making periodic payments on [ ].]
As of the Cut-Off Date, the stated rate of interest (the "Stated
Interest Rate") on each SAM will be not less than [ ]% and not more than [
]% per annum. As of the Cut-Off Date, the weighted average (by principal
balance) of the Stated Interest Rates on the SAMs will be approximately [
]% per annum. [[ ]% of the SAMs are adjustable rate SAMs] [description of
features of shared appreciation adjustable-rate mortgage loans, including
adjustment date, index, gross margin, adjustment limits, interest ceilings
and floors, method of establishing initial rate and historical index
tables]. [[ ]% of the SAMs will have been originated as adjustable rate
SAMs but converted to fixed rate SAMs prior to inclusion in the SAM Pools.]
[[ ]% of the SAMs will have been originated as adjustable rate SAMs and may
convert to fixed rate SAMs after inclusion in the SAM Pools.] [[ ]% of the
SAMs are Mortgage Subsidy SAMs.] [[ ]% of the SAMs are Equity Release
SAMs.]
At origination, each SAM will have had a principal balance of not less
than $[ ] nor more than $[ ] , and the average principal balance of the
SAMs as of the Cut-Off Date will be approximately $[ ]. All of the SAMs
will have been secured by owner-occupied Mortgaged Properties, based solely
on representations of the Mortgagors obtained at the origination of the
related SAMs.
[Each SAM has a remittance rate (the "Remittance Rate") equal to the
Stated Interest Rate for such SAM less the sum of the Retained Yield, the
[[Seller][Servicing] Fee and the Master Servicing Fee] [Servicing Fee and
the Certificate Administrator Fee] for such SAM. As of the Cut-Off Date,
the Pass-Through Rate for each SAM will be not less than [ ]% and not more
than [ ]% per annum. As of the Cut-Off Date, the weighted average (by
principal balance) of the Remittance Rates for the SAMs will be
approximately [ ]% per annum.]
Each SAM provides for the payment of additional interest at the earlier
of the maturity date thereof and the occurrence of a Mortgage Termination
Event equal to a portion of the increase in value, if any, of the Mortgaged
Properties over the term of the SAM (the "Additional Interest Payment").
Such Additional Interest Payment is equal to the product of (i) a
percentage set forth in the SAM (the "Appreciation Share") and (ii) the
amount by which the Settlement Value of such SAM exceeds the Adjusted Value
of such SAM at the earlier of the maturity date of such SAM and the
occurrence of a Mortgage Termination Event. The index used to compute
stated interest on the SAMs is [ ]. The margins range from [ ]% to [ ]%.
[other relevant adjustable rate characteristics] The range of Appreciation
Shares is from [ ]% to [ ]%.
The latest original scheduled maturity of any SAM will be [ ][20 ]. As
of the Cut-Off Date, the weighted average (by principal balance) remaining
term to maturity of the SAMs will be approximately [ ] months.
[At origination, based upon an appraisal of the Mortgaged Property
securing each SAM, approximately [ ]% of the SAMs (by principal balance)
will have had a ratio of the principal balance of the SAM to the value of
the Mortgaged Property (the "LTV") greater than or equal to 80%, and
approximately [ ]% of the SAMs (by principal balance) will have had LTVs
greater than 80% but less than or equal to [95]%. [ ]% of the SAMs had a
LTV Ratio greater than [95]%. As of the Cut-Off Date, the weighted average
(by principal balance) of the LTVs of the SAMs will be approximately [ ]%.]
[Approximately [ ]% of the SAMs (by principal balance) will be covered
by Primary Insurance Policies as of the Cut-Off Date.]
[description of other insurance]
No more than [ ]% of the SAMs (by principal balance as of the Cut-Off
Date) will be secured by Mortgaged Properties located in any one zip code
area. A geographic distribution of the Mortgaged Properties on a [state by
state][zip code by zip code] basis is attached as [Annex I].
Approximately [ ]% of the SAMs (by principal balance as of the Cut-Off
Date) will have been originated for the purpose of refinancing existing
mortgage debt, including cash-out refinancings. [Approximately [ ]% of the
SAMs (by principal balance) will have been originated for the purpose of
refinancing existing SAMs.] Approximately [ ]% of the SAMs (by principal
balance) will have been originated for the purpose of purchasing the
Mortgaged Property.
[additional description of SAMs as applicable, i.e. the number of SAMs
that provide for Balloon Loans, particular characteristics thereof, whether
_____SAMs may provide for Negative Amortization and Equity Release SAMs and
any special characterization of SAMs; add charts re: SAMs which were
originated for the purpose of purchasing and refinancing the related
Mortgaged Properties and chart re: Mortgagors in specified age groups;
additional chart showing relevant characteristics of SAMs]
[add charts (attached in Annex I) as necessary]
The Sellers/Originators
[description, as applicable, of [Seller's][Originator's] underwriting
criteria and loan documentation standards]
Description of the Certificates
The Shared Appreciation Mortgage Pass-Through Certificates, Series
[1999]-[ ] (the "Certificates;" and the holders of the Certificates, the
"Certificateholders") will be issued pursuant to a Pooling and Servicing
Agreement (the "Pooling Agreement") to be dated as of the Cut-Off Date
[between][among] the Depositor and the [Master Servicer] [Certificate
Administrator] and [ ], as trustee (the "Trustee"), a form of which is
filed as an exhibit to the Registration Statement of which this Prospectus
Supplement is a part. Reference is made to the Prospectus for important
additional information regarding the terms and conditions of the Pooling
Agreement and the Certificates. The issuance of the Certificates is subject
to the condition that they be rated [" "] by [ ] [and will otherwise
qualify as "mortgage related securities" within the meaning of the
Secondary Mortgage Market Enhancement Act of 1984.] [The Certificates will
be freely transferable and exchangeable at the office of [ ], the Registrar
and Paying Agent, in [ ] , [ ] . The net proceeds of the offering will be
held in trust by the Depositor for the benefit of Certificateholders,
subject to release to the Depositor simultaneously with receipt by the
Trustee of the SAMs.
Book-Entry Registration
The Certificates, other that the Class R Certificates (as defined
herein), will generally be available only in book-entry form through the
facilities of DTC if they are Participants, or indirectly through
organizations which are Participants (the "Book-Entry Certificates").
Transfers between Participants will occur in the ordinary way in accordance
with DTC rules. Cede, as nominee of DTC, will hold the global Certificate
for each Class of Book-Entry Certificates. The Depositor is offering the
Class [ ] Certificates in minimum denominations of $1,000 and increments of
$1.00 in excess thereof and the Class [ ] Certificates in minimum
denominations of $25,000 and increments of $1.00 in excess thereof.
DTC has advised the Depositor that it is a limited purpose trust
company organized under the laws of the State of New York, a member of the
Federal Reserve System, a "clearing corporation" within the meaning of the
UCC and a "clearing agency" registered pursuant to the provisions of
Section 17A of the Exchange Act. DTC was created to hold securities for its
Participants and facilitate the clearance and settlement of securities
transactions between Participants through electronic book-entry changes in
accounts of its Participants, thereby eliminating the need for physical
movement of certificates. Participants include Bear, Stearns & Co. Inc.
(the "Underwriter"), securities brokers and dealers, banks, trust companies
and clearing corporations and may include certain other organizations.
Indirect access to the DTC system also is available to other entities, such
as banks, brokers, dealers and trust companies that clear through or
maintain a custodial relationship with an Indirect Participants.
Certificateholders that are not Participants or Indirect Participants
but desire to purchase, sell or otherwise transfer ownership of, or other
interests in, Book-Entry Certificates may do so only through Participants
and Indirect Participants. In addition, unless Definitive Certificates are
issued, Certificateholders will receive all distributions of principal of
and interest on the Book-Entry Certificates through Participants. Under a
book-entry format, Certificateholders will receive payments after the
related Distribution Date, because while payments are required to be
forwarded to Cede, as nominee for DTC, on each such date, DTC will forward
such payments to its Participants which thereafter will be required to
forward them to Indirect Participants or Certificateholders. It is
anticipated that the sole "Certificateholder" (as such term is used in the
Pooling Agreement) of the Book-Entry Certificates will be Cede, as nominee
of DTC, and that Book-Entry Certificateholders will not be recognized by
the Trustee as Certificateholders under the Pooling Agreement. Book-Entry
Certificateholders will be permitted to exercise the rights of
Certificateholders under the Pooling Agreement only indirectly through
Participants, who in turn will exercise their rights through DTC.
Under the rules, regulations and procedures creating and affecting DTC
and its operations, DTC is required to make book-entry transfers among
Participants on whose behalf it acts with respect to the Book-Entry
Certificates and is required to receive and transmit distributions of
principal of and interest on the Book-Entry Certificates. Participants and
Indirect Participants with which Certificateholders have accounts with
respect to the Book-Entry Certificates similarly are required to make
book-entry transfers and receive and transmit such payments on behalf of
their respective Certificateholders.
Because DTC can only act on behalf of Participants, who in turn act on
behalf of Indirect Participants and certain banks, the ability of a
Certificateholder to pledge Book-Entry Certificates to persons or entities
that do not participate in the DTC system, or otherwise take actions in
respect of such Certificates, may be limited due to the lack of a physical
certificate for such Certificates.
DTC has advised the Depositor that it will take any action permitted to
be taken by a Certificateholder under the Pooling Agreement only at the
direction of one or more Participants to whose account with DTC the
Certificates are credited. Additionally, DTC has advised the Depositor that
it will take such actions with respect to a Certificate only at the
direction of and on behalf of the Participant whose holdings include that
Certificate. DTC may take conflicting actions with respect to other
Certificates to the extent that such actions are taken on behalf of
Participants whose holdings include such Certificates.
Although DTC has agreed to the foregoing procedures in order to
facilitate transfers of Book-Entry Certificates among Participants, it is
under no obligation to perform or continue to perform such procedures and
such procedures may be discontinued at any time.
Definitive Certificates
The Book-Entry Certificates will be issued in fully registered,
certificated form to Certificateholders or their nominees ("Definitive
Certificates"), rather than to DTC or its nominee, only if (i) the
Depositor advises the Trustee in writing that DTC is no longer willing or
able to discharge properly its responsibilities as depository with respect
to the Certificates, and the Trustee or the Depositor is unable to locate a
qualified successor or (ii) the Depositor, at its option, elects to
terminate the book-entry system through DTC.
Upon notice of the occurrence of any of the events described in the
immediately preceding paragraph, DTC is required to notify all Participants
of the availability through DTC of Definitive Certificates. Upon surrender
by DTC of the definitive certificates representing each Class of the
Book-Entry Certificates and instructions for registration, the Trustee will
issue the Book-Entry Certificates in the form of Definitive Certificates,
and thereafter the Trustee will recognize the holders of such Definitive
Certificates as Certificateholders under the Pooling Agreement.
Distribution of principal of and interest on the Certificates will be
made by [ ] (the "Paying Agent") directly to holders of Definitive
Certificates in accordance with the procedures set forth herein and in the
Pooling Agreement. Interest and principal payments on each Distribution
Date will be made to holders in whose names the Definitive Certificates
were registered at the close of business on the last business day of the
month preceding the month in which the Distribution Date occurs (the
"Record Date"). Distributions will be made by check mailed to the address
of such holder as it appears on the register maintained by the Registrar.
The final payment on any Certificate (whether Definitive Certificates or
the Certificates registered in the name of Cede representing each Class of
the Book-Entry Certificates) will be made only upon presentation and
surrender of such Certificate at the offices of the "Transfer Agent" and
"Registrar," which shall initially be [ ], or such office or agency as is
specified in the notice of final distribution to holders of Certificates of
the Class being retired. The Trustee will provide such notice to registered
Certificateholders not later than the fifth day of the month in which all
remaining outstanding Certificates of the applicable Class will be retired.
Definitive Certificates will be transferable and exchangeable at the
offices of the Transfer Agent and Registrar. No service charge will be
imposed for any registration of transfer or exchange, but the Transfer
Agent and Registrar may require payment of a sum sufficient to cover any
tax or other governmental charge imposed in connection therewith.]
[Exchangeable Certificates]
The Class [ ] Certificates are exchangeable Certificates.
Advances
The [Master Servicer][Servicer][Seller][Originator] will [not] make
Advances for delinquent payments of principal and interest on SAMs and real
estate taxes, assessments and certain insurance premiums necessary to
maintain the Mortgaged Property as described in the Prospectus under
"Description of the Certificates--Advances." [No Advance of Additional
Interest Payments will be made to the SAMs]
Distributions of Interest
[description of amounts passed through to Certificateholders as
interest and allocation of such amounts among Classes, if any]
Distributions of Principal
[description of amounts passed through to Certificateholders as
principal and allocation of such amounts among Classes, if any]
Subordination and Allocation of Losses
[description of loss allocation provisions]
Priority of the Senior Certificates. As of the Closing Date, the
aggregate current principal amounts of the Class [ ] Certificates (the
"Senior Certificates") and of the Class [ ] Certificates, Class [ ]
Certificates, Class [ ] Certificates, and Class [ ] Certificates (the
"Subordinated Certificates") will equal approximately [ ]% and [ ]%,
respectively, of the aggregate current principal amounts of the
Certificates.
The rights of the holders of the Subordinated Certificates to receive
distributions with respect to the SAMs will be subordinated to such rights
of the holders of the Senior Certificates and to each Class of Subordinated
Certificates having a lower numerical designation than such Class. The
subordination of the Subordinated Certificates to the Senior Certificates
and of Subordinated Certificates to Classes of Subordinated Certificates
with a higher payment priority is intended to increase the likelihood of
timely receipt by the holders of the Senior Certificates and the applicable
Class of Subordinated Certificates of the maximum amount to which they are
entitled on any Distribution Date and to provide such holders protection
against losses resulting from defaults on SAMs to the extent described
above.
However, in certain circumstances, the amount of available
subordination (including the limited subordination provided for excess
losses) may be exhausted and shortfalls in distributions on the Senior
Certificates or Subordinated Certificates, as applicable, could result.
Holders of the Senior Certificates or Subordinated Certificates, as
applicable, will then bear their proportionate share of realized losses in
excess of the total subordination amount.
Priority among the Subordinated Certificates. On each Distribution
Date, the holders of any particular Class of Subordinated Certificates will
have a preferential right to receive the amounts due them on such
Distribution Date out of the Distribution Account, prior to any
distribution being made on such date on each Class of Certificates
subordinated to such Class.
As a result of the subordination of any Class of Certificates, such
Class of Certificates will be more sensitive than more senior Classes of
Certificates to the rate of delinquencies and defaults on the SAMs in the
related SAM Pool, and under certain circumstances investors in such
Certificates may not recover their initial investment.
The Class R Certificates
On each Distribution Date, any amounts remaining in the Distribution
Account after distributions of interest on and principal of the
Certificates [, including Additional Interest Payments or the Appreciation
Certificates,] and payment of expenses, if any, of the Trust will be
distributed to the holder of the Class R Certificates together with Excess
Liquidation Proceeds (as defined below), if any. Distributions of such
excess amounts to the holder of the Class R Certificates will be
subordinate to all payments required to be made on the Certificates on any
Distribution Date.
Any amounts remaining in the Distribution Account upon reduction of the
principal balance of the Certificates to zero, payment of any outstanding
expenses and termination of the Trust will be distributable to the holder
of the Class R Certificates. Such remaining assets are expected to be
minimal. See "--Optional Termination of the Trust" below.
Available Distribution Amount
On each Distribution Date, the Available Distribution Amount, which
generally includes scheduled principal and interest payments on the SAMs
due on the related [Due Date], Curtailments and Payoffs (together with
Curtailments, "Principal Prepayments") received thereon in the previous
calendar month (as set forth below) and amounts received with respect to
liquidations and repurchases upon conversions thereof, will be distributed
by or on behalf of the Trustee to the related Class of Certificateholders.
The Due Date related to each Distribution Date is the first day of the
month in which such Distribution Date occurs. The determination date (the
"Determination Date") is a day not later than the 18th day preceding the
related Distribution Date.
The "Available Distribution Amount" will equal the sum of the following
amounts with respect to the SAMs:
(1) the total amount of all cash received by the [Master
Servicer][Servicer][Certificate Administrator] by the Determination
Date for such Distribution Date (including Advances made by the [Master
Servicer][Servicer][Seller][Originator] and withdrawals from the
Reserve Fund), except:
(a) all scheduled payments of principal and interest due on or
before the Cut-Off Date;
(b) all scheduled payments of principal and interest collected but
due on a date subsequent to the related Due Date;
(c) all Principal Prepayments received after the previous calendar
month (together with any interest payments received with such
Principal Prepayments to the extent that they represent the payment
of interest accrued on the related SAMs for the period subsequent
to the previous calendar month);
(d) Insurance Proceeds and Liquidation Proceeds received in the
calender month and [proceeds of SAMs repurchased following
conversion of such SAMs to fixed Stated Interest Rates] during such
month;
(e) all amounts in the Distribution Account which are due and
reimbursable to the [Master Servicer][Servicer][Seller][Originator]
pursuant to the terms of the Pooling
Agreement;
(f) the sum of [the Master Servicing Fee and] the Servicing Fee
[and the Certificate Administrator Fee] for each SAM; and
(g) with respect to a SAM, the excess, if any, of aggregate
Liquidation Proceeds received during the previous calendar month
over the amount that would have been received if a Payoff had been
made with respect to the related SAM on the date such Liquidation
Proceeds are received ("Excess Liquidation Proceeds"); and
(2) all Advances made by the [Master Servicer][Servicer][Seller]
[Originator] to the Trustee with respect to such Distribution Date.]
Last Scheduled Distribution to Certificateholders
Scheduled distributions on the SAMs, assuming defaults or losses on the
SAMs do not exceed amounts that are covered by the credit enhancements
described elsewhere herein, will be sufficient to make timely distributions
of interest on the Certificates and to reduce the Principal Balance of each
Class of Certificates to zero not later than its Last Scheduled
Distribution Date set forth below:
Last Scheduled
Class Distribution Date
- -------------------------------------- ------------------------------------
[List of Classes of Certificates] [List of Last Scheduled Distribution
Dates for each Class of Certificates]
The "Last Scheduled Distribution Date" is the Distribution Date that
occurs in the month following the latest scheduled maturity date of any of
the SAMs. The determination of such date assumes, among other things,
timely payments, without Prepayments, of principal of and interest on the
SAMs underlying the Certificates, [no conversions to fixed rates or any
SAMs], no repurchases of any SAMs and no optional termination of the Trust.
Since the rate of payment (including Prepayments) of the SAMs can be
expected to exceed the scheduled rate of payments, and could exceed the
scheduled rate by a substantial amount, the actual final Distribution Date
may be earlier, and could be substantially earlier, than the Last Scheduled
Distribution Date indicated.
[The Master Servicer
description, as applicable, of Master Servicer's business and
delinquency, foreclosure and loss experience with respect to comparable
shared appreciation loans serviced by the Master Servicer]
[The Servicer
description, as applicable, of Servicer's business and delinquency,
foreclosure and loss experience with respect to comparable shared
appreciation loans serviced by the Servicer]
Servicing Compensation, Retained Yield and Payment of Expenses
[The [Master][Servicer] Fee with respect to each SAM [is expected to]
[will] range from a minimum of [ ]% to a maximum of [ ]% per annum.] The
[initial weighted average] [Master][Servicing][Seller][Originator] Fee with
respect to each SAM [is expected to] [will] be approximately [ ]% per
annum. [The Certificate Administrator Fee with respect to each SAM [is
expected to] [will] be approximately [ ]% per annum.] [The Retained Yield
for each SAM will be the percentage specified by the Depositor for such
SAM.] [The Retained Yield [is expected to] [will] range from [ ]% to [ ]%,
with an initial weighted average Retained Yield of approximately [ ]%. The
Retained Yield [is expected to be] [may be] [sold] [transferred to [the
Underwriter for resale] to] a third party.] See "Description of the
Certificates--Retained Yield" and "--Servicing Compensation and Payment of
Expenses" in the Prospectus for information regarding other possible
compensation to the Depositor and the [Seller][Originator][Master]
[Servicer]. The [Master] Servicer will pay [all] [certain] expenses
incurred in connection with its responsibilities under the Pooling
Agreement [and the Sale and Servicing Agreement] (subject to reimbursement
as described in the Prospectus), including, without limitation, the various
items of expense enumerated in the Prospectus. In particular, pursuant to
the [Pooling Agreement][Sale and Servicing Agreement], each month or year,
as applicable, the [Master] Servicer will be obligated to pay from the
[Master] Servicing Fee [(i)] the premiums on the Pool Insurance Policy,
[(ii) the fees of the Trustee] and [(ii)] [(iii)] certain other fees and
expenses of the Trust, as prescribed by the Pooling Agreement. Such fees
and expenses are expected to aggregate not more than [ ]% per annum. [The
Certificate Administrator will pay the fees and expenses of the Trustee.]
Optional Termination of the Trust
On any Distribution Date after the first date on which the aggregate
outstanding principal balance of the SAMs is less than [ ]% of the
aggregate principal balance of the SAMs as of the Cut-Off Date, the
Depositor may repurchase the SAMs and any other property remaining in the
Trust, and thereby effect the termination of the Trust and the retirement
of the Certificates. The repurchase price will equal the sum of (1) 100% of
the aggregate outstanding principal balances of such SAMs, plus accrued
interest thereon at the applicable [Stated Interest Rates] through the last
day of the month of such repurchase plus the Indexed Appreciation Payments
for all such SAMs and (2) the fair market value of all other property
remaining in the Trust less expenses of disposition of any property
remaining in the Trust. The proceeds of such repurchase will be treated as
a Principal Prepayment of the SAMs for purposes of distributions to
Certificateholders. Accordingly, an optional termination of the Trust will
cause the outstanding principal balance of the Certificates to be paid in
full. In no event will the Trust continue beyond the expiration date
identified in the Pooling Agreement. See "Description of
Certificates--Termination and Optional Termination" in the Prospectus.
Yield, Appreciation and Prepayment Considerations
The effective yield to maturity of the Certificates will depend upon,
among other things, the price at which the Certificates are purchased, the
applicable Pass-Through Rate and the rate of principal payments on the
SAMs. The effective yield to Certificateholders will be lower than the
yield otherwise produced by the applicable Pass-Through Rate and purchase
price of such Certificates, because principal and interest distributions
will not be payable to such Certificateholders until the 25th day of the
month following the month of accrual (without any additional distribution
of interest or earnings thereon with respect to such delay). [Because the
[Master] Servicer will not be obligated to pass through a full month's
payment of interest with respect to Principal Prepayments, the effective
yield may also be reduced in the event of interest shortfalls attributable
to Payoffs of, or Curtailments with respect to, one or more SAMs.]
Further, the level of the appreciation of the Mortgaged Properties
underlying the SAMs in the Trust will, and the index used for calculating
the Indexed Appreciation Payment for any SAM in the Trust or the
Appreciation Certificates may, affect the yield earned by holders of
principally the Appreciation Certificates. The level of appreciation of the
Mortgaged Properties underlying the SAMs may be affected by a variety of
factors, including but not limited to: economic conditions in the area
where the Mortgaged Property is located, the general level of inflation and
unemployment in the economy, the general level of liquidity in the economy
and more specifically the level of liquidity in the residential mortgage
market. The amount of appreciation paid to any holders of Appreciation
Certificates may also be affected by the amount of Principal Prepayments
that are occurring on the SAMs. Holders of Appreciation Certificates should
be aware that their yield may be low, zero or negative and should be
prepared that they can lose their entire investment in the Appreciation
Certificates they have purchased.
The rate of principal payments on the Certificates is directly related
to the rate of payments of principal on the SAMs, which may be in the form
of scheduled payments or Principal Prepayments. See "Yield Considerations"
in the Prospectus. A higher than anticipated rate of Principal Prepayments
would reduce the aggregate principal balance of the SAMs more quickly than
expected. As a consequence, aggregate interest payments at the applicable
Stated Interest Rate with respect to such SAMs could be substantially less
than expected. Therefore, a higher rate of Principal Prepayments could
result in a lower than expected yield to investors in Classes of
Certificates purchased at a premium. Conversely, a lower than anticipated
rate of Principal Prepayments could reduce the return to investors on any
Classes of Certificates purchased at a discount, in that payments of
principal with respect to the SAMs would occur later than anticipated.
The actual rate of payments of principal and Principal Prepayments on
the SAMs may be influenced by a variety of economic, geographic, social and
other factors, including general economic conditions and homeowner
mobility. In general, if prevailing interest rates fall significantly below
the effective interest rates on the SAMs (i.e., the sum of the applicable
Stated Interest Rate and the implicit rate associated with the payment of
additional interest) the SAMs are likely to be subject to higher Principal
Prepayment rates than if prevailing rates remain at or above the effective
interest rates on the SAMs. Conversely, if interest rates rise above the
effective interest rate on the SAMs, the rate of Principal Prepayment would
be expected to decrease. The rate of payment of principal will also be
affected by any repurchase by the Depositor of the SAMs. See "Maturity,
Average Life, Appreciation and Prepayment Assumptions" and "Description of
Certificates--Termination and Optional Termination" in the Prospectus and
"Description of the Certificates--Optional Termination of the Trust"
herein. In such event, the repurchase price paid by the Depositor would be
passed through to Certificateholders in accordance with their respective
interests.
The Depositor makes no representation as to the specific factors that
will affect the prepayment of the SAMs or the appreciation of the
underlying Mortgaged Properties or the relative importance of such factors.
Factors not identified by the Depositor or discussed herein may
significantly affect the Principal Prepayments of the SAMs or the level of
appreciation of the underlying Mortgaged Properties. In particular, the
Depositor makes no representation as to the percentage of the principal
amount of the SAMs that will be paid as of any date or as to the overall
rate of prepayment or appreciation.
[The SAMs comprising the SAM Pools are adjustable rate shared
appreciation mortgage loans. The Depositor is not aware of any publicly
available statistics that set forth Principal Prepayment experience or
prepayment forecasts of adjustable rate shared appreciation mortgage loans
over an extended period of time, and its experience with respect to such
loans is insufficient to draw any conclusions with respect to the expected
prepayment rates on the adjustable rate shared appreciation mortgage loans
comprising the SAM Pools. The rate of Principal Prepayments with respect to
adjustable rate shared appreciation mortgage loans has fluctuated in recent
years. As in the case with conventional fixed rate mortgage loans,
adjustable rate mortgage loans may be subject to a greater rate of
principal prepayment in a declining interest rate environment. For example,
if prevailing interest rates fall significantly, adjustable rate mortgage
loans could be subject to higher prepayment rates than if prevailing
interest rates remain constant, because the availability of fixed rate
shared appreciation mortgage loans at competitive interest rates may
encourage Mortgagors to refinance their adjustable rate shared appreciation
mortgage loans to "lock in" a lower fixed interest rate. The features of
the adjustable rate shared appreciation mortgage loan programs of shared
appreciation mortgage loan originators during the past years have varied
significantly in response to market conditions such as interest rates,
consumer demand, regulatory restrictions and other factors. The lack of
uniformity of the terms and provisions of such adjustable rate shared
appreciation mortgage loan programs have made it impracticable to compile
meaningful comparative data on prepayment rates and, accordingly, there can
be no certainty as to the rate of prepayments on the SAMs in stable or
changing interest rate environments.]
[With respect to all SAMs, including SAMs that are Balloon Loans,
payment of the unamortized principal balance and any additional interest
due at maturity (which, based on the amortization schedule of such SAMs, is
expected to be a substantial amount) will generally depend on the
Mortgagor's ability to obtain refinancing of such SAM or to sell the
Mortgaged Property prior to the maturity of such SAMs. The ability to
obtain refinancing will depend on a number of factors prevailing at the
time refinancing or sale is required, including, without limitation, real
estate values, the Mortgagor's financial situation, prevailing mortgage
loan interest rates, the Mortgagor's equity in the related Mortgaged
Property, tax laws and prevailing general economic conditions.]
[With respect to Equity Release SAMs, payments of the principal balance
and any additional interest due at maturity will [also] generally depend on
the Mortgagor's ability to obtain refinancing of such SAM or sell the
Mortgaged Property prior to the maturity of the SAM. The ability to obtain
refinancing will depend on a number of factors prevailing at the time the
refinancing or sale is required, including without limitation, real estate
values, the Mortgagor's financial situation, prevailing mortgage loan
interest rates, tax laws and prevailing general economic conditions and may
particularly depend upon whether SAMs are being offered at that time. In
addition, in the case of Equity Release SAMs, the ability to obtain
refinancing may be more difficult than for other types of mortgage loans
and SAMs, since the typical Mortgagor of an Equity Release SAM may have
less current income available to repay such refinancing than would be
acceptable to most financial institutions that would facilitate such
refinancing. There can be no assurance that SAMs or similar type of
mortgages will be used as a method for financing single family residential
real estate at that time.]
[Because distributions on the Adjustable Strip Certificates [consist
primarily of distributions of interest] [are based upon the excess of
interest at the weighted average Remittance Rate on the SAMs over [ ]% per
annum], the yield to maturity on the Adjustable Strip Certificates will be
extremely sensitive to the level of Principal Prepayments on the SAM, and
may fluctuate significantly from time to time. The yield to maturity on
such Class will be particularly sensitive to the rate of prepayments on
SAMs bearing higher interest rates, which could be significantly higher
than the prepayment rates on SAMs bearing lower interest rates, since the
rate of interest payable on the Adjustable Strip Certificates will decrease
as a result of Principal Prepayments on SAMs with gross margins that are
higher than the weighted average gross margin from time to time on the
SAMs. Investors should fully consider all of the associated risks,
including the risk that an extremely rapid rate of principal prepayments on
the SAMs could result in the failure of investors in Adjustable Strip
Certificates to recoup fully their initial investments. For information
regarding yield considerations on the Adjustable Strip Certificates, see
"--Yield Considerations with Respect to the Adjustable Strip Certificates"
below.]
[Prepayments on mortgage loans are commonly measured relative to a
prepayment standard or model. The model used in this Prospectus Supplement
[(the "Constant Prepayment Rate" or "CPR")] assumes a constant annual rate
of prepayment each month, expressed as a per annum percentage of the
then-scheduled principal balance of the Mortgage Pool.] [Investors in the
Appreciation Certificates will be affected by the level of appreciation in
value of the Mortgaged Properties. The model used in this Prospectus
Supplement (the "Constant Appreciation Rate" or "CAR") assumes a constant
annual rate of appreciation each month, expressed as a per annum percentage
of the then-scheduled principal balance of the Mortgage Pool, taking into
account the Volatility of the CAR. "Volatility" is the standard deviation
from the CARs assumed in each applicable table.
The [Constant Prepayment Rate] does not purport to be either an
historical description of the appreciation experience of the mortgaged
properties underlying any pool of mortgage loans or a prediction of the
anticipated rate of appreciation of the mortgaged properties underlying any
pool of mortgage loans, including the SAMs, and there is no assurance that
the SAMs will prepay at any given percentage of the [Constant Prepayment
Rate].
The [Constant Appreciation Rate] does not purport to be either an
historical description of the prepayment experience of any pool of mortgage
loans or a predictor of the anticipated rate of prepayments of any pool of
mortgage loans, including the SAMs, and there is no assurance that the SAMs
will prepay at any given percentage of the [Constant Appreciation Rate].
The table set forth below has been prepared on the basis of the
characteristics of the SAMs that are expected to be included in the SAM
Pools and the respective expected initial Principal Balances of the
Certificates as set forth herein and using the following assumptions:
o The figures shown for 0% of the [Constant Prepayment Rate]
were calculated assuming, among other things, that the SAMs
have Stated Interest Rates of [ ]%, Remittance Rates of [ ]%
and remaining terms to maturity of [ ] months;
o In connection with calculating the figures shown for the
other percentages of the [Constant Prepayment Rate], it was
assumed that the SAMs have Stated Interest Rates and
original and remaining terms to maturity which fall within
the parameters set forth beginning on page [ ] under
"Description of the SAM Pools" herein;
o The SAMs have an aggregate principal balance of $[ ];
o The SAMs have Remittance Rates which fall within the
parameters set forth beginning on page [ ] under
"Description of the SAM Pools" herein;
o Each monthly payment is received on its [Due Date]
commencing [ ], [1999];
o The first monthly payment on the Certificates is received on
[ ], [1999];
o No optional termination of the Trust occurs and no default
in the payment of any SAM occurs;
o Prepayments on the SAMs are received on the last day of each
month commencing [ ], [1999] at the various percentages of
the [Constant Prepayment Rate] specified in the table; and
o All prepayments will be prepayments in full and 30 days of
interest is received in connection with such Principal
Prepayments. (Certificateholders generally will receive less
than 30 days of interest on Principal Prepayments) and
o Volatility is at the level indicated in each table.
See "Description of the Certificates--Distributions of Interest"
herein).
Any discrepancy between the characteristics of the SAMs actually
included in the SAM Pools and the characteristics of the SAMs expected to
be so included may affect the percentages of the outstanding Principal
Balances of such Class set forth in the table and the weighted average
lives of the Certificates. To the extent that the SAMs that are actually
included in the SAM Pools have characteristics that differ from those
assumed in preparing the following table, the outstanding Principal Balance
of any Class of Certificates may be reduced to zero earlier or later than
indicated by the table.
Variations in actual prepayment experience may increase or decrease the
percentages of the original outstanding Principal Balances of a Class and
the weighted average lives shown in the following table. Such variations
may occur even if the average prepayment experience of all of the SAMs
equals the indicated percentage of the [Constant Prepayment Rate]. There is
no assurance, however, that prepayment of the SAMs will conform to any
given percentage of the [Constant Prepayment Rate].
There are no historical prepayment or appreciation data available for
the SAM Pools, and comparable data are not available because the SAMs do
not constitute a representative sample of the shared appreciation mortgage
loan market generally. In addition, experiences with respect to shared
appreciation mortgage loans may differ from historical data with respect to
mortgage loans underlying mortgage pass-through certificates issued by the
Government National Mortgage Association ("GNMA"), the Federal National
Mortgage Association ("FNMA") or the Federal Home Loan Mortgage Corporation
("FHLMC") and the prepayments experienced by the mortgage loans underlying
such mortgage pass-through certificates may not be comparable to
prepayments expected to be experienced by the SAM Pools, because the SAMs
may have characteristics which differ from the shared appreciation mortgage
loans underlying certificates issued by GNMA, FNMA and FHLMC.
Based on the foregoing assumptions, the following table indicates the
projected weighted average life of each Class of Certificates (other than
the Class R Certificates) and sets forth the percentages of the initial
outstanding Principal Balance of each such Class of Certificates that would
be outstanding after each of the dates shown at various constant
percentages of the [Constant Prepayment Rate].
Percentage of
Principal Amount
Class Date Outstanding
- ---------------------------- ------------------ ------------------------
[Prepayment tables]
[Yield Considerations with Respect to the Adjustable Strip Certificates
The following table illustrates the significant effect that Principal
Prepayments on the SAMs have upon the pre-tax yield to maturity of the
Adjustable Strip Certificates. The actual prices to be paid on the
Adjustable Strip Certificates have not been determined and will be
dependent on the characteristics of the SAM Pools as ultimately
constituted. The table shows hypothetical pre-tax yields to maturity for
the Adjustable Strip Certificates, stated on a corporate bond equivalent
basis, under five different prepayment assumptions based on the [Constant
Prepayment Rate]. The table has been prepared based on the same assumptions
underlying the table on page [ ] relating to percentages of the [Constant
Prepayment Rate] [and the percentages of Constant Appreciation Rate], and
the additional assumption that the Adjustable Strip Certificates are
purchased on [ ] (the "Closing Date") at the purchase prices stated in the
table, including accrued interest from the Cut-Off Date.
Pre-tax
Yield to Maturity
Certificate (Basic Prepayment
Class Price Assumptions)
- --------------------------- ---------------- -----------------------
[Yield Charts]
The yields set forth in the preceding table were calculated by
initially determining, for each prepayment assumption shown in the table,
the monthly discount rate which, when applied to the assumed stream of cash
flows to be paid to the Adjustable Strip Certificateholders, would cause
the discounted present value of such assumed stream to equal the assumed
purchase price including accrued interest for the Adjustable Strip
Certificates. These monthly discount rates were then converted to corporate
bond equivalent yields, which are higher than the monthly discount rates,
because they are based on semiannual compounding.
On the basis of a constant prepayment rate of approximately [ ]% of the
[Constant Prepayment Rate], a constant appreciation rate of approximately [
]% of the [Constant Appreciation Rate], a purchase price of $[ ], including
accrued interest, and the assumptions described above, the pre-tax yield to
maturity of the Adjustable Strip Certificates would be approximately 0%. If
the actual prepayment rate were to exceed the rate assumed above, an
investor in the Adjustable Strip Certificates would not fully recoup the
initial purchase price of such Certificates.
It is unlikely that the characteristics of the SAMs will correspond
exactly to those assumed in preparing the tables above. The yields to
maturity of the Adjustable Strip Certificates therefore will differ even if
all of the SAMs prepay monthly at the related assumed prepayment rates. In
addition, it is not likely that the SAMs will prepay at a constant
percentage of the [Constant Prepayment Rate] and [Constant Appreciation
Rate] until maturity or that all of the SAMs will prepay at the same
percentage of the [Constant Prepayment Rate] and [Constant Appreciation
Rate], and the timing of changes in the rate of prepayments and
appreciation may affect significantly the yield to maturity received by a
holder of the Adjustable Strip Certificates.
[Yield Considerations with Respect to the Appreciation Certificates
The following table illustrates the significant effect that [Principal
Prepayments and] different appreciation rates on the SAMs have upon the
pre-tax yield to maturity of the Appreciation Certificates. The actual
prices to be paid on the Appreciation Certificates have not been determined
and will be dependent on the characteristics of the SAM Pools as ultimately
constituted. The table shows hypothetical pre-tax yields to maturity for
the Appreciation Certificates, stated on a corporate bond equivalent basis,
under [five] different prepayment assumptions based on the [Constant
Prepayment Rate] described above. The table has been prepared based on the
same assumptions underlying the table on page [ ] relating to percentages
of the [Constant Prepayment Rate][and the percentage of the Constant
Appreciation Rate], and the additional assumption that the Appreciation
Certificates are purchased on the Closing Date at the purchase prices
stated in the table, including accrued interest from the Cut-Off Date.
Pre-tax
Yield to Maturity
Certificate (Basic Prepayment and
Class Price Appreciation Assumption)
- ------------------------ ------------------ --------------------------
[Yield Charts]
The yields set forth in the preceding table were calculated by
initially determining, for each prepayment [and appreciation] assumption
shown in the table, the monthly discount rate which, when applied to the
assumed stream of cash flows to be paid to the Appreciation
Certificateholders, would cause the discounted present value of such
assumed stream to equal the assumed purchase price. These monthly discount
rates were then converted to corporate bond equivalent yields, which are
higher than the monthly discount rates because they are based on semiannual
compounding.
On the basis of a constant prepayment rate of approximately [ ]% of the
[Constant Prepayment Rate], constant appreciation rates of approximately [
]% of the [Constant Appreciation Rate], a purchase price of $[ ], and the
assumptions described above, the pre-tax yield to maturity of the
Appreciation Certificates would be approximately 0%. If the actual
prepayment rate or appreciation rate were to exceed the rate assumed above,
an investor in the Appreciation Certificates would not fully recoup the
initial purchase price of such Certificates.
It is unlikely that the characteristics of the SAMs will correspond
exactly to those assumed in preparing the tables above. The yields to
maturity of the Appreciation Certificates therefore will differ even if all
of the SAMs prepay monthly at the related assumed prepayment rate and the
related Mortgaged Properties appreciate at the assumed appreciation rate.
In addition, it is not likely that the SAMs will prepay at a constant
percentage of the [Constant Prepayment Rate][Constant Appreciation Rate]
until maturity or that all of the SAMs will [prepay at the same percentage
of the Constant Prepayment Rate][appreciate at the same percentage of the
Constant Appreciation Rate], and the timing of changes in the rate of
prepayments may affect significantly the yield to maturity received by a
holder of the Appreciation Certificates.
The Depositor makes no representation that the SAMs will prepay in the
manner or at any of the rates assumed above or that the underlying
Mortgaged Properties will appreciate at any of the rates assumed above or
that such rate will be constant. Each investor must make its own decision
as to the appropriate prepayment or appreciation assumptions to be used in
deciding whether or not to purchase any of the Certificates. Since the rate
of principal payments (including prepayments) with respect to, and
repurchases of, the SAMs and appreciation on the underlying Mortgaged
Properties will significantly affect the yield to maturity on the
Certificates, prospective investors are urged to consult their investment
advisors as to both the anticipated rate of future principal payments
(including prepayments) on the SAMs and appreciation on the underlying
Mortgaged Properties and the suitability of the Certificates to their
investment objectives.]
[Residual Certificate Yield Considerations
Any distributions payable on the Residual Certificates may be subject
to United States federal income tax withholding in an amount equal to the
total distributions paid thereon which would result in a zero after-tax
rate of return. The Residual Certificates bear a greater risk of loss than
the other Classes of Senior Certificates because of their later priority
for distributions of principal and because the interest thereon is added to
the Principal Balances thereof until such principal distributions commence.
The Residual Certificateholders should consult their own tax advisors
as to the effect of taxes and the receipt of any payments made to such
holders in connection with the purchase of the Residual Certificates on
after-tax rates of return on the Residual Certificates. See "Certain
Federal Income Tax Consequences" in the Prospectus.]
[Additional Information
The Depositor intends to file with the Commission certain additional
yield tables and other computational materials with respect to one or more
Classes of the Certificates on a Current Report on Form 8-K to be dated [
]. Such tables and materials were prepared by the Underwriter at the
request of certain prospective investors, based on assumptions provided by,
and satisfying the special requirements of, such prospective investors.
Such tables and materials are preliminary in nature, and the information
contained therein is subject to, and superseded by, the information in this
Prospectus Supplement.]
The Pooling and Servicing Agreement and Sale and Servicing Agreement
General
The Certificates will be issued pursuant to the Pooling Agreement.
Reference is made to the Prospectus for important information additional to
that set forth herein regarding the terms and conditions of the Pooling
Agreement, [any servicing agreements] and the Certificates. SAMCO Mortgage
Securities Corp. will provide to a prospective or actual Certificateholder
without charge, upon written request, a copy (without exhibits) of the
Pooling Agreement. Requests should be addressed to [
] at [ ].
Representations and Warranties
In the Sale and Servicing Agreement between BSMCC and each Seller of
the SAMs (each such agreement, a "Sale and Servicing Agreement"), each
Seller will represent and warrant to BSMCC with respect to all SAMs, among
other things, that:
[a summary of the representations and warranties that will be approved here]
Credit Enhancements
[The Pool Insurance Policy
The Pool Insurance Policy for the Certificates will be issued by [ ]
(the "Pool Insurer"). Claims under the Pool Insurance Policy will be
limited to an aggregate initial amount [(to be specified in the Current
Report on Form 8-K referred to above under "Description of the SAM
Pools--Additional Information")] [equal to not less
than [ ]% of the aggregate principal balance of the SAMs that are not
covered as to their entire outstanding principal balances by Primary
Insurance Policies as of the Cut-Off Date.] [The Pool Insurance Policy will
include an Advance Claims Endorsement.] [The Pool Insurance Policy will
[also] include an endorsement which provides that the insurer will pay
claims presented thereunder although claims against the applicable Primary
Insurance Policy have not been settled due to insolvency, bankruptcy,
receivership or assignment for the benefit of creditors of the issuer of
the Primary Insurance Policy.] The coverage provided by the Pool Insurance
Policy may be cancelled or reduced, provided that the then current rating
of the Certificates assigned by [the Rating Agencies] will not be adversely
affected thereby.
The Pool Insurer is a corporation engaged principally in the business
of insuring shared appreciation mortgage loans on residential properties
against default in payment by the mortgagor. At [ ], [1999], the Insurer
had at risk $[ ] billion covering approximately $[ ] billion of residential
mortgages. At such date, the Insurer had total assets of approximately $[ ]
million, capital and surplus aggregating $[ ] million and statutory
contingency reserves of $[ ] million, resulting in total policyholders'
reserves of approximately $[ ] million. The information set forth in this
paragraph has been provided by the Pool Insurer. The Depositor makes no
representation as to the accuracy or completeness of such information.]
[Audited financial statements of the Pool Insurer are attached hereto as
Annex II.]
[The Special Hazard [Insurance Policy][Reserve Fund] [Letter of Credit]
[The Special Hazard Reserve Fund for the SAM Pools will be established
with a financial institution[, the debt obligations of which are rated at
least " " by [ ]] [acceptable to the Rating Agencies] to cover a specified
amount of certain losses arising from special hazards. The initial coverage
amount of the Special Hazard Reserve Fund is expected to be approximately [
], which is equal to the greatest of (a) the aggregate principal balance of
the SAMs located in the single [California] zip code zone that has the
largest aggregate principal balance of SAMs, (b) [ ]% of the aggregate
unpaid principal balance of the SAMs or (c) [twice] the unpaid principal
balance of the largest single SAM, in each case calculated as of the
Cut-Off Date. On each anniversary of the Cut-Off Date, the amount of such
Special Hazard Reserve Fund will be reduced to an amount equal to the
greatest of clause (a), (b) and (c), calculated as of the preceding [ ].
However, if the balance of the Special Hazard Reserve Fund as of [ ] has
been reduced by payment of special hazard losses to an amount less than the
greatest of clauses (a), (b) and (c), the Depositor will not be obligated
to deposit additional amounts in the Special Hazard Reserve Fund on such
anniversary of the Cut-Off Date to return the amount in the fund to such
required amount. The amount required to be deposited into the Special
Hazard Reserve Fund may be reduced to zero, provided that the then current
rating of the Certificates obtained from [the Rating Agencies] will not be
adversely affected thereby.]
[The Special Hazard Letter of Credit will be issued by [ ], [ ] in an
amount equal to the greatest of (a) the aggregate principal balance of the
SAMs located in the single [California] zip code zone that has the largest
aggregate principal balance of SAMs, (b) [ ]% of the aggregate unpaid
principal balance of the SAMs or (c) [twice] the unpaid principal balance
of the largest single SAM, in each case calculated as of the Cut-Off Date.
On each anniversary of the Cut-Off Date, the amount available under the
Special Hazard Letter of Credit will be reduced to an amount equal to the
greatest of clauses (a), (b) and (c), calculated as of the preceding [ ].
Moreover, the amount available as of each anniversary of the Cut-Off Date
will in no event be greater than the coverage amount on the immediately
preceding anniversary, reduced by all payments made in respect of special
hazard losses during such year. The coverage provided by the Special Hazard
Letter of Credit may be cancelled or reduced, provided that the then
current rating of the Certificates obtained from [ ] will not be adversely
affected thereby. At [ ], [1999], [ ] had total assets of approximately
$[ ] and total policyholders' surplus of $[ ]. The information set forth in
the preceding sentence has been provided by [ ], [ ] and the Depositor
makes no representation as to the accuracy or completeness of such
information.]
[The Special Hazard Insurance Policy for the SAM Pools will be issued
by the Special Hazard Insurer, [ ], a [ ] corporation. Claims under such
policy initially will be limited to an amount equal to the greatest of (a)
[ ]% of the aggregate unpaid principal balance of such SAMs, (b) the
aggregate principal balance of the SAMs located in the single [California]
zip code zone that has the largest aggregate principal balance of SAMs or
(c) [twice] the unpaid principal balance of the largest single SAM, in each
case calculated as of the Cut-Off Date. On each anniversary of the Cut-Off
Date, the amount of coverage will be reduced to an amount equal to the
greatest of clauses (a), (b) and (c), calculated as of the preceding [ ].
Moreover, the coverage amount of the Special Hazard Insurance Policy as of
each anniversary of the Cut-Off Date will in no event be greater than the
balance on the immediately preceding anniversary, reduced by all payments
made in respect of claims thereunder during such year. The coverage
provided by the Special Hazard Insurance Policy may be cancelled or
reduced, provided that the then current rating of the Certificates obtained
from [ ] will not be adversely affected thereby. At December 31, [1999], [
] had total assets of approximately $ [ ] and total policyholders' surplus
of $[ ]. The information set forth in the preceding sentence has been
provided by [ ], and the Depositor makes no representation as to the
accuracy or completeness of such information.]]
[The SAM Repurchase [Reserve Fund] [Letter of Credit] [Bond]
Some or all of the Primary Insurance Policies may contain an exclusion
from coverage for circumstances involving fraudulent conduct or negligence
by the [Seller][Master] [Servicer] [Originator] or the Mortgagor. The
[Master] Servicer will agree to repurchase any such SAM for which Primary
Insurance Policy coverage is ultimately not available solely by reason of
such exclusion (a "SAM Repurchase"). A SAM Repurchase [Reserve Fund]
[Letter of Credit] [Bond] will be [obtained] [established] for the SAM
Pools to support the [Master] Servicer's repurchase obligation.
The SAM Repurchase [Reserve Fund] [Letter of Credit] [Bond] will be in
an aggregate amount of $[ ], which is equal to [ ]% of the aggregate
outstanding principal balance of the SAMs as of the Cut-Off Date. This
coverage amount will be maintained during the first year of the SAM Pools
and will thereafter be reduced on [the first anniversary of the Cut-Off
Date to [ ]% of the aggregate outstanding principal balance of the SAMs on
such date, and thereafter on] each anniversary of the Cut-Off Date to an
amount equal to [ ]% of the then aggregate outstanding principal balance of
the SAMs. In addition, the coverage provided by the SAM Repurchase [Letter
of Credit] [Bond] may be cancelled or reduced and the amount required to be
deposited into the [Reserve Fund] may be reduced to zero, provided that the
then current rating of the Certificates obtained from [ ] will not be
adversely affected thereby. Coverage provided by the SAM Repurchase
[Reserve Fund] [Letter of Credit] [Bond] will terminate five years after
the Cut-Off Date.
[The SAM Repurchase Reserve Fund for the SAM Pools will be established
and maintained with a financial institution, the debt obligations of which
are rated at least " " by [ ]. Amounts placed in such Reserve Fund may be
invested for the benefit of the [Master] Servicer in instruments rated not
less than " " by [ ]. Such Reserve Fund will initially be established at [
] with a cash deposit by the [Master] Servicer.]
[The SAM Repurchase Letter of Credit will be issued by [ ]. As of [ ],
[1999], [ ] had total assets of approximately $[ ] and total liabilities of
approximately $[ ].] [The information set forth in this paragraph
concerning [ ] has been provided by [ ]. The Depositor makes no
representation as to the accuracy or completeness of such information.
[The SAM Repurchase Bond will be issued by [ ], a[n] [ ] corporation.
As of [ ], [1999], [ ] had total assets of approximately $[ ] and total
policyholders' surplus of $[ ]. The Depositor makes no representation as to
the accuracy or completeness of such information.]
[The Bankruptcy [Reserve Fund] [Letter of Credit] [Bond]
Under the terms of the [Pooling Agreement][applicable Sale and
Servicing Agreement], the [Master] Servicer will agree to pay to the
Trustee for the benefit of Certificateholders any portion of the principal
balance of a SAM that becomes unsecured pursuant to a ruling under the
federal Bankruptcy Code. The [Master] Servicer will also agree to pay to
the Trustee for the benefit of Certificateholders any shortfall in payment
of principal and interest resulting from the recasting of any originally
scheduled monthly principal and interest payment pursuant to a ruling under
the Bankruptcy Code. These payment obligations will be subject to the
limitations specified in the Pooling Agreement. The [Master] Servicer will
have the option, in lieu of making such payments, to repurchase any SAM
affected by bankruptcy court rulings. To insure the [Master] Servicer's
obligation to make the payments described above, [a Bankruptcy [Letter of
Credit] [Bond] will be issued by [ ]]. [The [Master] Servicer will
establish and maintain a Bankruptcy Reserve Fund with a financial
institution, the debt obligations of which are rated at least " " by [ ].
Amounts placed in such Reserve Fund may be invested for the benefit of the
[Master] Servicer in instruments rated not less than " " by [ ].]
The [Master] Servicer's payment obligations and the related coverage
under the Bankruptcy [Reserve Fund] [Letter of Credit] [Bond] shall in no
event exceed $[ ], the amount of the "Bankruptcy Coverage". The Bankruptcy
Coverage shall be reduced by the amount of any payment by the [Master]
Servicer in accordance with the preceding paragraph. The [Master]
Servicer's payment obligations and the coverage amount of the Bankruptcy
[Reserve Fund] [Letter of Credit][Bond] may be cancelled or reduced,
provided that the then current rating of the Certificates obtained from [ ]
will not be adversely affected thereby. [See "--The SAM Repurchase [Reserve
Fund] [Letter of Credit] [Bond]" above for certain financial information
regarding [ ].] [At [ ], [1999], [ ] had total assets of approximately $[
], and total liabilities of $[ ]. The information set forth in the
preceding sentence has been provided by [ ], and the Depositor makes no
representation as to the accuracy or completeness of such information.]]
Certain Legal Investment Aspects
[discussion of investments and possible legal ramifications]
ERISA Considerations
Any Plan fiduciary that proposes to cause a Plan to purchase
Certificates should consult with its counsel with respect to the potential
consequences under ERISA and the Code of the Plan's acquisition and
ownership of Certificates. See "ERISA Considerations" in the Prospectus.
[discussion of PTCE 83-1, Underwriter's PTCE, and/or other prohibited
transaction class exemptions or prohibited transaction exemptions relevant
or potentially relevant to the Certificates]
Certain Federal Income Tax Consequences
[The Certificates may be issued with original issue discount for
federal income tax purposes. The prepayment assumption that will be used in
determining the rate of accrual of original issue discount for federal
income tax purposes is [ ]% of the Constant Prepayment Rate. See
"Description of the Certificates--Yield, Appreciation and Prepayment
Considerations" herein.]
For federal income tax purposes, the Depositor will cause an election
to be made to treat a segregated asset pool of the SAMs, excluding the
related Additional Interest Payments, as a REMIC. The Certificates, other
than Appreciation Certificates and the Residual Interest Certificates, will
be designated as REMIC regular interests. As REMIC regular interests, the
Certificates will generally be treated as debt for federal income tax
purposes. Certificateholders will be required to include in income all
interest on the Certificates in accordance with the accrual method of
accounting regardless of the Certificateholders' usual methods of
accounting.
[If interests in the Certificates are issued through a grantor trust or
a financial asset securitization investment trust under Sections 860H
through 860L of the Code, disclosure of the applicable federal income tax
consequences will be provided.]
[The Certificates [other than the Appreciation Certificates and the
Residual Interest Certificates] will generally be treated as "qualifying
real property loans" for mutual savings banks and domestic building and
loan associations, "loans secured by an interest in real property" for
domestic building and loan associations, and "real estate assets" for REITs
in the same proportion that the assets in the REMIC would be so treated. In
addition, interest on the Certificates will generally be treated as
"interest on obligations secured by mortgages on real property" for REITs
to the extent that such Certificates are treated as "real estate assets."
See "Certain Federal Income Tax Consequences" in the Prospectus.]
Method of Distribution
[Subject to the terms and conditions set forth in the underwriting
agreement, dated as of [ ], between [ ] and [ ] (the "Underwriting
Agreement"), the Depositor has agreed to sell to the Underwriter[s], and
the Underwriter[s] [has][have] agreed to purchase, all of the Offered
Certificates. [Bear, Stearns & Co. Inc., an Underwriter, is an affiliate of
the Depositor.] Such Offered Certificates will be offered by the
Underwriter[s] (only as and if issued and delivered to and accepted by the
Underwriter[s]) from time to time in negotiated transactions or otherwise
at varying prices to be determined at the time of sale. Proceeds (excluding
accrued interest) to the Depositor from the sale of the Certificates,
before deducting expenses estimated to be $[ ], will be approximately [ ]%
of the initial aggregate Certificate Principal Balance of the Certificates
plus accrued interest thereon. In connection with the purchase and sale of
such Offered Certificates, the Underwriter[s] may be deemed to have
received compensation from the Depositor in the form of an underwriting
discount. ]
[The Depositor has agreed to indemnify the Underwriter[s] against
certain civil liabilities, including liabilities under the Securities Act
of 1933, as amended, or to contribute to payments the Underwriter[s] may be
required to make in respect thereof.]
[This Prospectus Supplement and the related Prospectus may be used by
Bear, Stearns & Co. Inc., an affiliate of the Depositor, in connection with
offers and sales related to secondary market transactions in the
Certificates. Bear, Stearns & Co. Inc., may act as principal or agent in
such transactions. Such sales will be made at prices related to prevailing
market prices at the time of sale or otherwise.]
There is currently no secondary market for the Certificates and no
assurances are made that such a market will develop. The Underwriter[s]
intends to establish a market in the Offered Certificates, but it is not
obligated to do so. Any such market, even if established, may or may not
continue.
[See "The Depositor--Relationships with Affiliates" in the Prospectus
for a description of the affiliation between the Underwriter and the
Depositor.] [Pending final sale of the Certificates, the Depositor may
cause the Certificates to be issued to itself and may enter into repurchase
agreements or secured lending arrangements for purposes of financing the
holding of Certificates by the Depositor.]
Legal Matters
Certain legal matters will be passed upon for the Depositor and the
Underwriter by [Skadden, Arps, Slate, Meagher & Flom LLP].
Certificate Ratings
It is a condition to the issuance of the Certificates that they be
rated [" "] by [ ] and the Appreciation Certificates be rated [" "] by [ ].
A security rating is not a recommendation to buy, sell or hold securities
and may be subject to revision or withdrawal at any time by the assigning
rating organization. Each security rating should be evaluated independently
of any other security rating].
The ratings on the Certificates address the likelihood of the receipt
by Certificateholders of all distributions on the underlying SAMs, in light
of the structural and legal aspects associated with the Certificates and
the nature of the underlying SAMs. The ratings do not represent any
assessment of the likelihood that Principal Prepayments by Mortgagors might
differ from those originally anticipated or the rate that appreciation will
occur on the underlying Mortgaged Properties. As a result of such
differences in Principal Prepayments or appreciation, Certificateholders
might suffer a lower than anticipated yield. [The ratings also do not
address the likelihood that the [Master] Servicer will be able to
repurchase any SAM which has been converted from an adjustable rate loan to
a fixed rate loan.] See "Description of the Certificates--Yield,
Appreciation and Prepayment Considerations" herein.]
Index of Terms for Prospectus Supplement
Additional Interest Payment..............................................S-11
Appreciation Share.......................................................S-11
Available Distribution Amount............................................S-16
Bankruptcy Coverage......................................................S-28
Book-Entry Certificates..................................................S-12
BSMCC....................................................................S-10
CAR......................................................................S-20
Certificateholder........................................................S-13
Certificateholders.......................................................S-12
Certificates.............................................................S-12
Closing Date.............................................................S-22
Constant Appreciation Rate...............................................S-20
Constant Prepayment Rate.................................................S-20
CPR......................................................................S-20
Cut-Off Date..............................................................S-9
Definitive Certificates..................................................S-13
Depositor................................................................S-10
Determination Date.......................................................S-16
Excess Liquidation Proceeds..............................................S-16
FHLMC....................................................................S-22
FNMA.....................................................................S-22
GNMA.....................................................................S-22
Last Scheduled Distribution Date.........................................S-17
Loan Schedule.............................................................S-9
LTV......................................................................S-11
Mortgaged Property.......................................................S-10
Originators..............................................................S-10
Paying Agent.............................................................S-13
Pool Insurer.............................................................S-25
Pooling Agreement........................................................S-12
Principal Prepayments....................................................S-15
Prospectus...............................................................S-10
Record Date..............................................................S-14
Registrar................................................................S-14
Remittance Rate..........................................................S-10
Sale and Servicing Agreement.............................................S-25
SAM Repurchase...........................................................S-27
Sellers..................................................................S-10
Senior Certificates......................................................S-14
Stated Interest Rate.....................................................S-10
Subordinated Certificates................................................S-14
Transfer Agent...........................................................S-14
Trust.....................................................................S-9
Trustee..................................................................S-12
Underwriter..............................................................S-12
Underwriting Agreement...................................................S-29
Volatility...............................................................S-20
PROSPECTUS
SAMCO Mortgage Securities Corp.
DEPOSITOR
Shared Appreciation Mortgage Pass-Through Certificates
Consider care fully the risk factors beginning on page 4 in this
prospectus.
A certificate will represent an inter est only in the trust created for
that series of cer tificates. A certif icate will not rep resent an
interest in or an obliga tion of SAMCO Mortgage Securi ties Corp., Bear,
Stearns & Co. Inc., or any of their affiliates.
This prospectus may be used to offer and sell a series of certificates
only if accompanied by the prospectus sup plement for that series.
SAMCO Mortgage Securities Corp. may periodically issue certificates
representing interests in a trust that consists primarily of shared
appreciation mortgage loans. The certificates will be issued in series, and
each series of certificates will represent interests in a different trust
established by SAMCO Mortgage Securities Corp.
Each trust will consist of:
1. a pool or pools of shared appreciation mortgage loans secured by
residential properties, described in detail in the accompanying
prospectus supplement;
2. related property and interests in such property or other interests in
shared appreciation mortgage loans;
3. mortgage pass through securities issued or guaranteed by certain
government or government sponsored agencies;
4. privately issued mortgaged-backed securities; and
5. other property as described in the accompanying prospectus supplement.
The certificates in a series:
1. will represent interests in a trust and will be paid only from the
assets of that trust; and
2. may be divided into multiple classes of certificates, and, if so, each
class may:
a. receive a different fixed or variable rate of interest or no
interest; and/or
b. receive additional interest representing a share of the
appreciation in the underlying mortgaged property; and
c. be subordinated to other classes of certificates in that series; and
d. represent interests in only certain of the assets of the trust; and
e. receive principal at different times or no principal; and
f. have different forms of credit enhancement.
The certificates may be offered to the public through different methods as
described in "Methods of Distribution" in this prospectus. Bear, Stearns &
Co. Inc. may act as agent or underwriter in connection with the sale of the
certificates. This prospectus and the accompanying prospectus supplement
may be used by Bear, Stearns & Co. Inc. in secondary market transactions in
connection with the offer and sale of any certificates. Bear, Stearns & Co.
Inc. may act as principal or agent in such transactions and such sales will
be made at prevailing market prices or otherwise.
Neither the SEC nor any state securities commission has approved or
disapproved of these certificates or determined that this prospectus is
accurate or complete. Any representation to the contrary is a criminal
offense.
___________, 1999
Important Notice about Information Presented in this
Prospectus and the Accompanying Prospectus Supplement
We provide information to you about the certificates in two separate
documents that progressively provide more detail: (a) this prospectus,
which provides general information, some of which may not apply to your
series of certificates and (b) the accompanying prospectus supplement,
which describes the specific terms of your series of certificates.
If the terms of a particular series of certificates vary between this
prospectus and the accompanying prospectus supplement, you should rely on
the information in the prospectus supplement.
You should rely only on the information provided in this prospectus and
the accompanying prospectus supplement, including the information
incorporated by reference. We have not authorized anyone to provide you
with different information. We are not offering the certificates in any
state where the offer is not permitted. We do not claim the accuracy of the
information in this prospectus or the accompanying prospectus supplement as
of any date other than the dates stated on their respective covers.
We include cross-references in this prospectus and the accompanying
prospectus supplement to captions in these materials where you can find
further related discussions. The following table of contents and the table
of contents included in the accompanying prospectus supplement provide the
pages on which these captions are located.
You can find a listing of the pages where capitalized terms used in
this prospectus are defined under the caption "Index of Terms for
Prospectus" beginning on page 110.
Table of Contents
Risk Factors.............................................................4
The SAM Pools...........................................................10
General.............................................................10
Agency Certificates.................................................14
Private Mortgage-Backed Securities..................................20
Use of Proceeds.........................................................22
Yield Considerations....................................................22
General.............................................................22
Effective Interest Rate.............................................23
Maturity, Average Life, Appreciation and Prepayment
Assumptions.........................................................24
The Depositor...........................................................26
Bear Stearns Mortgage Capital Corporation...........................26
Mortgage Purchase Program...........................................26
Loan Standards......................................................26
Credit, Appraisal and Underwriting Standards........................27
Representations and Warranties and Indemnification of the
Depositor...........................................................28
Mortgage Subsidy SAMs and Equity Release SAMs.......................28
Description of the Certificates.........................................31
General.............................................................31
Book-Entry Registration.............................................32
Definitive Certificates.............................................36
Assignment of SAMs..................................................37
Substitution of SAMs................................................38
Representations and Warranties......................................38
Retained Yield......................................................40
Payments on SAMs; Deposits to Accounts..............................40
Distributions on Certificates.......................................42
Advances............................................................44
Termination and Optional Termination................................45
Reports to Certificateholders.......................................45
Description of the Pooling and Servicing Agreement
and the Servicing Agreement.........................................47
General.............................................................47
Servicing...........................................................47
Collection and Other Servicing Procedures...........................48
Servicing Compensation and Payment of Expenses......................48
Events of Default...................................................49
Rights Upon Event of Default........................................50
Amendment...........................................................50
List of Certificateholders..........................................51
The Trustee.........................................................51
Duties of the Trustee...............................................51
Resignation of Trustee..............................................52
Evidence as to Compliance...........................................52
Certain Matters Regarding the Master Servicer,
the Servicer and the Certificate Administrator......................53
Exchangeable Certificates...............................................54
General.............................................................54
Exchanges...........................................................54
Procedures and Exchange Proportions.................................59
Primary Insurance, Hazard Insurance; Claims Thereunder..................59
Primary Insurance...................................................60
Hazard Insurance....................................................60
Maintenance of Mortgage Impairment Insurance........................61
Maintenance of Fidelity Bond and Errors and Omissions
Insurance...........................................................62
Description of Credit Enhancements......................................62
Pool Insurance Policies.............................................63
Subordination.......................................................64
Fraud Bond..........................................................65
Bankruptcy Bond.....................................................66
Special Hazard Insurance Policies...................................66
Letter of Credit....................................................67
Reserve Fund........................................................68
Certificate Insurance Policies......................................68
Maintenance of Credit Enhancements; Claims Thereunder and
Other Realization Upon Defaulted SAMs...............................68
Certain Legal Considerations............................................71
Authority to Originate SAMs.........................................71
Applicability of Usury Laws.........................................72
Disclosure Requirements related to SAMs.............................73
Certain State Law Considerations....................................73
Certain Legal Considerations Applicable to SAMs.....................73
ERISA Considerations....................................................78
Plan Assets Regulation..............................................79
Prohibited Transaction Class Exemption 83-1.........................79
Other Exemptions....................................................81
General Considerations..............................................83
Certain Federal Income Tax Consequences.................................83
Classification of REMIC Trust Funds.................................84
Taxation of Owners of REMIC Regular Certificates....................85
Taxation of Owners of REMIC Residual Certificates...................93
Sales of REMIC Certificates.........................................97
Pass-Through of Servicing Fees......................................99
Prohibited Transactions and Other Possible REMIC
Taxes...............................................................99
Termination of a REMIC Trust Fund...................................99
Reporting and Other Administrative Matters of REMICs...............100
Backup Withholding with Respect to REMIC
Certificates.......................................................101
Foreign Investors in REMIC Certificates............................101
Alternatives.......................................................102
State and Local Taxation...........................................102
Taxation of U.S. Holders of Appreciation Certificates..............102
Taxation of Classes of Exchangeable Certificates...................104
Methods of Distribution................................................106
Certain Legal Investment Aspects...................................107
Legal Matters..........................................................108
Financial Information..................................................108
Reports to Certificateholders..........................................108
Where You Can Find More Information....................................109
Index of Terms for Prospectus..........................................110
Annex I: Global Clearance, Settlement
and Tax Documentation Procedures...................................A-1
Risk Factors
You should consider the following risk factors (in addition to the risk
factors in the prospectus supplement) in deciding whether to purchase any
of the certificates.
Lack of Secondary Market A secondary market for the certificates of
May Limit Your Ability any series may not develop. If a secondary
to Resell Your Certificates market does develop, it might not
continue or it might not be sufficiently
liquid to allow you to resell any of your
certificates. An underwriter, including
Bear, Stearns & Co. Inc., may decide to
establish a secondary market for a
particular series of certificates. If so,
the prospectus supplement for that series
of certificates will indicate this
intention. However, no underwriter,
including Bear, Stearns & Co. Inc., will
be obligated to do so. The certificates
will not be listed on any securities
exchange.
There Is No Source of Payments When you buy a certificate, you will not
for Your Certificates Other own an interest in SAMCO Mortgage Securities
than Payments on the SAMs in Corp., Bear, Stearns & Co. Inc. or any of
the Trust its affiliates. You will own an interest
in the Trust established for that series
of certificates. Your payments come only
from assets in the Trust. Therefore, the
mortgagors' payments on the shared
appreciation mortgage loans included in
the Trust (and any credit enhancements)
will be the sole source of payments to
you. If those amounts are insufficient to
make required payments of interest or
principal to you, there is no other
source of payments. Moreover, unless
otherwise specified in the related
prospectus supplement, no governmental
agency or any other entity either
guarantees or insures payments on the
certificates or any of the shared
appreciation mortgage loans. SAMCO
Mortgage Securities Corp. and/or the
Master Servicer or Servicers will have
limited obligations. These will usually
include: the obligation under certain
circumstances to repurchase the shared
appreciation mortgage loans if there has
been a breach of representations and
warranties; advancing payments on the
shared appreciation mortgage loans when
the mortgagor is delinquent if the Master
Servicer or Servicers, as applicable,
believe the advance is recoverable; and
various servicing and/or administrative
obligations made in the pooling agreement
and/or servicing contracts.
You Bear the Risk of Certain Because your certificates represent an
Shared Appreciation Mortgagor interest in the shared appreciation
Defaults; Certain of the Shared mortgage loans, your investment may be
Appreciation Mortgage Loans affected by a decline in real estate
May Be Especially Prone to values and changes in individual
Defaults mortgagors' financial conditions.
Investors should be aware that the value
of the mortgaged properties may decline.
If the outstanding balance of a shared
appreciation mortgage loan and any
secondary financing on the mortgaged
property is greater than the value of the
property, there is an increased risk of
delinquency, foreclosure and losses on or
with respect to the shared appreciation
mortgage loan. If the residential real
estate market experiences an overall
decline in property values, the rates of
delinquencies, foreclosures and losses
could be higher than those now generally
experienced in the mortgage lending
industry as to mortgage loans that are
not shared appreciation mortgage loans or
mortgage loans generally. To the extent
your certificates do not have any form of
credit enhancements, you will bear all of
the risks resulting from defaults by
mortgagors.
Further, shared appreciation mortgage
loans may involve a greater degree of
risk with respect to default, because the
ability of a mortgagor to make this final
payment, which because of the shared
appreciation feature may be greater than
a typical mortgage loan, typically
depends on the ability of the mortgagor
to refinance the shared appreciation
mortgage loan or sell the related
mortgaged property. If the mortgagor is
unable to obtain such financing at
maturity, the mortgagor may be more
likely to default.
In addition, certain types of shared
appreciation mortgage loans may have
higher than average rates of default than
mortgage loans which are not shared
appreciation mortgage loans or other
types of shared appreciation mortgage
loans that may be included in the Trust
that issues your certificates. For
instance, the value of a mortgaged
property subject to an equity release
mortgage loan may decline more than would
have been the case had such mortgaged
property been subject to a mortgage
associated with a shared appreciation
mortgage loan other than an equity
release mortgage loan. The principal
reason why this may occur is that the
mortgagor under an equity release
mortgage loan may have agreed to pay the
originator a more substantial portion of
the appreciation in the value of the
mortgaged property since the date of
origination of the mortgage loan than
another type of shared appreciation
mortgage loan and therefore may be less
inclined to perform routine maintenance
or make capital expenditures on or with
respect to the property. Further, your
Trust may include shared appreciation
mortgage loans with a negative
amortization feature. The principal
balances of such loans may be increased
to amounts greater than the value of the
underlying mortgaged property and such
value may decrease as described above.
This increases the likelihood of default.
Your Trust may include shared
appreciation mortgage loans that do not
fully amortize over their terms to
maturity. Such mortgage loans are
sometimes referred to as balloon loans.
Such loans will require a large payment
at their stated maturity. These mortgage
loans involve a greater degree of risk,
because the ability of a mortgagor to
make this final payment typically depends
on the ability of the mortgagor to
refinance the shared appreciation
mortgage loan or sell the related
mortgaged property. Further, your Trust
may include shared appreciation mortgage
loans that provide for escalating or
variable payments by the mortgagor. The
mortgagor may have qualified for such
shared appreciation mortgage loans based
on an income level sufficient to make the
initial payments only. As the required
payments increase, the likelihood of
default will increase. Finally, your
Trust may include shared appreciation
mortgage loans that are concentrated in
certain regions, states or zip code areas
of the United States. Such geographic
units may experience weak economic
conditions or housing markets. This may
cause higher rates of loss and
delinquency on the shared appreciation
mortgage loans originated in these areas.
See "Description of the SAM Pool" in the
related prospectus supplement to see if
any of these or other types of special
risk loans are present in the mortgage
pool applicable to your certificates.
Credit Enhancements May Be The prospectus supplement related to
Limited or Reduced and this your certificates may specify that credit
May Cause Your Certificates enhancements will provide some protection
to Bear More Risk of to cover certain losses on the underlying
Mortgagor Defaults shared appreciation mortgage loans. The
forms of credit enhancement include (but
are not limited to) the following:
subordination of one or more classes of
certificates to other classes of
certificates in the same series;
insurance policies on particular classes
of certificates to support payments on
those certificates; a letter of credit; a
mortgage pool insurance policy; a special
hazard insurance policy; a fraud bond; a
bankruptcy bond; a reserve fund; or any
combination thereof. See "Description of
the Credit Enhancements" herein. See also
"Credit Enhancements" in the related
prospectus supplement in order to see
what forms of credit enhancements apply
to your certificates.
Regardless of the form of credit
enhancement, an investor should be aware
that:
1. the amount of coverage is usually
limited;
2. the amount of coverage will usually
be reduced over time according to a
schedule or formula;
3. the particular form of credit
enhancements may provide coverage
only to certain types of losses on
the shared appreciation mortgage
loans, and not to other types of
losses;
4. the particular form of credit
enhancements may provide coverage
only to certain certificates and not
other certificates of the same
series; and
5. if the applicable rating agencies
believe that the rating on the
certificates will not be adversely
affected, certain types of credit
enhancements may be reduced or
terminated.
If the Rate of Prepayments on The yield to maturity of your certificates
the Shared Appreciation will depend primarily on the price you
Mortgage Loans Is Different paid for your certificates and the rate
than Expected, Your Yield May of principal payments on the shared
Be Considerably Lower than appreciation mortgage loans in the
Anticipated applicable Trust. The rate of principal
payments includes scheduled payments of
interest and principal, payments of
additional interest, prepayments,
liquidations due to defaults and
repurchases. If the rate of prepayments
on the shared appreciation mortgage loans
related to your certificates is higher or
lower than anticipated, the yield to
maturity may be adversely affected. The
yield on some types of certificates are
more sensitive to variations in
prepayments than others. For example,
certificates that receive only payments
of interest are especially sensitive to
variations in the rate of prepayments. If
the rate of prepayments is high or if a
redemption or call feature of the
certificates or the underlying shared
appreciation mortgage loans occurs, the
holders of such certificates may not
fully recoup their initial investment.
See "Yield Considerations" and "Maturity,
Average Life, Appreciation and Prepayment
Assumptions" in this prospectus. See also
"Risk Factors" and "Description of the
Certificates--Yield, Appreciation and
Prepayment Considerations" in the related
prospectus supplement for more
information concerning the prepayment
risks pertaining to your certificates.
The Redemption of the Your certificates may be subject to
Certificates or the redemption or other call features. Likewise,
Underlying Shared Appreciation the underlying shared appreciation
Mortgage Loans Will Affect mortgage loans may be subject to a call
Your Yield feature which would result in the
retirement of the certificates. Such an
event would affect the average life and
yield of each class of certificates in
such series. In addition, if you are the
purchaser of an appreciation certificate,
your yield will also be affected by the
method for calculating the indexed
appreciation payments for any shared
appreciation mortgage loans or any
certificates. See "Yield Considerations"
and "Maturity, Average Life, Appreciation
and Prepayment Assumptions" in this
prospectus.
If You Purchase Appreciation Appreciation certificates will be allocated
Certificates, Your Yield Will some or all of the additional interest
Be Especially Affected by payments generated by the shared
Changes in the Value of the appreciation mortgage loans in your
Mortgaged Property Trust. The amount of these payments for
any Trust is a function of both (a) the
actual appreciation occurring on the
mortgaged properties underlying the
shared appreciation mortgage loans in the
Trust that have matured and (b) the index
used for calculating the indexed
appreciation payments for the shared
appreciation mortgage loans in the Trust
or such certificates. The value of any
mortgaged properties in the Trust may not
increase. Thus, as an investor in the
appreciation certificates, you should be
aware that your yield may be low, zero or
negative and you may lose the entire
investment in the appreciation
certificates that you purchase. See
"Yield Considerations" and "Maturity,
Average Life, Appreciation and Prepayment
Assumptions" in this prospectus.
Violation of Various Federal Applicable state laws generally regulate
and State Laws May Result interest rates and other charges and
in Losses on the Shared require certain disclosures. In addition,
Appreciation Mortgage Loans most states have other laws, public
policies and general principles of equity
relating to the protection of consumers,
unfair and deceptive practices, and other
practices that may apply to the
origination, servicing and collection of
the shared appreciation mortgage loans.
The shared appreciation mortgage loans
may also be subject to various federal
laws. The Truth-in-Lending Act and
Regulation Z promulgated thereunder and
the Real Estate Settlement Procedures Act
and Regulation X promulgated thereunder
require certain disclosures to the
mortgagors regarding the terms of the
shared appreciation mortgage loans. The
Equal Credit Opportunity Act and
Regulation B promulgated thereunder and
the Fair Housing Act and the regulations
promulgated thereunder prohibit
discrimination in the provision of
housing credit on the basis of certain
protected classes. The Fair Credit
Reporting Act regulates the use and
reporting of information related to the
mortgagors' credit experience. Other
federal laws may also apply.
Depending on the provisions of the
applicable law and the specific facts and
circumstances involved, violations of
such laws, policies and general
principles of equity may limit the
ability of a servicer to collect all or
part of the principal of or interest
charged on the shared appreciation
mortgage loans, may entitle the
mortgagors to rescind the loan or to a
refund of amounts previously paid and, in
addition, could subject the owner of the
shared appreciation mortgage loans to
damages and administrative sanctions.
Appreciation Certificates may If the additional interest provision of the
be Subject to Usury Laws shared appreciation mortgage loans does not
fall within the scope of the Depositary
Institutions Deregulation and Monetary
Control Act of 1980 and the Alternative
Mortgage Transaction Parity Act of 1982
is interpreted not to provide for an
exemption from state usury statutes,
individual state usury laws may apply to
such loans. Only limited case law exists
on the application of these federal acts
to shared appreciation mortgage loans.
The SAM Pools
General
Unless otherwise indicated in the applicable Prospectus Supplement,
each series will consist of a pool or pools (each, a "SAM Pool"), each of
which will consist of fixed or adjustable rate shared appreciation mortgage
loans, which currently pay interest or currently pay no interest
(respectively, the "Mortgage Subsidy SAMs" or "Equity Release SAMs;"
collectively, "SAMs") evidenced by promissory notes (the "Mortgage Notes")
secured by first and secured mortgages, deeds of trust or security deeds
(the "Mortgages") on one- to four-family residential properties or
multi-family residential properties (the "Mortgaged Properties"), mortgage
pass-through securities ("Agency Securities") issued or guaranteed by the
government agencies or government sponsored agencies, and private issued
mortgage-backed securities ("Private Mortgage-Backed Securities"). The
types of Mortgaged Properties securing the SAMs in each SAM Pool may
include owner-occupied (a) (i) attached or detached single-family
residences, including residences in planned unit developments, (ii) two- to
four-family primary residences and (iii) condominiums or other attached
dwelling units and (b) leasehold interests in the underlying Mortgaged
Properties and such other types of homes or dwellings as are set forth in
the related Prospectus Supplement. In the case of leasehold interests, the
term of the leasehold will exceed the scheduled maturity of the SAM by at
least ten years.
Private Mortgage-Backed Securities may include:
(a) mortgage participation or pass-through certificates
representing beneficial interests in certain mortgage loans
or SAMs,
(b) Collateralized Mortgage Obligations ("CMOs") secured by such
mortgage loans or SAMs, and
(c) stripped mortgage-backed securities representing an
undivided interest in all or a part of any of the principal
distributions (but not the interest distributions) or the
interest distributions (but not the principal distributions)
or in some specified portion of the principal and interest
distributions (but not all of such distributions) on certain
mortgage loans or SAMs.
Agency Securities may include:
(a) fully modified pass-through mortgage-backed certificates
guaranteed as to timely payment of principal and interest by
the Government National Mortgage Association ("GNMA
Certificates")
(b) Guaranteed Mortgage Pass-Through Certificates issued and
guaranteed as to timely payment of principal and interest by
the Federal National Mortgage Association ("FNMA
Certificates"),
(c) Mortgage Participation Certificates issued and guaranteed as
to timely payment of interest and ultimate (but generally
not timely) payment of principal by FHLMC (formerly, the
Federal Home
Loan Mortgage Corporation) ("FHLMC Certificates"),
(d) stripped mortgage-backed securities representing an
undivided interest in all or a part of either the principal
distributions (but not the interest distributions) or the
interest distributions (but not the principal distributions)
or in some specified portion of the principal and interest
distributions (but not all of such distributions) on certain
GNMA, FNMA, FHLMC or other government agency or
government-sponsored agency certificates and generally
guaranteed to the same extent as the underlying securities,
(e) another type of guaranteed pass-through certificate issued
or guaranteed by GNMA, FNMA, FHLMC or another government
agency or government-sponsored agency and described in the
related Prospectus Supplement, or
(f) a combination of such Agency Securities.
The SAMs to be purchased by Bear Stearns Mortgage Capital Corporation
("BSMCC") (which will transfer them to SAMCO Mortgage Securities Corp. (the
"Depositor") for inclusion in a SAM Pool) will be screened in accordance
with the standards set forth herein under "The Depositor--Credit, Appraisal
and Underwriting Standards" unless there are changes thereto, which changes
are set forth in the related Prospectus Supplement. BSMCC will also
underwrite a percentage of the SAMs to be purchased. The SAMs in each SAM
Pool will be originated by "Originators" in accordance with standards set
forth by BSMCC and purchased from lending institutions which meet the
requirements set forth under "The Depositor--Mortgage Purchase Program"
(such institutions, "Sellers"). Generally, with respect to Mortgage
Pass-Through Certificates to be issued in series from time to time (each, a
"Series"), an entity (often being or affiliated with such Seller) set forth
in the related Prospectus Supplement will be responsible for the servicing
and administration of the SAMs and will perform certain servicing functions
with respect to the SAMs. In the event that a master servicer (each, a
"Master Servicer") or Servicer (as defined below) named in the Prospectus
Supplement, is acting as Master Servicer or Servicer with respect to a
single Series, (i) such Master Servicer or Servicer will act as Master
Servicer or Servicer only for the SAMs in the related SAM Pool as set forth
in the related Prospectus Supplement, (ii) the duties, obligations and
liabilities of such Master Servicer or Servicer shall relate only to its
respective SAM Pool, and (iii) the Master Servicer or Servicer will
calculate amounts distributable to the Certificateholders of Mortgage
Pass-Through Certificates (the "Certificates"), prepare tax returns on
behalf of the Trust Fund (as defined below) and provide certain other
administrative services specified in the Pooling Agreement (in such
capacity, the "Certificate Administrator"). If so specified in the
applicable Prospectus Supplement, the Trustee may be the Certificate
Administrator with respect to such Series. Unless so specified in the
applicable Prospectus Supplement, (i) the servicing of the SAMs will be
performed by the Seller which sold the SAMs to BSMCC for inclusion in the
Trust Fund, or by a qualified servicer selected by the Depositor (either
entity acting in such capacity, the "Servicer") and (ii) there will not be
a Master Servicer. The Master Servicer, the Servicer and the Certificate
Administrator may perform their respective servicing and administrative
responsibilities through agents or independent contractors but shall not
thereby be released from any of their obligations under the Pooling
Agreement. See "Description of the Pooling and Servicing Agreement and the
Servicing Agreement--Servicing."
For each Series, the applicable Prospectus Supplement will set forth
information respecting the number and principal amount of SAMs in each SAM
Pool (i) which were originated for the purpose of purchasing and
refinancing the related Mortgaged Properties; and (ii) for borrowers on
such SAMs (the "Mortgagor") in specified age groups. For each SAM Pool, the
related Prospectus Supplement will generally contain specific information
as of the date specified in the Prospectus Supplement relating to the
creation of the Trust Fund (the "Cut-Off Date") regarding:
(1) the aggregate principal balance of the SAMs;
(2) the range of contractual stated periodic interest payments
("Stated Interest Rates" borne by the SAMs) and the
Appreciation Shares (as defined herein) by principal
balance;
(3) the month and year in which the first monthly payments
occur, and the latest maturity of the SAMs;
(4) the largest and smallest principal balances of the SAMs at
origination;
(5) the aggregate principal balance of all SAMs having LTVs at
origination exceeding 80%;
(6) the types of dwellings constituting the Mortgaged Properties
securing the SAMs; and
(7) the geographic distribution of the SAMs, prepared on a
state-by-state or zip code by zip code basis for states
containing 5% or more of the SAM Pool.
To the extent specified in the applicable Prospectus Supplement, SAMs with
LTVs and/or principal balances exceeding certain limits will be covered
partially by Primary Insurance Policies. In addition, if specified in the
applicable Prospectus Supplement, the Depositor, the Master Servicer, a
Seller or a Servicer, as applicable, may obtain or establish one or more
credit enhancements for a SAM Pool. Any such credit enhancement will be
described in the applicable Prospectus Supplement. Such credit enhancements
may be limited to one or more Classes of Certificates and may include, but
will not necessarily be limited to, any of the following: a Pool Insurance
Policy, a Special Hazard Insurance Policy, a Fraud Bond, a Bankruptcy Bond,
a Letter of Credit, a Reserve Fund, a Certificate Insurance Policy, or any
combination of the foregoing (each as defined herein). Coverage of certain
risks of default or loss may also be provided to a particular Class or
Classes of Certificates by the subordination in right of payment of one or
more other Classes of Certificates of the same Series to the right of
holders of such Class or Classes of Certificates to receive payments. See
"Description of Credit Enhancements" herein.
All SAMs will be of one or more of the following types of SAMs of
varying terms at origination:
(1) Mortgage Subsidy SAMs (see "The Depositor--Mortgage Subsidy
SAMs and Equity Release SAMs" herein);
(2) Equity Release SAMs (see "The Depositor--Mortgage Subsidy
SAMs and Equity Release SAMs" herein); and
(3) any other type of SAM described in the applicable Prospectus
Supplement.
Specific information with respect to the SAMs in a particular SAM Pool
and the applicable credit enhancements which is not included in the related
Prospectus Supplement will generally be included in a Current Report on
Form 8-K which will be available to purchasers of the Certificates at or
before the time of initial issuance of the related Series of Certificates
and which will be filed with the Securities and Exchange Commission (the
"Commission") within 15 days thereafter.
Each Master Servicer has entered or will enter into a contract with
each related Servicer to perform, as an independent contractor, certain
servicing functions for such Master Servicer subject to its supervision and
may enter into a contract with an independent entity to perform
administrative functions for the SAM Pools, or the Trustee has entered or
will enter into a contract with each related Servicer to perform certain
servicing functions for the SAM sold to the Trust by it or for all the SAMs
in the SAM Pool (any such contract which may be the related Sale and
Servicing Agreement, a "Servicing Agreement"). If so specified in the
applicable Prospectus Supplement, there will be no Master Servicer for a
particular Series of Certificates. In such event, the servicing of the SAMs
will be performed by the Servicer specified in the applicable Prospectus
Supplement. Such Master Servicer may have the right to remove any related
Servicer of any SAM at any time if such Master Servicer considers such
removal to be in the best interests of Certificateholders, but only for
cause as described in such Prospectus Supplement. In such event, such
Master Servicer must designate a replacement Servicer (which may include a
related Master Servicer or Servicer, or an affiliate of such Master
Servicer or Servicer). Each Master Servicer may also perform its
administrative and servicing responsibilities through agents or independent
contractors but shall not thereby be released from any of its
responsibilities under the Pooling Agreement. Each Master Servicer will
receive a fee (the "Master Servicing Fee") for its services in accordance
with performing its duties and under any Pooling Agreement or Servicing
Agreement, as applicable. The Servicer will receive a fee (the "Servicing
Fee") for performing its services in accordance with performing its duties
under any Pooling Agreement or Servicing Agreement, as applicable. The fees
to a Master Servicer and the Servicers will be paid from the difference
between the Stated Interest Rate on each SAM (or SAM Pool, if applicable)
and the amount needed to pay Master Servicing Fees, Servicing Fees,
Certificate Administrator Fees and any Retained Yield (as defined herein)
(the "Remittance Rate") with respect to such SAM or, if specified in the
Prospectus Supplement, be paid from Additional Interest Payments (as
defined herein).
With respect to each Series, a Certificate Administrator may be
appointed. If appointed, the Certificate Administrator will calculate
amounts distributable to the Certificateholders, and may prepare tax
returns on behalf of the Trust Fund and provide certain other services
specified in a separate pooling and servicing agreement (a "Pooling
Agreement") for the Series. The Servicer and the Certificate Administrator
may perform their respective servicing and administrative responsibilities
through agents or independent contractors but shall not thereby be released
from any of their respective responsibilities under the Pooling Agreement.
With respect to such Series of Certificates, the Certificate Administrator
will receive a fee for its services (the "Certificate Administrator Fee"),
which will be paid from the difference between the Stated Interest Rate on
each SAM and the Remittance Rate (net of any Retained Yield) with respect
to such SAM or if specified in the Prospectus Supplement, be paid from
Additional Interest Payments in such other manner specified in the related
Prospectus Supplement.
The Certificates of each Series will represent undivided interests in a
trust (the "Trust Fund") consisting of the SAMs included in one or more SAM
Pools for that Series and related property (the "Trust Assets"). Certain
Series will be enhanced by mortgage loan insurance or other forms of credit
enhancement, in each case as more fully described herein under the captions
"Description of the Certificates" and "Description of Credit Enhancements"
and/or in the related Prospectus Supplement. When each Series of
Certificates is issued, the Depositor will cause the SAMs in each SAM Pool
for that Series to be assigned to an independent bank or trust company as
trustee (a "Trustee") for the benefit of the holders of Certificates of
that Series, and the Master Servicer or the Servicer, as applicable, will
be responsible for master servicing the SAMs pursuant to the Pooling
Agreement. The Trustee may also serve as Certificate Administrator.
The Depositor's assignment of the SAMs to the Trustee will be without
recourse, and the Depositor's obligations with respect to the SAMs will,
unless otherwise indicated in the Prospectus Supplement for a Series of
Certificates, be limited to any representations and warranties made by it
in, as well as its contractual obligations under, the Pooling Agreement for
each Series. In the event of delinquencies in payments on the SAMs (or the
related SAM Pool for such Series), the Master Servicer, the Seller and/or
the Originator, as specified in the applicable Prospectus Supplement will
only be obligated to advance cash ("Advances") in the amounts described
herein under "Description of the Certificates--Advances" relating to its
SAM Pool to the extent such Advances are not made by the Servicers. Any
such Advances by a Master Servicer, the Servicer, the Seller or the
Originator will be limited to amounts which, in the judgment of such
entity, ultimately will be reimbursable with respect to such
SAM Pool from principal payments, Additional Interest Payments and the
Stated Interest (both as defined herein) paid on the SAMs or amounts paid
by or under any applicable Pool Insurance Policy, any applicable Special
Hazard Insurance Policy, any Primary Insurance Policy, any applicable
Letter of Credit, Reserve Fund or any other applicable policy of insurance,
any subordination feature described herein or the proceeds of liquidation
of a SAM. See "Description of Credit Enhancements." If so specified in the
applicable Prospectus Supplement, neither a Master Servicer nor any such
other entity will be obligated to make Advances with respect to SAMs
delinquent longer than the time period specified in such Prospectus
Supplement. See "Description of the Certificates--Advances" and
"Description of Credit Enhancements." A Master Servicer is obligated to
remit to Certificateholders of a Series all amounts relating to the SAMs to
the extent such amounts have been collected or advanced by the Servicers or
advanced by such Master Servicer and are due Certificateholders pursuant to
the terms of the Pooling Agreement for such Series. With respect to any
Series of Certificates as to which there will be no Master Servicer and the
servicing of the SAMs will be performed by the Servicer and the Seller or
the Originator as specified in the related Prospectus Supplement, if so
stated in the related Prospectus Supplement, the Servicer will be obligated
to make Advances in the amounts described herein under "Description of the
Certificates--Advances" limited to amounts which, in the judgment of the
Servicer, ultimately will be reimbursable with respect to such SAM Pool
from any of the sources stated above.
Agency Certificates
Government National Mortgage Association
Government National Mortgage Association ("GNMA") is a wholly-owned
corporate instrumentality of the United States with the United States
Department of Housing and Urban Development. Section 306(g) of Title II of
the National Housing Act of 1934, as amended (the "Housing Act"),
authorizes GNMA to guarantee the timely payment of the principal of and
interest on certificates which represent an interest in a pool of mortgage
loans insured by Federal Housing Authority ("FHA") under the Housing Act,
or Title V of the Housing Act of 1949 ("FHA Loans"), or partially
guaranteed by the Veterans Administration ("VA") under the Servicemen's
Readjustment Act of 1944, as amended, or Chapter 37 of Title 38, United
States Code ("VA Loans").
Section 306(g) of the Housing Act provides that "the full faith and
credit of the United States is pledged to the payment of all amounts which
may be required to be paid under any guarantee under this subsection." In
order to meet its obligations under any such guarantee, GNMA may, under
Section 306(d) of the Housing Act, borrow from the United States Treasury
in an amount which is at any time sufficient to enable GNMA, with no
limitations as to amount, to perform its obligations under its guarantee.
GNMA Certificates
Each GNMA Certificate held in a Trust Fund (which may be issued under
either the GNMA I Program or the GNMA II Program) will be a "fully modified
pass-through" mortgaged-backed certificate issued and serviced by a
mortgage banking company or other financial concern ("GNMA Issuer")
approved by GNMA or approved by FNMA as a seller-servicer of FHA Loans
and/or VA Loans. The mortgage loans underlying the GNMA Certificates will
consist of FHA Loans and/or VA Loans. Each such mortgage loan is secured by
a one- to four-family residential property or a manufactured home. GNMA
will approve the issuance of each such GNMA Certificate in accordance with
a guaranty agreement (a "Guaranty Agreement") between GNMA and the GNMA
Issuer. Pursuant to its Guaranty Agreement, a GNMA Issuer will be required
to advance its own funds in order to make timely payments of all amounts
due on each such GNMA Certificate, even if the payments received by the
GNMA Issuer on the FHA Loans or VA Loans underlying each such GNMA
Certificate are less than the amounts due on each such GNMA Certificate.
The full and timely payment of principal of and interest on each GNMA
Certificate will be guaranteed by GNMA, which obligation is backed by the
full faith and credit of the United States. Each such GNMA Certificate will
have an original maturity of not more than 30 years (but may have original
maturities of substantially less than 30 years). Each such GNMA Certificate
will be based on and backed by a pool of FHA Loans or VA Loans secured by
one- to four-family residential properties or manufactured homes and will
provide for the payment by or on behalf of the GNMA Issuer to the
registered holder of such GNMA Certificate of scheduled monthly payments of
principal and interest equal to the registered holder's proportionate
interest in the aggregate amount of the monthly principal and interest
payment on each FHA Loan or VA Loan underlying such GNMA Certificate, less
the applicable servicing and guarantee fee which together equal the
difference between the interest on the FHA Loan or VA Loan and the
pass-through rate on the GNMA Certificate. In addition, each payment will
include proportionate pass-through payments of any prepayments of principal
on the FHA Loans or VA Loans underlying such GNMA Certificate and
liquidation proceeds in the event of a foreclosure or other disposition of
any such FHA Loans or VA Loans.
If a GNMA Issuer is unable to make the payments on a GNMA Certificate
as it becomes due, it must promptly notify GNMA and request GNMA to make
such payment. Upon notification and request, GNMA will make such payments
directly to the registered holder of such GNMA Certificate. In the event no
payment is made by a GNMA Issuer and the GNMA Issuer fails to notify and
request GNMA to make such payment, the holder of such GNMA Certificate will
have recourse only against GNMA to obtain such payment. The Trustee or its
nominee, as registered holder of the GNMA Certificates held in a Trust
Fund, will have the right to proceed directly against GNMA under the terms
of the Guaranty Agreements relating to such GNMA Certificates for any
amounts that are not paid when due.
All mortgage loans underlying a particular GNMA I Certificate must have
the same interest rate (except for pools of mortgage loans secured by
manufactured homes) over the term of the loan. The interest rate on such
GNMA I Certificate will equal the interest rate on the mortgage loans
included in the pool of mortgage loans underlying such GNMA I Certificate,
less one-half percentage point per annum of the unpaid principal balance of
the mortgage loans.
Mortgage loans underlying a particular GNMA II Certificate may have per
annum interest rates that vary from each other by up to one percentage
point. The interest rate on each GNMA II Certificate will be between
one-half percentage point and one and one-half percentage points lower than
the highest interest rate on the mortgage loans included in the pool of
mortgage loans underlying such GNMA II Certificate (except for pools of
mortgage loans secured by manufactured homes).
Regular monthly installment payments on each GNMA Certificate held in a
Trust Fund will be comprised of interest due as specified on such GNMA
Certificate plus the scheduled principal payments on the FHA Loans or VA
Loans underlying such GNMA Certificate due on the first day of the month in
which the scheduled monthly installments on such GNMA Certificate is due.
Such regular monthly installments on each such GNMA Certificate are
required to be paid to the Trustee as registered holder by the 15th day of
each month in the case of a GNMA I Certificate and are required to be
mailed to the Trustee by the 20th day of each month in the case of a GNMA
II Certificate. Any principal prepayments on any FHA Loans or VA Loans
underlying a GNMA Certificate held in a Trust Fund or any other early
recovery of principal on such loan will be passed through to the Trustee as
the registered holder of such GNMA Certificate.
GNMA Certificates may be backed by graduated payment mortgage loans or
by "buydown" mortgage loans for which funds will have been provided (and
deposited into escrow accounts) for application to the payment of a portion
of the borrowers' monthly payments during the early years of such mortgage
loan. Payments due the registered holders of GNMA Certificates backed by
pools containing "buydown" mortgage loans will be computed in the same
manner as payments derived from other GNMA Certificates and will include
amounts to be collected from both the borrower and the related escrow
account. The graduated payment mortgage loans will provide for graduated
interest payments that, during the early years of such mortgage loans, will
be less than the amount of stated interest on such mortgage loans. The
interest not so paid will be added to the principal of such graduated
payment mortgage loans and, together with interest thereon, will be paid in
subsequent years. The obligations of GNMA and of a GNMA Issuer will be the
same irrespective of whether the GNMA Certificates are backed by graduated
payment mortgage loans or "buydown" loans. No statistics comparable to the
FHA's prepayment experience on level payment, non-buydown loans are
available in respect of graduated payment or buydown mortgages. GNMA
Certificates related to a Series of Certificates may be held in book-entry
form.
If specified in a related Prospectus Supplement, GNMA Certificates may
be backed by multifamily mortgage loans having the characteristics
specified in such Prospectus Supplement.
The GNMA Certificates included a Trust Fund, and the related underlying
mortgage loans, may have characteristics and terms different from those
described above. Any such different characteristics and terms will be
described in the related Prospectus Supplement.
FNMA
FNMA is a federally chartered and privately owned corporation organized
and existing under the Federal National Mortgage Association Charter Act
(the "Charter Act"). FNMA was originally established in 1938 as a United
States government agency to provide supplemental liquidity to the mortgage
market and was transformed into a stockholder-owned and privately-managed
corporation by legislation enacted in 1968.
FNMA provides funds to the mortgage market primarily by purchasing
mortgage loans from lenders, thereby replenishing their funds for
additional lending. FNMA acquires funds to purchase mortgage loans from
many capital market investors that may not ordinarily invest in mortgages,
thereby expanding the total amount of funds available for housing.
Operating nationwide, FNMA helps to redistribute mortgage funds from
capital-surplus to capital-short areas.
FNMA Certificates
FNMA Certificates are Guaranteed Mortgage Pass-Through Certificates
representing fractional undivided interests in a pool of mortgage loans
formed by FNMA. Each mortgage loan must meet the applicable standards of
the FNMA purchase program. Mortgage loans comprising a pool are either
provided by FNMA from its own portfolio or purchased pursuant to the
criteria of the FNMA purchase program.
Mortgage loans underlying FNMA Certificates held by a Trust Fund will
consist of conventional mortgage loans, FHA Loans or VA Loans. Original
maturities of substantially all of the conventional, level payment mortgage
loans underlying a FNMA Certificate are expected to be between either 8 to
15 years or 20 to 30 years. The original maturities of substantially all of
the fixed rate level payment FHA Loans or VA Loans are expected to be 30
years.
Mortgage loans underlying a FNMA Certificate may have annual interest
rates that vary by as much as two percentage points from each other. The
rate of interest payable on a FNMA Certificate is equal to the lowest
interest rate of any mortgage loan in the related pool, less a specified
minimum annual percentage representing servicing compensation and FNMA's
guaranty fee. Under a regular servicing option (pursuant to which the
mortgagee or other servicers assumes the entire risk of foreclosure
losses), the annual interest rates on the mortgage loans underlying a FNMA
Certificate will be between 50 basis points and 250 basis points greater
than in its annual pass-through rate and under a special servicing option
(pursuant to which FNMA assumes the entire risk for foreclosure losses),
the annual interest rates on the mortgage loans underlying a FNMA
Certificate will generally be between 55 basis points and 255 basis points
greater than the annual FNMA Certificate pass-through rate. If specified in
the related Prospectus Supplement, FNMA Certificates may be backed by
adjustable rate mortgages.
FNMA guarantees to each registered holder of a FNMA Certificate that it
will distribute amounts representing such holder's proportionate share of
scheduled principal and interest payments at the applicable pass-through
rate provided for by such FNMA Certificate on the underlying mortgage
loans, whether or not received, and such holder's proportionate share of
the full principal amount of any foreclosed or other finally liquidated
mortgage loan, whether or not such principal amount is actually recovered.
The obligations of FNMA under its guarantees are obligations solely of FNMA
and are not backed by, nor entitled to, the full faith and credit of the
United States. Although the Secretary of the Treasury of the United States
has discretionary authority to lend FNMA up to $2.25 billion outstanding at
any time, neither the United States nor any agency thereof is obligated to
finance FNMA's operations or to assist FNMA in any other manner. If FNMA
were unable to satisfy its obligations, distributions to holders of FNMA
Certificates would consist solely of payments and other recoveries on the
underlying mortgage loans and, accordingly, monthly distributions to
holders of FNMA Certificates would be affected by delinquent payments and
defaults on such mortgage loans.
FNMA Certificates evidencing interests in pools of mortgage loans
formed on or after May 1, 1985 (other than FNMA Certificates backed by
pools containing graduated payment mortgage loans or mortgage loans secured
by multifamily projects) are available in book-entry form only.
Distributions of principal and interest on each FNMA Certificate will be
made by FNMA on the 25th day of each month to the persons in whose name the
FNMA Certificate is entered in the books of the Federal Reserve Banks (or
registered on the FNMA Certificate register in the case of fully registered
FNMA Certificates) as of the close of business on the last day of the
preceding month. With respect to FNMA Certificates issued in book-entry
form, distributions thereon will be made by wire, and with respect to fully
registered FNMA Certificates, distributions thereon will be made by check.
The FNMA Certificates included in a Trust Fund, and the related
underlying mortgage loans, may have characteristics and terms different
from those described above. Any such different characteristics and terms
will be described in the related Prospectus Supplement.
FHLMC
FHLMC is a publicly-held United States government-sponsored enterprise
created pursuant to the Federal Home Loan Mortgage Corporation Act, Title
III of the Emergency Home Finance Act of 1970, as amended (the "FHLMC
Act"). FHLMC was established primarily for the purpose of increasing the
availability of mortgage credit for the financing of urgently needed
housing. It seeks to provide an enhanced degree of liquidity for
residential mortgage investments primarily by assisting in the development
of secondary markets for conventional mortgages. The principal activity of
FHLMC currently consists of the purchase of first lien conventional
mortgage loans or participation interests in such mortgage loans and the
sale of the mortgage loans or participations so purchased in the form of
mortgage securities, primarily FHLMC Certificates. FHLMC is confined to
purchasing, so far as practicable, mortgage loans that it deems to be of
such quality, type and class as to meet generally the purchase standards
imposed by private institutional mortgage investors.
FHLMC Certificates
Each FHLMC Certificate represents an undivided interest in a pool of
mortgage loans that may consist of first lien conventional loans, FHA Loans
or VA Loans. Freddie Mac Certificates are sold under the terms of a
Mortgage Participation Certificate Agreement. A Freddie Mac Certificate may
be issued under either Freddie Mac's Cash Program or Guarantor Program.
Mortgage loans underlying the FHLMC Certificates held by a Trust Fund
will consist of mortgage loans with original terms to maturity of between
10 and 30 years or such other period as provided in the related Prospectus
Supplement. Each such mortgage loan must meet the applicable standards set
forth in the FHLMC Act. A FHLMC Certificate group may include whole loans,
participation interests in whole loans and undivided interests in whole
loans and/or participations comprising another FHLMC Certificate group.
Under the Guarantor Program, any such FHLMC Certificate group may include
only whole loans or participation interests in whole loans.
FHLMC guarantees to each registered holder of a FHLMC Certificate the
timely payment of interest on the underlying mortgage loans to the extent
of the applicable Certificate rate on the registered holder's pro rata
share of the unpaid principal balance outstanding on the underlying
mortgage loans in the FHLMC Certificate group represented by such FHLMC
Certificate, whether or not received. FHLMC also guarantees to each
registered holder of a FHLMC Certificate collection by such holder of all
principal on the underlying mortgage loans, without any offset or
deduction, to the extent of such holder's pro rata share thereof, but does
not, except if and to the extent specified in the Prospectus Supplement for
a Series of Certificates, guarantee the timely payment of scheduled
principal. Under FHLMC's Gold PC Program, FHLMC guarantees the timely
payment of principal based on the difference between the pool factor,
published in the month preceding the month of distribution and the pool
factor published in such month of distribution. Pursuant to its guarantees,
FHLMC indemnifies holders of FHLMC Certificates against any diminution in
principal by reason of charges for property repairs, maintenance and
foreclosure. FHLMC may remit the amount due on account of its guarantee of
collection of principal at any time after default on an underlying mortgage
loan, but not later than (i) 30 days following foreclosure sale, (ii) 30
days following payment of the claim by any mortgage insurer, or (iii) 30
days following the expiration of any right of redemption, whichever occurs
later, but in any event no later than one year after demand has been made
upon the mortgagor for accelerated payment of principal. In taking actions
regarding the collection of principal after default on the mortgage loans
underlying FHLMC Certificates, including the timing of demand for
acceleration, FHLMC reserves the right to exercise its judgment with
respect to the mortgage loans in the same manner as for mortgage loans
which it has purchased but not sold. The length of time necessary for FHLMC
to determine that a mortgage loan should be accelerated varies with the
particular circumstances of each mortgagor, and FHLMC has not adopted
standards which require that the demand be made within any specified
period.
FHLMC Certificates are not guaranteed by the United States or by any
Federal Home Loan Bank and do not constitute debts or obligations of the
United States or any Federal Home Loan Bank. The obligations of FHLMC under
its guarantee are obligations solely of FHLMC and are not backed by, nor
entitled to, the full faith and credit of the United States. If FHLMC were
unable to satisfy such obligations, distributions to holders of FHLMC
Certificates would consist solely of payments and other recoveries on the
underlying mortgage loans and, accordingly, monthly distributions to
holders of FHLMC Certificates would be affected by delinquent payments and
defaults on such mortgage loans.
Registered holders of FHLMC Certificates are entitled to receive their
monthly pro rata share of all principal payments on the underlying mortgage
loans received by FHLMC, including any scheduled principal payments, full
and partial repayments of principal and principal received by FHLMC by
virtue of condemnation, insurance, liquidation or foreclosure, and
repurchases of the mortgage loans by FHLMC or the seller thereof. FHLMC is
required to remit each registered FHLMC Certificateholder's pro rata share
of principal payments on the underlying mortgage loans, interest at the
FHLMC pass-through rate and any other sums such as prepayment fees, within
60 days of the date on which such payments are deemed to have been received
by FHLMC.
Under FHLMC's cash program, there is no limitation on the amount by
which interest rates on the mortgage loans underlying a FHLMC Certificate
may exceed the pass-through rate on the FHLMC Certificate. Under such
program, FHLMC purchases groups of whole mortgage loans from sellers at
specified percentages of their unpaid principal balances, adjusted for
accrued or prepaid interest, which when applied to the interest rate of the
mortgage loans and participations purchased, results in the yield
(expressed as a percentage) required by FHLMC. The required yield, which
includes a minimum servicing fee retained by the servicer, is calculated
using the outstanding principal balance. The range of interest rates on the
mortgage loans and participations in a FHLMC Certificate group under the
Cash Program with vary since mortgage loans and participations are
purchased and assigned to a FHLMC Certificate group based upon their yield
to FHLMC rather than on the interest rate on the underlying mortgage loans.
Under FHLMC's Guarantor Program, the pass-through rate on a FHLMC
Certificate is established based upon the lowest interest rate on the
underlying mortgage loans, minus a minimum servicing fee and the amount of
FHLMC's management and guaranty income as agreed upon between the seller
and FHLMC.
FHLMC Certificates duly presented for registration of ownership on or
before the last business day of a month are registered effective as of the
first day of the month. The first remittance to a registered holder of a
FHLMC Certificate will be distributed so as to be received normally by the
15th day of the second month following the month in which the purchaser
became a registered holder of the FHLMC Certificates. Thereafter, such
remittance will be distributed monthly to the registered holder so as to be
received normally by the 15th day of each month. The Federal Reserve Bank
of New York maintains book-entry accounts with respect to FHLMC
Certificates sold by FHLMC on or after January 2, 1985, and makes payments
of principal and interest each month to the registered holders thereof in
accordance with such holders' instructions.
Stripped Mortgage-Backed Securities
Agency Securities may consist of one or more stripped mortgage-backed
securities, each as described herein and in the related Prospectus
Supplement. Each such Agency Security will represent an undivided interest
in all or part of either the principal distributions (but not the interest
distributions) or the interest distributions (but not the principal
distributions), or in some specified portion of the principal and interest
distributions (but not all of such distributions) on certain FHLMC, FNMA,
GNMA or other government agency or government-sponsored agency
Certificates. The underlying securities will be held under a trust
agreement by FHLMC, FNMA, GNMA or another government agency or government-
sponsored agency, each as trustee, or by another trustee named in the
related Prospectus Supplement. FHLMC, FNMA, GNMA or another government
agency or government-sponsored agency generally will guarantee each
stripped Agency Security to the same extent as such entity guarantees the
underlying securities backing such stripped Agency Security.
Other Agency Securities
If specified in the related Prospectus Supplement, a Trust Fund may
include other mortgage pass-through certificates issued or guaranteed by
GNMA, FNMA, FHLMC or other government agencies or government-sponsored
agencies. The characteristics of any such mortgage pass-through
certificates will be described in such related Prospectus Supplement. If so
specified, a combination of different types of Agency Securities may be
held in a Trust Fund.
Private Mortgage-Backed Securities
Private Mortgage-Backed Securities may consist of (a) mortgage
pass-through certificates evidencing a direct or indirect undivided
interest in a pool of mortgage loans or SAMs, or (b) CMOs secured by
mortgage loans or SAMs. Private Mortgage-Backed Securities will have been
issued pursuant to a pooling and servicing agreement (a "PMBS Agreement").
The Private Mortgage-Backed Securities in a Trust Fund may include a class
or classes of securities that are callable at the option of another class
or classes of securities. The seller/servicer of the underlying mortgage
loans will have entered into the PMBS Agreement with the trustee under the
PMBS Agreement (the "PMBS Trustee"). The PMBS Trustee or its agent, or a
custodian, will possess the mortgage loans or SAMs underlying such Private
Mortgage-Backed Security. Mortgage loans or SAMs underlying a Private
Mortgage-Backed Security will be serviced by the servicer directly or by
one or more sub-servicers who may be subject to the supervision of the PMBS
Servicer. The "PMBS Servicer" will be a FNMA or FHLMC approved servicer
and, if FHA Loans underlie the Private Mortgage-Backed Securities, approved
by the Department of Housing and Urban Development ("HUD") as an FHA
mortgagee, or such other servicer as specified in the related Prospectus
Supplement.
Such securities will (1) either (a) have been previously registered
under the Securities Act of 1933, as amended, or (b) will at the time be
eligible for sale under Rule 144(k) under such act; and (2) will be
acquired in bona fide secondary market transactions not from the issuer or
its affiliates. The "PMBS Issuer" generally will be a financial institution
or other entity engaged generally in the business of mortgage lending or
the acquisition of mortgage loans or SAMs, a public agency or
instrumentality of a state, local or federal government, or a limited
purpose or other corporation organized for the purpose of among other
things, establishing trusts and acquiring and selling housing loans to such
trusts and selling beneficial interests in such trusts. If so specified in
the related Prospectus Supplement, the PMBS Issuer may be an affiliate of
the Seller. The obligations of the PMBS Issuer will generally be limited to
certain representations and warranties with respect to the assets conveyed
by it to the related trust or the assignment by it of the representations
and warranties of another entity from which it acquired the assets. The
PMBS Issuer generally will not have guaranteed any of the assets conveyed
to the related trust or any of the Private Mortgage-Backed Securities
issued under the PMBS Agreement. Additionally, although the mortgage loans
or SAMs underlying the Private Mortgage-Backed Securities may be guaranteed
by an agency or instrumentality of the United States, the Private
Mortgage-Backed Securities themselves will not be so guaranteed.
Distributions of principal and interest will be made on the Private
Mortgage-Backed Securities on the dates specified in the related Prospectus
Supplement. The Private Mortgage-Backed Securities may be entitled to
receive nominal or no principal distributions or nominal or no interest
distributions. Principal and interest distributions will be made on the
Private Mortgage-Backed Securities by the PMBS Trustee or the PMBS
Servicer. The PMBS Issuer or the PMBS Servicer may have the right to
repurchase assets underlying the Private Mortgage-Backed Securities after a
certain date or under other circumstances specified in the related
Prospectus Supplement.
Credit Support Relating to Private Mortgage-Backed Securities
Credit support in the form of subordination of other private mortgage
certificates issued under the PMBS Agreement, reserve funds, insurance
policies, letters of credit, financial guaranty insurance policies,
guarantees or other types of credit support may be provided with respect to
the mortgage loans or SAMs underlying the Private Mortgage-Backed
Securities or with respect to the Private Mortgage-Backed Securities
themselves.
Additional Information
The related Prospectus Supplement for a Series for which the Trust Fund
includes Private Mortgage-Backed Securities will specify:
(1) the aggregate approximate principal amount and type of the
Private Mortgage-Backed Securities to be included in the
Trust Fund;
(2) certain characteristics of the mortgage loans or SAMs which
comprise the underlying assets for the Private
Mortgage-Backed Securities including to the extent available
(A) the payment features of such mortgage loans or
SAMs,
(B) the approximate aggregate principal balance,
if known, of underlying mortgage loans or SAMs
insured or guaranteed by a governmental
entity,
(C) the servicing fee or range of servicing fees
with respect to the mortgage loans or SAMs,
(D) the minimum and maximum stated maturities of
the underlying mortgage loans or SAMs and at
origination and
(E) delinquency experience with respect to the
mortgage loans or SAMs;
(3) the pass-through or certificate rate of the Private
Mortgage-Backed Securities and the method of determination
thereof;
(4) the PMBS Issuer, the PMBS Servicer (if other than the PMBS
Issuer) and the PMBS Trustee for such Private
Mortgage-Backed Securities;
(5) certain characteristics of credit support, if any, such as
subordination, reserve funds, insurance policies, letters of
credit or guarantees relating the mortgage loans or SAMs
underlying the Private Mortgage-Backed Securities or to such
Private Mortgage-Backed Securities themselves;
(6) the terms on which the underlying mortgage loans or SAMs for
such Private Mortgage-Backed Securities, or such Private
Mortgage-Backed Securities themselves, may, or are required
to, be purchased prior to their stated maturity or the
stated maturity of the Private Mortgage-Backed Securities;
and
(7) the terms on which mortgage loans, SAMs or Private
Mortgage-Backed Securities may be substituted for those
originally deposited with the PMBS Trustee or the Trustee.
Use of Proceeds
All of the net proceeds to be received from the sale of each Series of
the Certificates will be used by the Depositor to purchase the SAMs related
to that Series or to return to the Depositor the amounts previously used to
effect such purchases, the costs of carrying the SAMs until sale of the
Certificates and other expenses connected with pooling the SAMs and issuing
the Certificates, or for general corporate purposes. The Depositor expects
to issue Certificates in Series from time to time as part of its continuing
program of acquiring SAMs and selling Certificates. See "The
Depositor--Mortgage Purchase Program."
Yield Considerations
General
The yield to maturity on any Certificate will depend on the purchase
price paid by the Certificateholder, the effective interest rate of the
Certificate and, if such Certificate is an Appreciation Certificate, the
amount of any Additional Interest Payments passed through to such
Certificate. See "Maturity, Average Life, Appreciation and Prepayment
Assumptions" for a discussion of the weighted average life of the
Certificates and consideration of the effect of the appreciation of the
Mortgaged Properties on payments made on the Appreciation Certificates. Any
prepayment of a SAM, liquidation of a SAM (by foreclosure proceedings or by
virtue of the purchase of a SAM in advance of its stated maturity or
otherwise) or, if applicable, the occurrence of an early termination or
other call feature of the Certificates of a Series or the underlying SAMs
will have the effect of passing through to Certificateholders amounts of
principal which would otherwise be passed through in amortized increments
over the remaining term of such SAM, causing interest payments which may
have been expected to continue to be paid over time to stop and an Indexed
Appreciation Payment to be made which may be zero. The effect of such
prepayments on the yield to maturity to Certificateholders depends on
several factors. For example, if the Certificates are purchased above par
(i.e., for more than 100% of the outstanding principal balance of the SAMs
they represent), such prepayments will tend to decrease the yield to
maturity. If the Certificates are purchased at a discount (i.e., for less
than 100% of such outstanding principal balance), such prepayments will
tend to increase the yield to maturity. Moreover, in either case, such
effect may be negatively affected by the payment of smaller than
anticipated Additional Interest Payments. See "Certain Legal
Considerations--Certain Legal Considerations Applicable to
SAMs--Enforceability of Certain Provisions" for a description of certain
provisions of each SAM and statutory, regulatory and judicial developments
that may affect the prepayment experience, maturity assumptions and
appreciation payments on the SAMs. See also "Description of the
Certificates--Termination and Optional Termination" for a description of
the repurchase of the SAMs in any SAM Pool when the aggregate outstanding
principal balance thereof is less than a specified percentage of the
aggregate outstanding principal balance of the SAMs in such SAM Pool on the
related Cut-Off Date. For this purpose, an Additional Interest Payment may
include a payment at the purchase price of the SAM based upon an index
defined in the Prospectus Supplement and used as a surrogate for what the
Additional Interest Payment would have been had the SAM matured or
terminated.
The timing of changes in the rate of principal payments on or
repurchases of the SAMs (including, if applicable, the occurrence of a
redemption, other call or put feature of the Certificates of a Series or
the underlying SAMs) may significantly affect an investor's actual yield to
maturity, even if the average rate of principal payments experienced over
time is consistent with an investor's expectation. In general, the earlier
a prepayment of principal on the underlying SAMs or a repurchase thereof
(including, if applicable, the occurrence of a redemption or other call
feature of the Certificates of a Series or the underlying SAMs), the
greater will be the effect on an investor's yield to maturity. As a result,
the effect on an investor's yield to maturity of principal payments and
repurchases occurring at a rate higher (or lower) than the rate anticipated
by the investor during the period immediately following the issuance of a
Series of Certificates would not be fully offset by a subsequent like
reduction (or increase) in the rate of principal payments.
Effective Interest Rate
Unless otherwise specified in the applicable Prospectus Supplement,
each monthly interest payment on a SAM is calculated as 1/12 of the
applicable Stated Interest Rate multiplied by the unpaid principal balance
outstanding on the first day of the month after application of principal
payments made on such date. Unless otherwise specified in the applicable
Prospectus Supplement, the amount paid to the Certificateholders for each
Class of Certificates (the "Pass-Through Rate") will be calculated on the
basis of the Remittance Rate for the related SAMs. The "Remittance Rate"
for any SAM will equal the related Stated Interest Rate less the sum of the
Master Servicing Fee, the Servicing Fee, the Certificate Administrator Fee
and any Retained Yield (each expressed as a percentage of the outstanding
principal balance of the related SAM Pool) for such SAM. Such rate does not
take into account the amount of any Additional Interest Payments which may
be payable to any Certificates entitled to such payments (each, an
"Appreciation Certificate").
As described in the applicable Prospectus Supplement, in certain
events, if the amounts available for distribution in respect of interest
are not sufficient to cover the total of all accrued and unpaid interest at
the Remittance Rate, the available amount will be distributed to the
Certificateholders pro rata in accordance with their respective interests
or in an order of priority described in the applicable Prospectus
Supplement.
For the sale of Certificates under this Prospectus, the Depositor may
establish one or more SAM Pools having a variable, as opposed to a fixed,
Stated Interest Rate. A SAM Pool with a variable Stated Interest Rate may
be composed of SAMs that have adjustable Stated Interest Rates, or of SAMs
with fixed Stated Interest Rates if the amount to be passed through is
determined on a SAM-by-SAM basis as the Stated Interest Rate minus
specified fees for servicing and administrative compensation, which may
include any of the Master Servicing Fee, the Servicing Fee and the
Certificate Administrator Fee, for each such SAM, as set forth in the
applicable Prospectus Supplement, or as otherwise determined as described
in such Prospectus Supplement. Because the Stated Interest Rates may vary
in such a SAM Pool, and the servicing and administrative compensation
generally will be fixed as a percentage of the principal balance of the
SAMs, the Remittance Rate will be affected by disproportionate principal
prepayments among SAMs bearing different Stated Interest Rates and,
consequently, for Certificates which are not Appreciation Certificates, the
yield to maturity on the Certificates will be affected. The characteristics
of any such variable-rate SAM Pools will be described in the applicable
Prospectus Supplement. Although Stated Interest Rates for SAMs in a SAM
Pool may vary from SAM to SAM, disproportionate Principal Prepayments among
the SAMs bearing different Stated Interest Rates will not affect the return
to Certificateholders of Certificates with fixed Pass-Through Rates
purchased on par.
For any Class of Certificates that are not Appreciation Certificates,
the effective yield to maturity to Certificateholders generally will be
lower than the yield to maturity otherwise produced by the applicable
Pass-Through Rate, because while interest will accrue on each SAM from the
first day of each month, the distribution of such interest to
Certificateholders at the applicable Pass-Through Rate generally will be
made on a later day, which, unless otherwise specified in the applicable
Prospectus Supplement, will be the 25th day (or, if such day is not a
business day, the next succeeding business day) of the month following the
month of accrual.
When a prepayment in full (a "Payoff") is made by the Mortgagor on a
SAM during a month, the Mortgagor is charged interest on the days in the
month actually elapsed up to the date of the Payoff at the daily interest
rate (determined by dividing the Stated Interest Rate by 365, or 360 in the
case of Payoffs received on a date on which the monthly payment for such
SAM is due (a "Due Date")) which is applied to the principal amount of the
SAM so prepaid. Similarly, when a SAM is liquidated under a Pool Insurance
Policy during a month, the Pool Insurer will pay interest on the SAM only
to the date the claim is paid. Also, when a partial principal prepayment (a
"Curtailment") is made on a SAM together with the scheduled monthly payment
for a month on or after the related Due Date, the Mortgagor does not pay
interest on the prepaid amount, and therefore Certificateholders will not
receive any interest on such prepaid amount.
To the extent that Compensating Interest (as defined below) is not
paid, the effect of a Payoff or such a liquidation will be to reduce the
amount of interest passed through on the next Distribution Date (as defined
herein), because interest on the principal amount of the SAM so prepaid was
paid only to the date of such Payoff or liquidation and not to the end of
the month of prepayment. Unless otherwise specified in the applicable
Prospectus Supplement, the following will apply: Payoffs received during
the period from the first day of a calendar month through the 15th day of
such month will be passed through, without Compensating Interest and
without interest accrued from the first day of such month to the date of
the Payoff, on the Distribution Date in such month, and Payoffs received
during the period from the 15th day of a calendar month through the last
day of such month will be passed through, with Compensating Interest and
with interest at the applicable Pass-Through Rate attributable to interest
paid through the date of the Payoff by the Mortgagors, on the Distribution
Date in the following month. Proceeds of SAMs liquidated under a Pool
Insurance Policy during a month will be passed through, with Compensating
Interest and interest at the applicable Pass-Through Rate attributable to
interest paid by the Pool Insurer under an applicable Pool Insurance
Policy, on the Distribution Date in the following month.
"Compensating Interest" will consist of a full month's payment of
interest (to the extent of any applicable limits) at the applicable
Pass-Through Rate on a SAM for which a Payoff is made or which is
liquidated, less the interest at the applicable Pass-Through Rate
attributable to interest paid by the Mortgagor or by the Pool Insurer under
an applicable Pool Insurance Policy through the date of Payoff.
Compensating Interest on liquidated SAMs will be passed through to
Certificateholders, together with any interest at the applicable
Pass-Through Rate attributable to interest paid by the Pool Insurer under
any applicable Pool Insurance Policy to the date of liquidation on the
Distribution Date of the month following liquidation. Unless otherwise
stated in the related Prospectus Supplement, Compensating Interest on
Payoffs will be paid on a Distribution Date only with respect to Payoffs
received during the period from the 15th day of the preceding calendar
month through the last day of such preceding month. The applicable
Prospectus Supplement will specify any limitations on the extent of or
source of funds available for payments of Compensating Interest.
Maturity, Average Life, Appreciation and Prepayment Assumptions
The SAMs at origination will have varying Stated Interest Rates,
maturities and Appreciation Shares as more fully described in the
applicable Prospectus Supplement. The Depositor expects that most such SAMs
will have maturities at origination of either 15 to 30 years and, unless
otherwise stated in the related Prospectus Supplement, such SAMs may be
prepaid in full or in part at any time. However, some of the SAMs may,
where permissible under state law, require a penalty for prepayment in
whole or in part in the initial years after origination of the SAM. The
particulars of such prepayment penalties will be disclosed in the
applicable Prospectus Supplement. The prepayment experience or, if
applicable, the occurrence of an optional termination or other call or put
of the Certificates of a Series or the underlying SAMs will affect the
weighted average lives of the Certificates. The yield on any Certificates,
including Appreciation Certificates, purchased at a premium will be
adversely affected by any increase in the level of prepayments occurring
with respect to any Series. A substantial number of SAMs are anticipated to
be paid in full prior to their scheduled maturity.
A number of factors, including homeowner mobility, economic conditions,
enforceability of "due-on-sale" clauses, mortgage market interest rates,
the appreciation of real estate generally and the general availability of
mortgage funds may affect prepayment experience. Generally, each Mortgage
executed in connection with a fixed rate SAM, will contain "Mortgage
Termination Event" provisions permitting the holder of the Mortgage Note to
accelerate the maturity of the SAM upon conveyance by the Mortgagor of the
underlying Mortgaged Property. With respect to Series of Certificates, the
Master Servicer or the Servicer, as applicable, will agree that it will
enforce the Mortgage Termination Event clause contained in each such SAM to
the extent it has knowledge of the termination and reasonably believes that
it is entitled to do so under applicable law.
Further, the level of the appreciation of the Mortgaged Properties
underlying the SAMs in any Trust and, to a much lesser degree, the index
used for calculating the indexed appreciation payments for such SAMs or
such certificates will affect the yield earned by holders of the
Appreciation Certificates of any Series. The level of appreciation of the
Mortgaged Properties underlying the SAMs may be affected by a variety of
factors, including but not limited to: economic conditions in the area
where the Mortgaged Property is located, the general level of inflation and
unemployment in the economy, the general level of liquidity in the economy
and more specifically the level of liquidity in the residential mortgage
market. The amount of appreciation paid to any Appreciation Certificates
may also be affected by the amount of prepayments that are occurring on the
SAMs. Holders of Appreciation Certificates should be aware that their yield
may be low, zero or negative and should be prepared for the possibility
that they could lose their entire investment in the Appreciation
Certificates they have purchased.
The Prospectus Supplement with respect to any Series will further
describe the risks that prepayments and low levels of increase in the value
of the Mortgaged Properties may have on the yield of holders of the
Certificates of such Series.
"Weighted average life" refers to the average amount of time that will
elapse from the date of issuance of a Certificate until each dollar of
principal will be repaid to the Certificateholders. The weighted average
life of the Certificates will be influenced by the rate at which principal
on the SAMs in the Trust is paid, which may be in the form of (i) scheduled
amortization and (ii) Curtailments and Payoffs (collectively, "Principal
Prepayments"). The Depositor has to date not compiled information on the
prepayment experience of SAMs. However, based upon published information,
the rate of prepayments on fixed and adjustable rate conventional one-to
four-family mortgage loans has fluctuated significantly in recent years.
The Depositor believes such fluctuation is due to a number of factors,
including those discussed above, and that such factors will also affect the
prepayment experience on the SAMs in any Trust. Accordingly, the Depositor
cannot predict what future prepayment experience will be or what the
resulting weighted average life might be applicable to SAMs. However,
principal prepayments on mortgage loans which are not SAMs are commonly
measured relative to a prepayment standard or model. The model used in this
Prospectus and in each Prospectus Supplement, unless otherwise indicated
therein (the "Constant Prepayment Rate" or "CPR"), assumes a constant
annual rate of prepayment each month, expressed as a per annum percentage
of the then-scheduled principal balance of the Mortgage Pool. Such
prepayment model assumes a constant prepayment rate as stated in the
Prospectus Supplement. Further, as stated above, investors in the
Appreciation Certificates will be affected by the level of appreciation in
value of the Mortgaged Properties. The model used in this Prospectus and
each Prospectus Supplement, unless otherwise indicated therein (the
"Constant Appreciation Rate" or "CAR"), assumes a constant annual rate of
appreciation each month, expressed as a per annum percentage of the
then-scheduled principal balance of the Mortgage Pool, taking into account
the Volatility of the CAR. "Volatility" is the standard deviation from the
CARs assumed in the Prospectus Supplement. It is unclear whether either of
these models even has any relevance to the Certificates. The Prospectus
Supplement or Current Report on Form 8-K for each Series of Certificates
may contain a table setting forth the projected weighted average life of
each Class of Certificates of such Series and the percentage of the
original principal amounts or notional principal amounts of each such Class
that would be outstanding on specified Distribution Dates for such Series
and the yield on Appreciation Certificates, based on the assumptions set
forth with respect to the CPR and CAR deemed appropriate by the Depositor
and specified therein.
The Depositor
The Depositor, a Delaware corporation, is a wholly-owned subsidiary of
Bear Stearns Mortgage Capital Corporation. The Depositor was organized as a
special purpose entity for the purpose of acquiring SAMs and selling
interest therein. The Depositor does not have, nor is it expected to have
in the future, any significant assets. The Depositor's principal executive
offices are located at 245 Park Avenue, New York, New York 10167, telephone
(212) 272-2000.
Bear Stearns Mortgage Capital Corporation
BSMCC is a Delaware Corporation organized on December 23, 1995. BSMCC
is an affiliate of Bear, Stearns & Co. Inc. and is a wholly-owned
subsidiary of The Bear Stearns Companies Inc. BSMCC's principal executive
offices are located at 245 Park Avenue, New York, New York 10167, telephone
(212) 272-2000.
Mortgage Purchase Program
Set forth below is a description of the principal aspects of the
BSMCC's purchase program for SAMs eligible for inclusion in a SAM Pool.
Unless otherwise stated in the applicable Prospectus Supplement, the
Depositor will represent and warrant to the Trustee that at the time that a
SAM was originated, the originator was a mortgagee approved by the
Secretary of Housing and Urban Development pursuant to Sections 203 and 211
of the National Housing Act, as amended, or a savings and loan association,
a savings bank, a commercial bank, a licensed mortgage banker or similar
banking or lending institution which is supervised and examined by a
federal or state authority or such other entities as may be described in
the applicable Prospectus Supplement. The institutions described in the
preceding sentence will collectively be referred to herein as
"Originators." BSMCC has approved (or will approve) individual institutions
as eligible Originators by applying certain criteria, including the
Originator's depth of mortgage origination experience, servicing experience
and financial stability. In general, each Originator must have experience
in originating and servicing conventional residential mortgages and must
have a net worth acceptable to BSMCC. Each Originator is required to use
the services of qualified underwriters, appraisers and attorneys. Other
factors evaluated by BSMCC in approving Originators include delinquency and
foreclosure ratio performances for conventional mortgage loans.
Loan Standards
The SAMs to be included in each SAM Pool will be loans with fixed or
adjustable rates of interest secured by first mortgages, deeds of trust or
security deeds on residential properties with original principal balances
which generally did not exceed 95% of the value of the Mortgaged
Properties, unless such loans are FHA insured or VA guaranteed. Each SAM
having an LTV at origination and as of the Cut-Off Date in excess of 80%
will be covered by a Primary Insurance Policy insuring against default all
or a specified portion of the principal amount thereof. See "Primary
Insurance, Hazard Insurance; Claims Thereunder." Each mortgage insurer must
be a mortgage guaranty insurance company which is duly qualified as such
under the laws of each state in which the Mortgaged Properties are located,
duly authorized and licensed in such states to transact a mortgage guaranty
insurance business and to write the insurance provided by the Primary
Insurance Policy or the Pool Insurance Policy, as the case may be, and
which is approved as an insurer by FHLMC or FNMA or any successor entity
and by the Depositor (a "Qualified Insurer").
The SAMs to be included in each SAM Pool will be "one- to four-family"
shared appreciation mortgage loans, which means permanent loans (as opposed
to construction or land development loans) secured by Mortgages on non-farm
properties, including attached or detached single-family homes, two- to
four-family primary residences and condominiums or other attached dwelling
units, including individual condominiums, row houses, townhouses and other
separate dwelling units even when located in buildings containing five or
more such units. Unless otherwise stated in the applicable Prospectus
Supplement, each SAM must be secured by an owner occupied primary
residence. The Mortgaged Property may not be a mobile home or cooperative.
Credit, Appraisal and Underwriting Standards
The SAMs to be included in each SAM Pool will be subject to the various
credit, appraisal and underwriting standards described herein. The
Depositor's credit, appraisal and underwriting standards with respect to
certain SAMs will generally conform to the Program (as defined herein) as
established and maintained by BSMCC. The Program may be revised based on
opportunities and prevailing conditions in the residential mortgage market
and the market for the Depositor's mortgage pass-through certificates. The
SAMs are being underwritten by designated third party Sellers involved in
the Program.
In addition, the Depositor may purchase SAMs which do not conform to
the underwriting standards set forth by the Depositor. Such SAMs may be
purchased in negotiated transactions from Sellers who will represent that
the SAMs have been originated in accordance with credit, appraisal and
underwriting standards agreed to by the Depositor. The Depositor will
generally review only a limited portion of the SAMs in any delivery of such
SAMs for conformity with the applicable credit, appraisal and underwriting
standards.
The credit, appraisal and underwriting standards utilized in negotiated
transactions and the credit, appraisal and underwriting standards of
insurance companies issuing insurance for SAMS may vary substantially from
the credit, appraisal and underwriting standards set forth in the Program.
The relevant Prospectus Supplement will detail such differences in
underwriting standards. All of the credit, appraisal and underwriting
standards will provide an underwriting officer with sufficient information
to evaluate the Mortgagor's repayment ability and the adequacy of the
Mortgaged Property as collateral. Due to the variety of underwriting
standards and review procedures that may be applicable to the SAMs included
in any SAM Pool, the related Prospectus Supplement will not distinguish
among the various credit, appraisal and underwriting standards applicable
to the SAMs nor describe any review for compliance with applicable credit,
appraisal and underwriting standards performed by the Depositor. Moreover,
there can be no assurance that every SAM was originated in conformity with
the applicable credit, appraisal and underwriting standards in all material
respects or that the quality or performance of SAMs underwritten pursuant
to varying standards as described above will be equivalent under all
circumstances.
The Program's underwriting standards generally follow standards
established by FHLMC. The Program's underwriting standards are intended to
evaluate, except in the case of an Equity Release SAM, the prospective
Mortgagor's credit standing and repayment ability and the value and
adequacy of the proposed Mortgaged Property as collateral. In the loan
application process, prospective Mortgagors will be required to provide
information regarding such factors as their assets, liabilities, income,
credit history, employment history and other related items. Each
prospective Mortgagor will also provide an authorization to apply for a
credit report which summarizes the prospective Mortgagor's credit history.
With respect to establishing the prospective Mortgagor's ability to make
timely payments in the context of most SAMs, BSMCC will require evidence
regarding the prospective Mortgagor's employment and income, and of the
amount of deposits made to financial institutions where the Mortgagor
maintains demand or savings accounts.
The Mortgagor will also be required to have an appraisal performed on
the property. In determining the adequacy of the property as collateral, an
independent appraisal is made of each property considered for financing.
The appraiser is required to inspect the property and verify that it is in
good condition and that construction, if new, has been completed. With
respect to the SAMs, the appraisal is based on the market value of
comparable homes and the cost of replacing the home.
Certain states where the Mortgaged Properties may be located are
"anti-deficiency" states where, in general, lenders providing credit on
one- to four-family residential properties must look solely to the property
for repayment in the event of foreclosure. See "Certain Legal
Considerations--Certain Legal Considerations Applicable to
SAMs--Anti-Deficiency Legislation and Other Limitations on Originators."
The Depositor's underwriting standards in all states (including
anti-deficiency states) require that the underwriting officers be satisfied
that the value of the property being financed, as indicated by the
independent appraisal, currently supports and is anticipated to support in
the future the outstanding loan balance, and provides sufficient value to
mitigate the effects of adverse shifts in real estate values.
Representations and Warranties and Indemnification of the Depositor
With respect to any Series of Certificates, each Seller generally will
make representations and warranties with respect to SAMs in the SAM Pool,
sold by it to BSMCC for inclusion in the Trust Fund, which the Depositor
deems sufficient to permit it to make its representations and warranties in
respect of such SAMs to the Trustee and the Certificateholders under the
related Pooling Agreement. See "Description of the
Certificates--Representations and Warranties." Each Seller will also make
certain other representations and warranties. Upon the breach of any
representation or warranty made by a Seller that materially and adversely
affects the interests of the Certificateholders in a SAM (other than those
breaches which have been cured), the Depositor may require the Seller or
the Servicer or other party specified in the Prospectus Supplement, to
repurchase the related SAM. In addition, each Seller will agree to
indemnify the Depositor against any loss or liability incurred by the
Depositor on account of any breach of any representation or warranty made
by the Seller, any failure to disclose any matter that makes any such
representation and warranty misleading, or any inaccuracy in information
furnished by the Seller to the Depositor, including any information set
forth in this Prospectus or in any Prospectus Supplement. See "Description
of the Certificates--Assignment of SAMs" and "--Representations and
Warranties" herein.
Mortgage Subsidy SAMs and Equity Release SAMs
A "Mortgage Subsidy SAM" is a residential mortgage loan under which the
Mortgagor pays to the Originator an interest rate that is below, and may be
substantially below, the market interest rate for such loans (such fixed
interest, the "Stated Interest Rate" and the amount of such interest, the
"Stated Interest") and the Appreciation Share that is calculated as
described below. The Stated Interest Rate for a SAM will be determined at
the time of loan origination based upon (i) the loan-to-value ratio ("LTV")
and (ii) the Appreciation Share taken by the Originator. Generally, a lower
LTV and higher Appreciation Share will result in a lower Stated Interest
Rate. The minimum rate of Stated Interest Rate will be 35% of the
prevailing 30-year fixed interest rate for residential mortgages. The
maximum LTV permitted for the purchase or refinancing of a home is 95% and
for a cash-out refinancing transaction is 75%. See "Primary Insurance,
Hazard Insurance; Claims Thereunder." For Jumbo SAMs, the maximum LTV is
80% for a purchase or refinancing of a home, respectively. A "Jumbo SAM" is
defined as a SAM having an initial principal amount of greater than
$650,000. The minimum permitted LTV is 30%, and a Primary Insurance Policy
will be required in transactions where LTV is greater than 80%. Mortgage
Subsidy SAMs will generally have stated amortization terms of 15 years or
30 years, unless earlier terminated in accordance with the terms thereof
upon the occurrence of a Mortgage Termination Event.
An "Equity Release SAM" is a residential mortgage loan under which the
Mortgagor pays no interest or principal to the holder of the SAM
periodically but pays all principal due and the Appreciation Share upon the
occurrence of a Mortgage Termination Event. During the term of an Equity
Release SAM, no payments will be due until the occurrence of a Mortgage
Termination Event. If a Mortgage Termination Event occurs as a result of
the death of a Mortgagor, an appraisal will be performed and the Equity
Release SAM will be due and payable on the date that is nine months after
such death.
The Principal Balance of an Equity Release SAM will not exceed an
amount that would create an LTV in excess of 25%. The "Principal Balance"
as of any Determination Date will equal the initial principal amount
thereof reduced by (i) all voluntary prepayments of principal actually made
on or before such date; and (ii) the portion of all Liquidation Proceeds,
Insurance Proceeds (each as defined herein) or income from the Mortgaged
Property applied to or prior to such date as a payment of principal on such
Equity Release SAM.
General
The SAMs to be included in each SAM Pool will be "one- to four-family"
shared appreciation mortgage loans, which means permanent loans (as opposed
to construction or land development loans) secured by Mortgages on non-farm
properties, including attached or detached single-family, two- to
four-family primary residences and condominiums or other attached dwelling
units, including individual condominiums, row houses, townhouses and other
separate dwelling units even when located in buildings containing five or
more such units. Unless otherwise stated in the applicable Prospectus
Supplement, each SAM must be secured by an owner-occupied primary
residence.
Appreciation Share
The "Appreciation Share" for a SAM is a percentage (the "SAM
Percentage") of the future capital appreciation in the Mortgaged Property
that is assessed by the Mortgagor to be paid to the Originator upon a
Mortgage Termination Event with payment or at maturity. Such capital
appreciation is the amount by which the Settlement Value (as defined below)
of the Mortgaged Property exceeds the Adjusted Value (as defined below) of
the Mortgaged Property upon the earlier of the maturity of the Mortgage
Subsidy SAM and the occurrence of such Mortgage Termination Event (such
earlier date, the "Termination Date"). The "Additional Interest Payment" is
the amount of such Appreciation Share paid to the holder of the
Appreciation Certificate.
The Appreciation Certificates may be sold pursuant to an offering in
connection with this Registration Statement (as specified in the applicable
Prospectus Supplement), may be sold pursuant to another Registration
Statement, may be sold pursuant to a private placement pursuant to an
offering memorandum or may be sold outside the United States pursuant to an
offshore transaction complying with Rule 903 or 904 of Regulation S under
the Securities Act of 1933, as amended (the "Act").
Settlement Value
The "Settlement Value" is the appraised value of the Mortgaged Property
on the Termination Date; provided that (i) there is no sale of the
Mortgaged Property; (ii) the purchaser is not a relative of the Mortgagor;
or (iii) the variance between the sales price, if any, of such Mortgaged
Property (the "Sales Price") and the appraised value is less than or equal
to five percent. In the event that such variance is greater than 5% and the
Sales Price is lower than the appraised value, a subsequent appraisal will
be conducted and a second appraised value will be calculated. The
Settlement Value will equal the average of the first and second appraised
values; provided that the variance between the Sales Price and the second
appraised value is greater than 5%. The Settlement Value is the Sales Price
in the event that (a) the variance between the Sales Price and the first
appraised value is greater than 5% and the Sales Price is greater than the
first appraised value; or (b) the variance between the Sales Price and the
second appraised value is not greater than 5%.
Adjusted Value
Upon loan origination, the original value of the Mortgaged Property
(the "Original Value") will be calculated. The Original Value will equal
the lower of the purchase price, if any, and the appraised value of the
property on the origination date of the Mortgage Subsidy SAM. The "Adjusted
Value" is an amount equal to the Original Value (or if the Original Value
has previously been adjusted, the most recent Adjusted Value), minus the
sum of (i) any Casualty Adjustment and (ii) any Condemnation Adjustment,
and plus or minus, as applicable, the net difference between any
Post-Improvement Appraised Value and the related Pre-Improvement Appraised
Value (each as defined below).
The "Casualty Adjustment" is an amount equal to the estimated cost to
restore the Mortgaged Property following the occurrence of damage or
destruction by flood, fire or other casualties (each, a "Casualty"). The
Casualty Adjustment will be subtracted from the Adjusted Value of the
Mortgaged Property, only if: (i) the Mortgagor has not restored the
Mortgaged Property to its original condition by 180 days from the date of
the Casualty; (ii) the Depositor, Master Servicer or Servicer has made the
repairs necessary to restore the Mortgaged Property; or (iii) the decrease
in the market value of the Mortgaged Property due to such Casualty is
greater than 5% of the Adjusted Value determined prior to such Casualty.
The "Condemnation Adjustment" is an amount equal to: (i) the Adjusted
Value determined immediately prior to such adjustment, minus (ii) the
product of the Adjusted Value determined immediately prior to such
adjustment multiplied by a fraction, the numerator of which is the
appraised value of the Mortgaged Property determined immediately after any
partial taking by eminent domain and the denominator of which is the
appraised value determined immediately prior to such partial taking.
The "Post-Improvement Appraised Value" is the appraised value of the
Mortgaged Property conducted after the completion of a Qualifying Major
Home Improvement and the "Pre-Improvement Appraised Value" is the appraised
value of the Mortgaged Property determined prior to the commencement of a
Qualifying Major Home Improvement. A "Qualifying Major Home Improvement" is
an improvement made to the Mortgaged Property which increases the value of
the Mortgaged Property and (i) is a major improvement having a minimum
total project value of the greater of $5,000 and 3% of the Original Value
or Adjusted Value, if one exists; (ii) is completed within six months of
the start date of the Qualifying Major Home Improvements; and (iii)
excludes certain work or items, including, but not limited to, (a) ordinary
maintenance and repair, including the replacement of roofing, (b)
decorations, wallpaper, paint and the replacement of appliances and floor
coverings, (c) landscaping, plants, patios, decks, fences and sheds, and
(d) replacement or updating of existing systems such as, heating, air
conditioning, septic and wells.
Mortgage Termination Event
A "Mortgage Termination Event" is: (i) any transfer of any interest in
the Mortgaged Property, other than a Permitted Transfer (as defined below);
(ii) total taking of the Mortgaged Property as the result of any condemning
authority exercising rights of eminent domain; (iii) the commencement of
foreclosure proceedings in connection with any lien junior to the
Depositor's security interest in the Mortgaged Property; (iv) the voluntary
or involuntary filing of any petition seeking to extend to the Mortgagor
the protection of any state or federal bankruptcy law; (v) no Mortgagor
occupying the Mortgaged Property for a period greater than 12 months or the
rental of the Mortgaged Property; (vi) the repayment (including through
refinancing) of the principal amount of the SAM; and (vii) at the option of
the Depositor, a default by the Mortgagor with respect to any amounts due
(including any amounts required to be escrowed), or any covenant or
representation made, by the Mortgagor under the Mortgage Note or the
Mortgage. A "Permitted Transfer" is (i) a transfer by devise, descent, or
operation of law on the death of a joint tenant or tenant by the entirety;
(ii) a transfer to a relative resulting from the death of the Mortgagor;
(iii) a transfer where the Mortgagor's spouse or children become an owner
of the Mortgaged Property; (iv) a transfer resulting from a decree of a
dissolution of marriage, legal separation agreement, or from an incidental
property settlement agreement, by which the Mortgagor's spouse becomes an
owner of the Mortgaged Property; (v) a transfer into an inter vivos trust
in which the Mortgagor is and remains a beneficiary and which does not
relate to a transfer of rights of occupancy in the property; (vi) the
creation of a lien or other encumbrance subordinate to the Depositor's
security instrument which does not relate to a transfer of rights of
occupancy in the Mortgaged Property; (vii) the creation of a purchase money
security interest for household appliances; or (viii) any other transfer or
disposition described in regulations prescribed by the Office of Thrift
Supervision ("OTS").
Upon the occurrence of a Mortgage Termination Event, the Additional
Interest Payment payable to the Mortgagee will equal the product of (x) the
Appreciation Share and (y) the Settlement Value of the Mortgaged
Property at such time minus its Original Value.
Description of the Certificates
General
The Certificates of each Series will represent undivided interests in
the Trust Fund created pursuant to the Pooling Agreement for such Series.
The Trust Fund for each Series will consist, to the extent provided in the
Pooling Agreement, of (i) such SAMs as from time to time are subject to the
Pooling Agreement (exclusive of any related Retained Yield (described
below), (ii) such assets as from time to time are held in the Distribution
Account (described below) and the Collection Account or Accounts (described
below) related to such SAMs (exclusive of any Retained Yield, (iii)
property acquired by foreclosure of SAMs or deed in lieu of foreclosure,
(iv) any combination, as specified in the related Prospectus Supplement, of
a Letter of Credit, Pool Insurance Policy, Special Hazard Insurance Policy,
Bankruptcy Bond, Fraud Bond, Reserve Fund or other type of credit
enhancement as described herein under "Description of Credit Enhancements,"
(v) the Eligible Investments (as defined herein) and (vi) such other assets
or rights as are described in the applicable Prospectus Supplement. If so
specified in the applicable Prospectus Supplement, Certificates of a given
Series may be issued in several Classes, which may pay interest at
different rates, may represent different allocations of the right to
receive principal and interest and Additional Interest Payments, and
certain of which may be subordinated to others. Any such Class of
Certificates may also provide for payments of principal only or interest
only or Additional Interest Payments for disproportionate payments of
principal and interest. Appreciation Certificates may be offered in
transactions registered under the Act or in transactions which are exempt
under such Act, as described in the related Prospectus Supplement.
Subordinated Classes of a given Series of Certificates may or may not be
offered by the same Prospectus Supplement as the senior Classes of such
Series.
The Certificates will be freely transferable and exchangeable for
Certificates of the same Series and Class at the office set forth in such
Certificates; provided, however, that certain Classes of Certificates may
be subject to transfer restrictions set forth in such Certificates and
described in the applicable Prospectus Supplement. A reasonable service
charge may be imposed for any registration of exchange or transfer of
Certificates, and the Depositor may require payment of a sum sufficient to
cover any tax or other governmental charge. If specified in the applicable
Prospectus Supplement, one or more Classes of Certificates for any Series
may be transferable only on the books of The Depositary Trust Company
("DTC") or another depository identified in such Prospectus Supplement.
Beginning with the month following the month in which the Cut-Off Date
occurs for a Series of Certificates, distributions of principal and
interest (or, where applicable, principal only or interest only) on each
Class of Certificates will be made either by the Trustee, the Servicer, the
Master Servicer or the Certificate Administrator, as applicable, acting on
behalf of the Trustee or a paying agent appointed by the Trustee (the
"Paying Agent") on the 25th day (or if such 25th day is not a business day,
the business day immediately following such 25th day) of each calendar
month (the "Distribution Date") to the persons in whose names the
Certificates are registered at the close of business on the last business
day of the month preceding the month in which the Distribution Date occurs
(the "Record Date"). Distributions for each Series will be made by wire
transfer in immediately available funds, if, unless otherwise specified in
the Prospectus Supplement, such Certificateholder holds more than
$1,000,000 in aggregate original principal amount in Certificates, for the
account of, or by check mailed to, each Certificateholder of record;
provided, however, that, the final distribution in retirement of the
Certificates for each Class of a Series will be made only upon presentation
and surrender of the Certificates at the office or agency of the Depositor
or the Trustee specified in the notice to Certificateholders of such final
distribution.
Certain Series may provide for the issuance of one or more classes of
exchangeable certificates (each, an "Exchangeable Class" or "Exchangeable
Certificates") as provided in the related Prospectus Supplement. The
holders of such Exchangeable Classes will be entitled to exchange all or a
portion of such Exchangeable Classes for proportionate interests in other
related classes of Exchangeable Certificates. See "Exchangeable
Certificates--General." Further, if so provided in the related Prospectus
Supplement, one or more classes of Certificates (each, a "Callable Class")
may be callable at the option of one or more other classes of securities
(each, a "Call Class"). A Call Class and its related Callable Class or
Classes will be issued pursuant to a separate trust agreement. A Callable
Class generally will not be called unless the market value of the assets in
the trust fund for such Callable Class exceeds the outstanding principal
balance of such assets. If so provided in the related Prospectus
Supplement, after the issuance of the Callable Class, there may be a
specified "lockout period" during which such Certificates could not be
called. It is anticipated that Call Classes generally will be offered only
on a private basis.
Book-Entry Registration
The information in this section concerning DTC, Cedelbank, societe
anonyme ("Cedelbank") and Euroclear (as defined below) and their book-entry
systems and procedures will apply to each Series of Certificates and has
been obtained from sources that the Depositor believes to be reliable, but
the Depositor takes no responsibility for the accuracy of the information
in this section.
Certificateholders may hold their Certificates through DTC (in the
United States) or Cedelbank or Euroclear (in Europe). The Certificates will
be registered in the name of the nominee of DTC. Cedelbank and Euroclear
will hold omnibus positions on behalf of the Cedelbank Customers and the
Euroclear Participants, respectively, through customers' securities
accounts in Cedelbank's and Euroclear's names on the books of their
respective depositaries (collectively, the "Depositaries") which in turn
will hold such positions in customers' securities accounts in the
Depositaries' names on the books of DTC. The Depositor has been informed by
DTC that DTC's nominee will be Cede & Co. ("Cede"). Accordingly, Cede is
expected to be the holder of record of the Certificates. Senior
Certificates will be available for purchase in book-entry form in minimum
denominations of $1,000 and increments of $1.00 in excess thereof, and
Subordinated Certificates will be available for purchase in book-entry form
in minimum denominations of $25,000 and increments of $1.00 in excess
thereof. No person acquiring an interest in the Certificates (each, a
"Certificateholder") will be entitled to receive a certificate representing
that person's interest in the Certificates. Unless and until Definitive
Certificates are issued under the limited circumstances described herein,
all references herein to actions by Certificateholders will refer to
actions taken by DTC upon instructions from its Participants, as
hereinafter defined, and all references herein to distributions and notices
to Certificateholders will refer to distributions and notices to DTC or
Cede, as the registered holder of the Certificates, for distribution to
Certificateholders in accordance with DTC procedures. See "--Definitive
Certificates." For additional information regarding clearance and
settlement procedures for the Certificates, see Annex I hereto.
DTC is a limited purpose trust company organized under the laws of the
State of New York, a member of the Federal Reserve System, a "clearing
corporation" within the meaning of the New York Uniform Commercial Code and
a "clearing agency" registered pursuant to the provisions of Section 17A of
the Exchange Act. DTC was created to hold securities for its participating
organizations ("Participants") and facilitate the clearance and settlement
of securities transactions between Participants through electronic
book-entry changes in accounts of its Participants, thereby eliminating the
need for physical movement of certificates. Participants include securities
brokers and dealers, banks, trust companies and clearing corporations, and
may include certain other organizations including underwriters of any
Series of Certificates. Indirect access to the DTC system also is available
to others such as banks, brokers, dealers and trust companies that clear
through or maintain a custodial relationship with a Participant, either
directly or indirectly ("Indirect Participants").
DTC management is aware that some computer applications and systems
used for processing data were written using two digits rather than four to
define the applicable year, and therefore may not recognize a date using
"00" as the year 2000. This could result in the inability of these systems
to properly process transactions with dates in the year 2000 and
thereafter. DTC has developed and is implementing a program to address this
problem so that its applications and systems as the same relate to the
timely payment of distributions (including principal and interest payments)
to securityholders, book-entry deliveries and settlement of trades within
DTC continue to function properly. This program includes a technical
assessment and a remediation plan, each of which is complete. Additionally,
DTC plans to implement a testing phase of this program which is expected to
be completed within appropriate time frames.
In addition, DTC is contacting (and will continue to contact) third
party vendors that provide services to DTC to determine the extent of their
year 2000 compliance, and DTC will develop contingency plans as it deems
appropriate to address failures in year 2000 compliance on the part of
third party vendors. However, there can be no assurance that the systems of
third party vendors will be timely converted and will not adversely affect
the proper functioning of DTC's services.
The information set forth in the preceding two paragraphs has been
provided by DTC for informational purposes only and is not intended to
serve as a representation, warranty or contract modification of any kind.
The Transferor makes no representations as to the accuracy or completeness
of such information.
Transfers between Participants will occur in accordance with DTC rules.
Transfers between Cedelbank Customers and Euroclear Participants (each as
defined below) will occur in accordance with their applicable rules
and operating procedures.
Cross-market transfers between persons holding directly or indirectly
through DTC, on the one hand, and directly or indirectly through Cedelbank
Customers or Euroclear Participants, on the other hand, will be effected in
DTC in accordance with DTC rules on behalf of the relevant European
international clearing system by its Depositary; however, such cross-market
transactions will require delivery of instructions to the relevant European
international clearing system by the counterparty in such system in
accordance with its rules and procedures and within its established
deadlines (European time). The relevant European international clearing
system will, if the transaction meets its settlement requirements, deliver
instructions to its Depositary to take action to effect final settlement on
its behalf by delivering or receiving securities in DTC, and making or
receiving payment in accordance with normal procedures for same-day funds
settlement applicable to DTC. Cedelbank Customers and Euroclear
Participants may not deliver instructions directly to the Depositaries.
Because of time-zone differences, credits of securities in Cedelbank or
Euroclear as a result of a transaction with a Participant will be made
during the subsequent securities settlement processing, dated the business
day following the DTC settlement date, and such credits or any transactions
in such securities settled during such processing will be reported to the
relevant Cedelbank Customer or Euroclear Participant on such business day.
Cash received in Cedelbank or Euroclear as a result of sales of securities
by or through a Cedelbank Customer or a Euroclear Participant to a
Participant will be received with value on the DTC settlement date but will
be available in the relevant Cedelbank or Euroclear cash account only as of
the business day following settlement in DTC.
Certificateholders that are not Participants or Indirect Participants
may purchase, sell or otherwise transfer ownership of, or other interests
in, the Certificates only through Participants and Indirect Participants.
In addition, Certificateholders will receive all distributions of
principal, stated interest and Additional Interest Payments from the
Trustee through the Participants. Under a book-entry format,
Certificateholders may experience some delay in their receipt of payments,
since the payments will be forwarded by the Trustee to Cede, as nominee for
DTC. DTC will forward the payments to its Participants, which thereafter
will forward them to Indirect Participants or Certificateholders. It is
anticipated that the only Certificateholder will be Cede, as nominee of
DTC. Certificateholders will not be recognized by the Trustee as
"Certificateholders," as that term is used in the Pooling Agreement, and
Certificateholders only will be permitted to exercise the rights of
Certificateholders indirectly through the Participants.
Under the rules, regulations and procedures creating and affecting DTC
and its operations (the "Rules"), DTC is required to make book-entry
transfers among Participants on whose behalf it acts with respect to the
Certificates and is required to receive and transmit distributions of the
principal of and interest on the Certificates. Participants and Indirect
Participants with which Certificateholders have accounts with respect to
the Certificates similarly are required to make book-entry transfers and
receive and transmit such payments on behalf of their respective
Certificateholders.
Because DTC can only act on behalf of Participants, who in turn act on
behalf of Indirect Participants and certain banks, the ability of a
Certificateholder to pledge Certificates to persons or entities that do not
participate in the DTC system, or otherwise take actions in respect of
those Certificates, may be limited due to the lack of a physical
certificate for those Certificates.
DTC has advised the Depositor that it will take any action permitted to
be taken by a Certificateholder under the Pooling Agreement or any
applicable Prospectus Supplement only at the direction of one or more
Participants to whose account with DTC the Certificates are credited. DTC
may take conflicting action with respect to other undivided interests in
the Certificates to the extent that those actions are taken on behalf of
Participants whose holdings include those undivided interests.
Cedelbank is incorporated under the laws of Luxembourg as a
professional depository. Cedelbank holds securities for its participating
organizations ("Cedelbank Customers") and facilitates the clearance and
settlement of securities transactions between Cedelbank Customers through
electronic book-entry changes in accounts of Cedelbank Customers, thereby
eliminating the need for physical movement of certificates. Transactions
may be settled in Cedelbank in any of 36 currencies, including United
States dollars. Cedelbank provides to its Cedelbank Customers, among other
things, services for safekeeping, administration, clearance and settlement
of internationally traded securities and securities lending and borrowing.
Cedelbank deals with domestic securities markets in over 30 countries
through established depository and custodial relationships. Cedelbank has
established an electronic bridge with Morgan Guaranty Trust as the Operator
of the Euroclear System ("MGT/EOC") in Brussels to facilitate settlement of
trades between Cedelbank and MGT/EOC. Cedelbank currently accepts over
110,000 securities issues on its books. As a professional depository,
Cedelbank is subject to regulation by the Luxembourg Commission for the
Supervision of the Financial Sector, which supervises Luxembourg banks.
Cedelbank Customers are recognized financial institutions around the world,
including underwriters, securities brokers and dealers, banks, trust
companies, clearing corporations and certain other organizations and may
include the underwriters of any Series of Certificates. Cedelbank Customers
in the United States are limited to securities brokers and dealers and
banks. Currently, Cedelbank has approximately 2,000 customers located in
over 80 countries, including all major European countries, Canada and the
United States. Indirect access to Cedelbank is also available to others,
such as banks, brokers, dealers and trust companies that clear through or
maintain a custodial relationship with a Cedelbank Customer, either
directly or indirectly.
The Euroclear System was created in 1968 to hold securities for
participants of the Euroclear System ("Euroclear Participants") and to
clear and settle transactions between Euroclear Participants through
simultaneous electronic book-entry delivery against payment, thereby
eliminating the need for physical movement of certificates and any risk
from lack of simultaneous transfers of securities and cash. Transactions
may now be settled in any of 34 currencies, including United States
dollars. The Euroclear System includes various other services, including
securities lending and borrowing and interfaces with domestic markets in
several countries generally similar to the arrangements for cross-market
transfers with DTC described above. The Euroclear System is operated by
Morgan Guaranty Trust Company of New York, Brussels, Belgium office (the
"Euroclear Operator" or "Euroclear"), under contract with Euroclear
Clearance System, S.C., a Belgian cooperative corporation (the
"Cooperative"). All operations are conducted by the Euroclear Operator, and
all Euroclear securities clearance accounts and Euroclear cash accounts are
accounts with the Euroclear Operator, not the Cooperative. The Cooperative
establishes policy for the Euroclear System on behalf of Euroclear
Participants. Euroclear Participants include banks (including central
banks), securities brokers and dealers and other professional financial
intermediaries and may include the underwriters of any Series of
Certificates. Indirect access to the Euroclear System is also available to
other firms that clear through or maintain a custodial relationship with a
Euroclear Participant, either directly or indirectly.
The Euroclear Operator is the Belgian branch of a New York banking
corporation which is a member bank of the Federal Reserve System. As such,
it is regulated and examined by the Board of Governors of the Federal
Reserve System and the New York State Banking Department, as well as the
Belgian Banking
Commission.
Securities clearance accounts and cash accounts with the Euroclear
Operator are governed by the Terms and Conditions Governing Use of
Euroclear and the related Operating Procedures of the Euroclear System and
applicable Belgian law (collectively, the "Terms and Conditions"). The
Terms and Conditions govern transfers of securities and cash within the
Euroclear System, withdrawal of securities and cash from the Euroclear
System, and receipts of payments with respect to securities in the
Euroclear System. All securities in the Euroclear System are held on a
fungible basis without attribution of specific certificates to specific
securities clearance accounts. The Euroclear Operator acts under the Terms
and Conditions only on behalf of Euroclear Participants and has no record
of or relationship with persons holding through Euroclear Participants.
Distributions with respect to certificates held through Cedelbank or
Euroclear will be credited to the cash accounts of Cedelbank Customers or
Euroclear Participants in accordance with the relevant system's rules and
procedures, to the extent received by its Depositary. Such distributions
will be subject to tax reporting in accordance with relevant United States
tax laws and regulations. Cedelbank or the Euroclear Operator, as the case
may be, will take any other action permitted to be taken by a
Certificateholder under the Pooling Agreement or any applicable Supplement
on behalf of a Cedelbank Customer or Euroclear Participant only in
accordance with its relevant rules and procedures and subject to its
Depositary's ability to effect such actions on its behalf through DTC.
Although DTC, Cedelbank and Euroclear have agreed to the foregoing
procedures in order to facilitate transfers of investor certificates among
participants of DTC and Euroclear and Cedelbank customers, they are under
no obligation to perform or continue to perform such procedures and such
procedures may be discontinued at any time.
Definitive Certificates
The Certificates will be issued in fully registered, certificated form
to Certificateholders or their nominees ("Definitive Certificates"), rather
than to DTC or its nominee, only if:
(1) the Depositor advises the Trustee in writing that DTC is no longer
willing or able to discharge properly its responsibilities as
depository with respect to the Certificates, and the Trustee or the
Depositor is unable to locate a qualified successor,
(2) the Depositor, at its option, elects to terminate the book-entry
system through DTC,
(3) after the occurrence of an event causing the Master Servicer or
applicable Servicer to be replaced, Certificateholders representing
in the aggregate not less than 51% of the aggregate certificate
principal amount of such Series advise DTC through Participants in
writing that the continuation of a book-entry system through DTC
(or a successor thereto) is no longer in the best interest of the
Certificateholders or
(4) if so disclosed in the applicable Prospectus Supplement.
Upon the occurrence of any of the events described in the immediately
preceding paragraph, the Trustee is required to notify all
Certificateholders of the availability through DTC of Definitive
Certificates. Upon surrender by DTC of a definitive certificate
representing the certificates and instructions for re-registration, the
Trustee will issue the certificates in Definitive Certificates, and
thereafter the Trustee will recognize the registered holders of such
Definitive Certificates as Certificateholders under the Pooling Agreement
("Holders").
Distribution of principal, stated interest and Additional Interest
Payments on the Certificates will be made by the Trustee directly to
Holders of Definitive Certificates in accordance with the procedures set
forth herein and in the Pooling Agreement. On each Distribution Date,
stated interest, principal and Additional Interest Payments will be made to
Holders in whose names the Definitive Certificates were registered at the
close of business on the related Record Date. Payments will be made by
check mailed to the address of such Holder as it appears on the register
maintained by the Trustee. The final distribution on any certificate
(whether Definitive Certificates or certificates registered in the name of
Cede representing the Certificates), however, will be made only upon
presentation and surrender of such certificate at the office or agency
specified in the notice of final distribution to Certificateholders.
The Trustee will provide such notice to registered Certificateholders not
later than the tenth day of the month of such final distribution.
Definitive Certificates will be transferable and exchangeable at the
offices of the Trustee, or at such other office as the Depositor
designates. No service charge will be imposed for any registration of
transfer or exchange, but the Transfer Agent may require payment of a sum
sufficient to cover any tax or other governmental charge imposed in
connection therewith.
Assignment of SAMs
The Depositor will cause the SAMs to be assigned to the Trustee,
together with all principal, stated interest and Additional Interest
Payments on the SAMs other than principal and interest due, if any, on or
before the Cut-Off Date. The Master Servicer, applicable Servicer or Seller
will expressly reserve its rights in and to any Retained Yield, which
accordingly will not constitute part of the Trust Fund. In addition, the
applicable Prospectus Supplement may specify that the Seller will retain
the right to a specified portion of either principal, stated interest and
Additional Interest Payments payable by the Mortgagor. The Trustee will,
concurrently with such assignment, authenticate and deliver the
Certificates or cause the Certificates to be authenticated and delivered to
the Depositor or its designated agent in exchange for the Trust Fund. Each
SAM will be identified in the Loan Schedule. Such schedule will include
information as of the close of business on the Cut-Off Date as to the
principal balance of each SAM, the Stated Interest Rate and the maturity of
each Mortgage Note, the Appreciation Shares, the Servicing, Master
Servicing and/or Certificate Administrator's Fee, whether a Primary
Insurance Policy has been obtained for each SAM and the then-current
scheduled monthly payment of principal and interest for each SAM.
In addition, each Seller will, as to each SAM, deliver or cause to be
delivered to the Trustee the Mortgage Note, an assignment to the Trustee of
the SAM in a form for recording or filing as may be appropriate in the
state where the Mortgaged Property is located, the original recorded SAM
with evidence of recording or filing indicated thereon, a copy of the title
insurance policy or other evidence of title and evidence of any Primary
Insurance Policy, for such SAM, if applicable. In certain instances where
original documents respecting a SAM may not be available prior to execution
of the Pooling Agreement, such Seller will deliver such documents to the
Trustee within 270 days thereafter unless, as set forth in the Pooling
Agreement, the county recorder has not yet returned such SAM.
Notwithstanding the foregoing, a Trust Fund may include SAMs where the
original Mortgage Note is not delivered to the Trustee if the Depositor
delivers to the Trustee or the custodian a copy or a duplicate original of
the Mortgage Note, together with an affidavit certifying that the original
thereof has been lost or destroyed. With respect to such SAMs, the Trustee
(or its nominee) may not be able to enforce the Mortgage Note against the
related Mortgagor. Each Originator, Seller, Depositor, Master Servicer or
Servicer, as applicable, will agree to repurchase SAMs in certain
circumstances or substitute for them other qualifying SAMs (see
"--Representations and Warranties").
In instances where, due to a delay on the part of the title insurer, a
copy of the title insurance policy for a particular SAM cannot be delivered
to the Trustee prior to or concurrently with the execution of the Pooling
Agreement, the Depositor will provide a copy of such title insurance policy
to the Trustee within 90 days after the Depositor's receipt of the original
recorded SAM, any intervening recorded assignments or other documents
necessary to issue such title insurance policy.
The Trustee will review the mortgage documents within 45 days of
receipt thereof to ascertain that all required documents have been properly
executed and received. The Trustee will hold such documents for each Series
in trust for the benefit of Certificateholders of such Series. If any
document is found by the Trustee not to have been properly executed or
received or to be unrelated to the SAMs identified in the Pooling
Agreement, the Trustee will notify the appropriate Seller and the Master
Servicer or Servicer. If the Seller cannot cure such defect, the
appropriate Originator or Seller will substitute a new SAM meeting the
conditions set forth in the Pooling Agreement (see "--Substitution of SAMs"
below) or repurchase the related SAM from the Trustee at a price equal to
100% of the outstanding principal balance of such SAM, plus accrued
interest thereon at the greater of (a) the applicable Stated Interest Rate
on the outstanding Principal Balance of the related SAM through the last
day of the month of such repurchase plus the Indexed Appreciation Payment
and (b) the Implied Market Rate on the outstanding Principal Balance of the
related SAM through the last day of the month of such repurchase, plus in
either case, any expenses reasonably incurred by the Master Servicer in
respect of the breach or defect giving rise to the repurchase obligation.
"Implied Market Rate" means with respect to any SAM, a typical market
interest rate for a comparable single-family mortgage product having the
same principal terms as the related SAM but not having a shared
appreciation mortgage feature. The purchase price of any SAM so repurchased
will be passed through to Certificateholders as liquidation proceeds in
accordance with the procedures specified below under "--Distributions on
Certificates." This substitution or repurchase obligation constitutes the
sole remedy available to the Certificateholders or the Trustee for such a
defect in a constituent document. The "Indexed Appreciation Payment" means,
as further defined in the applicable Prospectus Supplement, as to any SAM
or Class of Certificates, an amount determined by reference to an index of
single family residential house appreciation which estimates the Additional
Interest Payment or Payments which would have been due on such SAM or SAM
Pool had a Mortgage Termination Event occurred with respect to such SAM at
the time that the repurchase obligation arose.
An assignment of each SAM to the Trustee will be recorded or filed. In
certain states, the assignment may not be recorded where, in the written
opinion of counsel admitted to practice in such state acceptable to the
Depositor and the Trustee, such filing or recording is not required to
protect the Trustee's interest in the SAM against sale, further assignment,
satisfaction or discharge by the appropriate Seller, the Depositor or the
Master Servicer or any Servicer.
Substitution of SAMs
With respect to Series of Certificates, the applicable Seller may
substitute an eligible shared appreciation mortgage loan for a defective
SAM (or, if applicable, a SAM in its related SAM Pool) in lieu of
repurchasing such defective SAM or the related Mortgaged Property. Any
shared appreciation mortgage loan, to be eligible for substitution, must
fit within the general description of the SAMs set forth herein and in the
related Prospectus Supplement. See "The SAM Pools."
Representations and Warranties
Unless otherwise stated in the applicable Prospectus Supplement, in the
agreements pursuant to which the SAMs were sold to BSMCC (each such
agreement a "Sale and Servicing Agreement") for each Series of
Certificates, each Seller will generally represent and warrant to the
Depositor with respect to all SAMs, among other things, that:
(1) that title insurance (or in the case of Mortgaged Properties
located in areas where such policies are generally not
available, an attorney's certificate of title) in the case
of each SAMs and any required hazard insurance policy was in
effect on the date of purchase of the SAM from the
Originator by or on behalf of the Seller;
(2) that the Originator had title to each such SAM and such SAM
was subject to no offsets, defenses or counterclaims;
(3) that each SAM constituted a valid first or other applicable
lien on, or a perfected security interest with respect to,
the Mortgaged Property (subject only to permissible title
insurance exceptions, if applicable, and certain other
exceptions described in the Pooling Agreement) and that the
Mortgaged Property was free from damage and was in good
repair;
(4) that there were no delinquent tax or assessment liens
against the Mortgaged Property,
(5) that no required payment on a SAM was more than a specified
number of days delinquent;
(6) that each SAM was made in compliance with, and is
enforceable under, all applicable state and federal laws and
regulations in all material respects;
(7) that each SAM complies with all LTV requirements and will be
insured as to payment defaults by a Primary Insurance
Policy;
(8) at the time that the SAM was originated, the Originator was
a mortgagee approved by the Secretary of Housing and Urban
Development or a savings and loan association, a savings
bank, a commercial bank, a licensed mortgage banker or
similar banking or lending institution which is supervised
and examined by a federal or state authority;
(9) that the Stated Interest Rate of any SAM, unless stated
otherwise in the applicable Prospectus Supplement, provides
for an Appreciation Share on the SAM of not less than 30%
and not greater than 60%, with a principal balance at
origination of no more than $650,000, and a stated Principal
Balance of at least $25,000, and there is no negative
amortization other than the Appreciation Shares on the SAMs;
(10) that the Mortgage contains an enforceable provision for the
acceleration of the payment of the unpaid principal balance
of the SAM in the event that a Mortgage Termination Event
occurs, and the Mortgage Note and Mortgage have been
originated on the form provided for in the applicable
Pooling and Servicing Agreement or Sale and Servicing
Agreement; and
(11) that, as of the Closing Date, the Mortgaged Property is
lawfully occupied by the Mortgagor under applicable law.
The applicable Prospectus Supplement and Pooling Agreement may set
forth additional representations and warranties of each Originator or
Seller. In addition, with respect to any SAM as to which the Seller
delivers to the Trustee or the custodian an affidavit certifying that the
original Mortgage Note has been lost or destroyed, if such SAM subsequently
is in default and the enforcement thereof or of the related Mortgage is
materially adversely affected by the absence of the original Mortgage Note,
such Originator or Seller will be obligated to repurchase or substitute for
such SAM in the manner described above. If specified in the related
Prospectus Supplement, the Depositor may make similar representations and
warranties with respect to the SAMs and will have similar repurchase and/or
substitution obligations.
In the event of the discovery by the Trustee, the Master Servicer or
the Servicer of a breach of any representation or warranty which materially
and adversely affects the interest of the Certificateholders in the related
SAM, or the receipt of notice of such a breach from the Master Servicer,
the Trustee or the Servicer, as the case may be, will cure the breach,
substitute a new shared appreciation mortgage loan for such SAM or
repurchase such SAM, or any Mortgaged Property acquired with respect
thereto, on the terms set forth above under "--Assignment of SAMs." The
proceeds of any such repurchase will be passed through to
Certificateholders as liquidation proceeds. This substitution or repurchase
obligation constitutes the sole remedy available to the Certificateholders
or the Trustee for any such breach.
Retained Yield
For certain Series, the Depositor, an Originator, a Seller, the Master
Servicer or a Servicer, as specified in the related Prospectus Supplement,
may retain a portion of the interest payable on each SAM (the "Retained
Yield"). Unless otherwise specified in the applicable Prospectus
Supplement, the Retained Yield will be set as a fixed rate. Unless
otherwise specified in the applicable Prospectus Supplement, any such
Retained Yield and any earnings from reinvestments thereof will not be part
of the Trust Fund. The Originator, the Seller, the Master Servicer, the
Servicer or the Depositor, as the case may be, may at its option transfer
to a third party all or a portion of the Restated Yield for a Series of
Certificates.
Payments on SAMs; Deposits to Accounts
In general, the Master Servicer or a Servicer servicing the SAMs will
be required to establish and maintain for one or more Series of
Certificates a separate account or accounts for the collection of payments
on the related SAMs (the "Collection Account"), which must be (i)
maintained with a depository institution the debt obligations of which (or
in the case of a depository institution that is the principal subsidiary of
a holding company, the obligations of such holding company) are rated in
one of the two highest rating categories by Moody's Investors Services,
Inc. or Standard & Poor's Ratings Services, a division of The McGraw-Hill
Companies or another nationally recognized statistical rating agency
specified in the related Prospectus Supplement (any, a "Rating Agency")
rating the Series of Certificates, (ii) an account or accounts the deposits
in which are fully insured by the Federal Deposit Insurance Corporation
(the "FDIC"), (iii) an account or accounts the deposits in which are
insured by the FDIC (to the limits established by the FDIC), and the
uninsured deposits in which are invested in Eligible Investments held in
the name of the Trustee, or (iv) an account or accounts otherwise
acceptable to each Rating Agency. A Collection Account may be maintained as
an interest bearing account or the funds held therein may be invested
pending each succeeding Distribution Date in Eligible Investments. The
Master Servicer or related Servicer or its designee or another person
specified in the Prospectus Supplement will be entitled to receive any such
interest or other income earned on funds in the Collection Account as
additional compensation and will be obligated to deposit or deliver for
deposit in the Collection Account the amount of any loss immediately as
realized. The Collection Account may be maintained with the Master Servicer
or Servicer or with a depository institution that is an affiliate of the
Master Servicer or Servicer, provided it meets the standards set forth
above.
The Master Servicer and Servicer generally will be required to deposit
or cause to be deposited in the Collection Account for each Trust Fund on a
daily basis the following payments and collections received or Advances
made by or on behalf of it subsequent to the Cut-Off Date (other than
payments due on or before the CutOff Date and exclusive of any amounts
representing Retained Yield):
(1) all payments on account of principal, including Principal
Prepayments and, if specified in the related Prospectus
Supplement, prepayment penalties, on the SAMs;
(2) all payments on account of interest on the SAMs, net of
applicable servicing compensation;
(3) to the extent specified in the related Pooling Agreement,
all proceeds (net of unreimbursed payments of property
taxes, insurance premiums and similar items ("Insured
Expenses") incurred, and unreimbursed Advances made, by the
related Master Servicer or Servicer, if any) of the Hazard
Insurance Policies and any Primary Insurance Policies, to
the extent such proceeds are not applied to the restoration
of the property or released to the Mortgagor in accordance
with the Master Servicer's or Servicer's normal servicing
procedures (collectively, "Insurance Proceeds") and all
other cash amounts (net of unreimbursed expenses incurred in
connection with liquidation or foreclosure ("Liquidation
Expenses") and unreimbursed advances made, by the Master
Servicer or Servicer, if any) received and retained in
connection with the liquidation of defaulted SAMs, by
foreclosure or otherwise ("Liquidation Proceeds"), together
with any net proceeds received with respect to any
properties acquired on behalf of the Certificateholders by
foreclosure or deed in lieu of foreclosure;
(4) all proceeds of any SAM or property in respect thereof
purchased as described above under "--Representations and
Warranties;"
(5) all payments required to be deposited in the Collection
Account with respect to any deductible clause in any blanket
insurance policy described herein under "Primary Insurance,
Hazard Insurance; Claims Thereunder--Hazard Insurance"
below;
(6) any amount required to be deposited by the Master Servicer
or Servicer in connection with losses realized on
investments for the benefit of the Master Servicer or
Servicer of funds held in any account; and
(7) all other amounts required to be deposited in the Collection
Account pursuant to the Pooling Agreement.
If acceptable to any Rating Agency rating the Series of Certificates, a
Collection Account maintained by the Master Servicer or Servicer may
commingle funds from the SAMs deposited in the Trust Fund with similar
funds relating to other mortgage loans which are serviced or owned by the
Master Servicer or Servicer. The Pooling Agreement may require that certain
payments related to the SAMs be transferred from a Collection Account
maintained by the Master Servicer or Servicer into another account
maintained under conditions acceptable to any Rating Agency.
The Trustee will be required to establish in its name as Trustee for
one or more Series of Certificates a trust account or another account
acceptable to any Rating Agency (the "Distribution Account"). The
Distribution Account may be maintained as an interest bearing account or
the funds held therein may be invested pending each succeeding Distribution
Date in Eligible Investments. If there is a Master Servicer or more than
one Servicer for the rated Series of Certificates, there may be a separate
Distribution Account or a separate subaccount in a single Distribution
Account for funds received from the Master Servicer. The Master Servicer or
Servicer or its designee or another person specified in the related
Prospectus Supplement may be entitled to receive any interest or other
income earned on funds in the Distribution Account or subaccount of the
Distribution Account as additional compensation and, if so entitled, will
be obligated to deposit or deliver for deposit in the Distribution Account
or subaccount the amount of any loss immediately as realized. The Trustee
will be required to deposit into the Distribution Account on the business
day received all funds received from the Master Servicer or the Servicer
for deposit into the Distribution Account and any other amounts required to
be deposited into the Distribution Account pursuant to the Pooling
Agreement. In addition to other purposes specified in the Pooling
Agreement, the Trustee will be required to make withdrawals from the
Distribution Account to make distributions to Certificateholders. If the
Series includes one Trust Fund which contains a beneficial ownership
interest in another Trust Fund, funds from the Trust Assets may be
withdrawn from the Distribution Account included in the latter Trust Fund
and deposited into another account included in the former Trust Fund prior
to transmittal to Certificateholders with a beneficial ownership interest
in the former Trust Fund. If specified in the related Prospectus
Supplement, the Collection Account and the Distribution Account may be
combined into a single Distribution Account.
Distributions on Certificates
Unless otherwise specified in the related Prospectus Supplement, for
each Series, on each Distribution Date commencing in the month following
the month in which the Cut-Off Date occurs (or such other time as may be
set forth in the applicable Prospectus Supplement), the Trustee, the Master
Servicer, the Servicer or the Certificate Administrator, as applicable,
acting on behalf of the Trustee or the Paying Agent will withdraw from the
Distribution Account and distribute to Certificateholders of record on the
applicable Record Date, and to holders of residual interests, if any, who
are entitled to receive such distributions pursuant to the terms of the
applicable Pooling Agreement, to the extent of their entitlement thereto,
an amount in the aggregate equal to the sum of:
(1) all scheduled payments of principal, interest at the
Pass-Through Rate and Additional Interest Payments either
collected from the Mortgagors on the SAMs prior to the
related Determination Date (as defined below) or advanced by
the Master Servicer or Servicer;
(2) all Curtailments received on the SAMs in the month prior to
the month in which the Distribution Date occurs (the
"Distribution Period");
(3) all Insurance Proceeds or Liquidation Proceeds received
during the Distribution Period, together with interest at
the applicable Pass-Through Rate to the extent described
herein under "Yield Considerations--Effective Interest
Rate;" and
(4) all Payoffs received during the period from the 15th day of
the immediately preceding calendar month through the 14th
day of such calendar month (unless another date specified in
the applicable Prospectus Supplement), in each case together
with interest at the applicable Pass-Through Rate, to the
extent described herein under "Yield
Considerations--Effective Interest Rate";
less the sum of:
(a) previously unreimbursed Advances made by the Master Servicer
or Servicer on SAMs which are considered by the Master
Servicer or Servicer as of the Distribution Date to be
nonrecoverable;
(b) amounts expended by the Master Servicer or Servicer in
connection with the preservation or restoration of property
securing SAMs which have been liquidated and related
liquidation expenses; and
(c) amounts representing other expenses of the Master Servicer
or Servicer, reimbursable pursuant to the Pooling Agreement.
In addition, the Master Servicer or Servicer shall include with any
such distribution an Advance equal to principal and stated interest
payments and Additional Interest Payments due on the first day of the month
in which the Distribution Date occurs and not received as of the close of
business on the 15th day of said month or if such day is not a business
day, the next succeeding business day (unless otherwise stated in the
related Prospectus Supplement), subject to such Master Servicer's or
Servicer's determination that such payments are recoverable from future
payments or collections on the SAMs, any subordination feature or Insurance
Proceeds or Liquidation Proceeds. See "--Advances" below.
The method of allocating the amount withdrawn from the Distribution
Account on each Distribution Date to principal and stated interest and
Additional Interest Payments on a particular Series of Certificates will be
described in the applicable Prospectus Supplement. Distributions of
interest and additional interest on each Class of Certificates will be made
prior to distributions of principal thereon. Each Class of Certificates may
have a different Pass-Through Rate, and each Pass-Through Rate may be fixed
(and such rate may be zero percent), variable or adjustable. The applicable
Prospectus Supplement will specify the Pass-Through Rate for each Class, or
in the case of a variable or adjustable Pass-Through Rate, the initial
Pass-Through Rate and the method for determining the Pass-Through Rate.
Unless otherwise stated in an applicable Prospectus Supplement, on each
Distribution Date for a Series of Certificates, the Trustee or the Paying
Agent, as the case may be, will distribute to each holder of record on each
Record Date, an amount equal to the Percentage Interest (as defined below)
represented by a Certificate, which is not an Appreciation Certificate,
held by such holder multiplied by the sum of the Class Principal
Distribution Amount (as defined below) for such Class, if such Class is
entitled to payments of interest on such Distribution Date, one month's
interest at the applicable Pass-Through Rate on the principal balance or
notional principal balance of such Class specified in the applicable
Prospectus Supplement, less such Class's pro rata share of the sum of (i)
the shortfalls in collections of interest on Payoffs with respect to which
distribution is to be made on such Distribution Date, if any, (ii) the
amount of any deferred interest added to the principal balance of the SAMs
and/or the outstanding balance of the Certificates on the related Due Date,
(iii) one month's interest at the applicable Pass-Through Rate on the
amount of any Curtailments received on the SAMs in the month preceding the
month of the distribution and (iv) any other interest shortfalls
(including, without limitation, shortfalls arising out of application of
the Relief Act (as defined herein) or similar legislation or regulations as
in effect from time to time) allocable to Certificateholders which are not
covered by Advances or applicable credit enhancements, in each case in such
amount as is allocated to such Class on the basis set forth in the related
Prospectus Supplement (such amount, the "Class Total Distribution Amount"
for such Class of Certificates). Unless otherwise stated in the applicable
Prospectus Supplement, on each Distribution Date for a Series of
Certificates, the Trustee or the Paying Agent, as the case may be, will
distribute to each holder of record on the Record Date, an amount equal to
the Percentage Interest represented by each Appreciation Certificate held
by such holder multiplied by the sum of the Class Appreciation Distribution
Amount (as defined below) for such Class, which will represent all or a
portion of the Additional Interest Payments made on the pool of SAMs and,
if so specified, a Class Total Distribution Amount for such Class of
Certificates. The "Percentage Interest" represented by a Certificate of a
particular Class will be equal to the percentage obtained by dividing the
initial principal balance or notional amount of such Certificate by the
aggregate initial amount or notional amount of all the Certificates of such
Class. The "Class Principal Distribution Amount" for a Class of
Certificates for any Distribution Date will be the portion, if any, of the
Principal Balance allocable to such Class for such Distribution Date, as
described in the related Prospectus Supplement. The "Class Appreciation
Distribution Amount" shall mean for a Class of Appreciation Certificates
for any Distribution Date, all or a portion of the Appreciation Share
allocable to such Class for such Distribution Date, as described in the
related Prospectus Supplement.
In the case of a Series of Certificates which includes two or more
Classes of Certificates, the timing, sequential order, priority of payment
or amount of distributions in respect of principal, and any schedule or
formula or other provisions applicable to the determination thereof with
respect to each such Class shall be as provided in the related Prospectus
Supplement. Unless otherwise specified, distributions in respect of
principal of any Class of Certificates will be made on a pro rata basis
among all of the Certificates of such Class.
Except as otherwise provided in the applicable Pooling Agreement, not
later than the tenth day preceding each Distribution Date (the
"Determination Date"), the Master Servicer or the Servicer, as applicable,
will furnish to the Trustee (and to any Certificateholder upon request) a
statement setting forth the aggregate amount to be distributed on such
Distribution Date to each Class of Certificates, on account of principal
and/or stated interest and/or additional interest, stated separately.
Advances
The Originator, the Seller, the Master Servicer or the Servicer or
other person designated in the Prospectus Supplement will be required to
advance on or before each Distribution Date (from its own funds, funds
advanced by others or funds held in any of the accounts for future
distributions to the holders of such Certificates), an amount equal to the
aggregate of payments of principal and interest that were delinquent on the
related Determination Date, subject to such person's determination that
such Advances will be recoverable out of late payments by Mortgagors,
Liquidation Proceeds, Insurance Proceeds or otherwise with respect to the
specific SAM or, if required by the applicable Rating Agency, with respect
to any of the SAMs.
In making Advances, the Originator, the Seller, the Master Servicer or
the Servicer will endeavor to maintain a regular flow of interest and
principal payments to holders of the Certificates, rather than to guarantee
or insure against losses. If Advances are made by the Originator, the
Seller, the Master Servicer or the Servicer from cash being held for future
distributions to Certificateholders, the Originator, the Seller, the Master
Servicer or the Servicer will replace such funds on or before any future
Distribution Date to the extent that funds in the applicable account on
such Distribution Date would be less than the amount required to be
available for distributions to Certificateholders on such date. Any
Originator, Seller, Master Servicer or Servicer funds advanced will be
reimbursable to the Originator, Seller, Master Servicer or Servicer out of
recoveries on the specific SAMs with respect to which such Advances were
made (late payments made by the related Mortgagor, any related Insurance
Proceeds, Liquidation Proceeds or proceeds of any SAM purchased by a Seller
under the circumstances described herein). Advances by the Originator,
Seller, Master Servicer or Servicer also will be reimbursable to the
Originator, Seller, Master Servicer or Servicer from cash otherwise
distributable to Certificateholders (including the holders of Senior
Certificates) at such time as the Originator, Seller, Master Servicer or
Servicer determines that any such Advances previously made are not
ultimately recoverable from the proceeds with respect to the specific SAM
or, if required by the applicable Rating Agency, at such time as a loss is
realized with respect to a specific SAM. The Originator, Seller, Master
Servicer or Servicer also will be obligated to make Advances, to the extent
recoverable out of Insurance Proceeds, Liquidation Proceeds or otherwise,
in respect of certain taxes and insurance premiums not paid by Mortgagors
on a timely basis. Funds so advanced are reimbursable to the Originator,
Seller, Master Servicer or Servicer to the extent permitted by the Pooling
Agreement. If specified in the related Prospectus Supplement, the
obligations of the Originator, Seller, Master Servicer or Servicer to make
Advances may be supported by a cash advance reserve fund, a surety bond or
other arrangement, in each case as described in such Prospectus Supplement.
Termination and Optional Termination
The obligations created by the Pooling Agreement for a Series of
Certificates generally will terminate upon the payment to the related
Certificateholders of all amounts held in any Distribution Accounts or
Collection Accounts or by the Master Servicer or Servicer and required to
be paid to them pursuant to such Pooling Agreement following the later of
(i) the final payment or other liquidation of the last of the Trust Assets
subject thereto or the disposition of all property acquired upon
foreclosure or deed in lieu of foreclosure of any Mortgaged Property or
other assets remaining in the Trust Fund and (ii) the purchase by the
Seller, the Master Servicer, the Servicer or other entity specified in the
related Prospectus Supplement including, if REMIC treatment has been
elected, by the holder of the residual interest in the REMIC (see "Certain
Federal Income Tax Consequences" herein), from the related Trust Fund of
all of the remaining Trust Assets and all property acquired in respect of
Mortgage Assets remaining in the Trust Fund.
Any such purchase of Trust Assets and property acquired in respect of
Mortgaged Properties evidenced by a Series of Certificates will be made at
the option of the Seller or other entity identified in the related
Prospectus Supplement, at a price, and in accordance with the procedures,
specified in the related Prospectus Supplement. Such purchase price may not
in all cases equal the entire unpaid principal and accrued unpaid interest
on the Certificates that are outstanding at the time of the optional
termination due to the fact that any component of the purchase price based
on existing property (i.e., real property acquired following foreclosure
and as to which a realized loss has not yet been taken) will be equal to
the fair market value of such property (less expected liquidation or
foreclosure expenses) and not necessarily the previously outstanding
principal balance of the related loan. There may not be sufficient proceeds
to pay off the then current balance of and accrued unpaid interest on
Certificates (including Appreciation Indexed Payments for Appreciation
Certificates) of such Series outstanding. The exercise of such right will
effect early retirement of the Certificates, but the right of the Seller or
such other entity to so purchase will generally be subject to the principal
balance of the related Trust Assets being less than the percentage
specified in the related Prospectus Supplement of the aggregate principal
balance of the Trust Assets at the Cut-Off Date for the Series. The
foregoing is subject to the provision that if a REMIC election is made with
respect to a Trust Fund, any repurchase pursuant to clause (ii) above will
be made only in connection with a "qualified liquidation" of the REMIC
within the meaning of Section 860F(g)(4) of the Code.
Reports to Certificateholders
Prior to or concurrently with each distribution on a Distribution Date
or at such other time as is specified in the related Prospectus Supplement
or Pooling Agreement, the Master Servicer, the Servicer or the Trustee will
furnish to each Certificateholder of record of the related Series a
statement setting forth, to the extent applicable or material to such
Series of Certificates, among other things:
(1) the amount of such distribution allocable to principal,
separately identifying the aggregate amount of any Principal
Prepayments and if so specified in the related Prospectus
Supplement, prepayment penalties included therein;
(2) the amount of such distribution allocable to interest and
additional interest;
(3) the amount of any Advance by the Master Servicer, the
Servicer, the Seller or the Originator;
(4) the aggregate amount (a) otherwise allocable to the
subordinated Certificateholders on such Distribution Date,
and (b) withdrawn from the Reserve Fund, if any, that is
included in the amounts distributed to the
Certificateholders;
(5) the outstanding current principal amount or notional
principal balance of such Class after giving effect to the
distribution of principal on such Distribution Date;
(6) the percentage of principal payments on the SAMs, if any,
which such Class will be entitled to receive on the
following Distribution Date;
(7) the percentage of Principal Prepayments on the SAMs, if any,
which such Class will be entitled to receive on the
following Distribution Date;
(8) unless the Pass-Through Rate is a fixed rate, the
Pass-Through Rate applicable to the distribution on the
Distribution Date;
(9) the number and aggregate principal balances of SAMs in the
related SAM Pool delinquent (a) one month, (b) two months or
(c) three or more months, and the number and aggregate
principal balances of SAMs in foreclosure;
(10) the book value of any real estate acquired through
foreclosure or grant of a deed in lieu of foreclosure; and
(11) if applicable, the amount remaining in any Reserve Account
or the amount remaining of any other credit support, after
giving effect to the distribution on the Distribution Date.
Where applicable, any amount set forth above may be expressed as a
dollar amount per single Certificate of the relevant class having a
denomination or interest specified in the related Prospectus Supplement or
in the report to Certificateholders. The report to Certificateholders for
any Series of Certificates may include additional or other information of a
similar nature to that specified above.
In addition, within a reasonable period of time after the end of each
calendar year, the Master Servicer, the Servicer or the Trustee will mail
to each Certificateholder of record at any time during such calendar year a
report (a) as to the aggregate of amounts reported pursuant to (i) and (ii)
for such calendar year and (b) such other customary information as may be
deemed necessary or desirable for Certificateholders to prepare their tax
returns.
Description of the Pooling and Servicing Agreement
and the Servicing Agreement
General
Each Series of Certificates will be issued pursuant to a separate
Pooling Agreement. Each Pooling Agreement will be among the Depositor, as
depositor, and the Trustee and Master Servicer or Servicer named in the
Prospectus Supplement. BSMCC will enter into a sale and servicing agreement
with each Seller and/or Originator (the "Sale and Servicing Agreement").
Pursuant to each Sale and Servicing Agreement the related Seller or
Originator will assign all of its right, title and interest to the related
SAMs to BSMCC and make the representations and warranties set forth herein
under "Description of the Certificates--Representations and Warranties,"
among others. The rights of BSMCC pursuant to such agreements will be
assigned to the Depositor, which will, in turn, assign it to the Trustee.
In the event of a breach of any representation or warranty by the related
Originator or Seller that materially adversely affects the interests of the
Certificateholders in the related SAM, such breach shall be cured if such
SAM is repurchased as described herein under "Description of the
Certificates--Assignment of SAMs."
In the Pooling Agreement or each Servicing Agreement, the Master
Servicer or Servicer, as applicable, will agree to perform diligently some
of the services and duties customary to the servicing of shared
appreciation mortgage loans. Any Master Servicer will monitor a Servicer's
performance under any such Servicing Agreement. The Master Servicer may
have the right to remove any Servicer from the performance of its duties
under the Servicing Agreement. The duties performed by the Servicer include
collection and remittance of principal, stated interest and Additional
Interest Payments, administration of mortgage escrow accounts, collection
of insurance claims and, if necessary, foreclosure.
A form of Pooling Agreement and a form of a Sale and Servicing
Agreement are filed as exhibits to the Registration Statement of which this
Prospectus is a part. The following discussion summarizes certain
provisions expected to be contained in each Pooling Agreement. The
applicable Prospectus Supplement will describe material features of the
related Pooling Agreement, which may differ from the features described
below. The following summary and the summary contained in a Prospectus
Supplement do not purport to be complete and are subject to, and are
qualified in their entirety by reference to, all of the provisions of the
Pooling Agreement for each particular Series and of the applicable
Servicing Agreement or similar contracts.
Servicing
With respect to each Series of Certificates, pursuant to the Pooling
Agreement, the Master Servicer or Servicer will be responsible for
servicing and administering the SAMs, or the SAMs in its respective SAM
Pool, as applicable. The Master Servicer, as described in the related
Prospectus Supplement, may provide master servicing for one or more
Servicers described in such Prospectus Supplement.
As specified in each Prospectus Supplement, the Master Servicer, the
Servicer and the Certificate Administrator will calculate amounts
distributable to the Certificateholders, prepare tax returns on behalf of
the Trust Fund and provide certain other administrative services specified
in the Pooling Agreement. The Master Servicer will generally perform the
same services and duties as a Servicer under a Servicing Agreement, as well
as certain services of a Master Servicer described herein.
The Trustee may act as the Certificate Administrator. With respect to
each Series of Certificates, as established in the applicable Pooling
Agreement, a Certificate Administrator will be appointed and will receive
the Certificate Administrator Fee.
Collection and Other Servicing Procedures
The Master Servicer or Servicer will make reasonable efforts to collect
all payments called for under the SAMs and will, consistent with each
Pooling Agreement and any Pool Insurance Policy, Primary Insurance Policy,
Special Hazard Insurance Policy, Bankruptcy Bond, Fraud Bond, Letter of
Credit, Reserve Fund, Certificate Insurance Policy or alternative
arrangements, follow such collection procedures as are customary with
respect to mortgage loans that are comparable to the SAMs ("Accepted
Servicing Practices"). Consistent with the above, the Master Servicer or
Servicer may, in its discretion, (i) waive any assumption fee, late payment
or other charge in connection with a SAM and (ii) to the extent not
inconsistent with the coverage of such SAM by a Pool Insurance Policy,
Primary Insurance Policy, Special Hazard Insurance Policy, Bankruptcy Bond,
Fraud Bond, Letter of Credit, Reserve Fund, Certificate Insurance Policy or
alternative arrangements, if applicable, arrange with a Mortgagor a
schedule for the liquidation of delinquencies running for no more than a
period as is specified in the Pooling Agreement or the Servicing Agreement
after the applicable due date for each payment. The Master Servicer or
Servicer remain obligated to make Advances during any period of such an
arrangement.
In any case in which property securing a SAM has been, or is about to
be, conveyed by the Mortgagor, the Master Servicer or Servicer generally
will, to the extent it has knowledge of such transfer, exercise or cause to
be exercised its rights to accelerate the maturity of such SAM as a
Mortgage Termination Event, but only if the exercise of such rights is
permitted by applicable law. Any fee collected by or on behalf of the
Master Servicer or Servicer for entering into an assumption agreement will
be retained by or on behalf of the Master Servicer or Servicer as
additional servicing compensation.
Servicing Compensation and Payment of Expenses
With respect to each Series of Certificates, the Master Servicer's or
any Servicer's primary compensation for their servicing activities will
come from the payment to them, or the retention by them, of an amount equal
to the Master Servicing Fee or the Servicing Fee for each SAM. The Master
Servicer's or the Servicer's primary compensation for supervising the
mortgage servicing and advancing certain expenses of a SAM Pool will come
from the payment to it of an amount equal to the Master Servicing Fee or
the Servicing Fee, as applicable, with respect to each SAM (or a SAM in its
respective SAM Pool) in such SAM Pool. The Master Servicing Fee or the
Servicing Fee, with respect to each payment of interest received on a SAM,
will equal one-twelfth of the Master Servicing Fee or the Servicing Fee
annual percentage, as applicable, set forth in the Pooling Agreement, or
the Servicing Agreement, as applicable, multiplied by the outstanding
principal balance of such SAM during the month for which such amount is
computed.
With respect to a Series of Certificates as to which the Master
Servicer will act as Master Servicer, the Master Servicer will retain as
its Master Servicing Fee a portion of the interest payable on each SAM
serviced by it. In addition, unless otherwise set forth in the applicable
Prospectus Supplement, the Master Servicer will retain late charges,
assumption fees and similar charges to the extent collected from
Mortgagors. The Depositor expects that such fees and charges will be
negligible in amount. Unless otherwise provided in the applicable
Prospectus Supplement, the Master Servicer will retain as its Master
Servicing Fee an amount which will be calculated as a per annum percentage
for each SAM plus an amount calculated to reimburse it for the expenses
required to be borne by it, which, unless otherwise set forth in the
applicable Prospectus Supplement, will include the Trustee's fees and
premiums on or other expenses relating to any Pool Insurance Policy and/or
other credit enhancements.
With respect to Series of Certificates as to which there will be a
Servicer, each Servicer will receive a Servicing Fee, as established in the
applicable Pooling Agreement.
As principal payments are made on each SAM, the outstanding principal
balance of the SAMs will decline, and thus compensation to the Master
Servicer or Servicer will decrease as the SAMs amortize (subject to any
minimum levels of such compensation set forth in the applicable Prospectus
Supplement). Principal Prepayments, Curtailments and liquidations of SAMs
prior to maturity will also cause servicing compensation to the Servicer
and/or the Master Servicer to decrease (subject to any minimum levels of
such compensation set forth in the applicable Prospectus Supplement).
In addition to their primary compensation, the Master Servicer or the
Servicer, as applicable, will retain all prepayment fees, assumption fees
and late payment charges, to the extent collected from a Mortgagor. The
Master Servicer's or the Servicer's income from such charges will depend
upon their origination and servicing policies.
The Master Servicer and the Servicer, as applicable, are entitled to
reimbursement for certain expenses incurred by them in connection with the
liquidation of related defaulted SAMs. Certificateholders of such Series
will suffer no loss by reason of such expenses to the extent claims are
paid under any applicable credit enhancements. In the event, however, that
claims are not paid under such policies or alternative coverages, or if
coverage has been exhausted, Certificateholders of such Series will suffer
a loss to the extent that the proceeds of liquidation of a defaulted SAM,
after reimbursement of each such Master Servicer's and Servicer's expenses,
as applicable, are less than the principal balance of such SAM. In
addition, the Master Servicer and the Servicer, as applicable, are entitled
to reimbursement of expenditures incurred by them in connection with the
restoration of a related damaged Mortgaged Property, such right of
reimbursement being prior to the rights of Certificateholders to receive
any related Insurance Proceeds or Liquidation Proceeds.
Events of Default
"Events of Default" under the Pooling Agreement will generally include
(i) any failure by the Master Servicer or Servicer to cause to be deposited
in the Distribution Account or Collection Account, as applicable, any
amount so required to be deposited pursuant to the Pooling Agreement and
such failure continues unremedied for two business days or such other time
period as is specified in such agreement; (ii) any failure by the Master
Servicer or Servicer duly to observe or perform in any material respect any
of its other covenants or agreements in the Pooling Agreement, which
continues unremedied for 60 days or such other time period as is specified
in the Pooling Agreement, after the giving of written notice of such
failure to the Master Servicer or Servicer by the Trustee, or to the Master
Servicer or Servicer and the Trustee by the holders of Certificates of any
Class evidencing not less than 25% of the Percentage Interests evidenced by
such Class; (iii) certain events of insolvency, readjustment of debt,
marshaling of assets and liabilities or similar proceedings and certain
actions by or on behalf of the Master Servicer or Servicer indicating its
insolvency, reorganization or inability to pay its obligations; and (iv)
the Master Servicer or Servicer assigning or delegating its duties or
rights in contravention of the provisions permitting such assignment or
delegation under the Pooling Agreement.
If specified in the related Prospectus Supplement, the Pooling
Agreement will permit the Trustee to sell the assets of the Trust Fund in
the event that payments in respect thereto are insufficient to make the
payments required 'in the Pooling Agreement. The assets of the Trust Fund
will be sold only under the circumstances and in the manner specified in
the related Prospectus Supplement.
Rights Upon Event of Default
As long as an Event of Default under the Pooling Agreement, for any
Series remains unremedied, the Trustee or holders of 25% of the Percentage
Interest, as determined in the manner set forth in such Pooling Agreement,
may terminate all of the rights and obligations of the defaulting Master
Servicer or the Servicer, as applicable, under such Pooling Agreement, and
in and to the Trust Fund, whereupon the Trustee will succeed to all the
responsibilities, duties and liabilities of such Master Servicer or
Servicer (except to the extent, as specified in the applicable Prospectus
Supplement, the Master Servicer takes over the obligations of a defaulting
Servicer), under such Pooling Agreement and such successor will be entitled
to similar compensation arrangements and limitations on liability. In the
event that the Trustee is unwilling or unable so to act, it may appoint or
petition a court of competent jurisdiction for the appointment of a housing
and home finance institution with a net worth of at least $10,000,000 to
act as successor to the defaulting Master Servicer or the Servicer under
such Pooling Agreement. Pending any such appointment, the Trustee is
obligated to act in such capacity. In the event that the Trustee acts as
successor to such Master Servicer or the Servicer, the Trustee will be
obligated to make Advances unless it is prohibited by law from doing so.
The Trustee and such successor may agree upon the compensation to be paid,
which in no event may be greater than the compensation to the Master
Servicer or the Servicer, as applicable. Subject to certain limitations,
holders of Certificates for a Series evidencing interests aggregating not
less than 25% of the Trust Fund, as determined in the manner set forth in
the Pooling Agreement for that Series, may direct the action of the Trustee
in pursuing remedies and exercising powers under such Pooling Agreement.
No Certificateholder of any Series will have any right under the
Pooling Agreement to institute any proceeding with respect to such Pooling
Agreement unless such Certificateholder previously has given to the Trustee
written notice of default and unless the holders of Certificates for that
Series evidencing interests aggregating not less than 25% of the Trust
Fund, as determined in the manner set forth in such Pooling Agreement, have
made written request upon the Trustee to institute such proceeding in its
own name as Trustee thereunder and have offered to the Trustee reasonable
indemnity. However, the Trustee is under no obligation to exercise any of
the trusts or powers vested in it by the Pooling Agreement for any Series
or to make any investigation of matters arising thereunder or to institute,
conduct or defend any litigation thereunder or in relation thereto at the
request, order or direction of any of the Certificateholders, unless such
Certificateholders have offered to the Trustee reasonable security or
indemnity against the costs, expenses and liabilities which may be incurred
therein or thereby.
Amendment
In general, the Pooling Agreement may be amended by the parties
thereto, without the consent of any of the Certificateholders, (i) to cure
any ambiguity; (ii) to correct or supplement any provision therein which
may be defective or inconsistent with any other provision therein; (iii) to
comply with any changes in the Code or (iv) to make any other revisions
with respect to matters or questions arising under the Pooling Agreement
which are not inconsistent with the provisions thereof, provided that such
action will not adversely affect in any material respect the interests of
any Certificateholder. In addition, to the extent provided in the Pooling
Agreement, a Pooling Agreement may be amended without the consent of any of
the Certificateholders, to change the manner in which the Distribution
Account, the Collection Account or any other accounts is maintained,
provided that any such change does not adversely affect the then current
rating on the Class or Classes of Certificates of such Series that have
been rated. In addition, if a REMIC election is made with respect to a
Trust Fund, the related Pooling Agreement may be amended to modify,
eliminate or add to any of its provisions to such extent as may be
necessary to maintain the qualification of the related Trust Fund as a
REMIC, provided that the Trustee has received an opinion of counsel to the
effect that such action is necessary or helpful to maintain such
qualification. In general, each Pooling Agreement may also be amended by
the parties thereto with consent of holders of Certificates of such Series
evidencing not less than 662/3% of the aggregate Percentage Interests of
each Class affected thereby for the purpose of adding any provisions to or
changing in any manner or eliminating any of the provisions of the Pooling
Agreement or of modifying in any manner the rights of the holders of the
related Certificates; provided, however, that no such amendment may (i)
reduce in any manner the amount of or delay the timing of, payments
received on Trust Assets which are required to be distributed on any
Certificate without the consent of the holder of such Certificate, or (ii)
reduce the aforesaid percentage of Certificates of any Class of holders
which are required to consent to any such amendment without the consent of
the holders of all Certificates of such Class covered by such Pooling
Agreement then outstanding. If a REMIC election is made with respect to a
Trust Fund, the Trustee will not be entitled to consent to an amendment to
the related Pooling Agreement without having first received an opinion of
counsel to the effect that such amendment will not cause such Trust Fund to
fail to qualify as a REMIC.
List of Certificateholders
Upon written request of three or more Certificateholders of record of
such a Series of Certificates, for purposes of communicating with other
Certificateholders with respect to their rights under the Pooling Agreement
for such Series, the Trustee will afford such Certificateholders access
during business hours to the most recent list of Certificateholders of that
Series held by the Trustee.
The Trustee
The identity of the commercial bank, savings and loan association or
trust company named as the Trustee for each Series of Certificates will be
set forth in the related Prospectus Supplement. The entity serving as
Trustee may have normal banking relationships with the Seller and its
affiliates. In addition, for the purpose of meeting the legal requirements
of certain local jurisdictions, the Trustee will have the power to appoint
co-trustees or separate trustees of all or any part of the Trust Fund
relating to a Series of Certificates. In the event of such appointment, all
rights, powers, duties and obligations conferred or imposed upon the
Trustee by the applicable Pooling Agreement will be conferred or imposed
upon the Trustee and each such separate trustee or co-trustee jointly, or,
in any jurisdiction in which the Trustee shall be incompetent or
unqualified to perform certain acts, singly upon such separate trustee or
co-trustee who will exercise and perform such rights, powers, duties and
obligations solely at the direction of the Trustee. The Trustee may also
appoint agents to perform any of the responsibilities of the Trustee, which
agents will have any or all of the rights, powers, duties and obligations
of the Trustee conferred on them by such appointment; provided that the
Trustee will continue to be responsible for its duties and obligations
under the Pooling Agreement.
Duties of the Trustee
The Trustee will not make any representations as to the validity or
sufficiency of the Pooling Agreement, the Certificates or of any assets or
related documents. If no Event of Default (as defined in the related
Pooling Agreement) has occurred, the Trustee is required to perform only
those duties specifically required of it under the Pooling Agreement. Upon
receipt of the various certificates, statements, reports or other
instruments required to be furnished to it, the Trustee is required to
examine them to determine whether they are in the form required by the
related Pooling Agreement. However, the Trustee will not be responsible for
the accuracy or content of any such documents furnished to it by the
Certificateholders, the Master Servicer or the Servicer under the Pooling
Agreement.
The Trustee may be held liable for its own negligent action or failure
to act, or for its own misconduct; provided, however, that the Trustee will
not be personally liable with respect to any action taken, suffered or
omitted to be taken by it in good faith in accordance with the direction of
the Certificateholders following an Event of Default. The Trustee is not
required to expend or risk its own funds or otherwise incur any financial
liability in the performance of any of its duties under the Pooling
Agreement, or in the exercise of any of its rights or powers, if it has
reasonable grounds for believing that repayment of such funds or adequate
indemnity against such risk or liability is not reasonably assured to it.
Resignation of Trustee
The Trustee may, upon written notice to the Seller, resign at any time,
in which event the Seller will be obligated to use its best efforts to
appoint a successor Trustee. If no successor Trustee has been appointed and
has accepted the appointment within the period specified in the Pooling
Agreement after the giving of such notice of resignation, the resigning
Trustee may petition any court of competent jurisdiction for appointment of
a successor Trustee. The Trustee may also be removed at any time (i) if the
Trustee ceases to be eligible to continue as such under the Pooling
Agreement, (ii) if the Trustee becomes insolvent or (iii) by the
Certificateholders evidencing over 50% of the aggregate voting rights of
the Certificates in the Trust Fund upon written notice to the Trustee and
to the Seller. Any resignation or removal of the Trustee and appointment of
a successor Trustee will not become effective until acceptance of the
appointment by the successor Trustee.
Evidence as to Compliance
The Pooling Agreement will provide that on or before a specified date
in each year, a firm of independent public accountants will furnish a
statement to the Trustee to the effect that, on the basis of the
examination by such firm conducted substantially in compliance with the
Uniform Single Audit Program for Mortgage Bankers, the Audit Program for
Mortgages serviced for the FHLMC or a program certified by such firm to be
comparable, the servicing by or on behalf of the Master Servicer or
Servicer of mortgage loans, agency securities or private mortgage-backed
securities, under pooling and servicing agreements substantially similar to
each other (including the related Pooling Agreement) was conducted in
compliance with such agreements except for any significant exceptions or
errors in records that, in the opinion of the firm, the Uniform Single
Audit Program for Mortgage Bankers, the Audit Program for Mortgages
serviced for FHLMC or such comparable program requires it to report. In
rendering its statement, such firm may rely, as to matters relating to the
direct servicing of mortgage loans, agency securities or private
mortgage-backed securities by Servicers, upon comparable statements for
examinations conducted substantially in compliance with the Uniform Single
Audit Program for Mortgage Bankers, the Audit Program for Mortgages
serviced for FHLMC or such comparable program (rendered within one year of
such statement) of firms of independent public accountants with respect to
the related Servicer.
The Pooling Agreement will also provide for delivery to the Trustee, on
or before a specified date in each year, of an annual statement signed by
an officer of the Master Servicer or Servicer to the effect that such
Master Servicer or Servicer has fulfilled its obligations under the Pooling
Agreement throughout the preceding year.
Copies of the annual accountants' statement and the statement of
officers of the Master Servicer or Servicer may be obtained by
Certificateholders of the related Series without charge upon written
request to the Master Servicer or Servicer at the address set forth in the
related Prospectus Supplement.
Certain Matters Regarding the Master Servicer,
the Servicer and the Certificate Administrator
One or more Master Servicer or Servicers under the Pooling Agreement,
will be named in the related Prospectus Supplement. Each entity serving as
Master Servicer or Servicer may have normal business relationships with the
Seller or the Seller's affiliates.
The Pooling Agreement will provide that a Master Servicer or Servicers
may not resign from its obligations and duties under the Pooling Agreement,
except upon a determination that its duties thereunder are no longer
permissible under applicable law or as otherwise specified in the related
Prospectus Supplement. No such resignation will become effective until the
Trustee or a successor servicer has assumed the Master Servicer's or
Servicer's obligations and duties under the Pooling Agreement.
Each Pooling Agreement will further provide that neither the Master
Servicer or Servicers, in certain instances, the Seller nor any director,
officer, employee, or agent of the Master Servicer, the Servicers or the
Seller will be under any liability to the Trustee, the related Trust Fund
or Certificateholders for any action taken or for refraining from the
taking of any action in good faith pursuant to the Pooling Agreement or for
errors in judgment; provided, however, that neither the Master Servicer,
the Servicer, the Seller nor any such person will be protected against any
breach of warranties or representations made in the Pooling Agreement or
any liability which would otherwise be imposed by reason of willful
misfeasance, bad faith or negligence in the performance of duties
thereunder or by reason of reckless disregard of obligations and duties
thereunder. The Pooling Agreement will further provide that the Master
Servicer or Servicers, in certain instances, the Seller and any director,
officer, employee or agent of the Master Servicer, Servicers or the Seller
will be entitled to indemnification by the Trust Fund and will be held
harmless against any loss, liability or expense incurred in connection with
any legal action relating to the Pooling Agreement or the Certificates,
other than any loss, liability or expense related to any failure to perform
its duties in compliance with the Pooling Agreement (except any such loss,
liability or expense otherwise reimbursable pursuant to the Pooling
Agreement) and any loss, liability or expense incurred by reason of willful
misfeasance, bad faith or negligence in the performance of duties
thereunder or by reason of reckless disregard of obligations and duties
thereunder. In addition, the Pooling Agreement will provide that neither
the Master Servicer, the Servicers nor, in certain instances, the Seller
will be under any obligation to appear in, prosecute or defend any legal
action which is not incidental to its respective responsibilities under the
Pooling Agreement and which in its opinion may involve it in any expense or
liability. The Master Servicer, the Servicer or the Seller may, however, in
its discretion undertake any such action which it may deem necessary or
desirable with respect to the Pooling Agreement and the rights and duties
of the parties thereto and the interests of the Certificateholders
thereunder. In such event, the legal expenses and costs of such action and
any liability resulting therefrom will be expenses, costs and liabilities
of the Trust Fund and the Master Servicer, the Servicer or the Seller, as
the case may be, will be entitled to be reimbursed therefor out of funds
otherwise distributable to Certificateholders.
Any person into which the Master Servicer or Servicers may be merged or
consolidated, or any person resulting from any merger or consolidation to
which the Master Servicer or Servicers is a party, or any person succeeding
to the business of the Master Servicer or Servicers, will be the successor
of the Master Servicer or Servicers under the Pooling Agreement, provided
that such person is, among other things, qualified to sell mortgage loans
to, and service mortgage loans on behalf of, FNMA or FHLMC and further
provided that such merger, consolidation or succession does not adversely
affect the then current rating or ratings of the Class or Classes of
Certificates of such Trust.
Exchangeable Certificates
General
Certain Series will provide for the issuance of one or more classes of
Exchangeable Certificates, as set forth in the related Prospectus
Supplement. In any such Series, the holders of one or more of the specified
Classes of Exchangeable Certificates will be entitled, upon notice and
payment to the Trustee of an administrative fee, to exchange all or a
portion of such classes for proportionate interests in one or more of the
other specified Classes of Exchangeable Certificates. The Classes of
Exchangeable Certificates that are exchangeable for one another will be
referred to as being "related" to one another, and related classes of
Exchangeable Certificates will be referred to as "Combinations." The
Combinations for the Exchangeable Certificates in a Series, if any, will be
set forth in the Prospectus Supplement for the Series.
In each Series that includes Exchangeable Certificates, all of the
Classes of Certificates that are shown on the cover page of the related
Prospectus Supplement will be issued, and those Classes that are to be the
basis for the exchange arrangements will be deposited in a separate trust
fund (an "Exchangeable Certificate Trust Fund") established pursuant to a
trust agreement between the Seller and a trustee. The Trustee may serve as
such trustee. The Exchangeable Certificate Trust Fund initially will issue
Classes of Exchangeable Certificates that are identical in all respects to
the Classes of Certificates deposited in such trust fund. At any time after
their issuance, including immediately after such issuance, these Classes of
Exchangeable Certificates may be exchanged, in whole or in part, for other
related Classes of Exchangeable Certificates that are part of the same
Combination, as specified in the related Prospectus Supplement. When an
exchange is effected, the Exchangeable Certificate Trust Fund will cancel
the relevant portion or portions of the Class or Classes of Exchangeable
Certificates that are being exchanged and will issue the corresponding
portion or portions of the Class or Classes of other related Exchangeable
Certificates into which such Class or Classes of Certificates are
exchangeable. Exchangeable Certificates received in an exchange may
subsequently be exchanged for other Exchangeable Certificates that are part
of the same Combination. This process may be repeated again and again. Each
Exchangeable Certificate issued by an Exchangeable Certificate Trust Fund
will represent a beneficial ownership interest in the Class or Classes of
Certificates deposited in such Trust Fund.
In general, the descriptions in this Prospectus of Classes of
Certificates of a Series also apply to the Exchangeable Classes of that
Series, except where the context requires otherwise. For example, the
Exchangeable Classes of a Series are entitled to receive payments of
principal and/or interest, are issued in book-entry form or as Definitive
Certificates to Certificateholders in prescribed denominations, may be
provided with credit enhancements, and are subject to yield, appreciation
and prepayment considerations, in the same manner and to the same extent as
are the Classes of Certificates of such Series. Similarly, the discussions
under "ERISA Considerations" and "Certain Legal Considerations" apply to
Exchangeable Certificates as well as Certificates.
Exchanges
The ability of a holder of a Class or Classes of Exchangeable
Certificates to exchange such Class or Classes for another related Class or
Classes of Exchangeable Certificates within the same Combination will be
subject to three basic constraints, as follows:
o The aggregate principal amount (rounded to whole dollars) of
the Exchangeable Certificates received in the exchange,
immediately after the exchange, must equal that of the
Exchangeable Certificates surrendered for exchange
immediately before the exchange (for this purpose, the
principal amount of any interest only Class will always
equal $0);
o The aggregate amount of annual interest (rounded to whole
dollars) (the "Annual Interest Amount") payable with respect
to the Exchangeable Certificates received in the exchange
must equal that of the Exchangeable Certificates surrendered
for exchange; and
o Such Classes must be exchanged in the applicable exchange
proportions, if any, shown in the related Prospectus
Supplement, which, as described below, are based at all
times on the original principal amounts (or original
notional principal amounts, if applicable) of such Classes.
Within any particular Series, one or more types of Combinations may
exist. For example, a Class of Exchangeable Certificates with a Stated
Interest Rate that varies directly with changes in an index (a "Floating
Rate Class") and a Class of Exchangeable Certificates with a Stated
Interest Rate that varies inversely with changes in an index (an "Inverse
Floating Rate Class") may be exchangeable for a Class of Exchangeable
Certificates with a fixed Stated Interest Rate. Under another Combination,
a Class of Exchangeable Certificates that is a principal only Class and a
Class of Exchangeable Certificates that is an interest only Class may be
exchangeable for a Class of Exchangeable Certificates that pays both
principal and interest. Further, a Class of Exchangeable Certificates that
accretes all of its interest for a period (such accreted interest being
added to the principal of such Class) (an "Accrual Class") and a Class of
Exchangeable Certificates that receives principal payments from such
accretions on the Accrual Class may be exchangeable for a Class of
Exchangeable Certificates that receives payments of principal continuously
from the first Distribution Date on which it receives principal until it is
retired. Under another Combination, a Class of Exchangeable Certificates
that is designed to receive principal payments in accordance with a
predetermined schedule derived by assuming two constant prepayment rates
for the underlying SAMs ( a "Planned Amortization Class") and a Class of
Exchangeable Certificates that receives principal payments on any
Distribution Date only if scheduled payments have been made on the Planned
Amortization Class may be exchangeable for a Class of Exchangeable
Certificates that receives payments of principal continuously from the
first Distribution Date on which it receives principal until it is retired
and that also receives a coupon. The foregoing examples describe only some
of the types of Combinations that are possible.
Set forth below are additional examples that illustrate in simple
mathematical terms how certain possible Combinations might operate. The
first example shows a Combination in which Exchangeable Certificates of a
principal only Class and Exchangeable Certificates of an interest bearing
Class are exchangeable for Exchangeable Certificates of a Class that has
the aggregate characteristics of the two original Classes of Exchangeable
Certificates:
Maximum
Original Original
Principal Interest Principal Interest
Class Amount Rates Class Amount Rate
- --------- ------------- --------- --------- ------------- ----------
ES-1 $20,000,000 10% ES-2 $40,000,000 5%
ES-P* 20,000,000 0%
- -----------------------
* Class ES-P is a principal only Class and will receive no interest.
The following example illustrates a Combination of a Floating Rate
Class and an Inverse Floating Rate Exchangeable Certificate which are
exchangeable for a single Class of Exchangeable Certificates with a fixed
interest rate:
Maximum
Original Original
Principal Interest Principal Interest
Class Amount Rates Class Amount Rate
- --------- ------------- ---------- -------- ------------ ---------
ES-3 $9,333,330 LIBOR + ES-5 $11,333,330 7%
0.75%
ES-4 2,000,000 36.1666 -
(LIBOR x
4.66667)
In the following Combination, an Exchangeable Certificate that pays
both principal and interest is exchangeable for two Exchangeable
Certificates, one of which pays only interest and the other pays only
principal:
Maximum
Original
Principal or
Original Notional
Principal Interest Principal Interest
Class Amount Rate Class Amount Rates
- -------- ----------- --------- --------- ------------- ---------
ES-5 $20,000,000 10% ES-P* $20,000,000 0%
ES-X** 20,000,000 10%
(notional)***
- ----------------------
* Class ES-P is a principal only Class and will receive no interest.
** Class ES-X is an interest only Class and will receive no principal.
*** Notional principal amount of ES-X Class being exchanged equals principal
amount of ES-P Class being exchanged.
In some Series, a Combination may include a number of Classes of
Exchangeable Certificates that are exchangeable for one another and that
will enable a holder of one of the Classes of Exchangeable Certificates to
exchange it for another Class of Exchangeable Certificates with a higher or
lower coupon. As discussed below, any such exchange also will require the
issuance of a third Class of Exchangeable Certificates that will pay only
principal or interest, respectively. The following table illustrates such a
Combination:
Maximum
Original
Principal or
Original Notional
Principal Interest Principal Interest
Class Amount Rate Class Amount Rates
- ------- ------------- --------- --------- --------------- ---------
ES-6 $20,000,000 7% ES-X* $20,000,000 7%
(notional)
ES-7 20,000,000 6%
ES-8 20,000,000 6.25%
ES-9 20,000,000 6.50%
ES-10 20,000,000 6.75%
ES-11 19,310,344 7.25%
ES-12 18,666,666 7.50%
ES-13 18,064,516 7.75%
ES-14 17,500,000 8.00%
ES-P** 20,000,000 0.00%
- --------------------
* Class ES-X is an interest only Class and will receive no principal.
** Class ES-P is a principal only Class and will receive no interest.
The foregoing table shows the maximum amount of each other ES Class
that can be created from the related Class ES-6 Exchangeable Certificate.
Such amounts could not exist concurrently, as any Combination is limited to
the amount of principal and interest distributable on the related
Exchangeable Certificate to be exchanged. One method of calculating the
maximum amount that can be created in a specific combination is to
determine the annual Stated Interest applicable to the Exchangeable
Certificates to be exchanged, and divide such interest amount by the coupon
of the desired Exchangeable Certificate. The resulting principal amount can
in no case be greater than the principal amount of Exchangeable
Certificates to be exchanged. For example, using the foregoing table, if
Class ES- 12 is desired, the maximum original principal amount of the Class
ES-12 Exchangeable Certificates that could be created would be $18,666,666,
an amount arrived at by dividing the annual Stated Interest of the Class
ES-6 Certificates ($1,400,000) by the Stated Interest Rate of the Class
ES-12 Exchangeable Certificates (7.50%). Since all of the available Stated
Interest with respect to the Class ES-6 Exchangeable Certificates would be
used to create the Class ES-12 Exchangeable Certificates, principal only
Class ES-P Exchangeable Certificates would be created to receive the
remainder of the Class ES-6 principal in the amount of $1,333,334
(calculated by subtracting the Class ES-12 Exchangeable Certificates
original principal amount from the Class ES-6 Exchangeable Certificates
original principal amount).
Similarly, if Class ES-9 Exchangeable Certificates are desired,
dividing the Stated Interest of the Class ES-6 Exchangeable Certificates
($1,400,000) by the Stated Interest Rate of the Class ES-9 Exchangeable
Certificates (6.50%) would indicate an original principal amount of
$21,538,461. However, since the Class ES-6 Exchangeable Certificates have a
principal balance of $20,000,000, only $20,000,000 of the Class ES-9
Exchangeable Certificates could be created. The Stated Interest applicable
to the Class ES-9 Exchangeable Certificates would be $20,000,000 multiplied
by 6.50% or $1,300,000. Since the Stated Interest of the Class ES-6
Exchangeable Certificates is $1,400,000, the interest only Class ES-X
Exchangeable Certificates would be created to receive the remaining
$100,000 of interest. The notional amount of such securities would be
calculated by dividing the Stated Interest ($100,000) by the Stated
Interest Rate applicable to Class ES-X Exchangeable Certificates (7.00%) to
determine the notional amount ($1,428,571).
Under the terms of this Combination, the Class ES-9 Exchangeable
Certificates described in the preceding paragraph might also be
exchangeable for the Class ES-14 Exchangeable Certificates. If the Stated
Interest of the Class ES-9 Exchangeable Certificates ($1,300,000) is
divided by the Stated Interest Rate on the Class ES-14 Exchangeable
Certificates (8.00%), the maximum original principal amount of the Class
ES-14 Exchangeable Certificates that can be created is $16,250,000. Since
all of the available Stated Interest with respect to the Class ES- 9
Exchangeable Certificates would be used to create the Class ES-14
Exchangeable Certificates, principal only Class ES-P Exchangeable
Certificates would be created to receive the remainder of the Class ES-9
principal in the amount of $3,750,000 (calculated by subtracting the Class
ES-14 Exchangeable Certificates original principal amount from the Class
ES-9 Exchangeable Certificates original principal amount).
The foregoing examples set forth various combinations of Exchangeable
Certificates which differ in interest characteristics (i.e., interest only
Classes, principal only Classes and Classes which have principal amounts
and bear interest). In certain Series, a Certificateholder may also be able
to exchange its Exchangeable Certificates for other Exchangeable
Certificates that have different principal payment characteristics. For
example, an exchange of two or more Classes of Exchangeable Certificates
for a single Class of Exchangeable Certificates may result in an
Exchangeable Certificate with the aggregate principal payment
characteristics of the multiple Classes of Exchangeable Certificates for
which it was exchanged. In addition, a holder of either an Exchangeable
Certificate representing Appreciation Shares or an Exchangeable Certificate
entitled to receive principal and stated interest payments from the SAMs
could exchange such classes for a single Exchangeable Certificate that
entitles such holder to receive both payments of the Appreciation Share and
principal and stated interest from the SAMs. Further, in certain Series,
Exchangeable Certificates may be exchangeable for other Exchangeable
Certificates with different credit characteristics. For example, a Class
that is senior in priority of payment may be combined with a subordinated
Class, to create a new Class with the aggregate credit characteristics of
the two Classes that were combined.
At any given time, a Certificateholder's ability to exchange
Exchangeable Certificates for other Exchangeable Certificates will be
limited by a number of factors. A Certificateholder must, at the time of
the proposed exchange, own the class or classes which are permitted to be
exchanged in the proportions necessary in order to effect the desired
exchange. A Certificateholder that does not own such class or classes or
the necessary amounts of such class or classes may not be able to obtain
the desired class or classes of Exchangeable Certificates. The
Certificateholder of a needed class may refuse or be unable to sell at a
reasonable price or at any price, or certain classes may have been
purchased and placed into other financial structures. ERISA or other
transfer restrictions may apply to certain of the Exchangeable Certificates
in a Combination, but not to others. In addition, principal payments and
prepayments will, over time, diminish the amounts available for exchange.
Procedures and Exchange Proportions
A Certificateholder proposing to effectuate an exchange must notify the
Trustee or follow other procedures as described in the related Prospectus
Supplement. Such notice must be given in writing or by telefax not later
than five business days before the proposed exchange date (which date,
subject to the Trustee's approval, can be any business day other than the
first or last business day of the month). The notice must include the
outstanding principal (or notional principal) amount of both the securities
to be exchanged and the securities to be received, and the proposed
exchange date. Promptly after the Certificateholder has given the required
notice, the Trustee will provide instructions for delivering the securities
and the payment of the administrative fee to the Trustee by wire transfer.
A Certificateholder's notice becomes irrevocable on the second business day
before the proposed exchange date.
An administrative fee will be payable to the Trustee in connection with
each exchange as specified in the related Prospectus Supplement. Any
exchanges will be subject to the rules, regulations and procedures
applicable to DTC's book-entry securities, in the case of Exchangeable
Classes issued in book-entry form.
Where exchange proportions are shown in the related Prospectus
Supplement for Classes of Exchangeable Certificates, the Depositor will
follow the convention of basing such proportions on the original, rather
than on the outstanding, principal or notional principal amounts of such
Classes. If such Classes receive principal payments pro rata with each
other, the exchange proportions also will apply to their outstanding
principal amounts. If such Classes do not receive principal payments pro
rata with each other, an investor can calculate current exchange
proportions for such Classes, based on their outstanding principal amounts,
by (i) multiplying the exchange proportion shown in the related Prospectus
Supplement for each such Class by its current Class Factor (as defined
below) and (ii) dividing each resulting percentage by the sum of such
percentages. The Trustee will include that Class Factor for each Class of
outstanding Exchangeable Certificates having a principal amount in the
statements it furnishes to Certificateholders in connection with each
Distribution Date. The current Class Factor also will be available to
Certificateholders upon request from the Trustee or the Seller as specified
in the related Prospectus Supplement. The "Class Factor" for any month will
be a truncated seven-digit decimal which, when multiplied by the original
principal amount of that Class, will equal its remaining principal amount,
after giving effect to any payment of (or addition to) principal to be made
on the Distribution Date in the following month. A Class Factor for each
interest only Class having a notional principal amount will be included in
the statements the Trustee furnishes to Certificateholders in connection
with each Distribution Date and also will be available to
Certificateholders upon request from the Trustee or the Seller as specified
in the related Prospectus Supplement. Such a Class Factor will reflect the
remaining notional principal amount of the interest only Class in an
analogous manner.
The first payment on an Exchangeable Certificate received in an
exchange transaction will be made on the Distribution Date in the month
following the month of the exchange or as specified in the related
Prospectus Supplement. Such payment will be made to the Certificateholder
of record as of the applicable Record Date.
Primary Insurance, Hazard Insurance; Claims Thereunder
As set forth below, a SAM may be required to be covered by a Primary
Insurance Policy and is required to be covered by a Hazard Insurance
Policy. The following is only a brief description of such coverage and does
not purport to describe all of the characteristics of each type of
insurance. Such insurance is subject to underwriting and approval of
individual SAMs by the respective insurers and guarantors. In some cases,
however, the issuer of the insurance or guaranty may delegate underwriting
authority to the originator of the SAM. The descriptions of any insurance
coverage in this Prospectus or any Prospectus Supplement do not purport to
be complete and are qualified in their entirety by reference to such forms
of policies, and to such statutes or regulations as may be applicable.
Primary Insurance
The Master Servicer or the related Servicer will be required to
maintain or in the case of the Master Servicer, cause each Servicer to
maintain, in full force and effect, to the extent specified in the related
Prospectus Supplement, a primary insurance policy (a "Primary Insurance
Policy") with regard to each SAM for which such coverage is required. The
Master Servicer or Servicer will be required not to cancel or refuse to
renew any such Primary Insurance Policy in effect at the time of the
initial issuance of a Series of Certificates that is required to be kept in
force under the applicable Pooling Agreement unless the replacement Primary
Insurance Policy for such cancelled or nonrenewed policy is maintained with
an insurer whose claims-paying ability is sufficient to maintain the
current rating of the Classes of Certificates of such Series that have been
rated.
Although the terms and conditions of primary mortgage insurance vary,
the amount of a claim for benefits under a Primary Insurance Policy
covering a SAM generally will consist of the insured percentage of the
unpaid principal amount of the covered SAM and accrued and unpaid interest
thereon and reimbursement of certain expenses, less (i) all rents or other
payments collected or received by the insured (other than the proceeds of
hazard insurance) that are derived from or in any way related to the
Mortgaged Property, (ii) hazard insurance proceeds in excess of the amount
required to restore the Mortgaged Property and which have not been applied
to the payment of the SAM, (iii) amounts expended but not approved by the
issuer of the related Primary Insurance Policy (the "Primary Insurer"),
(iv) claim payments previously made by the Primary Insurer and (v) unpaid
premiums.
Primary Insurance Policies reimburse certain losses sustained by reason
of defaults in payments by Mortgagors. Primary Insurance Policies will not
insure against, and exclude from coverage, a loss sustained by reason of a
default arising from or involving certain matters, including (i) fraud or
negligence in origination or servicing of the SAMs, including
misrepresentation by the Originator, Mortgagor or other persons involved in
the origination of the SAM; (ii) failure to construct the Mortgaged
Property subject to the SAM in accordance with specified plans; (iii)
physical damage to the Mortgaged Property; and (iv) the related Master
Servicer not being approved as a servicer by the Primary Insurer.
Hazard Insurance
The Master Servicer or the related Servicer will require the Mortgagor
on each SAM to maintain a hazard insurance policy providing for no less
than the coverage of the standard form of fire insurance policy with
extended coverage customary for the type of Mortgaged Property in the state
in which such Mortgaged Property is located (a "Hazard Insurance Policy").
Such coverage will be in an amount not less than the replacement value of
the improvements securing such SAM or the principal balance owing on such
SAM, whichever is less. All amounts collected by the Master Servicer or
Servicer under any hazard policy (except for amounts to be applied to the
restoration or repair of the Mortgaged Property or released to the
Mortgagor in accordance with the Master Servicer's or Servicer's normal
servicing procedures) will be deposited in the related Collection Account.
In the event that the Master Servicer or Servicer maintains a blanket
policy insuring against hazard losses on all of the SAMs comprising part of
a Trust Fund, it will conclusively be deemed to have satisfied its
obligation relating to the maintenance of hazard insurance. Such blanket
policy may contain a deductible clause, in which case the Master Servicer
or Servicer will be required to deposit from its own funds into the related
Collection Account the amounts which would have been deposited therein but
for such clause. Any additional insurance coverage for Mortgaged Properties
in a SAM Pool of multifamily loans will be specified in the related
Prospectus Supplement.
In general, the standard form of fire and extended coverage policy
covers physical damage to or destruction of the improvements or
manufactured home securing a SAM by fire, lightning, explosion, smoke,
windstorm and hail, riot, strike and civil commotion, subject to the
conditions and exclusions particularized in each policy. Although the
policies relating to the SAMs may have been underwritten by different
insurers under different state laws in accordance with different applicable
forms and therefore may not contain identical terms and conditions, the
basic terms thereof are dictated by respective state laws, and most such
policies typically do not cover any physical damage resulting from the
following: war, revolution, governmental actions, floods and other
water-related causes, earth movement (including earthquakes, landslides and
mud flows), nuclear reaction, wet or dry rot, vermin, rodents, insects or
domestic animals, theft and, in certain cases, vandalism. The foregoing
list is merely indicative of certain kinds of uninsured risks and is not
intended to be all-inclusive. If the Mortgaged Property securing a SAM is
located in a federally designated special flood area at the time of
origination, the Master Servicer or Servicer will require the Mortgagor to
obtain and maintain flood insurance.
The hazard insurance policies covering properties securing the SAMs
typically contain a clause which in effect requires the insured at all
times to carry insurance of a specified percentage (generally 80% to 90%)
of the full replacement value of the insured property in order to recover
the full amount of any partial loss. If the insured's coverage falls below
this specified percentage, then the insurer's liability in the event of
partial loss will not exceed the larger of (i) the actual cash value
(generally defined as replacement cost at the time and place of loss, less
physical depreciation) of the improvements damaged or destroyed or (ii)
such proportion of the loss, without deduction for depreciation, as the
amount of insurance carried bears to the specified percentage of the full
replacement cost of such improvements. Since the amount of hazard insurance
that the Master Servicer or Servicer may cause to be maintained on the
improvements securing the SAMs declines as the principal balances owing
thereon decrease, and since improved real estate generally has appreciated
in value over time in the past, the effect of this requirement in the event
of partial loss may be that hazard insurance proceeds will be insufficient
to restore fully the damaged property. If specified in the related
Prospectus Supplement, a special hazard insurance policy or an alternative
form of credit enhancement will be obtained to insure against certain of
the uninsured risks described above. See "Description of Credit
Enhancements--Special Hazard Insurance Policies."
Maintenance of Mortgage Impairment Insurance
If stated in the related Prospectus Supplement, the Master Servicer or
the related Servicer shall obtain and maintain a blanket policy insuring
against losses arising from fire and hazards covered under extended
coverage on all of the related SAMs, then, to the extent such policy
provides coverage in an amount equal to the amount required pursuant to the
Pooling Agreement and otherwise complies with all other requirements of the
Pooling Agreement, it shall conclusively be deemed to have satisfied its
obligations as set forth in the Pooling Agreement. Any amounts collected by
a Master Servicer or Servicer under any such policy relating to a SAM shall
be deposited in any Collection Account subject to withdrawal pursuant to
the Pooling Agreement. Such policy may contain a deductible clause, in
which case, in the event that there shall not have been maintained on the
related Mortgaged Property a policy complying with the Pooling Agreement,
and there shall have been a loss which would have been covered by such
policy, a Master Servicer or Servicer shall deposit in any Collection
Account at the time of such loss the amount not otherwise payable under the
blanket policy because of such deductible clause, such amount to be
deposited from the Master Servicer or Servicer funds, without reimbursement
therefor. Upon request of the Depositor, a Master Servicer or Servicer
shall cause to be delivered to the Depositor a certified true copy of such
policy.
Maintenance of Fidelity Bond and Errors and Omissions Insurance
If stated in the related Prospectus Supplement, the Master Servicer or
each Servicer shall maintain with responsible companies, at its own
expense, a blanket "Fidelity Bond" and an "Errors and Omissions Insurance
Policy", with broad coverage on all officers, employees or other persons
acting in any capacity requiring such persons to handle funds, money,
documents or papers relating to the SAMs ("Depositor Employees"). If so
stated in the related Prospectus Supplement, any such Fidelity Bond and
Errors and Omissions Insurance Policy will be in the form of the "Mortgage
Banker's Blanket Bond" and will protect and insure such Master Servicer or
Servicer against losses, including forgery, theft, embezzlement, fraud,
errors and omissions and negligent acts of such Depositor Employees. Such
Fidelity Bond and Errors and Omissions Insurance Policy also shall protect
and insure such Master Servicer or Servicer against losses in connection
with the release or satisfaction of a SAM without having obtained payment
in full of the indebtedness secured thereby.
Description of Credit Enhancements
To the extent provided in the applicable Prospectus Supplement, credit
enhancement for each Series of Certificates may be comprised of one or more
of the following components, each of which will have a dollar limit. Credit
enhancement components may include coverage with respect to losses that are
(i) attributable to the Mortgagor's failure to make any payment of
principal, interest or additional interest payments as required under the
Mortgage Note, but not including Special Hazard Losses, Extraordinary
Losses (as defined below) or other losses resulting from damage to a
Mortgaged Property, Bankruptcy Losses or Fraud Losses (any such loss, a
"Defaulted Mortgage Loss"); (ii) of a type generally covered by a Special
Hazard Insurance Policy (any such loss, a "Special Hazard Loss"); (iii)
attributable to certain actions which may be taken by a bankruptcy court in
connection with a SAM, including a reduction by a bankruptcy court of the
principal balance of or the Stated Interest Rate on a SAM or an extension
of its maturity (any such loss, a "Bankruptcy Loss"); (iv) incurred on
defaulted SAMs as to which there was fraudulent conduct or negligence by
any of the Originator, the Seller, the Depositor, the Master Servicer, the
Servicer or the Mortgagor in connection with such SAMs (any such loss, a
"Fraud Loss"); and (v) attributable to shortfalls in the payment of amounts
due to one or more Classes of Certificates. Losses occasioned by war, civil
insurrection, certain governmental actions, nuclear reaction, chemical
contamination, errors in design, faulty workmanship or materials or waste
by the Mortgagor ("Extraordinary Losses") will not be covered. To the
extent that the credit enhancement for any Series of Certificates is
exhausted, the Certificateholders will bear all further risks of loss not
otherwise insured against.
As set forth below and in the applicable Prospectus Supplement, (i)
coverage with respect to defaulted SAMs may be provided by one or more of a
Letter of Credit, Reserve Fund or a Pool Insurance Policy, (ii) coverage
with respect to Special Hazard Losses may be provided by one or more of a
Letter of Credit, Reserve Fund or a Special Hazard Insurance Policy (any
instrument, to the extent providing such coverage, a "Special Hazard
Instrument"), (iii) coverage with respect to Bankruptcy Losses may be
provided by one or more of a Letter of Credit, Reserve Fund or Bankruptcy
Bond (any instrument, to the extent providing such coverage, a "Bankruptcy
Instrument") and (iv) coverage with respect to Fraud Losses may be provided
by one or more of a Letter of Credit, Reserve Fund or Fraud Bond (any
instrument, to the extent providing such coverage, a "Fraud Instrument").
In addition, if provided in the applicable Prospectus Supplement, in lieu
of or in addition to any or all of the foregoing arrangements, credit
enhancement may be in the form of subordination of one or more Classes of
Certificates to provide credit support to one or more other Classes of
Certificates.
The amounts and types of credit enhancement arrangements as well as the
provider thereof, if applicable, with respect to each Series of
Certificates will be set forth in the related Prospectus Supplement. To the
extent provided in the applicable Prospectus Supplement and the Pooling
Agreement, the credit enhancement arrangements may be periodically
modified, reduced and substituted for based on the aggregate outstanding
principal balance of the SAMs covered thereby. If specified in the
applicable Prospectus Supplement, credit support for a Series of
Certificates may cover one or more other series of certificates issued by
the Depositor or others.
Unless otherwise specified in the applicable Prospectus Supplement, TO
the extent permitted by any applicable rating agency and provided that the
then current ratings of the Certificates are maintained, coverage under any
credit enhancement may be cancelled or reduced.
The descriptions of any credit enhancement instruments included in this
Prospectus or any Prospectus Supplement and the coverage thereunder do not
purport to be complete and are qualified in their entirety by reference to
the actual forms of governing documents, copies of which are available upon
request.
Pool Insurance Policies
If specified in the Prospectus Supplement related to a SAM Pool, a
separate "Pool Insurance Policy" will be obtained for the Pool and issued
by the insurer (the "Pool Insurer") named in such related Prospectus
Supplement. Each Pool Insurance Policy will, subject to the limitations
described below, cover loss by reason of default in payment on single
family loans in the SAM Pool in an amount specified in such Prospectus
Supplement. As more fully described below, the Master Servicer or Servicer
will present claims thereunder to the Pool Insurer on behalf of itself, the
Trustee and the holders of the Certificates. The Pool Insurance Policies,
however, are not blanket policies against loss, since claims thereunder may
only be made respecting particular defaulted SAMs and only upon
satisfaction of certain conditions precedent described below. A Pool
Insurance Policy generally will not cover losses due to a failure to pay or
denial of a claim under a Primary Insurance Policy.
In general, each Pool Insurance Policy will provide that no claims may
be validly presented unless (i) any required Primary Insurance Policy is in
effect for the defaulted SAM and a claim thereunder has been submitted and
settled; (ii) hazard insurance on the related Mortgaged Property has been
kept in force and real estate taxes and other protection and preservation
expenses have been paid; (iii) if there has been physical loss or damage to
the Mortgaged Property, it has been restored to its physical condition
(reasonable wear and tear excepted) at the time of issuance of the policy;
and (iv) the insured has acquired good and merchantable title to the
Mortgaged Property free and clear of liens except certain permitted
encumbrances. Upon satisfaction of these conditions, the Pool Insurer will
have the option either (a) to purchase the Mortgaged Property at a price
equal to the principal balance thereof plus accrued and unpaid interest at
the Stated Interest Rate to the date of purchase plus the Interest
Appreciation Payment and certain expenses incurred by the Master Servicer
or Servicer on behalf of the Trustee and Certificateholders, or (b) to pay
the amount by which the sum of the principal balance of the defaulted SAM
plus accrued and unpaid interest at the Stated Interest Rate plus the
Indexed Appreciation Payment to the date of payment of the claim and the
aforementioned expenses exceeds the proceeds received from an approved sale
of the Mortgaged Property, in either case net of certain amounts paid or
assumed to have been paid under the related Primary Insurance Policy. If
any Mortgaged Property securing a defaulted SAM is damaged and proceeds, if
any, from the related Hazard Insurance Policy or the applicable Special
Hazard Insurance Policy are insufficient to restore the damaged Mortgaged
Property to a condition sufficient to permit recovery under the Pool
Insurance Policy, the Master Servicer or Servicer will not be required to
expend its own funds to restore the damaged Mortgaged Property unless it
determines that (i) such restoration will increase the proceeds to
Certificateholders on liquidation of the SAM after reimbursement of the
Master Servicer or Servicer for its expenses and (ii) such expenses will be
recoverable by it through proceeds of the sale of the Mortgaged Property or
proceeds of the related Pool Insurance Policy or any related Primary
Insurance Policy.
A Pool Insurance Policy generally will not insure (and many Primary
Insurance Policies do not insure) against loss sustained by reason of a
default arising from, among other things, (i) fraud or negligence in the
origination or servicing of a SAM, including misrepresentation by the
Mortgagor, the originator or persons involved in the origination thereof,
or (ii) failure to construct a Mortgaged Property in accordance with plans
and specifications. If so specified in the Prospectus Supplement, an
endorsement to the Pool Insurance Policy, a bond or other credit support
may cover fraud in connection with the origination of SAMs. If so specified
in the related Prospectus Supplement, a failure of coverage attributable to
an event specified in clause (i) or (ii) above might result in a breach of
the related Seller's or Originator's representations described above and,
in such event, might give rise to an obligation on the part of such Seller
or Originator to purchase the defaulted SAM if the breach cannot be cured
by such Seller or Originator. No Pool Insurance Policy will cover (and many
Primary Insurance Policies do not cover) a claim in respect of a defaulted
SAM occurring when the servicer of such SAM, at the time of default or
thereafter, was not approved by the applicable insurer.
The original amount of coverage under each Pool Insurance Policy
generally will be reduced over the life of the related Certificates by the
aggregate dollar amount of claims paid less the aggregate of the net dollar
amounts realized by the Pool Insurer upon disposition of all foreclosed
properties covered thereby. The amount of claims paid will include certain
expenses incurred by the Master Servicer or Servicer as well as accrued
interest on delinquent SAMs to the date of payment of the claim.
Accordingly, if aggregate net claims paid under any Pool Insurance Policy
reach the original policy limit, coverage under that Pool Insurance Policy
will be exhausted and any further losses will be borne by the
Certificateholders.
The terms of any pool insurance policy relating to a SAM Pool will be
described in the related Prospectus Supplement.
See "--Fraud Bond" below for a discussion of the possible effect of
fraudulent conduct or negligence by the Seller, the Master Servicer, the
Servicer or the Mortgagor with respect to a SAM on the coverage of a Pool
Insurance Policy.
Subordination
If so specified in the applicable Prospectus Supplement, distributions
with respect to scheduled principal, Principal Prepayments, Stated Interest
Rate, Appreciation Share or any combination thereof that otherwise would
have been payable to one or more Classes of Certificates of a Series, which
may be Appreciation Certificates (the "Subordinated Certificates"), will
instead be payable to holders of one or more other Classes of such Series,
which may also be Appreciation Certificates (the "Senior Certificates"),
under the circumstances and to the extent specified in the Prospectus
Supplement. If specified in the applicable Prospectus Supplement, delays in
receipt of payments on the SAMs and losses on defaulted SAMs will be borne
first by the various Classes of Subordinated Certificates and thereafter by
the various Classes of Senior Certificates, in each case under the
circumstances and subject to the limitations specified in the Prospectus
Supplement. The aggregate distributions in respect of delinquent payments
on the SAMs over the lives of the Certificates or at any time, the
aggregate losses in respect of defaulted SAMs which must be borne by the
Subordinated Certificates by virtue of subordination and the amount of the
distributions otherwise distributable to holders of Subordinated
Certificates that will be distributable to holders of Senior Certificates
on any Distribution Date may be limited as specified in the applicable
Prospectus Supplement. If the aggregate distribution with respect to
delinquent payments on the SAMs or aggregate losses in respect of such SAMs
were to exceed the total amounts payable and available for distribution to
holders of Subordinated Certificates or, if applicable, were to exceed the
specified maximum amount, holders of Senior Certificates could experience
losses on the Certificates.
In addition to or in lieu of the foregoing, if so specified in the
applicable Prospectus Supplement, all or any portion of distributions
otherwise payable to holders of Subordinated Certificates on any
Distribution Date may instead be deposited into one or more reserve
accounts (the "Reserve Account") established by the Trustee. If so
specified in the applicable Prospectus Supplement, such deposits may be
made on each Distribution Date, on each Distribution Date for specified
periods or until the balance in the Reserve Account has reached a specified
amount and, following payments from the Reserve Account to holders of
Senior Certificates or otherwise, thereafter to the extent necessary to
restore the balance in the Reserve Account to required levels, in each case
as specified in the Prospectus Supplement. If so specified in the
applicable Prospectus Supplement, amounts on deposit in the Reserve Account
may be released to the Depositor, the Master Servicer, the Servicer or the
Seller, as applicable, or the holders of any Class of Certificates at the
times and under the circumstances specified in the Prospectus Supplement.
If specified in the applicable Prospectus Supplement, various Classes
of Senior Certificates and Subordinated Certificates may themselves be
subordinate in their right to receive certain distributions to other
Classes of Senior and Subordinated Certificates, respectively, through a
cross support mechanism or otherwise.
As between Classes of Senior Certificates and as between Classes of
Subordinated Certificates, distributions may be allocated among such
Classes (i) in the order of their scheduled final distribution dates, (ii)
in accordance with a schedule or formula, (iii) in relation to the
occurrence of events, or (iv) otherwise, in each case as specified in the
applicable Prospectus Supplement. As between Classes of Subordinated
Certificates, payments to holders of Senior Certificates on account of
delinquencies or losses and payments to any Reserve Account will be
allocated as specified in the applicable Prospectus Supplement.
Fraud Bond
Some or all of the Primary Insurance Policies covering SAMs in any SAM
Pool may contain an exclusion from coverage for Fraud Losses. To provide
limited protection to Certificateholders against losses in the event that
coverage relating to a SAM which otherwise would have been available under
a Primary Insurance Policy is not ultimately available by reason of such an
exclusion, if so specified in the applicable Prospectus Supplement, a Fraud
Instrument may be obtained or established by the Master Servicer or the
related Servicer, as applicable, for the SAM Pool. The type, coverage
amount and term of any such Fraud Instrument will be disclosed in the
applicable Prospectus Supplement or in the related Current Report on Form
8-K, and the coverage amount may be cancelled or reduced during the life of
the SAM Pool, provided that the then current ratings of the Certificates
will not be adversely affected thereby. The Master Servicer or the
Servicer, as applicable, may also replace the initial Fraud Instrument with
any other type of Fraud Instrument, provided that the then current ratings
of the Certificates will not be adversely affected thereby. The identity of
the issuer of any "Fraud Bond," Reserve Fund or the Letter of Credit
providing such coverage and certain financial information with respect to
such issuer will be contained in the applicable Prospectus Supplement or in
the related Current Report on Form 8-K.
In addition, the Depositor understands that, regardless of whether
exclusion language such as that described above is included in the
insurance documents, it is the policy of some or all issuers of Primary
Insurance Policies and of Pool Insurance Policies to deny coverage in
circumstances involving fraudulent conduct or negligence by any of the
related Seller, the Master Servicer, the related Servicer or the Mortgagor.
It is unclear whether any such denial would be upheld by a court. Neither
the repurchase obligation of the related Seller, the Master Servicer or the
related Servicer, nor any of the Fraud Instruments described above would
apply to any such denial of coverage unless, as described above, such
denial is based upon a specific exclusion relating to fraudulent conduct or
negligence which is included in a Primary Insurance Policy.
Bankruptcy Bond
The Prospectus Supplement for certain Series may specify that the
Master Servicer or the related Servicer has undertaken to pay to the
Trustee for the benefit of Certificateholders any portion of the principal
balance of a SAM which becomes unsecured pursuant to a proceeding under
Chapter 7, 11 or 13 of the federal Bankruptcy Code, as amended (the
"Bankruptcy Code"). If such obligation is undertaken, the Master Servicer
or the related Servicer, as applicable, will also agree to pay to the
Trustee for the benefit of Certificateholders any shortfall in payment of
principal, Stated Interest and Additional Interest Payments resulting from
the recasting of any originally scheduled monthly principal and stated
interest payment or the payment of additional interest pursuant to a ruling
under the Bankruptcy Code. These payment obligations will be subject to the
limitations specified in the applicable Pooling Agreement. The Master
Servicer or the related Servicer, as applicable, will have the option, in
lieu of making such payments, to repurchase any SAM affected by bankruptcy
court rulings. To insure the Master Servicer or the related Servicer's
obligation to make the payments described above, the Master Servicer or the
related Servicer, as applicable, will obtain or establish a Bankruptcy
Instrument in an initial amount specified in the Prospectus Supplement or
in the related Current Report on Form 8-K. The Prospectus Supplement or
Current Report on Form 8-K may also specify that, provided that the then
current ratings of the Certificates are maintained, coverage under any
Bankruptcy Instrument may be cancelled or reduced. The Master Servicer or
the related Servicer, as applicable, may also replace the initial method
pursuant to which such coverage is provided with either of the other two
alternative methods, provided that the then current ratings of the
Certificates will not be adversely affected thereby.
Special Hazard Insurance Policies
If specified in the related Prospectus Supplement, a separate Special
Hazard Insurance Policy will be obtained for the SAM Pool and will be
issued by the insurer (the "Special Hazard Insurer") named in such
Prospectus Supplement. Each "Special Hazard Insurance Policy" will, subject
to the limitations described below, protect holders of the related
Certificates from (i) loss by reason of damage to Mortgaged Properties
caused by certain hazards (including earthquakes and, to a limited extent,
tidal waves and related water damage) not insured against under the
standard form of Hazard Insurance Policy for the respective states in which
the Mortgaged Properties are located or under a flood insurance policy if
the Mortgaged Property is located in a federally designated flood area, and
(ii) loss caused by reason of the application of the coinsurance clause
contained in Hazard Insurance Policies. See "Primary Insurance, Hazard
Insurance; Claims Thereunder--Hazard Insurance." Special Hazard Insurance
Policies will not cover losses occasioned by war, civil insurrection,
certain governmental action, errors in design, faulty workmanship or
materials (except under certain circumstances), nuclear reaction, flood (if
the Mortgaged Property is located in a federally designated flood area),
chemical contamination and certain other risks. The amount of coverage
under any Special Hazard Insurance Policy will be specified in the related
Prospectus Supplement. Each Special Hazard Insurance Policy will provide
that no claim may be paid unless hazard and, if applicable, flood insurance
on the property securing the SAM has been kept in force and other
protection and preservation expenses have been paid.
Subject to the foregoing limitations, each Special Hazard Insurance
Policy will provide that where there has been damage to property securing a
foreclosed SAM (title to which has been acquired by the insured) and to the
extent such damage is not covered by the Hazard Insurance Policy or flood
insurance policy, if any, maintained by the Mortgagor or the Master
Servicer or the related Servicer, the Special Hazard Insurer will pay the
lesser of (i) the cost of repair or replacement of such property or (ii)
upon transfer of the property to the Special Hazard Insurer, the unpaid
principal balance of such SAM at the time of acquisition of such property
by foreclosure or deed in lieu of foreclosure, plus accrued interest and
the related Interest Appreciation Payments to the date of claim settlement
and certain expenses incurred by the Master Servicer or Servicer with
respect to such property. If the unpaid principal balance of a SAM plus
accrued interest and the related Interest Appreciation Payments and certain
expenses are paid by the Special Hazard Insurer, the amount of further
coverage under the related Special Hazard Insurance Policy will be reduced
by such amount less any net proceeds from the sale of the property. Any
amount paid as the cost of repair of the property will further reduce
coverage by such amount. So long as a Pool Insurance Policy remains in
effect, the payment by the Special Hazard Insurer of the cost of repair or
of the unpaid principal balance of the related SAM plus accrued interest
and certain expenses will not affect the total insurance proceeds paid to
Certificateholders, but will affect the relative amounts of coverage
remaining under the related Special Hazard Insurance Policy.
Collection of insurance proceeds under a Pool Insurance Policy is
generally not possible if the underlying property has been damaged and not
restored. A Special Hazard Insurance Policy permits full recovery under a
Pool Insurance Policy relating to the SAMs backing the Series of
Certificates by providing insurance to restore damaged property. Each
Pooling Agreement will provide that, if the related Pool Insurance Policy
shall have been terminated or been exhausted through payment of claims, the
Master Servicer or Servicer will be under no further obligation to maintain
such Special Hazard Insurance Policy.
To the extent specified in the related Prospectus Supplement, the
Master Servicer or the related Servicer may deposit cash, an irrevocable
letter of credit or any other instrument acceptable to any Rating Agency
rating the Certificates of the related Series in a special trust account to
provide protection in lieu of or in addition to that provided by a Special
Hazard Insurance Policy. The amount of any Special Hazard Insurance Policy
or of the deposit to the special trust account in lieu thereof relating to
such Certificates may be reduced so long as any such reduction will not
result in a downgrading of the ratings of such Certificates by any such
Rating Agency.
The terms of any Special Hazard Insurance Policy relating to a SAM Pool
will be described in the related Prospectus Supplement.
Letter of Credit
If any component of credit enhancement as to any Series of Certificates
is to be provided by a letter of credit (the "Letter of Credit"), a bank or
other entity (the "Letter of Credit Bank") will deliver to the Trustee an
irrevocable Letter of Credit. The Letter of Credit Bank and certain
information with respect thereto, as well as the amount available under the
Letter of Credit with respect to each component of credit enhancement, will
be specified in the applicable Prospectus Supplement. The Letter of Credit
will expire on the expiration date set forth in the related Prospectus
Supplement, unless earlier terminated or extended in accordance with its
terms.
The Letter of Credit may also provide for the payment of Advances which
the Master Servicer or the related Servicer would be obligated to make with
respect to delinquent monthly payments.
Reserve Fund
If so specified in the related Prospectus Supplement, the Master
Servicer, the Servicer, the Depositor, the Originator or the Seller, as
applicable, will deposit or cause to be deposited in a fund cash or
Eligible Investments in specified amounts, or any other instruments
satisfactory to the Rating Agency or agencies rating the Certificates
offered pursuant to such Prospectus Supplement, which will be applied and
maintained in the manner and under the conditions specified in such
Prospectus Supplement (the "Reserve Fund"). In the alternative or in
addition to such deposit, to the extent described in the related Prospectus
Supplement, a Reserve Fund may be funded through application of all or a
portion of amounts otherwise payable on one or more related Classes of
Certificates, from Retained Yield or otherwise. Amounts in a Reserve Fund
may be used to provide one or more components of credit enhancement, or
applied to reimburse the Master Servicer or the related Servicer, as
applicable, as Master Servicer, or the related Servicer with respect to
Series of Certificates as to which there will be no Master Servicer, for
outstanding Advances, or may be used for other purposes, in the manner and
to the extent specified in the related Prospectus Supplement. Any such
Reserve Fund will not be deemed to be part of the related Trust Fund.
Amounts deposited in any Reserve Fund for a Series of Certificates will
be invested in Eligible Investments by, or at the direction of, and for the
benefit of the Master Servicer, the related Servicer, the Depositor or the
related Seller, as applicable, or any other person named in the related
Prospectus Supplement. Unless otherwise specified in the applicable
Prospectus Supplement, ANY amounts remaining in the Reserve Fund upon the
termination of the Trust Fund will be returned to whomever deposited such
amounts in the Reserve Fund. "Eligible Investments" include obligations of
the United States and certain agencies thereof, certificates of deposit,
certain commercial paper, time deposits and bankers' acceptances sold by
eligible commercial banks and certain other instruments acceptable to the
applicable Rating Agency.
Certificate Insurance Policies
If so specified in the related Prospectus Supplement, the Master
Servicer or the related Servicer may obtain one or more "Certificate
Insurance Policies," issued by insurers acceptable to the Rating Agencies,
insuring to the holders of one or more Classes of Certificates the payment
of amounts due in accordance with the terms of such Class or Classes of
Certificates, subject to such limitations and exceptions as are set forth
in the applicable Prospectus Supplement.
Maintenance of Credit Enhancements; Claims Thereunder and Other Realization
Upon Defaulted SAMs
For each Series of Certificates which will be covered by a Pool
Insurance Policy or a Letter of Credit established in lieu of such policy
(such coverage to be disclosed in the applicable Prospectus Supplement),
the Master Servicer or the related Servicer, as applicable, will exercise
its best reasonable efforts to keep such Pool Insurance Policy or Letter of
Credit in full force and effect throughout the term of the Pooling
Agreement, unless coverage thereunder has been exhausted through the
payment of claims or until such instrument is replaced in accordance with
the terms of the Pooling Agreement. Unless otherwise specified in the
applicable Prospectus Supplement, the Master Servicer or the related
Servicer, as applicable, will agree to pay the premiums for any Pool
Insurance Policy, and the fee for any Letter of Credit, on a timely basis.
In the event that the insurer under the Pool Insurance Policy ceases to be
a Qualified Insurer or the Letter of Credit Bank ceases to be acceptable to
the Rating Agencies, if any, rating the Series of Certificates the Master
Servicer or the related Servicer, as applicable, will use its best
reasonable efforts to obtain from another Qualified Insurer or letter of
credit issuer a replacement policy or letter of credit comparable to the
Pool Insurance Policy or Letter of Credit which it replaces, with total
coverage equal to the then outstanding coverage of the Pool Insurance
Policy or Letter of Credit, provided that if the cost of the replacement
policy or letter of credit is greater than the cost of the Pool Insurance
Policy or Letter of Credit being replaced, the coverage of the replacement
policy or letter of credit for a Series of Certificates may be reduced to a
level such that its premium rate or cost does not exceed 150% of the
premium rate or cost of the Pool Insurance Policy or Letter of Credit for a
Series of Certificates which is rated by one or more Rating Agencies, or
100% of the premium rate or cost for such replacement policy or letter of
credit for a Series which is not so rated.
In addition, the Master Servicer or the related Servicer, as
applicable, may substitute at any time a Pool Insurance Policy or Letter of
Credit for an existing Pool Insurance Policy or Letter of Credit. In no
event, however, may the Master Servicer or the related Servicer, as
applicable, provide a Letter of Credit in lieu of a Pool Insurance Policy,
or vice versa, or substitute one such instrument for another, except under
the circumstances detailed in the preceding paragraph, if such action will
impair the then current ratings, if any, of the Certificates.
Unless otherwise specified in the applicable Prospectus Supplement, the
Master Servicer or the related Servicer, as applicable, will cause a
Primary Insurance Policy to be maintained in full force and effect with
respect to each SAM it services with a LTV in excess of 80%; provided,
however, that if the LTV of a SAM based on a subsequent appraisal of the
Mortgaged Property is less than 80%, such Primary Insurance Policy may be
terminated, if so specified in the applicable Prospectus Supplement. The
Master Servicer or the related Servicer, as applicable, will agree to pay
the premium for each Primary Insurance Policy on a timely basis in the
event that the Mortgagor does not make such payments. See "Primary
Insurance, Hazard Insurance; Claims Thereunder--Primary Insurance" herein.
For each Series of Certificates which will be covered by a Special
Hazard Instrument (such coverage to be disclosed in the applicable
Prospectus Supplement), the Master Servicer or the related Servicer, as
applicable, will exercise its best reasonable efforts to keep such Special
Hazard Instrument in full force and effect throughout the term of the
Pooling Agreement, unless coverage thereunder has been exhausted through
the payment of claims or until such Special Hazard Instrument has been
replaced in accordance with the terms of the Pooling Agreement. So long as
any applicable rating on a Series of Certificates will be maintained, the
Master Servicer or the related Servicer, as applicable, may at any time
replace the initial instrument providing special hazard coverage with
either of the other two alternative methods. Unless otherwise specified in
the applicable Prospectus Supplement, the Master Servicer or the related
Servicer, as applicable, will agree to pay the premium for any Special
Hazard Insurance Policy (or Letter of Credit obtained in lieu thereof) on a
timely basis. Unless otherwise specified in the applicable Prospectus
Supplement, any such policy will provide for a fixed premium rate on the
declining balance of the SAMs. In the event that any Special Hazard
Insurance Policy is cancelled or terminated for any reason other than the
exhaustion of total policy coverage, the Master Servicer or the related
Servicer, as applicable, is obligated either to substitute a Letter of
Credit or Reserve Fund or to exercise its best reasonable efforts to obtain
from another insurer a replacement policy comparable to such Special Hazard
Insurance Policy with a total coverage which is equal to the then existing
coverage of such Special Hazard Insurance Policy; provided, however, that
if the cost of any such replacement policy shall be greater than the cost
of the original Special Hazard Insurance Policy, the amount of coverage of
such replacement policy may be reduced to a level such that the cost shall
be equal to the cost of the original Special Hazard Insurance Policy. As
indicated above, in lieu of obtaining a replacement Special Hazard
Insurance Policy, the Master Servicer or the related Servicer, as
applicable, may obtain a Letter of Credit or establish a Reserve Fund in
accordance with terms prescribed by any applicable Rating Agency so that
any rating obtained for the Certificates will not be impaired.
For each Series of Certificates which will be covered by a Fraud
Instrument (such coverage to be disclosed in the applicable Prospectus
Supplement), the Master Servicer or the related Servicer, as applicable,
with respect to Series of Certificates as to which there will be no Master
Servicer, will exercise its best reasonable efforts to maintain and keep
any such Fraud Instrument in full force and effect throughout the required
term as set forth in the applicable Prospectus Supplement, unless coverage
thereunder has been exhausted through the payment of claims. The Master
Servicer or the related Servicer, as applicable, will agree to pay the
premium for any Fraud Bond or Bankruptcy Bond on a timely basis.
For each Series of Certificates or Class of Certificates which will be
covered by a Certificate Insurance Policy or a Letter of Credit or Reserve
Fund (such coverage to be disclosed in the applicable Prospectus
Supplement), the Master Servicer or the related Servicer, as applicable,
will exercise its best reasonable efforts to maintain and keep any such
Certificate Insurance Policy, Letter of Credit or Reserve Fund in full
force and effect throughout the required term as set forth in the
applicable Prospectus Supplement. Unless otherwise specified in the
applicable Prospectus Supplement, the Master Servicer or the related
Servicer, as applicable, will agree to pay the premium for any Certificate
Insurance Policy on a timely basis.
The Master Servicer or the related Servicer, as applicable, on behalf
of the Trustee and the Certificateholders, will present claims to the
issuer of any applicable Primary Insurance Policy, Pool Insurance Policy,
Special Hazard Insurance Policy or Letter of Credit, or under any Reserve
Fund or other form of credit enhancement, and will take such reasonable
steps as are necessary to permit recovery under such insurance policies or
alternative coverages respecting defaulted SAMs. With respect to any
applicable Fraud Bond, Bankruptcy Bond or Certificate Insurance Policy, the
Trustee will present claims to the issuer of such bond or policy on behalf
of the Certificateholders. As set forth above, all collections by the
Master Servicer or the related Servicer, as applicable, under such policies
or alternative coverages that are not applied to the restoration of the
related Mortgaged Property are to be deposited in the applicable Collection
Account or the Distribution Account, subject to withdrawal as heretofore
described.
If any property securing a defaulted SAM is damaged and proceeds, if
any, from the related hazard insurance policy or any applicable Special
Hazard Insurance Policy (or Letter of Credit or Reserve Fund), as the case
may be, are insufficient to restore the damaged property to a condition
sufficient to permit recovery under any applicable Pool Insurance Policy or
Primary Insurance Policy, the Master Servicer or the related Servicer, as
applicable, will not be required to expend its own funds to restore the
damaged property unless it determines (i) that such restoration will
increase the proceeds to Certificateholders upon liquidation of the SAM
after reimbursement of the Master Servicer or the related Servicer, as
applicable, for its expenses and (ii) that such expenses will be
recoverable to it through Liquidation Proceeds or Insurance Proceeds.
If recovery under any Pool Insurance Policy (or Letter of Credit
established in lieu of such policy) or Primary Insurance Policy is not
available, because the Master Servicer or the Servicer, as applicable, has
been unable to make the determinations described in the second preceding
paragraph or otherwise, the Master Servicer or the related Servicer, as
applicable, is nevertheless obligated to follow such normal practices and
procedures as it deems necessary or advisable to realize upon the defaulted
SAM. If the proceeds of any liquidation of the property securing the
defaulted SAM are less than the principal balance of the defaulted SAM plus
accrued and unpaid interest thereon at the applicable Stated Rate (after
deduction of the Retained Yield, if any, or a pro rata portion thereof as
required by the applicable Pooling Agreement) plus the applicable Interest
Appreciation Payment, Certificateholders in the aggregate will realize a
loss in the amount of such difference plus the aggregate of expenses
incurred by the Master Servicer or the related Servicer, as applicable, in
connection with such proceedings and which are reimbursable under the
Pooling Agreement. In addition, and as set forth above, in the event that
the Master Servicer or the Servicer, as applicable, has expended its own
funds to restore damaged property and such funds have not been reimbursed
under any Special Hazard Insurance Policy, Letter of Credit or Reserve
Fund, it will be entitled to receive from the Distribution Account, out of
related Liquidation Proceeds or Insurance Proceeds, an amount equal to such
expenses incurred by it, in which event the Certificateholders may realize
a loss up to the amount so charged. Since Insurance Proceeds cannot exceed
deficiency claims and certain expenses incurred by the Master Servicer or
the related Servicer, as applicable, no insurance payments will result in a
recovery to Certificateholders which exceeds the principal balance of the
defaulted SAM together with accrued and unpaid interest thereon at the
applicable Stated Rate plus the applicable Indexed Appreciation Payment. In
addition, where property securing a defaulted SAM can be resold for an
amount exceeding the principal balance of any related Mortgage Note
together with accrued interest and any Indexed Appreciation Payment and
expenses, it may be expected that, where retention of any such amount is
legally permissible, the insurer will exercise its right under any related
Pool Insurance Policy to purchase such property and realize for itself any
excess proceeds. Further, with respect to certain Series of Certificates,
if so provided in the applicable Prospectus Supplement, the Master Servicer
or the related Servicer, as applicable, may have the option to purchase
from the Trust Fund any defaulted SAM after a specified period of
delinquency. If a defaulted SAM is not so removed from the Trust Fund,
then, upon the final liquidation thereof, if a loss is realized which is
not covered by any applicable form of credit enhancement or other
insurance, the Certificateholders will bear such loss. However, if a gain
results from the final liquidation of a defaulted SAM which is not required
by law to be remitted to the related Mortgagor, the Master Servicer or the
related Servicer, as applicable, will be entitled to retain such gain as
additional servicing compensation unless the applicable Prospectus
Supplement provides otherwise.
Certain Legal Considerations
Authority to Originate SAMs
Nationally Chartered Lenders
The Office of the Comptroller of the Currency (the "OCC") has
informally determined that national banks which it charters have implicit
authority to accept consideration for a mortgage loan in the form of equity
appreciation in the real estate securing the loan, provided the national
bank expects to receive money rather than a possessory interest in real
property and the principal is to be repaid. National banks are required to
comply with certain OCC requirements when making residential mortgage loans
and these requirements would also apply to SAMs. In a statement of policy,
the OTS determined to the same effect that federal savings and loan
associations and savings banks ("Federal Thrifts") chartered by the OTS may
lend on terms where the principal is to be repaid and the institution
receives a "substantial payment of interest" periodically. The OTS has not
prescribed any other terms or limitations specific to SAMs. However, the
OTS's predecessor, the Federal Home Loan Bank Board (the "FHLBB"),
originally proposed to cap the maximum share in the appreciation of a
home's value to 40 percent, to limit the maximum term to 10 years, and to
obligate the lender to refinance the mortgage at maturity. These proposed
limits were dropped when the current OTS's SAM statement of policy was
adopted.
State Chartered Lenders
Alternative mortgage transactions ("AMTs"), including SAMs, have
historically been subjected to a variety of restrictions. Such restrictions
differed from state to state, resulting in difficulties in determining
whether a particular alternative mortgage instrument originated by a state
chartered lender was in compliance with applicable law. These difficulties
were alleviated by the enactment of the Alternative Mortgage Transaction
Parity Act of 1982 (the "Parity Act") which allows state chartered banks,
thrifts and most other mortgage lenders to "make, purchase and enforce"
qualifying AMTs, notwithstanding any state constitution, law or regulation.
AMTs include any loan or credit sale secured by an "interest in residential
real property, a dwelling, all stock allocated to a dwelling unit in a
residential cooperative housing corporation," or certain residential
manufactured homes, "involving any...type of rate, method of determining
return, term, repayment, or other variation...including without limitation,
transactions that involve the sharing of equity or appreciation." In order
to qualify as an AMT, the Parity Act requires that a state chartered lender
other than a state bank comply with certain OTS regulations generally
applicable to federal thrift mortgage lending. The OTS by regulation
specifies that such lenders making any AMT, as AMT is defined by the Parity
Act, are protected by the Parity Act's preemption. Likewise, the OCC
provides such protection to state bank lenders that comply with certain OCC
adjustable rate mortgage regulations. The Parity Act provides that any
state may reject applicability of the provisions thereof by adopting, prior
to October 15, 1985, a law or constitutional provision expressly rejecting
the application of such provisions. Maine, Massachusetts, New York and
South Carolina have exercised this override of the Parity Act.
Applicability of Usury Laws
National banks and federal thrifts are made subject by their respective
authorizing acts to limits on interest charged by the law of the state
where they are located, subject to penalties. Congress enacted the
Depository Institutions Deregulation and Monetary Control Act of 1980 (the
"Monetary Control Act") which preempts the application of any state law or
constitution limiting the "rate or amount of interest, discount points,
finance charges, or other charges which may be charged, taken, received, or
reserved" for loans secured by first liens on residential real property,
stock in a residential cooperative housing corporation or certain
residential manufactured homes. Eligible lenders include all national and
state banks, federal and state thrifts, HUD-approved mortgage-insurance
program lenders and any person who regularly extends or arranges for the
extension of credit and makes or invests in residential real property
loans, subject to certain limits. The Monetary Control Act's preemption is
not unlimited. The implementing regulation permits a state at any time to
"adopt a provision of law placing limitations on discount points or such
other charges on any loan." In addition, the law does not preempt any state
laws on "prepayment charges, attorneys' fees, late charges or other
provisions designed to protect borrowers."
The Monetary Control Act provides that any state may reject
applicability of the provisions thereof by adopting, prior to April 1,
1983, a law or constitutional provision expressly rejecting the application
of such provisions. Colorado, Georgia, Hawaii, Kansas, Maine,
Massachusetts, Minnesota, Nebraska, Nevada, North Carolina, South Carolina,
South Dakota and Wisconsin have exercised this override of the Monetary
Control Act.
The term "interest" is not defined by the Monetary Control Act. The
preemption protection provided for a SAM by the Monetary Control Act is
qualified by the possibility that equity appreciation could be determined
not to be "interest" and therefore not within the scope of the statute.
Alternatively, a plaintiff could argue that the shared appreciation portion
of the loan is not subject to federal preemption as an "other charge"
subject to state restrictions, or that the equity interest portion of a SAM
is protected from federal preemption by a state "provision designed to
protect borrowers." In the event that equity appreciation is not considered
"interest" under the Monetary Control Act or a state has opted out of the
Monetary Control Act, the Parity Act provides broad preemptive authority
for a qualifying SAM, including the preemption of state usury limitations.
The Parity Act specifically provides that "[a]n alternative mortgage
transaction may be made by a housing creditor in accordance with this
section, notwithstanding any State constitution, law, or regulation." While
the Parity Act's preemption appears to be express, complete and unlimited
by its terms, the limited case law applying the Parity Act has not focused
on the preemption of usury statutes. Rather, the banking agencies and
courts which have applied the Parity Act have focused on the stated purpose
of the statute to provide parity to state chartered institutions or
non-bank lenders with respect to the structure of a loan. They have not
focused on the Parity Act as a mechanism to override state interest rate
ceilings, even though the ability to make an AMT might at times be
inconsistent with such ceilings.
No SAMs will be originated in the states which have opted out of the
Parity Act. Under the Program, each Originator is required to represent and
warrant to the Depositor that all SAMs are originated in full compliance
with applicable state laws, including usury laws. Based upon such
representations and warranties from the Originators, the Depositor will, if
required by the rating agencies rating the Certificates, make a similar
representation and warranty in the Pooling Agreement for each Series to the
Trustee for the benefit of Certificateholders. See "Description of the
Certificates--Representations and Warranties."
Disclosure Requirements related to SAMs
SAMs, as any other mortgage loan, are subject to the disclosure
requirements of the federal Truth in Lending Act (the "TIL Act") and
Regulation Z as described below. SAMs are subject to the disclosure
provisions of the TIL Act and Regulation Z, which require creditors to
disclose to consumers the terms of all consumer credit transactions. Basic
credit terms such as the payment amounts, the finance charge, and the total
of payments must be disclosed. Rather than develop specific rules
pertaining to the many unique mortgage products, the Board of Governors of
the Federal Reserve System has opted to treat alternative mortgage
instruments such as SAMs within the already developed framework for
mortgage disclosure. As a result, although technically not variable-rate
mortgages, SAMs are treated as such, and a SAM Originator consequently must
disclose: (1) the circumstances under which the annual percentage rate may
increase; (2) any limitations on the increase; (3) the effect of an
increase; and (4) an example of the payment terms that would result from an
increase. Similarly, the OTS has determined that the disclosure
requirements prescribed by the OTS's adjustable rate mortgage regulation
are applicable to AMTs. Although SAMs would not appear to fit within the
OTS's definition of an adjustable rate mortgage, the OTS would likely look
to the treatment of SAMs under the TIL Act, where SAMs are subject to
variable-rate disclosures.
In addition, the Fair Housing Act (the "FH Act") and the Equal Credit
Opportunity Act (the "ECOA") prohibit discrimination on the basis of any of
a number of prohibited factors. As interpreted by the courts and applied by
the banking and enforcement agencies, underwriting standards, marketing,
pricing and other aspects of mortgage lending may be regarded as
discriminatory if members of protected classes or neighborhoods that are
predominantly constituted of such class members are treated differently
from other mortgagors or neighborhoods. Violations of the fair lending laws
could subject a lender to liability through an action brought by the
federal government and/or a private party. Lending discrimination may be
established by overt or circumstantial evidence of intentional
discrimination resulting in "disparate treatment," or evidence that a
lender's facially neutral policies and practices resulted in a "disparate
impact" on members of a protected class.
Certain State Law Considerations
If required given the concentration of SAMs originated in any one or
more states, certain state law considerations applicable to the SAMs in the
SAM Pool are described in the applicable Prospectus Supplement.
Certain Legal Considerations Applicable to SAMs
Foreclosure
Foreclosure may be accomplished by judicial action. The action is
initiated by the service of legal pleadings upon all parties having an
interest in the real property. Delays in completion of the foreclosure may
occasionally result from difficulties in locating the necessary defendant
parties. Judicial foreclosure proceedings are generally not contested by
any of the defendant parties. However, when the lender's right to foreclose
is contested, the legal proceedings necessary to resolve the issue can be
time consuming. After the completion of judicial foreclosure, the court
would issue a judgment of foreclosure and would generally appoint a referee
or other court officer to conduct the sale of the property.
In many states, foreclosure of a mortgage or deed of trust may also be
accomplished by a non-judicial sale under a specific provision in the
mortgage or deed of trust which authorizes the sale of the property at
public auction upon default by the mortgagor. The laws of the various
states establish certain notice requirements for non-judicial foreclosure
sales. In some states, notice of default must be recorded and sent to the
mortgagor and to any person who has recorded a request for a copy of a
notice of default and notice of sale. In addition, notice must be provided
in some states to certain other persons including junior lienholders and
any other individual having an interest in the real property. In some
states, the mortgagor, or any other person having a junior encumbrance on
the real estate, may, during a reinstatement period, cure the default by
paying the entire amount in arrears, plus the costs and expenses incurred
in enforcing the obligation. Generally, state law controls the amount of
foreclosure expenses and costs, including limited attorneys' fees, which
may be recovered by an originator. Some states also require a notice of
sale to be posted in a public place and published for a specified period of
time in one or more newspapers. In addition, some state laws require that a
copy of the notice of sale be posted on the property and sent to all
parties having an interest in the real property.
In case of foreclosure under either a mortgage or a deed of trust, the
sale by the receiver or other designated officer or by the trustee is a
public sale. However, because of a number of factors, including the
difficulty a potential buyer at the sale would have in determining the
exact status of title and the fact that the physical condition of the
property may have deteriorated during the foreclosure proceedings, it is
uncommon for a third party to purchase the property at the foreclosure
sale. Rather, it is common for the lender to purchase the property from the
trustee or referee with a credit bid in an amount equal to the principal
amount of the mortgage or deed of trust, accrued and unpaid interest,
including additional interest, and the expenses of foreclosure. Thereafter,
the lender will assume the burdens of ownership, including obtaining
casualty insurance and making such repairs at its own expense as are
necessary to render the property suitable for sale. The lender will
commonly obtain the services of a real estate broker and pay the broker's
commission in connection with the sale of the property. Depending upon
market conditions, the ultimate proceeds of the sale of the property may
not equal the originator's investment in the property.
Courts have imposed general equitable principles upon foreclosure
proceedings. These equitable principles are generally designed to relieve
the mortgagor from the legal effect of his default under the loan
documents. Examples of judicial remedies that have been fashioned include
judicial requirements that the originator undertake affirmative and
sometimes expensive actions to determine the causes for the mortgagor's
default and the likelihood that the mortgagor will be able to reinstate the
loan. In some cases, courts have substituted their judgment for the
lender's judgment and have required that lenders reinstate loans or recast
payment schedules in order to accommodate mortgagors who are suffering from
a temporary financial disability. In other cases, courts have limited the
right of the lender to foreclose if the default under the security
instrument is not monetary, such as the mortgagor failing to adequately
maintain or insure the property or the mortgagor executing a second
mortgage or deed of trust affecting the property. Some courts have been
faced with the issue of whether or not federal or state constitutional
provisions reflecting due process concerns for adequate notice require that
borrowers receive notices in addition to the statutorily prescribed
minimum. For the most part, these cases have upheld the notice provisions
as being reasonable or have found that the foreclosure sale does not
involve sufficient state action to afford constitutional protections to the
borrower.
Rights of Redemption
In some states, after sale pursuant to a deed of trust or foreclosure
of the mortgage, there are statutory periods during which the mortgagor and
foreclosed junior lienholders may redeem the property from the foreclosure
sale. One effect of the statutory right of redemption is to diminish the
ability of the originator to sell the foreclosed property, because the
right of redemption would defeat the title of any purchaser from the
originator subsequent to foreclosure or sale under a deed of trust. As a
practical matter, the originator may therefore be forced to retain the
mortgagor's property and pay the expenses of ownership until the redemption
period has run.
Anti-Deficiency Legislation and Other Limitations on Originators
Certain states have imposed statutory prohibitions which restrict or
eliminate the remedies of an originator under a deed of trust or a
mortgage. In some states, statutes limit the right of the lender to obtain
a deficiency judgment against the mortgagor following sale under a deed of
trust or foreclosure of the mortgage. A deficiency judgment would be a
personal judgment against the former mortgagor equal in most cases to the
difference between the net amount realized upon the public sale of the real
property and the amount due to the lender. Other statutes may require the
lender to exhaust the security afforded under a deed of trust or mortgage
by foreclosure in an attempt to satisfy the full debt before bringing a
personal action against the mortgagor. Some state statutes also prohibit
any deficiency judgment where the loan proceeds were used to purchase an
owner-occupied dwelling. Finally, other statutory provisions limit any
deficiency judgment against the former mortgagor following a judicial sale
to the excess of the outstanding debt over the fair market value of the
property at the time of the public sale. The basic purpose of these
statutes is to prevent a lender from obtaining a large deficiency judgment
against the former mortgagor as a result of low or no bids at the judicial
sale.
In addition to anti-deficiency and related legislation, numerous other
statutory provisions, including the federal bankruptcy laws and state laws
affording relief to debtors, may interfere with or affect the ability of
the secured mortgage lender to collect the full amount of interest due or
realize upon its security. For example, with respect to the Bankruptcy
Code, a court with federal bankruptcy jurisdiction may permit a mortgagor
through his or her Chapter 11, Chapter 12 or Chapter 13 rehabilitative plan
to cure a monetary default in respect of a mortgage loan on the mortgagor's
residence by paying arrearages within a reasonable time period and
reinstating the original mortgage loan payment schedule even though the
lender accelerated the mortgage loan and foreclosure proceedings had
occurred prior to the filing of its petition. Some courts with federal
bankruptcy jurisdiction have approved plans, based on the particular facts
of the reorganization case, that effected the curing of a mortgage loan
default by paying arrearages over a number of years.
Courts with federal bankruptcy jurisdiction have also held that the
terms of a mortgage loan secured by property of the mortgagor may be
modified. These courts have held that such modifications may include
reducing the amount of each monthly payment, changing the rate of interest,
altering the repayment schedule, and reducing the lender's security
interest to the value of the residence, thus leaving the lender in the
position of a general unsecured creditor for the difference between the
value of the residence and the outstanding balance of the loan.
The Code provides priority to certain tax liens over the lien of the
security instrument. Numerous federal and some state consumer protection
laws impose substantive requirements upon lenders in connection with the
origination and the servicing of mortgage loans. These laws include the
federal TIL Act, Real Estate Settlement Procedures Act, ECOA, Fair Credit
Billing Act, Fair Credit Reporting Act and related statutes. These federal
laws impose specific statutory liabilities upon lenders who originate
mortgage loans and who fail to comply with the provisions of the law. In
some cases, this liability may affect assignees of the mortgage loans.
Enforceability of Certain Provisions
The standard forms of note, mortgage and deed of trust used by
originators generally contain "due-on-sale" clauses. These clauses permit
the originator to accelerate the maturity of the loan if the mortgagor
sells, transfers or conveys the property. The enforceability of these
clauses was the subject of legislation and litigation in many states, and
in some cases the enforceability of these clauses was limited or denied.
However, the Garn-St Germain Depository Institutions Act of 1982 (the
"Garn-St Germain Act") purports to pre-empt state statutory and case law
that prohibits the enforcement of "due-on-sale" clauses and permits lenders
to enforce these clauses in accordance with their terms, subject to certain
limited exceptions as described below. The Garn-St Germain Act does
"encourage" lenders to permit assumption of loans at the original rate of
interest or at some other rate less than the average of the original rate
and the market rate. In addition, certain states have continuing
restrictions on the enforceability of due-on-sale clauses for certain
loans.
The Garn-St Germain Act also sets forth specific instances in which a
mortgage lender covered thereby (including federal savings associations and
federal savings banks) may not exercise a "due-on-sale" clause,
notwithstanding the fact that a transfer of the property may have occurred.
These include intrafamily transfers, leases of less than three years, the
creation of a junior encumbrance, certain transfers by operation of law and
transfers or dispositions described in regulations prescribed by the OTS.
Regulations promulgated under the Garn-St Germain Act by the FHLBB (now the
OTS) and statutes in some states also prohibit the imposition of a
prepayment penalty upon the acceleration of a loan pursuant to a
"due-on-sale" clause. In addition, a few states have exercised their rights
under the Garn-St Germain Act to limit the enforceability of the
due-on-sale clauses in certain loans made prior to passage of the Garn-St
Germain Act.
A consequence of the inability to enforce a due-on-sale clause may be
that a mortgagor's buyer may assume the existing mortgage loan rather than
paying it off, which may have an impact upon the average life of the SAMs
and the ability of the lender to collect equity appreciation from the
mortgagor.
Under the terms of the Soldiers' and Sailors' Civil Relief Act of 1940,
as amended (the "Relief Act"), a mortgagor who enters military service
after the origination of such mortgagor's mortgage loan (including a
mortgagor who is a member of the National Guard or is in reserve status at
the time of the origination of the mortgage loan and is later called to
active duty) may not be charged interest above an annual rate of 6% during
the period of such mortgagor's active duty status, unless a court orders
otherwise upon application of the lender. Any shortfall in interest or
additional interest collections resulting from the application of the
Relief Act, to the extent not covered by any applicable credit
enhancements, could result in losses to the holders of the Certificates. In
addition, the Relief Act imposes limitations which would impair the ability
of the Master Servicer or Servicer to foreclose on an affected SAM during
the mortgagor's period of active duty status. Thus, in the event that such
a SAM goes into default, there may be delays and losses occasioned by the
inability to realize upon the Mortgaged Property in a timely fashion.
Environmental Considerations
Real property pledged as security to a lender may be subject to
unforeseen environmental risks. Under the laws of certain states,
contamination of a property may give rise to a lien on the property to
assure the payment of costs of clean-up. In several states, such a lien has
priority over the lien of an existing mortgage against such property.
In addition, under the laws of some states and under the federal
Comprehensive Environmental Response, Compensation and Liability Act of
1980 ("CERCLA"), a lender may be liable, as an "owner" or "operator," for
costs arising out of releases or threatened releases of hazardous
substances that require remedy at a mortgaged property. CERCLA imposes
liability for such costs on any and all "responsible parties," including
the current owner or operator of a contaminated property, regardless of
whether or not the environmental damage was caused by a prior owner.
However, CERCLA excludes from the definition of "owner or operator" a
secured creditor who holds indicia of ownership primarily to protect its
security interest, but does not "participate in the management" of a
mortgaged property. The conduct which constitutes "participation in the
management," such that the lender would lose the protection of the
exclusion for secured creditors, has been a matter of judicial
interpretation of the statutory language, and court decisions have
historically been inconsistent. In 1990, the United States Court of Appeals
for the Eleventh Circuit suggested, in United States v. Fleet Factors
Corp., that the mere capacity of the lender to influence a borrower's
decisions regarding disposal of hazardous substances was sufficient
participation in the management of the borrower's business to deny the
protection of the secured creditor exclusion to the lender, regardless of
whether the lender actually exercised such influence. Other judicial
decisions did not interpret the secured creditor exclusion as narrowly as
did the Fleet Factors decision.
This ambiguity appears to have been resolved by the enactment of the
Asset Conservation, Lender Liability and Deposit Insurance Protection Act
of 1996 (the "Asset Conservation Act"), which took effect on September 30,
1996. The Asset Conservation Act provides that in order to be deemed to
have participated in the management of a mortgaged property, a lender must
actually participate in the operational affairs of the property or of the
borrower. The Asset Conservation Act also provides that participation in
the management of the property does not include "merely having the capacity
to influence, or unexercised right to control" operations. Rather, a lender
will lose the protection of the secured creditor exclusion only if it
exercises decision making control over the mortgagor's environmental
compliance and hazardous substance handling and disposal practices, or
assumes day-to-day management of all operational functions of the mortgaged
property. It should also be noted, however, that liability for costs
associated with the investigation and clean-up of environmental
contamination may also be governed by state law, which may not provide any
specific protections to lenders, or, alternatively, may not impose
liability on lenders at all.
CERCLA does not apply to petroleum products, and the secured creditor
exclusion, therefore, does not apply to liability for clean-up costs
associated with releases of petroleum contamination. Federal regulation of
underground petroleum storage tanks (other than heating oil tanks) is
governed by Subtitle I of the federal Resource Conservation and Recovery
Act ("RCRA"). The United States Environmental Protection Agency ("EPA") has
promulgated a lender liability rule for underground storage tanks regulated
by Subtitle I of RCRA. Under the EPA rule, a holder of a security interest
in an underground storage tank, or real property containing an underground
storage tank, is not considered an operator of the underground storage tank
as long as petroleum is not added to, stored in or dispensed from the tank
by the holder of the security interest. Moreover, amendments to RCRA,
enacted in 1996, concurrently with the CERCLA amendments discussed in the
previous paragraph, extend to the holders of security interests in
petroleum underground storage tanks the same protections accorded to
secured creditors under CERCLA. Again, it should be noted, however, that
liability for clean-up of petroleum contamination may be governed by state
law, which may not provide any specific protection for originators or,
alternatively, may not impose liability on originators at all.
Except as otherwise specified in the applicable Prospectus Supplement,
AT the time the SAMs were originated, no environmental assessment or a very
limited environment assessment of the Mortgaged Properties will have been
conducted.
Violation of Various Federal and State Laws May Result in Losses on the SAMs
Applicable state laws generally regulate interest rates and other
charges and require certain disclosures. In addition, most states have
other laws, public policies and general principles of equity relating to
the protection of consumers, unfair and deceptive practices and other
practices that may apply to the origination, servicing and collection of
the SAMs.
The SAMs may also be subject to various federal laws. The
Truth-in-Lending Act and Regulation Z promulgated thereunder and the Real
Estate Settlement Procedures Act and Regulation X promulgated thereunder
require certain disclosures to the borrowers regarding the terms of the
SAMs. The Equal Credit Opportunity Act and Regulation B promulgated
thereunder and the Fair Housing Act and the regulations promulgated
thereunder prohibit discrimination in the provision of housing credit on
the basis of certain protected classes. The Fair Credit Reporting Act
regulates the use and reporting of information related to the borrower's
credit experience. Other federal laws may also apply.
Depending on the provisions of the applicable law and the specific
facts and circumstances involved, violations of such laws, policies and
general principles of equity may limit the ability of the Master Servicer
or a Servicer to collect all or part of the principal of or interest on the
SAMs, may entitle the mortgagor to rescind the loan or to a refund of
amounts previously paid and, in addition, could subject the owner of the
SAM to damages and administrative sanctions.
ERISA Considerations
The Employee Retirement Income Security Act of 1974, as amended
("ERISA"), imposes certain requirements on employee benefit plans and other
benefit plans or arrangements which are subject to ERISA or Section 4975 of
the Code ("Plans") and on those persons who are fiduciaries with respect to
Plans or otherwise responsible for the investment of "plan assets" of Plans
("Plan Assets"). Moreover, based on the reasoning of the United States
Supreme Court in John Hancock Life Ins. Co. v. Harris Trust and Sav. Bank,
114 S. Ct. 517 (1993), an insurance company's general account may be deemed
to include assets of Plans investing in the general account (e.g., through
the purchase of an annuity contract). In accordance with the general
fiduciary standards of ERISA, an ERISA Plan fiduciary should consider
whether an investment in the Certificates is permitted by the documents and
instruments governing the Plan, consistent with the Plan's overall
investment policy and appropriate in view of the composition of its
investment portfolio.
Employee benefit plans which are governmental plans (as defined in
Section 3(32) of ERISA) and certain church plans (as defined in Section
3(33) of ERISA) are not subject to the requirements of ERISA or Section
4975 of the Code. Accordingly, assets of such plans may be invested in the
Certificates subject to the provisions of applicable state law and, in the
case of any such plan which is qualified under Section 401(a) of the Code,
the restrictions imposed under Section 503 of the Code.
In addition to imposing general fiduciary standards, ERISA and the Code
prohibit a broad range of transactions involving Plan Assets and certain
persons ("Parties in Interest") who have certain specified relationships to
the Plan. If the assets of a SAM Pool are treated for purposes of ERISA and
Section 4975 of the Code as Plans or other entities holding Plan Assets
with respect to Plans, collective investment funds, insurance company
general or separate accounts (collectively, "Plan Asset Investors") that
purchase or hold Certificates of the applicable Series, an investment in
Certificates by any such Plan Asset Investor might constitute or give rise
to a prohibited transaction under ERISA or Section 4975 of the Code, unless
a statutory or administrative exemption applies. Violation of the
prohibited transaction rules could result in the imposition of excise taxes
and/or other penalties under ERISA and/or Section 4975 of the Code.
Plan Assets Regulation
The United States Department of Labor ("DOL") has issued a final
regulation (the "Regulation") under which the assets of an entity in which
a Plan Asset Investor makes an equity investment will be treated as Plan
Assets in certain circumstances. Unless the Regulation provides an
exception from this "plan asset" treatment, and if an exemption is not
otherwise available under ERISA, an undivided portion of the assets of a
SAM Pool will be treated, for purposes of applying the fiduciary standards
and prohibited transaction rules of ERISA and Section 4975 of the Code, as
Plan Assets with respect to each Plan Asset Investor.
The Regulation provides an exception from "plan asset" treatment for
securities issued by an entity if, immediately after the most recent
acquisition of any equity interest in the entity, less than 25% of the
value of each class of equity interests in the entity, excluding interests
held by a person who has discretionary authority or control with respect to
the assets of the entity (or any affiliate of such a person), is held by
"benefit plan investors" (i.e., Plans, governmental, foreign and other
employee benefit plans not subject to ERISA and entities holding Plan
Assets). Because the availability of this exemption with respect to any SAM
Pool depends upon the identity of the Certificateholders of the applicable
Series at any time, there can be no assurance as to whether any Series or
Class of Certificates will qualify for this exemption.
Prohibited Transaction Class Exemption 83-1
Prohibited Transaction Class Exemption 83-1 (Class Exemption for
Certain Transactions Involving Mortgage Pool Investment Trusts) ("PTCE
83-1"), applicable to SAMs, permits, subject to certain conditions, certain
transactions involving the creation, maintenance and termination of certain
residential mortgage pools and the acquisition and holding of certain
residential mortgage pool pass-through certificates by Plan Asset
Investors, regardless of whether (a) the mortgage pool is exempt from "plan
asset" treatment or (b) the transactions would otherwise be prohibited
under ERISA or Section 4975 of the Code. If the general conditions
(described below) of PTCE 83-1 are satisfied, an investment by a Plan in
Certificates (1) will be exempt from the prohibitions of Section 406(a) of
ERISA (relating generally to Plan Asset transactions involving Parties in
Interest who are not fiduciaries) if the Certificates are not subordinated
to the rights and interests evidenced by other Certificates of the same
Mortgage Pool and are purchased at no more than fair market value, and (2)
will be exempt from the prohibitions of Sections 406(b)(1) and (2) of ERISA
(relating generally to Plan Asset transactions with fiduciaries) if, in
addition, the purchase is approved by an independent fiduciary, the Plan
Asset Investor pays no more for the Certificates than would be paid in an
arm's length transaction with an unrelated party, no sales commission is
paid to the Depositor as SAM Pool sponsor, the Plan Asset Investor does not
purchase more than 25% of the Certificates of the applicable Series, and at
least 50% of the Certificates of that Series is purchased by persons
independent of the Depositor, the Trustee and the insurer, as applicable.
PTCE 83-1 sets forth three general conditions which must be satisfied
for any transaction to be eligible for exemption: (1) the existence of a
pool trustee who is not an affiliate of the pool sponsor; (2) the
maintenance of a system of insurance or other protection for the pooled
shared appreciation mortgage loans and property securing such loans, and
for indemnifying Certificateholders against reductions in pass-through
payments due to property damage or defaults in loan payments; and (3) a
limitation on the amount of the payment retained by the pool sponsor,
together with other funds inuring to its benefit, to not more than adequate
consideration for selling the shared appreciation mortgage loans plus
reasonable compensation for services provided by the pool sponsor to the
mortgage pool.
Unless otherwise specified in the applicable Prospectus Supplement, THE
Trustee for each Series will be unaffiliated with the Depositor, and the
first general condition of PTCE 83-1 will be satisfied for each such
Series. With respect to the second general condition of PTCE 83-1, the
Depositor intends to use its best efforts to establish for each Series of
Certificates an insurance, indemnification, subordination or other method
of credit support which will adequately protect the SAM Pools and indemnify
Certificateholders of the applicable Series against pass-through payment
reductions resulting from property damage or defaults in loan payments. See
"Description of Credit Enhancements." The amount, method and description of
the credit support method applicable to a Series of Certificates will be
set forth in the related Prospectus Supplement. With respect to the third
general condition of PTCE 83-1, the Depositor intends to use its best
efforts to establish for each Series a compensation method which will
produce for the Depositor total compensation which will not exceed adequate
consideration for forming the SAM Pool, selling the Certificates and
serving as Master Servicer or Servicer of the SAM Pool. However, the
Depositor does not guarantee that its credit support and compensation
methods will be sufficient to meet the second and third general conditions
(described above) with respect to any Series.
As indicated in the two preceding paragraphs, the continued maintenance
of a system of insurance or other protection for the pooled shared
appreciation mortgage loans and property securing such loans, and for
indemnifying Certificateholders against reductions in pass-through payments
due to property damage or defaults in loan payments, is one of the three
general conditions that must be satisfied for any transaction involving a
SAM Pool to remain eligible for exemption by PTCE 83-1 from the prohibited
transaction rules of ERISA and Section 4975 of the Code. If the credit
support method established for any Series is cancelled or terminated, or if
the credit support is reduced to such an extent that its coverage amount is
less than the greater of (a) 1% of the aggregate unpaid principal balance
of the SAMs or (b) the unpaid principal balance of the largest single SAM
(see "Description of Credit Enhancements"), then the SAM Pool relating to
that Series may no longer satisfy the general conditions of PTCE 83-1. In
such event, the exemption from the prohibited transaction rules afforded by
PTCE 83-1 may no longer be available.
One or more Series of Certificates may be offered to Plan Asset
Investors through a forward delivery commitment contract, which is a
contract for the purchase of Certificates to be delivered at an agreed
future settlement date. PTCE 83-1 permits the sale of Certificates to a
Plan Asset Investor pursuant to such a contract, provided that the forward
delivery commitment is expressly approved by a fiduciary who is independent
of the Depositor, the Trustee, the insurer (if any) and their respective
affiliates, and who has the authority to manage and control the Plan Assets
being committed for investment in the Certificates.
PTCE 83-1 will not provide exemptive relief with respect to a Series of
Certificates evidencing interests in a Trust Fund that include loans to
cooperatives. If a Series of Certificates is subdivided into two or more
Classes which are entitled to disproportionate allocations of the principal
and interest payments on the SAMs, the availability of the exemption
afforded by PTCE 83-1 may be adversely affected, as described in the
applicable Prospectus Supplement. Moreover, if any Class of Certificates is
entitled to pass-through payments of principal (but no or only nominal
interest) or interest (but no or only nominal principal), PTCE 83-1 will
not exempt holders of that Class of Certificates from the prohibited
transaction rules of ERISA and Section 4975 of the Code.
Other Exemptions
The DOL also has issued an individual administrative exemption,
Prohibited Transaction Exemption ("PTE") 90-30, to Bear, Stearns & Co.,
Inc. ("PTE 90-30"), which exempts the initial purchase, the holding and the
subsequent resale by Plans of certificates representing interests in
asset-backed pass through trusts that consists of certain secured
receivables, loans and other obligations that meet the conditions and
requirements of PTE 90-30 from certain of the prohibited transaction rules
of ERISA and the Code. In addition, PTE 90-30 provides that the trust's
assets may include (i) yield supplement agreements or similar yield
maintenance arrangements of the type described above, provided such
arrangements do not involve swap agreements or other notional principle
contracts; and (ii) certain pre-funding account arrangements. PTE 90-30 may
apply to the acquisition and holding of one or more series of Certificates
that may be offered to Plan Asset Investors subject to the satisfaction of
certain conditions.
Among the conditions that must be satisfied for PTE 90-30 to apply
are the following:
1. The acquisition of the Certificates by a Plan must be on
terms (including the price) that are at least as favorable
to the Plan as they would be in an arm's length transaction
with an unrelated party;
2. The rights and interests evidenced by the Certificates
acquired by the Plan may not be subordinated to the rights
and interests evidenced by other certificates of the Trust;
3. The Certificates acquired by the Plan must have received a
rating at the time of such acquisition that is in one of the
three highest generic rating categories form either Standard
& Poor's Corporation ("S&P"), Moody's Investors Service,
Inc. ("Moody's"), Duff & Phelps Inc. ("D&P") or Fitch IBCA,
Inc. ("Fitch");
4. The sum of all payments made to the Underwriters in
connection with the distribution of the Certificates may
represent not more than reasonable compensation for
underwriting the Certificates. The sum of all payments made
to and retained by the Servicer may not represent more than
reasonable compensation for the Servicer's services under
the Pooling Agreement and reimbursement of the Servicer's
reasonable expenses in connection therewith;
5. The Trustee must not be an affiliate of any other member of
the Restricted Group (as defined below); and
6. The Plan investing in the Certificates must be an
"accredited investor" as defined in Rule 501(a)(1) of
Regulation D of the Securities and Exchange Commission under
the Securities Act of 1933.
The Trust also must meet the following requirements:
a. the corpus of the Trust must consist solely of assets
of the type which have been included in other
investment pools;
b. certificates in such other investment pools must have
been rated in one of the three highest rating
categories of S&P, Moody's, Duff & Phelps or Fitch
for at least one year prior to the Plan's acquisition
of certificates; and
c. certificates evidencing interests in such other
investment pools must have been purchased by
investors other than plans for at least one year
prior to any Plan's acquisition of Certificates.
In order for PTE 90-30 to apply to certain self-dealing/conflict of
interest prohibited transactions that may occur when a Plan fiduciary
causes the Plan to acquire Certificates, PTE 90-30 requires, among other
matters, that: (i) in the case of an acquisition in connection with the
initial issuance of certificates at least fifty percent of each class of
certificates in which Plans have invested is acquired by persons
independent of the Restricted Group and at least fifty percent of the
aggregate interest in the trust is acquired by persons independent of the
Restricted Group (as defined below); (ii) such fiduciary (or its affiliate)
is an obligor with respect to 5 percent or less of the fair market value of
the obligations contained in the trust; (iii) the Plan's investment in each
class of certificates does not exceed twenty-five (25) percent of all of
the certificates of that class outstanding at the time of the acquisition
and (iv) immediately after the acquisition, no more than twenty-five
percent (25%) of the assets of the Plan are invested in certificates
representing an interest in one or more trusts containing assets sold or
serviced by the same entity. PTE 90-30 does not apply in the case of Plans
sponsored by the Underwriter, the Trustee, the Servicer, any obligor with
respect to the Receivables included in the Trust, any entity deemed to be a
"sponsor" of the Trust as such term is defined in PTE 90-30, or any
affiliate of any such party (the "Restricted Group").
If for any reason the above exemptions do not provide an exemption for
a particular Certificateholder who is a Plan Asset Investor, one of five
other prohibited transaction class exemptions issued by the DOL might
apply, i.e., PTCE 96-23 (Class Exemption for Plan Asset Transactions
Determined by In-House Asset Managers), PTCE 95-60 (Class Exemption for
Certain Transactions Involving Insurance Company General Accounts), PTCE
91-38 (Class Exemption for Certain Transactions Involving Bank Collective
Investment Funds), PTCE 90-1 (Class Exemption for Certain Transactions
Involving Insurance Company Pooled Separate Accounts) or PTCE 84-14 (Class
Exemption for Plan Asset Transactions Determined by Independent Qualified
Professional Asset Managers). There can be no assurance that any of these
class exemptions will apply with respect to any particular Plan Asset
Investor or, even if it were to apply, that the exemption would apply to
all transactions involving the SAM Pool. In addition, the underwriter with
respect to a particular Series may be the recipient of a final prohibited
transaction exemption which, if so specified in the applicable Prospectus
Supplement, MAY accord a Plan Asset Investor protection from violations of
the prohibited transaction rules of ERISA and Section 4975 of the Code if
the Plan Asset Investor satisfies the conditions described in the
applicable Prospectus Supplement.
As noted above, based on the reasoning of the United States Supreme
Court in John Hancock Life Ins. Co. v. Harris Trust and Sav. Bank, 114 S.
Ct. 517 (1993), an insurance company's general account may be deemed to
include assets of the Plans investing in the general account (e.g., through
the purchase of an annuity contract), and the insurance company might be
treated as a Party-in-Interest with respect to a Plan by virtue of such
investment. Any purchaser that is an insurance company using the assets of
an insurance company general account should note that the Small Business
Job Protection Act of 1996 added new Section 401(c) of ERISA relating to
the status of the assets of insurance company general accounts under ERISA
and Section 4975 of the Code. Pursuant to Section 401(c), the Department of
Labor is required to issue final regulations (the "General Account
Regulations") not later than December 31, 1997 with respect to insurance
policies issued on or before December 31, 1998 that are supported by an
insurer's general account. The General Account Regulations are to provide
guidance on which assets held by the insurer constitute "plan assets" for
purposes of the fiduciary responsibility provisions of ERISA and Section
4975 of the Code. Section 401(c) also provides that, except in the case of
avoidance of the General Account Regulation and actions brought by the
Secretary of Labor relating to certain breaches of fiduciary duties that
also constitute breaches of state or federal criminal law, until the date
that is 18 months after the General Account Regulations become final, no
liability under the fiduciary responsibility and prohibited transaction
provisions of ERISA and Section 4975 may result on the basis of a claim
that the assets of the general account of an insurance company constitute
the plan assets of any such plan. The plan asset status of insurance
company separate accounts is unaffected by new Section 401(c) of ERISA, and
separate account assets continue to be treated as the plan assets of any
such plan invested in a separate account.
General Considerations
In summary, the Depositor, the Trustee, a Master Servicer, a Servicer,
any insurer, the obligor under any other credit enhancement instrument, any
Servicer, any underwriter for any Series of Certificates, as applicable,
and their respective affiliates might be considered or might become Parties
in Interest with respect to a Plan Asset Investor. In that event, the
acquisition or holding of Certificates of the applicable Series or Class by
or on behalf of such Plan Asset Investor might be viewed as giving rise to
a prohibited transaction under ERISA and Section 4975 of the Code.
Accordingly, before a Plan Asset Investor makes the investment decision to
purchase, to commit to purchase or to hold Certificates of any Series or
Class, the Plan Asset Investor should determine (a) whether adequate
protection is accorded by PTCE 83-1, PTE 90-30 or any other prohibited
transaction exemption that may be issued with respect to the applicable
Series, as described in the applicable Prospectus Supplement; (b) whether
any other prohibited transaction class exemption (if required) is available
under ERISA and Section 4975 of the Code; or (c) whether an exemption from
"plan asset" treatment is available to the applicable SAM Pool. The Plan
Asset Investor should also consult the ERISA discussion, if any, in the
applicable Prospectus Supplement for further information regarding the
application of ERISA and Section 4975 of the Code to any Series or Class of
Certificates.
Any Plan Asset Investor that proposes to use Plan Assets to purchase
Certificates should consult with its own counsel with respect to the
potential consequences under ERISA and the Code of the acquisition and
ownership of Certificates.
Certain Federal Income Tax Consequences
The following is a general discussion of the anticipated material
federal income tax consequences of the purchase, ownership and disposition
of the Certificates offered hereunder. It does not purport to discuss all
federal income tax consequences that may be applicable to particular
categories of investors, some of which may be subject to special rules and
does not address the tax consequences of persons holding Certificates as
part of a hedge or hedging transaction. Further, the authorities on which
this discussion is based are subject to change or differing
interpretations, which changes or differing interpretations could apply
retroactively. This discussion does not address the state or local tax
consequences of the purchase, ownership and disposition of such
Certificates. Investors should consult their own tax advisors in
determining the federal, state, local or other tax consequences to them of
the purchase, ownership and disposition of the Certificates offered
hereunder.
The following discussion addresses certificates ("REMIC Certificates")
representing interests in a SAM Pool ("REMIC SAM Pool") as to which a
Servicer, in the case where there will be no Master Servicer for a Series,
or the Master Servicer or Servicer, in the case where the Master Servicer
or Servicer is the only Master Servicer for a Series, will cause that
portion of the Trust that does not include the Appreciation Certificates to
elect treatment as a real estate mortgage investment conduit ("REMIC")
under Sections 860A through 860G ("REMIC Provisions") of the Code. Under
the REMIC Provisions, REMICs may issue "regular" interests and must issue
one and only one class of "residual" interests. A REMIC Certificate
representing a regular interest in a REMIC SAM Pool will be referred to as
a "REMIC Regular Certificate" and a REMIC Certificate representing a
residual interest in a REMIC SAM Pool will be referred to as a "REMIC
Residual Certificate."
The following discussion is based in part upon the rules governing
original issue discount that are set forth in Code Sections 1271 through
1273 and 1275 and in Treasury regulations issued under the original issue
discount provisions of the Code (the "OID Regulations"), and the Treasury
regulations issued under the provisions of the Code relating to REMICs (the
"REMIC Regulations"). The OID Regulations generally are effective with
respect to debt instruments issued on or after April 4, 1994.
Classification of REMIC Trust Funds
With respect to each Series of REMIC Certificates, Skadden, Arps,
Slate, Meagher & Flom LLP, special counsel to the Depositor, will deliver
their opinion generally to the effect that, assuming (i) a REMIC election
is made timely in the required form, (ii) each Master Servicer or Servicer,
as applicable, complies with all provisions of the related Pooling
Agreement, (iii) certain representations set forth in the Pooling Agreement
are true, and (iv) there is continued compliance with applicable provisions
of the Code, as it may be amended from time to time, and applicable
Treasury regulations issued thereunder, the related REMIC SAM Pool will
qualify as a REMIC and the classes of interests offered will be considered
to be regular interests or residual interests in that REMIC SAM Pool within
the meaning of the REMIC Provisions.
Holders of REMIC Certificates should be aware that, if an entity
electing to be treated as a REMIC fails to comply with one or more of the
ongoing requirements of the Code for REMIC status during any taxable year,
the Code provides that the entity will not be treated as a REMIC for such
year and thereafter. In such event, an entity electing to be treated as a
REMIC may be taxable as a separate corporation under Treasury regulations,
and the related REMIC Certificates may not be accorded the status described
below under the heading "--Characterization of Investments in REMIC
Certificates." In the case of an inadvertent termination of REMIC status,
the Code provides the Treasury Department with authority to issue
regulations providing relief. Any such relief, however, may be accompanied
by sanctions, such as the imposition of a corporate tax on all or a portion
of the REMIC's income for the period of time in which the requirements for
REMIC status are not satisfied.
Characterization of Investments in REMIC Certificates
In general, REMIC Certificates are not treated for federal income tax
purposes as ownership interests in the assets of a REMIC SAM Pool. However,
(i) REMIC Certificates held by a domestic building and loan association
will constitute a "regular or residual interest in a REMIC" within the
meaning of Code Section 7701(a)(19)(C)(xi) in the same proportion that the
assets would be treated as "loans . . . secured by an interest in real
property" within the meaning of Code Section 7701(a)(19)(C)(v) or as other
assets described in Code Section 7701(a)(19)(C); and (ii) REMIC
Certificates held by a real estate investment trust will constitute "real
estate assets" within the meaning of Code Section 856(c)(5)(A), and
interest on the REMIC Certificates will be considered "interest on
obligations secured by mortgages on real property or on interests in real
property" within the meaning of Code Section 856(c)(3)(B) in the same
proportion that, for both purposes, the assets would be treated as
"interests in real property" as defined in Code Section 856(c)(6)(C) (or,
as provided in the Committee Report, as "real estate assets" as defined in
Code Section 856(c)(6)(B)). Moreover, if 95% or more of the assets qualify
for any of the foregoing treatments, the REMIC Certificates will qualify
for the corresponding status in their entirety. Investors should be aware
that the investment of amounts in any reserve account in assets not so
qualifying would, and holding property acquired by foreclosure pending sale
might, reduce the amount of the REMIC Certificate that would qualify for
the foregoing treatment. The REMIC Regulations provide that payments on
SAMs held pending distribution are considered part of the SAMs for purposes
of Code Section 856(c)(5)(A); it is unclear whether such collected payments
would be so treated for purposes of Code Section 7701(a)(19)(C)(v), but
there appears to be no reason why analogous treatment should not be given
to such collected payments under that provision. The determination as to
the percentage of the REMIC's assets that will constitute assets described
in the foregoing sections of the Code will be made with respect to each
calendar quarter based on the average adjusted basis of each category of
the assets held by the REMIC during such calendar quarter. The REMIC will
report those determinations to Certificateholders in the manner and at the
times required by applicable Treasury regulations. The applicable
Prospectus Supplement or the related Current Report on Form 8-K for each
Series of REMIC Certificates will describe the assets as of the Cut-Off
Date. REMIC Certificates held by certain financial institutions will
constitute "evidence of indebtedness" within the meaning of Code Section
582(c)(1); in addition, REMIC Regular Certificates acquired by a REMIC in
accordance with the requirements of Section 860G(a)(3)(C) or Section
860G(a)(4)(B) of the Code will be treated as "qualified mortgages" for
purposes of Code Section 860D(a)(4).
Taxation of Owners of REMIC Regular Certificates
Except as otherwise stated in this discussion, the REMIC Regular
Certificates will be treated for federal income tax purposes as debt
instruments issued by the REMIC SAM Pool and not as ownership interests in
the REMIC SAM Pool or its assets. In general, interest, original issue
discount and market discount paid or accrued on a REMIC Regular Certificate
will be treated as ordinary income to the holder of such REMIC Regular
Certificate. Distributions in reduction of the stated redemption price at
maturity of the REMIC Regular Certificate will be treated as a return of
capital to the extent of such holder's basis in such REMIC Regular
Certificate. Holders of REMIC Regular Certificates that otherwise report
income under a cash method of accounting will be required to report income
with respect to REMIC Regular Certificates under an accrual method.
Original Issue Discount
Certain REMIC Regular Certificates may be issued with "original issue
discount" within the meaning of Code Section 1273(a). Any holders of REMIC
Regular Certificates issued with original issue discount generally will be
required to include original issue discount in income as it accrues, in
accordance with a constant interest method that takes into account the
compounding of interest, in advance of the receipt of the cash attributable
to such income. The Depositor will report annually (or more often if
required) to the IRS and to Certificateholders such information with
respect to the original issue discount accruing on the REMIC Regular
Certificates as may be required under Code Section 6049 and the regulations
thereunder. See "--Reporting and Other Administrative Matters of REMICS"
below.
Rules governing original issue discount are set forth in Code Sections
1271 through 1273 and 1275 and, to some extent, in the OID Regulations.
Code Section 1272(a)(6) provides special original issue discount rules
applicable to REMIC Regular Certificates. Regulations have not yet been
proposed or adopted under Code Section 1272(a)(6) of the Code. Further,
application of the OID Regulations to the REMIC Regular Certificates
remains unclear in some respects because the OID Regulations generally
purport not to apply to instruments to which section 1272(a)(6) applies
such as REMIC Regular Certificates, and separately because they either do
not address, or are subject to varying interpretations with regard to,
several relevant issues.
Code Section 1272(a)(6) requires that a mortgage prepayment assumption
("Prepayment Assumption") be used in computing the accrual of original
issue discount on REMIC Regular Certificates and for certain other federal
income tax purposes. The Prepayment Assumption is to be determined in the
manner prescribed in Treasury regulations. To date, no such regulations
have been promulgated. The Committee Report indicates that the regulations
will provide that the Prepayment Assumption, if any, used with respect to a
particular transaction must be the same as that used by the parties in
pricing the transaction. Unless otherwise specified in the applicable
Prospectus Supplement, THE Depositor will use a percentage of the Constant
Prepayment Rate (or such other Prepayment Assumption as may be specified in
the applicable Prospectus Supplement) in reporting original issue discount
that is consistent with this standard. However, the Depositor does not make
any representation that the SAMs will in fact prepay at that percentage of
the Constant Prepayment Rate or at any other rate. Each investor must make
its own decision as to the appropriate prepayment assumption to be used in
deciding whether or not to purchase any of the REMIC Regular Certificates.
The Prospectus Supplement with respect to a Series of REMIC Certificates
will disclose the percentage of the Constant Prepayment Rate (or such other
Prepayment Assumption as may be specified therein) to be used in reporting
original issue discount, if any, and for certain other federal income tax
purposes.
The total amount of original issue discount on a REMIC Regular
Certificate is the excess of the "stated redemption price at maturity" of
the REMIC Regular Certificate over its "issue price." Except as discussed
in the following two paragraphs, in general, the issue price of a
particular Class of REMIC Regular Certificates offered hereunder will be
the price at which a substantial amount of REMIC Regular Certificates of
that Class are first sold to the public (excluding bond houses and
brokers).
If a REMIC Regular Certificate is sold with accrued interest that
relates to a period prior to the issue date of such REMIC Regular
Certificate, the amount paid for the accrued interest will be treated
instead as increasing the issue price of the REMIC Regular Certificate. In
addition, that portion of the first interest payment in excess of interest
accrued from the Closing Date to the first Distribution Date will be
treated for federal income tax reporting purposes as includible in the
stated redemption price at maturity of the REMIC Regular Certificate, and
as excludable from income when received as a payment of interest on the
first Distribution Date. The OID Regulations suggest that some or all of
this pre-issuance accrued interest "may" be treated as a separate asset
(and hence not includible in a REMIC Regular Certificate's issue price or
stated redemption price at maturity), whose cost is recovered entirely out
of interest paid on the first Distribution Date. It is unclear how such
treatment would be elected under the OID Regulations and whether an
election could be made unilaterally by a Certificateholder.
The stated redemption price at maturity of a REMIC Regular Certificate
is equal to the total of all payments to be made on such Certificate other
than "qualified stated interest." Under the OID Regulations, "qualified
stated interest" is interest that is unconditionally payable at least
annually during the entire term of the Certificate at either (i) a single
fixed rate that appropriately takes into account the length of the interval
between payments or (ii) the current values of a single "qualified floating
rate" or "objective rate" (each, a "Single Variable Rate"). A "current
value" is the value of a variable rate on any day that is no earlier than
three months prior to the first day on which that value is in effect and no
later than one year following that day. A "qualified floating rate" is a
rate whose variations can reasonably be expected to measure contemporaneous
variations in the cost of newly borrowed funds in the currency in which the
Certificate is denominated. Such a rate remains qualified even though it is
multiplied by a fixed, positive multiple, increased or decreased by a fixed
rate, or both. Certain combinations of rates constitute a single qualified
floating rate, including (i) interest stated at a fixed rate for an initial
period of less than one year followed by a qualified floating rate if the
value of the floating rate at the closing date is intended to approximate
the fixed rate, and (ii) two or more qualified floating rates that can be
expected to have approximately the same values throughout the term of the
Certificate. A combination of such rates is conclusively presumed to be a
single floating rate if the values of all rates on the closing date are
within 0.25% of each other. A variable rate that is subject to an interest
rate cap, floor, "governor" or similar restriction on rate adjustment may
be a qualified floating rate only if such restriction is fixed throughout
the term of the instrument, or is not reasonably expected as of the closing
date to cause the yield on the debt instrument to differ significantly from
the expected yield absent the restriction. An "objective rate" is a rate
(other than a qualified floating rate) determined using a single formula
fixed for the life of the Certificate, which is based on (i) one or more
qualified floating rates (including a multiple or inverse of a qualified
floating rate), (ii) one or more rates each of which would be a qualified
floating rate for a debt instrument denominated in a foreign currency,
(iii) the yield or changes in price of one or more items of "actively
traded" personal property, (iv) a combination of rates described in (i),
(ii) and (iii), or (v) a rate designated by the IRS. However, a variable
rate is not an objective rate if it is reasonably expected that the average
value of the rate during the first half of the Certificate's term will
differ significantly from the average value of such rate during the final
half of its term. A combination of interest stated at a fixed rate for an
initial period of less than one year followed by an objective rate is
treated as a single objective rate if the value of the objective rate at
the closing date is intended to approximate the fixed rate; such a
combination of rates is conclusively presumed to be a single objective rate
if the objective rate on the closing date does not differ from the fixed
rate by more than 0.25%. The qualified stated interest payable with respect
to certain variable rate debt instruments not bearing stated interest at a
Single Variable Rate generally is determined under the OID Regulations by
converting such instruments into fixed rate debt instruments. Instruments
qualifying for such treatment generally include those providing for stated
interest at (i) more than one qualified floating rate, or at (ii) a single
fixed rate and (a) one or more qualified floating rates or (b) a single
"qualified inverse floating rate" (each, a "Multiple Variable Rate"). A
"qualified inverse floating rate" is an objective rate equal to a fixed
rate reduced by a qualified floating rate, the variations in which can
reasonably be expected to inversely reflect contemporaneous variations in
the cost of newly borrowed funds (disregarding permissible rate caps,
floors, governors and similar restrictions such as are described above).
Under these rules, some of the payments of interest on a Certificate
bearing a fixed rate of interest for an initial period followed by a
qualified floating rate of interest in subsequent periods could be treated
as included in the stated redemption price at maturity if the initial fixed
rate were to differ sufficiently from the rate that would have been set
using the formula applicable to subsequent periods. See "--Variable Rate
Certificates." REMIC Regular Certificates offered hereby other than
Certificates providing for variable rates of interest or for the accretion
of interest are not anticipated to have stated interest other than
"qualified stated interest", but if any such REMIC Regular Certificates are
so offered, appropriate disclosures will be made in the related Prospectus
Supplement. Some or all of the payments on REMIC Regular Certificates
providing for the accretion of interest will be included in the stated
redemption price at maturity of such Certificates.
Under a de minimis rule in the Code, as interpreted in the OID
Regulations, original issue discount on a REMIC Regular Certificate will be
considered to be zero if such original issue discount is less than 0.25% of
the stated redemption price at maturity of the REMIC Regular Certificate
multiplied by the weighted average life of the REMIC Regular Certificate.
For this purpose, the weighted average life of the REMIC Regular
Certificate is computed as the sum of the amounts determined by multiplying
the amount of each payment under the instrument (other than a payment of
qualified stated interest) by a fraction, whose numerator is the number of
complete years from the issue date until such payment is made, and whose
denominator is the stated redemption price at maturity of such REMIC
Regular Certificate. The IRS may be anticipated to take the position that
this rule should be applied taking into account the Prepayment Assumption
and the effect of any anticipated investment income. Under the OID
Regulations, REMIC Regular Certificates bearing only qualified stated
interest except for any "teaser" rate, interest holiday or similar
provision would be treated as subject to the de minimis rule if the greater
of the deferred or foregone interest or the other original issue discount
is less than such de minimis amount.
The OID Regulations generally would treat de minimis original issue
discount as includible in income as each principal payment is made, based
on the product of the total amount of such de minimis original issue
discount and a fraction, whose numerator is the amount of such principal
payment and whose denominator is the stated principal amount of the REMIC
Regular Certificate. The OID Regulations also would permit a
Certificateholder to elect to accrue de minimis original issue discount
into income currently based on a constant yield method. See "--Market
Discount and Premium."
Each holder of a REMIC Regular Certificate must include in gross income
the sum of the "daily portions" of original issue discount on its REMIC
Regular Certificate for each day during its taxable year on which it held
such REMIC Regular Certificate. For this purpose, in the case of an
original holder of a REMIC Regular Certificate, the daily portions of
original issue discount will be determined as follows. A calculation will
first be made of the portion of the original issue discount that accrued
during each accrual period, that is, unless otherwise stated in the
applicable Prospectus Supplement, each period that begins or ends on a date
that corresponds to a Distribution Date on the REMIC Regular Certificate
and begins on the first day following the immediately preceding accrual
period (beginning on the closing date in the case of the first such
period). For any accrual period such portion will equal the excess, if any,
of (i) the sum of (A) the present value of all of the distributions
remaining to be made on the REMIC Regular Certificate, if any, as of the
end of the accrual period and (B) the distribution made on such REMIC
Regular Certificate during the accrual period of amounts included in the
stated redemption price at maturity, over (ii) the adjusted issue price of
such REMIC Regular Certificate at the beginning of the accrual period. The
present value of the remaining payments referred to in the preceding
sentence will be calculated based on (i) the yield to maturity of the REMIC
Regular Certificate, calculated as of the settlement date, giving effect to
the Prepayment Assumption, (ii) events (including actual prepayments) that
have occurred prior to the end of the accrual period, and (iii) the
Prepayment Assumption. The adjusted issue price of a REMIC Regular
Certificate at the beginning of any accrual period will equal the issue
price of such Certificate, increased by the aggregate amount of original
issue discount with respect to such REMIC Regular Certificate that accrued
in prior accrual periods, and reduced by the amount of any distributions
made on such REMIC Regular Certificate in prior accrual periods of amounts
included in the stated redemption price at maturity. The original issue
discount accruing during any accrual period will be allocated ratably to
each day during the period to determine the daily portion of original issue
discount for each day. With respect to an accrual period between the
settlement date and the first Distribution Date on the REMIC Regular
Certificate (notwithstanding that no distribution is scheduled to be made
on such date) that is shorter than a full accrual period, the OID
Regulations permit the daily portions of original issue discount to be
determined according to any reasonable method.
A subsequent purchaser of a REMIC Regular Certificate that purchases
such REMIC Regular Certificate at a cost (not including payment for accrued
qualified stated interest) less than its remaining stated redemption price
at maturity will also be required to include in gross income, for each day
on which it holds such REMIC Regular Certificate, the daily portions of
original issue discount with respect to such REMIC Regular Certificate, but
reduced, if such cost exceeds the "adjusted issue price," by an amount
equal to the product of (i) such daily portions and (ii) a constant
fraction, whose numerator is such excess and whose denominator is the sum
of the daily portions of original issue discount on such REMIC Regular
Certificate for all days on or after the day of purchase. The adjusted
issue price of a REMIC Regular Certificate on any given day is equal to the
sum of the adjusted issue price (or, in the case of the first accrual
period, the issue price) of the REMIC Regular Certificate at the beginning
of the accrual period during which such day occurs and the daily portions
of original issue discount for all days during such accrual period prior to
such day, reduced by the aggregate amount of distributions previously made
other than distributions of qualified stated interest.
Variable Rate Certificates. Purchasers of REMIC Regular Certificates
bearing a variable rate of interest should be aware that there is
uncertainty concerning the application of Section 1272(a)(6) of the Code
and the OID Regulations to such Certificates. In the absence of other
authority, the Depositor intends to be guided by the provisions of the OID
Regulations governing variable rate debt instruments in adapting the
provisions of Section 1272(a)(6) of the Code to such Certificates for the
purpose of preparing reports furnished to Certificateholders. The effect of
the application of such provisions generally will be to cause
Certificateholders holding Certificates bearing interest at a Single
Variable Rate to take into account for each period an amount corresponding
approximately to the sum of (i) the qualified stated interest, accruing on
the outstanding face amount of the REMIC Regular Certificate as the stated
interest rate for that Certificate varies from time to time and (ii) the
amount of original issue discount that would have been attributable to that
period on the basis of a constant yield to maturity for a bond issued at
the same time and issue price as the REMIC Regular Certificate, having the
same face amount and schedule of payments of principal as such Certificate,
subject to the same Prepayment Assumption, and bearing interest at a fixed
rate equal to the value of the applicable qualified floating rate or
qualified inverse floating rate in the case of a Certificate providing for
either such rate, or equal to the fixed rate that reflects the reasonably
expected yield on the Certificate in the case of a Certificate providing
for an objective rate other than an inverse floating rate, in each case as
of the issue date. Certificateholders holding REMIC Regular Certificates
bearing interest at a Multiple Variable Rate generally will take into
account interest and original issue discount under a similar methodology,
except that the amounts of qualified stated interest and original issue
discount attributable to such a Certificate first will be determined for an
equivalent fixed rate debt instrument, the assumed fixed rates for which
are (a) for each qualified floating rate, the value of each such rate as of
the closing date (with appropriate adjustment for any differences in
intervals between interest adjustment dates), (b) for a qualified inverse
floating rate, the value of the rate as of the closing date, (c) for any
other objective rate, the fixed rate that reflects the yield that is
reasonably expected for the Certificate, and (d) for an actual fixed rate,
such hypothetical fixed rate as would result under (a) or (b) if the actual
fixed rate were replaced by a hypothetical qualified floating rate or
qualified inverse floating rate such that the fair market value of the
Certificate as of the issue date would be approximately the same as that of
an otherwise identical debt instrument providing for the hypothetical
variable rate rather than the actual fixed rate. If the interest paid or
accrued with respect to a Certificate bearing interest at a multiple
variable rate during an accrual period differs from the assumed fixed
interest rate, such difference will be an adjustment (to interest or
original issue discount, as applicable) to the Certificateholder's taxable
income for the taxable period or periods to which such difference relates.
Additionally, purchasers of such Certificates should be aware that the
provisions of the OID Regulations applicable to variable rate debt
instruments have been limited and may not apply to some REMIC Regular
Certificates having variable rates. If such a Certificate is not governed
by the provisions of the OID Regulations applicable to variable rate debt
instruments, it may be subject to provisions of proposed Treasury
regulations applicable to instruments having contingent payments. The
application of those provisions to instruments such as variable rate REMIC
Regular Certificates is subject to differing interpretations. Prospective
purchasers of variable rate REMIC Regular Certificates are advised to
consult their tax advisors concerning the tax treatment of such
Certificates.
Market Discount and Premium
A Certificateholder that purchases a REMIC Regular Certificate at a
market discount, that is, at a purchase price less than the adjusted issue
price (as defined above under "--Original Issue Discount") of such REMIC
Regular Certificate generally will recognize market discount upon receipt
of each distribution of principal. In particular, such a holder will
generally be required to allocate each payment of principal on a REMIC
Regular Certificate first to accrued market discount, and to recognize
ordinary income to the extent such principal payment does not exceed the
aggregate amount of accrued market discount on such REMIC Regular
Certificate not previously included in income. Such market discount must be
included in income in addition to any original issue discount includible in
income with respect to such REMIC Regular Certificate.
A Certificateholder may elect to include market discount in income
currently as it accrues, rather than including it on a deferred basis in
accordance with the foregoing. If made, such election will apply to all
market discount bonds acquired by such Certificateholder on or after the
first day of the first taxable year to which such election applies. In
addition, the OID Regulations permit a Certificateholder to elect to accrue
all interest, discount (including de minimis market or original issue
discount) and premium in income as interest, based on a constant yield
method. If such an election were made for a REMIC Regular Certificate with
market discount, the Certificateholder would be deemed to have made an
election to currently include market discount in income with respect to all
other debt instruments having market discount that such Certificateholder
acquires during the year of the election or thereafter. Similarly, a
Certificateholder that makes this election for a Certificate that is
acquired at a premium is deemed to have made an election to amortize bond
premium, as described below, with respect to all debt instruments having
amortizable bond premium that such Certificateholder owns or acquires. The
election to accrue interest, discount and premium on a constant yield
method with respect to a Certificate is irrevocable.
Under a statutory de minimis exception, market discount with respect to
a REMIC Regular Certificate will be considered to be zero for purposes of
Code Sections 1276 through 1278 if such market discount is less than 0.25%
of the stated redemption price at maturity of such REMIC Regular
Certificate multiplied by the number of complete years to maturity
remaining after the date of its purchase. In interpreting a similar de
minimis rule with respect to original issue discount on obligations payable
in installments, the OID Regulations refer to the weighted average maturity
of obligations, and it is likely that the same rule will be applied in
determining whether market discount is de minimis. It appears that de
minimis market discount on a REMIC Regular Certificate would be treated in
a manner similar to original issue discount of a de minimis amount. See
"--Original Issue Discount" above. Such treatment would result in discount
being included in income at a slower rate than discount would be required
to be included using the method described above. However, Treasury
regulations implementing the market discount de minimis exception have not
been issued in proposed or temporary form, and the precise treatment of de
minimis market discount on obligations payable in more than one installment
therefore remains uncertain.
The Code grants authority to the Treasury Department to issue
regulations providing for the method for accruing market discount of more
than a de minimis amount on debt instruments, the principal of which is
payable in more than one installment. Until such time as regulations are
issued by the Treasury Department, certain rules described in the Committee
Report will apply. Under those rules, the holder of a bond purchased with
more than de minimis market discount may elect to accrue such market
discount either on the basis of a constant yield method or on the basis of
the appropriate proportionate method described below. Under the
proportionate method for obligations issued with original issue discount,
the amount of market discount that accrues during a period is equal to the
product of (i) the total remaining market discount, multiplied by (ii) a
fraction, the numerator of which is the original issue discount accruing
during the period and the denominator of which is the total remaining
original issue discount at the beginning of the period. Under the
proportionate method for obligations issued without original issue
discount, the amount of market discount that accrues during a period is
equal to the product of (i) the total remaining market discount, multiplied
by (ii) a fraction, the numerator of which is the amount of stated interest
paid during the accrual period and the denominator of which is the total
amount of stated interest remaining to be paid at the beginning of the
period. The Prepayment Assumption, if any, used in calculating the accrual
of original issue discount is to be used in calculating the accrual of
market discount under any of the above methods. Because the regulations
referred to in this paragraph have not been issued, it is not possible to
predict what effect such regulations might have on the tax treatment of a
REMIC Regular Certificate purchased at a discount in the secondary market.
Further, a purchaser generally will be required to treat a portion of
any gain on sale or exchange of a REMIC Regular Certificate as ordinary
income to the extent of the market discount accrued to the date of
disposition under one of the foregoing methods, less any accrued market
discount previously reported as ordinary income. Such purchaser also may be
required to defer a portion of its interest deductions for the taxable year
attributable to any indebtedness incurred or continued to purchase or carry
such REMIC Regular Certificate. Any such deferred interest expense is, in
general, allowed as a deduction not later than the year in which the
related market discount income is recognized. If such holder elects to
include market discount in income currently as it accrues on all market
discount instruments acquired by such holder in that taxable year or
thereafter, the interest deferral rule described above will not apply.
A REMIC Regular Certificate purchased at a cost (not including payment
for accrued qualified stated interest) greater than its remaining stated
redemption price at maturity will be considered to be purchased at a
premium. The holder of such a REMIC Regular Certificate may elect to
amortize such premium under the constant yield method. The OID Regulations
also permit Certificateholders to elect to include all interest, discount
and premium in income based on a constant yield method, further treating
the Certificateholder as having made the election to amortize premium
generally, as discussed above. The Committee Report indicates a
Congressional intent that the same rules that will apply to accrual of
market discount on installment obligations will also apply in amortizing
bond premium under Code Section 171 on installment obligations such as the
REMIC Regular Certificates.
Realized Losses
Under Code Section 166, both corporate holders of REMIC Regular
Certificates and noncorporate holders of REMIC Regular Certificates that
acquire such Certificates in connection with a trade or business should be
allowed to deduct, as ordinary losses, any losses sustained during a
taxable year in which their Certificates become wholly or partially
worthless as a result of one or more realized losses on the SAMs. However,
it appears that a noncorporate holder that does not acquire a REMIC Regular
Certificate in connection with a trade or business will not be entitled to
deduct a loss under Code Section 166 until such holder's Certificate
becomes wholly worthless (i.e., until its outstanding principal balance has
been reduced to zero) and that the loss will be characterized as a
short-term capital loss.
Each holder of a REMIC Regular Certificate will be required to accrue
interest under the life of the REMIC, because the REMIC's basis in the
underlying REMIC SAM Pool includes original issue discount with respect to
such Certificate without regard to any reduction in distributions
attributable to defaults or delinquencies on the SAMs or the underlying
assets until it can be established that any such reduction ultimately will
not be recoverable. As a result, the amount of taxable income reported in
any period by the holder of a REMIC Regular Certificate could exceed the
amount of economic income actually realized by the holder in such period.
Although the holder of a REMIC Regular Certificate eventually will
recognize a loss or reduction in income attributable to previously accrued
and included income that, as a result of a realized loss, ultimately will
not be realized, the law is unclear with respect to the timing and
character of such loss or reduction in income.
Callable Class Certificates
An entity electing to be treated as a REMIC may either itself directly,
or indirectly through the use of a trust owned by such entity, enter into a
redemption agreement pursuant to which the counterparty will have the right
to cause a redemption of the outstanding Certificates (as used herein, each
such right a "Call Right", and each such Certificate, a "Callable Class
Certificate") beginning on the Distribution Date and subject to payment of
the redemption price and other conditions that may be specified in the
applicable Prospectus Supplement. In the event the trust issues the Call
Right, counsel to the Depositor will deliver its opinion generally to the
effect that, assuming compliance with all provisions of the related Pooling
Agreement, the trust will be treated as a grantor trust under subpart E,
part 1 of Subchapter J of the Code and, as a result, the REMIC will be
treated as having directly issued the Call Right.
The REMIC will be treated as (i) owning an interest in the underlying
SAMs and (ii) writing a call option on its interest in the underlying SAMs,
represented by the right of the holder of the Call Right to direct the
Depositor to redeem the outstanding Certificates as described below.
Under these circumstances, the REMIC should be considered to have
acquired its interest in the underlying SAMs for an amount equal to its
initial aggregate basis in its assets, determined as described more fully
hereunder, plus the fair market value at the time of purchase of such
REMIC's assets of the call option the REMIC is deemed to have written,
which amount the REMIC is deemed also to have received. Accordingly, the
REMIC's basis in its interest in the underlying SAMs will actually be
greater than the aggregate issue price of the REMIC Certificates it issues,
resulting in less discount income or greater premium deductions to the
REMIC than it would have recognized had the call option not been written.
Under current federal income tax law, the REMIC will not be required to
include immediately in income the amount of the option premium it is deemed
to have received. However, although the treatment of these items is not
entirely clear, it appears that as the REMIC receives principal payments on
the underlying mortgage assets, and if the REMIC sells or distributes in
kind any of the underlying SAMs, the REMIC will be deemed to have received
(in addition to the amount of such payment, the sales price or the fair
market value of the asset, as the case may be) an amount equal to the
corresponding portion of the payment it was deemed to receive at the time
the call option was originally written. Accordingly, the amount realized by
the REMIC with respect to its interest in the underlying SAMs, will be
greater than the amount of cash received by it, and over the life of the
REMIC the entire amount of the deemed payment received when the call option
was written will be reported by the REMIC, although not at the times that a
corresponding amount of income would be reported based on a constant yield
method. Investors should be aware that, subject to certain specific
exceptions in the REMIC Regulations, it is not anticipated that the REMIC
will sell or transfer or otherwise dispose of any of the underlying SAMs
except pursuant to an exercise of the Call Right. See "--Prohibited
Transactions and Other Possible REMIC Taxes." In the event that the holder
of the Call Right chooses to effect such a redemption of the underlying
SAMs, the transactions by which the Certificates are retired and the
related Trust Fund terminated will constitute a "qualified liquidation" of
the REMIC within the meaning of Section 860F(a)(4) of the Code.
Taxation of Call Option Premium. Under current federal income tax law,
the REMIC will not be required to include immediately in income the option
premium with respect to the Call Right that it is deemed to receive.
Instead, such premium will be taken into account when the Call Right
lapses, is exercised or is otherwise terminated with respect to the REMIC.
As indicated above, an amount equal to the option premium that is deemed to
be received by the REMIC would be included in the REMIC's basis in the
SAMs. The REMIC's recovery of such basis will not occur at the same rate as
its inclusion in income of the option premium.
As a grantor of an option, the REMIC must include the option premium in
income when the option lapses, which with respect to the REMIC is no later
than the redemption by a holder of the Call Right. Although the Call Right
will not expire by its terms during the period in which the Certificates
remain outstanding the mortgage assets to which the Call Right relates will
be reduced over time through principal payments. Although it is not
entirely clear whether the Call Right would thus be deemed to lapse as the
SAMs are paid down, and if so, at what rate, the Depositor intends to
report income to the REMIC based on the assumption that the Call Right
lapses, and the related premium is recognized by the REMIC, proportionately
as principal is paid on the SAMs (as prepayments prior to the date on which
the Call Right may first be exercised or as scheduled principal payments or
prepayments after the first date on which the Call Right may be exercised).
There is no assurance that the IRS would agree with this method of
reporting income from the lapse of the Call Right, and furthermore, it
should be noted that the IRS currently is examining the rules regarding the
taxation of option premiums.
If the Call Right is exercised, the REMIC will add an amount equal to
the unamortized portion of the option premium to the amount realized from
the sale of the underlying SAMs.
If the REMIC transfers one of the underlying SAMs, such transfer will
be treated as a "closing transaction" with respect to the option the REMIC
is deemed to have written. Accordingly, the REMIC will recognize gain or
loss equal to the difference between the unamortized amount of option
premium and the amount the REMIC is deemed to pay, under the rules
discussed above, to be relieved from its obligations under the option.
However, as discussed above, subject to certain specified exceptions
(including in connection with the issuance of the Call Right), it is not
anticipated that the REMIC will transfer any of the underlying SAMs. See
"--Prohibited Transactions and Other Possible REMIC Taxes."
Certificateholders are urged to consult their tax advisors before
purchasing an interest in any Callable Class Certificate.
Taxation of Owners of REMIC Residual Certificates
General
An owner of a REMIC Residual Certificate ("Residual Owner") generally
will be required to report its daily portion of the taxable income or,
subject to the limitation described below under "--Basis Rules and
Distributions", the net loss of the REMIC SAM Pool for each day during a
calendar quarter that the Residual Owner owned such REMIC Residual
Certificate. For this purpose, the daily portion will be determined by
allocating to each day in the calendar quarter, using a 30 days per
month/90 days per quarter/360 days per year counting convention (unless
otherwise disclosed in the applicable Prospectus Supplement), its ratable
portion of the taxable income or net loss of the REMIC SAM Pool for such
quarter, and by allocating the daily portions among the Residual Owners (on
such day) in accordance with their percentage of ownership interests on
such day. Any amount included in the gross income or allowed as a loss of
any Residual Owner by virtue of this paragraph will be treated as ordinary
income or loss. Purchasers of REMIC Residual Certificates should be aware
that taxable income from such Certificates could exceed cash distributions
thereon in any taxable year. For example, if SAMs are acquired by a REMIC
at a discount, then the holder of a residual interest may recognize income
without corresponding cash distributions. This result could occur because a
payment produces recognition of discount on the SAM while the payment could
be used in whole or in part to make principal payments on REMIC Regular
Certificates issued without substantial discount. Taxable income may also
be greater in earlier years as a result of the fact that interest expense
deductions, expressed as a percentage of the outstanding principal amount
of the REMIC Regular Certificates, will increase over time as the lower
yielding sequences of Certificates are paid, whereas interest income with
respect to any given fixed rate SAM will remain constant over time as a
percentage of the outstanding principal amount of that loan.
Any payments received by a holder of a REMIC Residual Certificate in
connection with the acquisition of such Certificate will be taken into
account in determining the income of such holder for federal income tax
purposes. Although it appears likely that any such payment would be
includible in income immediately upon its receipt, the IRS might assert
that such payment should be included in income over time according to an
amortization schedule or according to some other method. Because of the
uncertainty concerning the treatment of such payments, holders of REMIC
Residual Certificates should consult their tax advisors concerning the
treatment of such payments for income tax purposes.
If so specified in the applicable Prospectus Supplement FOR a Series,
the underlying SAMs may be subject to redemption at the direction of the
holder of certain redemption rights. As a direct owner in the underlying
SAMs for federal income purposes, the REMIC will also be treated as having
written the call option on such underlying SAMs. See "--Taxation of Owners
of REMIC Regular Certificates--Callable Class Certificates."
Taxable Income or Net Loss of the REMIC Trust Fund
The taxable income or net loss of the REMIC SAM Pool will reflect a
netting of income from the SAMs, any cancellation of indebtedness income
due to the allocation of realized losses to REMIC Regular Certificates, and
deductions and losses allowed to the REMIC SAM Pool. Such taxable income or
net loss for a given calendar quarter will be determined in the same manner
as for an individual having the calendar year as his taxable year and using
the accrual method of accounting, with certain modifications. The first
modification is that a deduction will be allowed for accruals of interest
(including original issue discount) on the REMIC Regular Certificates.
Second, market discount equal to the excess of any SAM's adjusted issue
price (as determined above under "Taxation of Owners of REMIC Regular
Certificates--Market Discount and Premium") over its fair market value at
the time of their transfer to the REMIC SAM Pool generally will be included
in income as it accrues, based on a constant yield and on the Prepayment
Assumption. For this purpose, the Depositor intends to treat the fair
market value of the SAMs as being equal to the aggregate issue prices of
the REMIC Regular Certificates and REMIC Residual Certificates; if one or
more classes of REMIC Regular Certificates or REMIC Residual Certificates
are retained by the Depositor, it will estimate the value of such retained
interests in order to determine the fair market value of the SAMs for this
purpose. Third, no item of income, gain, loss or deduction allocable to a
prohibited transaction (see "--Prohibited Transactions and Other Possible
REMIC Taxes" below) will be taken into account. Fourth, the REMIC SAM Pool
generally may not deduct any item that would not be allowed in calculating
the taxable income of a partnership by virtue of Code Section 703(a)(2).
Fifth, the REMIC Regulations provide that the limitation on miscellaneous
itemized deductions imposed on individuals by Code Section 67 will not be
applied at the SAM Pool level to the servicing fees paid to a Master
Servicer or a Servicer. See, however, "--Pass-Through of Servicing Fees"
below. If the deductions allowed to the REMIC SAM Pool exceed its gross
income for a calendar quarter, such excess will be the net loss for the
REMIC SAM Pool for that calendar quarter.
Basis Rules and Distributions
Any distribution by a REMIC SAM Pool to a Residual Owner will not be
included in the gross income of such Residual Owner to the extent it does
not exceed the adjusted basis of such Residual Owner's interest in a REMIC
Residual Certificate. Such distribution will reduce the adjusted basis of
such interest, but not below zero. To the extent a distribution exceeds the
adjusted basis of the REMIC Residual Certificate, it will be treated as
gain from the sale of the REMIC Residual Certificate. See "--Sales of REMIC
Certificates" below. The adjusted basis of a REMIC Residual Certificate is
equal to the amount paid for such REMIC Residual Certificate, increased by
amounts included in the income of the Residual Owner and decreased by
distributions and by net losses taken into account with respect to such
interest. See "--Taxation of Owners of REMIC Residual
Certificates--General" above.
A Residual Owner is not allowed to take into account any net loss for
any calendar quarter to the extent such net loss exceeds such Residual
Owner's adjusted basis in its REMIC Residual Certificate as of the close of
such calendar quarter (determined without regard to such net loss). Any
loss disallowed by reason of this limitation may be carried forward
indefinitely to future calendar quarters and, subject to the same
limitation, may be used only to offset income from the REMIC Residual
Certificate.
The effect of these basis and distribution rules is that a Residual
Owner may not amortize its basis in a REMIC Residual Certificate, but may
only recover its basis through distributions, through the deduction of any
net losses of the REMIC SAM Pool or upon the sale of its REMIC Residual
Certificate See "--Sales of REMIC Certificates" below. The residual holder
does, however, receive reduced taxable income on the fair market value of
the REMIC Regular Certificates and REMIC Residual Certificates.
Excess Inclusions
Any "excess inclusions" with respect to a REMIC Residual Certificate
are subject to certain special tax rules. With respect to a Residual Owner,
the excess inclusion for any calendar quarter is defined as the excess (if
any) of the daily portions of taxable income over the sum of the "daily
accruals" for each day during such quarter that such REMIC Residual
Certificate was held by such Residual Owner. The daily accruals are
determined by allocating to each day during a calendar quarter its ratable
portion of the product of the "adjusted issue price" of the REMIC Residual
Certificate at the beginning of the calendar quarter and 120 percent of the
long-term "applicable federal rate" (generally, an average of current
yields on Treasury securities of comparable maturity) (the "AFR") in effect
at the time of issuance of the REMIC Residual Certificate. For this
purpose, the adjusted issue price of a REMIC Residual Certificate as of the
beginning of any calendar quarter is the issue price of the REMIC Residual
Certificate, increased by the amount of daily accruals for all prior
quarters and decreased by any distributions made with respect to such REMIC
Residual Certificate before the beginning of such quarter. The issue price
of a REMIC Residual Certificate is the initial offering price to the public
(excluding bond houses and brokers) at which a substantial amount of the
REMIC Residual Certificates were sold.
An excess inclusion cannot be offset by deductions, losses or loss
carryovers from other activities. For Residual Owners that are subject to
tax on unrelated business taxable income (as defined in Code Section 511),
an excess inclusion of such Residual Owner is treated as unrelated business
taxable income. For Residual Owners that are nonresident alien individuals
or foreign corporations generally subject to United States 30% withholding
tax, even if interest paid to such Residual Owners is generally eligible
for exemptions from such tax, an excess inclusion will be subject to such
tax and no tax treaty rate reduction or exemption may be claimed with
respect thereto. See "--Foreign Investors in REMIC Certificates" below.
Although it has not done so, the Treasury Department also has authority
to issue regulations that, if REMIC Residual Certificates are found in the
aggregate not to have "significant value," would treat as excess inclusions
with respect to such REMIC Residual Certificates the entire daily portion
of taxable income for such REMIC Residual Certificates. In order to have
significant value, the REMIC Residual Certificates must have an aggregate
issue price, at issuance, at least equal to two percent of the aggregate
issue prices of all of the related REMIC Regular and Residual Certificates.
In addition, the anticipated weighted average life of the REMIC Residual
Certificates must equal or exceed 20 percent of the anticipated weighted
average life of the REMIC, based on the Prepayment Assumption and on any
required or permitted clean-up calls or required liquidation provided for
in the REMIC's organizational documents. Each Prospectus Supplement
pursuant to which REMIC Residual Certificates are offered will state
whether such REMIC Residual Certificates will have, or may be regarded as
having, "significant value" under the REMIC Regulations; provided, however,
that any disclosure that a REMIC Residual Certificate will have
"significant value" will be based upon certain assumptions, and the
Depositor will make no representation that a REMIC Residual Certificate
will have "significant value" for purposes of the above described rules or
that a Residual Owner will receive distributions of amounts calculated
pursuant to those assumptions.
In the case of any REMIC Residual Certificates held by a real estate
investment trust, the aggregate excess inclusions with respect to such
REMIC Residual Certificates, reduced (but not below zero) by the real
estate investment trust taxable income (within the meaning of Code Section
857(b)(2), excluding any net capital gain), will be allocated among the
shareholders of such trust in proportion to the dividends received by such
shareholders from such trust, and any amount so allocated will be treated
as an excess inclusion with respect to a REMIC Residual Certificate as if
held directly by such shareholder.
Noneconomic REMIC Residual Certificates
Under the REMIC Regulations, transfers of "noneconomic" REMIC Residual
Certificates will be disregarded for all federal income tax purposes if "a
significant purpose of the transfer was to enable the transferor to impede
the assessment or collection of tax." If such transfer is disregarded, the
purported transferor will continue to remain liable for any taxes due with
respect to the income on such "noneconomic" REMIC Residual Certificate. The
REMIC Regulations provide that a REMIC Residual Certificate will be
considered a noneconomic residual interest unless, at the time of its
transfer and based on the Prepayment Assumption and any required or
permitted clean-up calls or required liquidation provided for in the
REMIC's organizational documents, (1) the present value of the expected
future distributions (discounted using the AFR) on the REMIC Residual
Certificate equals at least the present value of the expected tax on the
anticipated excess inclusions, and (2) the transferor reasonably expects
that the transferee will receive distributions with respect to the REMIC
Residual Certificate at or after the time the taxes accrue on the
anticipated excess inclusions in an amount sufficient to satisfy the
accrued taxes. Accordingly, all transfers of REMIC Residual Certificates
that may constitute noneconomic residual interests will be subject to
certain restrictions under the terms of the related Pooling Agreement that
are intended to reduce the possibility of any such transfer being
disregarded. Such restrictions will require each party to a transfer to
provide an affidavit that no purpose of such transfer is to impede the
assessment or collection of tax, including certain representations as to
the financial condition of the prospective transferee. Prior to purchasing
a REMIC Residual Certificate, prospective purchasers should consider the
possibility that a purported transfer of such REMIC Residual Certificate by
such a purchaser to another purchaser at some future date may be
disregarded in accordance with the above-described rules, which would
result in the retention of tax liability by such purchaser. The applicable
Prospectus Supplement will disclose whether offered REMIC Residual
Certificates may be considered "noneconomic" residual interests under the
REMIC Regulations; provided, however, that any disclosure that a REMIC
Residual Certificate will or will not be considered "noneconomic" will be
based upon certain assumptions, and the Depositor will make no
representation that a REMIC Residual Certificate will not be considered
"noneconomic" for purposes of the above-described rules or that a REMIC
Residual Owner will receive distributions calculated pursuant to such
assumptions. See "--Foreign Investors in REMIC Certificates" below for
additional restrictions applicable to transfers of certain REMIC Residual
Certificates to foreign persons.
Tax-Exempt Investors
Generally, tax exempt organizations that are not subject to Federal
income taxation on "unrelated business taxable income" pursuant to Code
Section 511 are treated as "disqualified organizations" under provisions of
the Code. Under provisions of the Pooling Agreement, such organizations
generally are prohibited from owning REMIC Residual Certificates. For
Residual Owners that are subject to tax on unrelated business taxable
income (as defined in Code Section 511), an excess inclusion of such
Residual Owner is treated as unrelated business taxable income. See
"--Sales of REMIC Certificates" below.
Real Estate Investment Trusts
If the applicable Prospectus Supplement so provides, a SAM Pool may
hold SAMs bearing interest based wholly or partially on Mortgagor profits,
Mortgaged Property appreciation, or similar contingencies. Such interest,
if earned directly by a real estate investment trust ("REIT"), would be
subject to the limitations of Code sections 856(f) and 856(j). Treasury
regulations treat a REIT holding a REMIC Residual Certificate for a
principal purpose of avoiding such Code provisions as receiving directly
the income of the REMIC SAM Pool, hence potentially jeopardizing its
qualification for taxation as a REIT and exposing such income to taxation
as a prohibited transaction at a 100 percent rate.
Mark-to-Market Rules
Treasury regulations provide that any REMIC Residual Certificate
acquired after January 3, 1995 will not be treated as a security and
therefore generally may not be marked to market.
Sales of REMIC Certificates
If a REMIC Certificate is sold, the seller will recognize gain or loss
equal to the difference between the amount realized on the sale and its
adjusted basis in the REMIC Certificate. The adjusted basis of a REMIC
Regular Certificate generally will equal the cost of such REMIC Regular
Certificate to the seller, increased by any original issue discount or
market discount included in the seller's gross income with respect to such
REMIC Regular Certificate and reduced by premium amortization deductions
and distributions previously received by the seller of amounts included in
the stated redemption price at maturity of such REMIC Regular Certificate.
The adjusted basis of a REMIC Residual Certificate will be determined as
described above under "--Taxation of Owners of REMIC Residual
Certificates--Basis Rules and Distributions," above. Gain from the
disposition of a REMIC Regular Certificate that might otherwise be treated
as a capital gain will be treated as ordinary income to the extent that
such gain does not exceed the excess, if any, of (i) the amount that would
have been includible in such holder's income had income accrued at a rate
equal to 110% of the AFR as of the date of purchase over (ii) the amount
actually includible in such holder's income. Except as otherwise provided
above under "--Taxation of Owners of REMIC Regular Certificates--Market
Discount and Premium" and under Code Section 582(c), any additional gain or
any loss on the sale or exchange of a REMIC Certificate will be capital
gain or loss, provided such REMIC Certificate is held as a capital asset
(generally, property held for investment) within the meaning of Code
Section 1221. The distinction between a capital gain or loss and ordinary
income or loss is also relevant for other purposes, including limitations
on the use of capital losses to offset ordinary income.
A portion of any gain from the sale of a REMIC Regular Certificate that
might otherwise be capital gain may be treated as ordinary income to the
extent that such Certificate is held as part of a "conversion transaction"
within the meaning of Code Section 1258. A conversion transaction generally
is one in which the taxpayer has taken two or more positions in
Certificates or similar property that reduce or eliminate market risk, if
substantially all of the taxpayer's return is attributable to the time
value of the taxpayer's net investment in such transaction. The amount of
gain so realized in a conversion transaction that is recharacterized as
ordinary income generally will not exceed the amount of interest that would
have accrued on the taxpayer's net investment at 120% of the AFR at the
time the taxpayer enters into the conversion transaction, subject to
appropriate reduction for prior inclusion of interest and other ordinary
income items from the transaction.
A taxpayer may elect to have net capital gain taxed at ordinary income
rates rather than capital gains rates in order to include such net capital
gain in total net investment income for that taxable year, for purposes of
the limitation on the deduction of interest on indebtedness incurred to
purchase or carry property held for investment to a taxpayer's net
investment income.
The Omnibus Budget Reconciliation Act of 1993 (the "Budget Act")
revised the rules for deducting interest on indebtedness allocable to
property held for investment. Generally, deductions for such interest are
limited to a taxpayer's net investment income for each taxable year. As
amended by the Budget Act, net investment income for each taxable year
includes net capital gain attributable to the disposition of investment
property only if the taxpayer elects to have such net capital gain taxed at
ordinary income rates rather than capital gains rates.
If a Residual Owner sells a REMIC Residual Certificate at a loss, the
loss will not be recognized if, within six months before or after the sale
of the REMIC Residual Certificate, such Residual Owner purchases another
residual interest in any REMIC or any interest in a taxable mortgage pool
(as defined in Code Section 7701(i)) comparable to a residual interest in a
REMIC. Such disallowed loss will be allowed upon the sale of the other
residual interest (or comparable interest) if the rule referred to in the
preceding sentence does not apply to that sale. While the Committee Report
states that this rule may be modified by Treasury regulations, the REMIC
Regulations do not address this issue and it is not clear whether any such
modification will in fact be implemented or, if implemented, what the
precise nature or effective date of it would be.
The Code makes transfers of a residual interest to certain
"disqualified organizations" subject to an additional tax on the transferor
in an amount equal to the maximum corporate tax rate applied to the present
value of the total anticipated excess inclusions (discounted using the AFR)
with respect to such residual interest for the periods after the transfer.
For this purpose, "disqualified organizations" includes the United States,
any state or political subdivision of a state, any foreign government or
international organization or any agency or instrumentality of any of the
foregoing; any tax-exempt entity (other than a Code Section 521
cooperative) which is not subject to the tax on unrelated business income;
and any rural electrical and telephone cooperative. The anticipated excess
inclusions must be determined as of the date that the REMIC Residual
Certificate is transferred and must be based on events that have occurred
up to the time of such transfer, the Prepayment Assumption, and any
required or permitted clean-up calls or required liquidation provided for
in the REMIC's organizational documents. The tax generally is imposed on
the transferor of the REMIC Residual Certificate, except that it is imposed
on an agent for a disqualified organization if the transfer occurs through
such agent. The Pooling Agreement requires, as a prerequisite to any
transfer of a Residual Certificate, the delivery to the Trustee of an
affidavit of the transferee to the effect that it is not a disqualified
organization and contains other provisions designed to render any attempted
transfer of a REMIC Residual Certificate to a disqualified organization
void.
In addition, if a "pass-through entity" includes in income excess
inclusions with respect to a REMIC Residual Certificate, and a disqualified
organization is the record holder of an interest in such entity, then a tax
will be imposed on such entity equal to the product of (i) the amount of
excess inclusions on the REMIC Residual Certificate that are allocable to
the interest in the pass-through entity held by such disqualified
organization and (ii) the highest marginal federal income tax rate imposed
on corporations. A pass-through entity will not be subject to this tax for
any period, however, if the record holder of an interest in such entity
furnishes to such entity (i) such holder's social security number and a
statement under penalties of perjury that such social security number is
that of the record holder or (ii) a statement under penalties of perjury
that such record holder is not a disqualified organization. For these
purposes, a "pass-through entity" means any regulated investment company,
REIT, trust, partnership or certain other entities described in Section
860E(e)(6) of the Code. In addition, a person holding an interest in a
pass-through entity as a nominee for another person shall, with respect to
such interest, be treated as a pass-through entity. Legislation presently
pending before the United States Congress, the Tax Simplification and
Technical Corrections Bill of 1993 (the "Simplification Act"), would apply
this tax on an annual basis to "large partnerships". Generally, the
Simplification Act would treat partnerships that have, or have had, 250 or
more partners as a large partnership for this purpose. The Simplification
Act would not limit application of the tax to excess inclusions allocable
to disqualified organizations, and in fact would apply the tax to large
partnerships having no disqualified organizations as partners. If enacted
in its present form, the Simplification Act would apply to partnership
taxable years ending on or after December 31, 1994.
Pass-Through of Servicing Fees
The general rule is that holders of Residual Certificates take into
account taxable income or net loss of the related REMIC SAM Pool. Under
that rule, servicing compensation of the Depositor would be allocated to
the holders of the REMIC Residual Certificates, and therefore would not
affect the income or deductions of holders of REMIC Regular Certificates.
However, in the case of a "single-class REMIC," such expenses and an
equivalent amount of additional gross income will be allocated among all
holders of REMIC Regular Certificates and REMIC Residual Certificates for
purposes of the limitations on the deductibility of certain miscellaneous
itemized deductions by individuals contained in Code Sections 56(b)(1) and
67. Generally, any holder of a REMIC Certificate who is an individual,
estate or trust will be able to deduct such expenses in determining regular
tax liability only to the extent that such expenses together with certain
other miscellaneous itemized deductions of such individual, estate or trust
exceed 2% of adjusted gross income; such a holder may not deduct such
expenses to any extent in determining liability for alternative minimum
tax. Accordingly, REMIC Residual Certificates, and REMIC Regular
Certificates receiving an allocation of servicing compensation, may not be
appropriate investments for individuals, estates or trusts, and such
persons should carefully consult with their own tax advisors regarding the
advisability of an investment in such Certificates.
A "single-class REMIC" is a REMIC that either (i) would be treated as a
pass-through trust under the provisions of Treasury Regulation Section
301.7701-4(c) in the absence of a REMIC election, or (ii) is substantially
similar to such a pass-through trust and is structured with the principal
purpose of avoiding the allocation of investment expenses to holders of
REMIC Regular Certificates. The Depositor intends to treat a REMIC SAM Pool
as other than a "single-class REMIC," consequently allocating servicing
compensation expenses and related income amounts entirely to REMIC Residual
Certificates and in no part to REMIC Regular Certificates.
Prohibited Transactions and Other Possible REMIC Taxes
The Code imposes a tax on REMIC SAM Pools equal to 100 percent of the
net income derived from "prohibited transactions". In general, a prohibited
transaction means the disposition of a SAM other than pursuant to certain
specified exceptions, the receipt of income from a source other than a SAM
or certain other permitted investments, the receipt of compensation for
services, or gain from the disposition of an asset purchased with the
payments on the SAMs for temporary investment pending distribution on the
REMIC Certificates. The Code also imposes a 100 percent tax on the value of
any contribution of assets to the REMIC after the "start-up day" (the day
on which the regular and residual interests are issued), other than
pursuant to specified exceptions, and subjects "net income from foreclosure
property" to tax at the highest corporate rate. It is not anticipated that
a REMIC SAM Pool will engage in any such transactions or receive any such
income.
Termination of a REMIC Trust Fund
In general, no special tax consequences will apply to a holder of a
REMIC Regular Certificate upon the termination of the REMIC SAM Pool by
virtue of the final payment or liquidation of the last SAM remaining in the
REMIC SAM Pool. If a Residual Owner's adjusted basis in its REMIC Residual
Certificate at the time such termination occurs exceeds the amount of cash
distributed to such Residual Owner in liquidation of its interest, then,
although the matter is not entirely free from doubt, it appears that the
Residual Owner would be entitled to a loss (which would be a capital loss)
equal to the amount of such excess.
Reporting and Other Administrative Matters of REMICs
Reporting of interest income, including any original issue discount,
with respect to REMIC Regular Certificates is required annually, and may be
required more frequently under Treasury regulations. In addition to those
holders of REMIC Regular Certificates to whom information reporting
generally applies, certain holders of REMIC Regular Certificates who are
generally exempt from information reporting on debt instruments, such as
corporations, banks, registered securities or commodities brokers, REITs,
registered investment companies, common trust funds, charitable remainder
annuity trusts and unitrusts, will be provided interest and original issue
discount income information and the information set forth in the following
paragraph upon request in accordance with the requirements of the Treasury
regulations. The information must be provided by the later of 30 days after
the end of the quarter for which the information was requested, or two
weeks after the receipt of the request. The REMIC SAM Pool must also comply
with rules requiring the face of a REMIC Certificate issued at more than a
de minimis discount to disclose the amount of original issue discount and
the issue date and requiring such information to be reported to the
Treasury Department.
The REMIC Regular Certificate information reports must include a
statement of the "adjusted issue price" of the REMIC Regular Certificate at
the beginning of each accrual period. In addition, the reports must include
information necessary to compute the accrual of any market discount that
may arise upon secondary trading of REMIC Regular Certificates. Because
exact computation of the accrual of market discount on a constant yield
method would require information relating to the holder's purchase price
which the REMIC SAM Pool may not have, it appears that this provision will
only require information pertaining to the appropriate proportionate method
of accruing market discount.
The party responsible for complying with the foregoing reporting rules
will be specified in the Pooling Agreement.
For purposes of the administrative provisions of the Code, REMIC SAM
Pools will be treated as partnerships and the holders of REMIC Residual
Certificates will be treated as partners. Unless otherwise stated in the
applicable Prospectus Supplement, the Depositor will file federal income
tax information returns on behalf of the related REMIC SAM Pool, and will
be designated as agent for, and will act on behalf of the "tax matters
person" with respect to the REMIC SAM Pool in all respects.
As agent for the tax matters person, the Depositor will, subject to
certain notice requirements and various restrictions and limitations,
generally have the authority to act on behalf of the REMIC and the Residual
Owners in connection with the administrative and judicial review of items
of income, deduction, gain or loss of the REMIC SAM Pool, as well as the
REMIC SAM Pool's classification. Residual Owners will generally be required
to report such REMIC SAM Pool items consistently with their treatment on
the REMIC SAM Pool's federal income tax information return and may in some
circumstances be bound by a settlement agreement between the Master
Servicer or Servicer, as agent for the tax matters person, and the IRS
concerning any such REMIC SAM Pool item. Adjustments made to the REMIC SAM
Pool tax return may require a Residual Owner to make corresponding
adjustments on its return, and an audit of the REMIC SAM Pool's tax return,
or the adjustments resulting from such an audit, could result in an audit
of a Residual Owner's return.
Backup Withholding with Respect to REMIC Certificates
Payments of interest and principal on REMIC Regular Certificates, as
well as payments of proceeds from the sale of REMIC Certificates, may be
subject to the "backup withholding tax" under Section 3406 of the Code at a
rate of 31 percent if recipients of such payments fail to furnish to the
payor certain information, including their taxpayer identification numbers,
or otherwise fail to establish an exemption from such tax. Any amounts
deducted and withheld from a distribution to a recipient would be allowed
as a credit against such recipient's federal income tax. Furthermore,
certain penalties may be imposed by the IRS on a recipient of payments that
is required to supply information but that does not do so in the proper
manner.
Foreign Investors in REMIC Certificates
REMIC Regular Certificates
Except as qualified below, payments made on a REMIC Regular Certificate
to a holder of a REMIC Regular Certificate that is not a U.S. Person, as
hereinafter defined (a "Non-U.S. Person"), or to a person acting on behalf
of such a Certificateholder, generally will be exempt from U.S. federal
income and withholding taxes, provided (a) the holder of the Certificate is
not subject to U.S. tax as a result of a connection to the United States
other than ownership of such Certificate, (b) the holder of such
Certificate signs a statement under penalties of perjury that certifies
that such holder is a Non-U.S. Person, and provides the name and address of
such holder, and (c) the last U.S. Person in the chain of payment to the
holder received such statement from such holder or a financial institution
holding on its behalf and does not have actual knowledge that such
statement is false. If the holder does not qualify for exemption,
distributions of interest, including distributions in respect of accrued
original issue discount, to such holder may be subject to a withholding tax
rate of 30%, subject to reduction under any applicable tax treaty.
"U.S. Person" means (i) a citizen or resident of the United States,
(ii) a corporation or partnership (including any entity treated as a
partnership or corporation for federal income tax purposes) created or
organized in or under the laws of the United States, any state or the
District of Columbia, or (iii) an estate or trust that is subject to U.S.
federal income tax regardless of the source of its income.
Holders of REMIC Regular Certificates should be aware that the IRS
might take the position that exemption from U.S. withholding taxes does not
apply to such a holder that also directly or indirectly owns 10% or more of
the REMIC Residual Certificates of a particular Series of Certificates.
Further, the foregoing rules will not apply to exempt a United States
shareholder of a controlled foreign corporation from taxation on such
United States shareholder's allocable portion of the interest or original
issue discount income earned by such controlled foreign corporation.
REMIC Residual Certificates
Amounts paid to a Residual Owner that is a Non-U.S. Person generally
will be treated as interest for purposes of applying the withholding tax on
Non-U.S. Persons with respect to income on its REMIC Residual Certificate.
However, it is unclear whether distributions on REMIC Residual Certificates
will be eligible for the general exemption from withholding tax that
applies to REMIC Regular Certificates as described above. Treasury
regulations provide that, for purposes of the portfolio interest exception,
payments to the foreign owner of a REMIC Residual Certificate are to be
considered paid on the obligations held by the REMIC, rather than on the
Certificate itself. Such payments would thus only qualify for the portfolio
interest exception if the underlying obligations held by the REMIC would so
qualify. Such withholding tax generally would be imposed at a rate of 30%
but would be subject to reduction under any tax treaty applicable to the
Residual Owner. However, there is no exemption from withholding tax nor may
the rate of such tax be reduced, under a tax treaty or otherwise, with
respect to any distribution of income that is an excess inclusion. See
"--Taxation of Owners of REMIC Residual Certificates--Excess Inclusions"
above.
Certain restrictions relating to transfers of REMIC Residual
Certificates to and by investors who are not U.S. Persons are also imposed
by the REMIC Regulations. First, transfers of REMIC Residual Certificates
to Non-U.S. Persons that have "tax avoidance potential" are disregarded for
all federal income tax purposes. If such transfer is disregarded, the
purported transferor of such a REMIC Residual Certificate to a Non-U.S.
Person would continue to remain liable for any taxes due with respect to
the income on such REMIC Residual Certificate. A REMIC Residual Certificate
has tax avoidance potential unless, at the time of the transfer, the
transferor reasonably expects that the REMIC will distribute to the
transferee amounts that will equal at least 30% of each excess inclusion,
and that such amounts will be distributed at or after the time at which the
excess inclusion accrues and not later than the close of the calendar year
following the calendar year of accrual. This rule does not apply to
transfers if the income from the REMIC Residual Certificate is taxed in the
hands of the transferee as income effectively connected with the conduct of
a U.S. trade or business. Second, if a Non-U.S. Person transfers a REMIC
Residual Certificate to a U.S. Person, and the transfer has the effect of
allowing the transferor to avoid tax on accrued excess inclusions, that
transfer is disregarded for all federal income tax purposes and the
purported Non-U.S. Person transferor continues to be treated as the owner
of the REMIC Residual Certificate. Thus, the REMIC's liability to withhold
30% of the accrued excess inclusions is not terminated even though the
REMIC Residual Certificate is no longer held by a Non-U.S. Person.
Alternatives
If interests in the Certificates are issued through a grantor trust or
a financial asset securitization investment trust under Sections 860H
through 860L of the Code, disclosure of the applicable federal income tax
consequences will be provided in a prospectus supplement for that series.
State and Local Taxation
Many states do not automatically conform to changes in the federal
income tax laws. Consequently, a REMIC SAM Pool which would not qualify as
a fixed investment trust for federal income tax purposes may be
characterized as a corporation, a partnership, or some other entity for
purposes of state income tax law. Such characterization could result in
entity level income or franchise taxation of a REMIC SAM Pool formed in,
owning mortgages or property in, or having servicing activity performed in
a state without conforming REMIC provisions in its income or franchise tax
law. Further, holders of REMIC Regular Certificates resident in
nonconforming states may have their ownership of REMIC Regular Certificates
characterized as an interest other than debt of the REMIC such as stock or
a partnership interest. Investors are advised to consult their tax advisors
concerning the state and local income tax consequences of their purchase,
ownership and disposition of REMIC Regular Certificates.
Taxation of U.S. Holders of Appreciation Certificates
The following discussion addresses only the United States federal
income tax consequences applicable to U.S. Holders of Appreciation
Certificates that are issued with respect to Mortgage Subsidy SAMs. If
Appreciation Certificates are issued with respect to Equity Release SAMs,
disclosure of any material United States federal income tax consequences to
U.S. Holders that differ from those described above will be provided in a
prospectus supplement.
An Appreciation Certificate will constitute a pool of stripped coupons
within the meaning of Section 1286(e) of the Code. There are no rules that
specifically govern the federal income consequences to U.S. Holders of
coupons stripped from loans that are subject to prepayment and provide for
contingent payments. In the absence of direct authority, the issuer, i.e.,
the Trust, will treat the Appreciation Certificates as newly-issued debt
instruments subject to Section 1272(a)(6) of the Code and Treasury
Regulation Section 1.1275-4 (the "Contingent Payment Debt Regulations").
There is no authority that prescribes the proper interaction between
Section 1272(a)(6) of the Code and the Contingent Payment Debt Regulations.
Therefore, there can be no assurance that the Internal Revenue Service will
agree with the treatment of the Appreciation Certificates set forth below.
Interest Accrual on the Appreciation Certificates. A U.S. Holder will
be required to accrue interest (including original issue discount) on an
Appreciation Certificate regardless of whether such U.S. Holder uses the
cash or accrual method of tax accounting. As a result, a U.S. Holder will
likely be required to include in its taxable income for a particular year
an amount of interest in excess of the cash payments received with respect
to an Appreciation Certificate in that year.
For each accrual period prior to and including the maturity date of an
Appreciation Certificate, the amount of interest that will accrue, as
original issue discount, on an Appreciation Certificate will equal (i) the
sum of (a) the present value of all remaining payments expected to be made
with respect to the Appreciation Certificate as of the close of such period
and (b) the payments made during the accrual period with respect to the
Appreciation Certificate over (ii) the Adjusted Issue Price (as defined
below) of the Appreciation Certificate at the beginning of the accrual
period. This amount is ratably allocated to each day in the accrual period
and is includible in income as interest by a U.S. Holder for each day in
the accrual period on which the U.S. Holder holds the Appreciation
Certificate.
The present value of all remaining payments expected to be made with
respect to an Appreciation Certificate will be determined by deriving the
Comparable Yield (as defined below) for the Appreciation Certificate and a
Projected Payment Schedule (as defined below) for the Appreciation
Certificate and discounting the projected payments at the comparable yield.
The "Comparable Yield" is the annual yield the issuer would be expected to
pay, as of the issue date, on a debt instrument with no contingent payments
but with terms and conditions otherwise comparable to those of an
Appreciation Certificate. Although there is no specific authority that
specifically authorizes an issuer to do so, the issuer will determine the
Comparable Yield based on an aggregate of the mortgage loans in the SAM
Pool rather than on a loan-by-loan basis. Similarly, although there is no
specific authority for the manner in which the Comparable Yield of an
Appreciation Certificate is to be determined, the issuer intends to take
the position that the Comparable Yield for an Appreciation Certificate is
equal to the rate that would be expected to apply to a stripped coupon that
paid interest monthly at a rate equal to the difference between the
Comparable Yield that would have been determined for the mortgage loans in
the SAM Pool had they not been stripped and the weighted average interest
rate on the Certificates that are not Appreciation Certificates. The
"Projected Payment Schedule" is a schedule of the payments expected to be
made with respect to the Appreciation Certificate, based upon reasonable
prepayment assumptions and the Comparable Yield. The "Adjusted Issue Price"
is the issue price of the Appreciation Certificate, increased by any
interest previously accrued and decreased by the amount of any payments
made with respect to the Appreciation Certificate. The issue price of an
Appreciation Certificate is the first price at which a substantial amount
of the Appreciation Certificates will be sold to the public (excluding
sales to bond houses and brokers). The issuer will make available to U.S.
Holders the amount of original issue discount accrued with respect to an
Appreciation Certificate for each accrual period.
Sale or Exchange of Appreciation Certificates. Upon the sale, exchange
or retirement of an Appreciation Certificate, a U.S. Holder will recognize
gain or loss equal to the difference between the amount realized and the
U.S. Holder's Adjusted Basis (as defined below) in the Appreciation
Certificate. A U.S. Holder's "Adjusted Basis" will be the U.S. Holder's
original basis in the Appreciation Certificate, increased by any interest
previously accrued by the U.S. Holder with respect to the Appreciation
Certificate and decreased by the amount of any payments made with respect
to the Appreciation Certificate. Any gain recognized upon the sale or
exchange of an Appreciation Certificate will be ordinary interest income;
any loss will be ordinary loss to the extent of interest previously
included in income by the U.S. Holder with respect to the Appreciation
Certificate, and thereafter, capital loss.
Because, however, there is no authority that clearly governs the
taxation of a U.S. Holder of an Appreciation Certificate, it is possible
that a U.S. Holder of an Appreciation Certificate could be subject to a
Unites States federal income tax regime different from that described
herein under which the amount and, possibly, the character of a U.S.
Holder's income inclusions and deductions would differ from those described
above.
EACH U.S. HOLDER IS URGED TO CONSULT ITS OWN TAX ADVISOR REGARDING THE
UNITED STATES FEDERAL INCOME TAX CONSEQUENCES OF THE ACQUISITION, OWNERSHIP
AND DISPOSITION OF AN APPRECIATION CERTIFICATE.
Taxation of Classes of Exchangeable Certificates
The arrangement pursuant to which the Exchangeable classes of a Series
("Exchangeable Classes") are created, sold and administered (an
"Exchangeable Pool") will be classified as a grantor trust under subpart E,
part I of subchapter J of the Code. The interests in the classes of
Certificates that have been exchanged for Exchangeable Classes will be the
assets of the Exchangeable Pool and the Exchangeable Classes represent
beneficial ownership of these interests in the classes of Certificates.
Tax Status
The Exchangeable Classes should be considered to represent "real estate
assets" within the meaning of Code Section 856(c)(4)(A) and assets
described in Section 7701(a)(19)(C) of the Code. Original issue discount
and interest accruing on Exchangeable Classes should be considered to
represent "interest on obligations secured by mortgages on real property"
within the meaning of Section 856(c)(3)(B) of the Code. Exchangeable
Classes will be "qualified mortgages" under Section 860G(a)(3) of the Code
for a REMIC.
Tax Accounting for Exchangeable Certificates
An Exchangeable Class represents beneficial ownership of an interest in
one or more classes of Certificates on deposit in an Exchangeable
Certificate Trust Fund, as specified in the applicable Prospectus
Supplement. If it represents an interest in more than one class of
Certificates, a purchaser must allocate its basis in the Exchangeable Class
among the interests in the classes of Certificates in accordance with their
relative fair market values as of the time of acquisition. Similarly, on
the sale of such an Exchangeable Class, the holder must allocate the amount
received on the sale among the interests in the classes of Certificates in
accordance with their relative fair market values as of the time of sale.
The holder of an Exchangeable Class must account separately for each
interest in a class of Certificates (there may be only one such interest).
Where the interest represents a pro rata portion of a class of
Certificates, the holder of the Exchangeable Class should account for such
interest as described under "--Taxation of Owners of REMIC Regular
Certificates" above. Where the interest represents beneficial ownership of
a disproportionate part of the principal and interest payments on a class
of Certificates (a "Strip"), the holder is treated as owning, pursuant to
Section 1286 of the Code, "stripped bonds" to the extent of its share of
principal payments and "stripped coupons" to the extent of its share of
interest payments on such class of Certificates. The Seller intends to
treat each Strip as a single debt instrument for purposes of information
reporting. The Internal Revenue Service, however, could take a different
position. For example, the IRS could contend that a Strip should be treated
as a pro rata part of the class of Certificates to the extent that the
Strip represents a pro rata portion thereof, and "stripped bonds" or
"stripped coupons" with respect to the remainder. An investor should
consult its tax advisor regarding this matter.
A holder of an Exchangeable Class should calculate original issue
discount with respect to each Strip and include it in ordinary income as it
accrues, which may be prior to the receipt of cash attributable to such
income, in accordance with a constant interest method that takes into
account the compounding of interest. See "--Taxation of Ownership of REMIC
Regular Certificates--Original Issue Discount" above. The holder should
determine its yield to maturity based on its purchase price allocated to
the Strip and on a schedule of payments projected using a prepayment
assumption, and then make periodic adjustments to take into account actual
prepayment experience. With respect to a particular holder, Treasury
regulations do not address whether the prepayment assumption used to
calculate original issue discount would be determined at the time of
purchase of the Strip or would be the original prepayment assumption with
respect to the related class of Certificates. Further, if the related class
of Certificates is subject to redemption as described in the applicable
Prospectus Supplement, Treasury regulations do not address the extent to
which such prepayment assumption should take into account the possibility
of the retirement of the Strip concurrently with the redemption of such
class of Certificates. An investor should consult its tax advisor regarding
these matters. For purposes of information reporting relating to original
issue discount, the original yield to maturity of the Strip, determined as
of the date of issuance of the Series, will be calculated based on the
original prepayment assumption.
If original issue discount accruing with respect to a Strip, computed
as described above, is negative for any period, the holder is entitled to
offset such amount only against future positive original issue discount
accruing from such Strip, and income is reported in all cases in this
manner. Although not entirely free from doubt, such a holder may be
entitled to deduct a loss to the extent that its remaining basis would
exceed the maximum amount of future payments to which the holder is
entitled with respect to such Strip, assuming no further prepayments of the
Mortgages (or, perhaps, assuming prepayments at a rate equal to the
prepayment assumption). Although the issue is not free from doubt, all or a
portion of such loss may be treated as a capital loss if the Strip is a
capital asset in the hands of the holder.
A holder realizes gain or loss on the sale of a Strip in an amount
equal to the difference between the amount realized and its adjusted basis
in such Strip. The holder's adjusted basis generally is equal to the
holder's allocated cost of the Strip, increased by income previously
included, and reduced (but not below zero) by distributions previously
received. Except as described below, any gain or loss on such sale is
capital gain or loss if the holder has held its interest as a capital asset
and is long-term if the interest has been held for the long-term capital
gain holding period (more than one year). Such gain or loss will be
ordinary income or loss (i) for a bank or thrift institution or (ii) to the
extent income recognized by the holder is less than the income that would
have been recognized if the yield on such interest were 110% of the
applicable federal rate under Section 1274(d) of the Code.
If a holder exchanges a single Exchangeable Class (an "Exchanged
Exchangeable Class") for several Exchangeable Classes (each, a "Received
Exchangeable Class") and then sells one of the Received Exchangeable
Classes, the sale will subject the investor to the coupon stripping rules
of Section 1286 of the Code. The holder must allocate its basis in the
Exchanged Exchangeable Class between the part of such class underlying the
Received Exchangeable Class that was sold and the part of the Exchanged
Exchangeable Class underlying the Received Exchangeable Classes that was
retained, in proportion to their relative fair market values as of the date
of such sale. The holder is treated as purchasing the interest retained for
the amount of basis allocated to such interest. The holder must calculate
original issue discount with respect to the retained interest as described
above.
Although the matter is not free from doubt, a holder that acquires in
one transaction a combination of Exchangeable Classes that may be exchanged
for a single Exchangeable Class that is identical to a class of
Certificates that is on deposit in the related Exchangeable Certificate
Trust Fund should be treated as owning the relevant class of Certificates.
Exchanges of Exchangeable Certificates
An exchange of an interest in one or more Exchangeable Classes for an
interest in one or more other related Exchangeable Classes that are part of
the same Combination, or vice versa, will not be a taxable exchange. After
the exchange, the holder is treated as continuing to own the interests in
the class or classes of Exchangeable Certificates that it owned immediately
prior to the exchange.
Tax Treatment of Foreign Investors
A holder of an Exchangeable Class is subject to taxation in the same
manner as foreign holders of REMIC Regular Certificates. See "Foreign
Investors in REMIC Certificates."
Backup Withholding
A holder of an Exchangeable Class is subject to backup withholding
rules to those applicable to REMIC Regular Certificates. See "--Backup
Withholding with Respect to REMIC Certificates."
Reporting and Administrative Matters
Reports will be made to the IRS and to holders of record of
Exchangeable Classes that are not excepted from the reporting requirements.
Methods of Distribution
The Certificates offered by the related Prospectus Supplements will be
offered in Series. The distribution of the Certificates may be effected
from time to time in one or more transactions, including negotiated
transactions, at a fixed public offering price or at varying prices to be
determined at the time of sale or at the time of commitment therefor. If so
specified in the related Prospectus Supplement, the Certificates will be
distributed in a firm commitment underwriting, subject to the terms and
conditions of the underwriting agreement, by Bear, Stearns & Co. Inc.
("Bear, Stearns"), an affiliate of the Depositor, acting as underwriter
with other underwriters, if any, named therein. In such event, the related
Prospectus Supplement may also specify that the underwriters will not only
be obligated to pay for any Certificates agreed to be purchased by
purchasers pursuant to purchase agreements acceptable to the Depositor. In
connection with the sale of the Certificates, underwriters may receive
compensation from the Depositor or from purchasers of the Certificates in
the form of discounts, concessions or commissions. The related Prospectus
Supplement will describe any such compensation paid by the Depositor.
Alternatively, the related Prospectus Supplement may specify that the
Certificates will be distributed by Bear, Stearns acting as agent or in
some cases as principal with respect to Certificates that it has previously
purchased or agreed to purchase. If Bear, Stearns acts as agent in the sale
of Securities, Bear Stearns will receive a selling commission with respect
to each Series of Certificates, depending on market conditions, expressed
as a percentage of the aggregate principal balance of the Certificates sold
hereunder as of the Cut-off Date. The exact percentage for each Series of
Certificates will be disclosed in the related Prospectus Supplement. To the
extent that Bear, Stearns elects to purchase Certificates as principal,
Bear, Stearns may realize losses or profits based upon the difference
between its purchase price and the sales price. The related Prospectus
Supplement with respect to any Series offered other than through
underwriters will contain information regarding the nature of such offering
and any agreements to be entered into between the Depositor and purchasers
of Certificates of such Series.
The Depositor will indemnify Bear, Stearns and any underwriters against
certain civil liabilities, including liabilities under the Securities Act
of 1933, or will contribute to payments Bear, Stearns and any underwriters
may be required to make in respect thereof.
In the ordinary course of business, Bear, Stearns and the Depositor may
engage in various securities and financing transactions, including
repurchase agreements to provide interim financing of the Depositor's
Mortgage Loans pending the sale of such Mortgage Loans or interests
therein, including the Certificates.
This Prospectus and the related Prospectus Supplement may be used by
Bear, Stearns in connection with offers and sales related to market-making
transactions in the Certificates. Bear, Stearns may act as principal or
agent in such transactions. Such sales will be made at prices related to
prevailing market prices at the time of sale or otherwise.
The Depositor anticipates that the Certificates will be sold primarily
to institutional investors. Purchasers of Certificates, including dealers,
may, depending on the facts and circumstances of such purchases, be deemed
to be "underwriters" within the meaning of the Act in connection with
reoffers and sales by them of Certificates. Certificateholders should
consult with their legal advisors in this regard prior to any such reoffer
or sale.
Certain Legal Investment Aspects
Unless otherwise stated in the applicable Prospectus Supplement, at the
time of their issuance, the Certificates which are rated "AAA" or "AA" by a
bank or a nationally recognized statistical rating agency will constitute
"mortgage related securities" for purposes of the Secondary Mortgage Market
Enhancement Act of 1984 ("SMMEA"), and as such will be legal investments
for persons, trusts, corporations, partnerships, associations, business
trusts and business entities (including depository institutions, life
insurance companies and pension funds) created pursuant to or existing
under the laws of the United States or of any state whose authorized
investments are subject to state regulation to the same extent that, under
applicable law, obligations issued by or guaranteed as to principal and
interest by the United States or any agency or instrumentality thereof
constitute legal investments for such entities. Under SMMEA, if a state
enacted legislation prior to October 4, 1991 specifically limiting the
legal investment authority of any of such entities with respect to
"mortgage related securities," the Certificates will constitute legal
investments for entities subject to such legislation only to the extent
provided therein. Certain states have enacted such legislation. Investors
should consult their own legal advisors in determining whether and to what
extent the Certificates constitute legal investments for such investors.
SMMEA also amended the legal investment authority of
federally-chartered depository institutions as follows: federal savings and
loan associations and federal savings banks may invest in, sell or
otherwise deal with Certificates without limitation as to the percentage of
their assets represented thereby; and federal credit unions may invest in
Certificates and national banks may purchase Certificates for their own
accounts without regard to the limitations generally applicable to
investment securities set forth in 12 U.S.C. ss.ss.24 (Seventh), subject in
each case to such regulations as the applicable federal regulatory
authority may prescribe.
Institutions whose investment activities are subject to review by
certain regulatory authorities hereafter may become subject to restrictions
on investment in the Certificates, and such restrictions may be
retroactively imposed. The Federal Financial Institutions Examination
Council, the Federal Deposit Insurance Corporation, the Office of the
Comptroller of the Currency, the Board of Governors of the Federal Reserve
System and the OTS have adopted guidelines regarding the suitability of
investments in various types of derivative mortgage-backed securities,
including securities such as the Certificates. Under the guidelines,
regulated institutions are required to evaluate the suitability of such
investments prior to purchase and on an ongoing basis. In addition, several
states have adopted regulations that would prohibit regulated institutions
subject to their jurisdiction from holding mortgage-backed securities, such
as the Certificates, including securities previously purchased. Investors
should consult their own legal advisors in determining whether and to what
extent the Certificates constitute legal investments for such investors.
There may be other restrictions on the ability of certain investors,
including depository institutions, either to purchase Certificates or to
purchase Certificates representing more than a specified percentage of such
investors' assets. Investors should consult their own legal advisors in
determining whether and to what extent the Certificates constitute legal
investments for such investors.
Legal Matters
Unless otherwise specified in the Prospectus Supplement, certain legal
matters will be passed upon for the Depositor and the Underwriters, by
their special counsel, Skadden, Arps, Slate, Meagher & Flom LLP, New York,
New York.
Financial Information
A new Trust will be formed with respect to each Series of Certificates
and no Trust Fund will engage in any business activities or have any assets
or obligations prior to the issuance of the related Series of Certificates.
Accordingly, no financial statements with respect to any Trust Fund will be
included in this Prospectus or in the related Prospectus Supplement.
Reports to Certificateholders
Unless and until Definitive Certificates are issued, monthly and annual
reports, containing information concerning each Trust and prepared by the
Master Servicer or the Servicer, will be sent on behalf of such Trust to
Cede as nominee of DTC and registered holder of the related Certificates,
pursuant to the related Pooling Agreement. See "Description of the
Certificates - Book-Entry Registration." "-Reports to Certificateholders"
and "-Evidence as to Compliance." Such reports will not constitute
financial statements prepared in accordance with generally accepted
accounting principles. The Servicer does not intend to send any financial
reports of SAMCO Mortgage Securities Corp. to Certificateholders. The
Master Servicer or the Servicer will file with the SEC such periodic
reports with respect to each Trust as are required under the Exchange Act
and the rules and regulations of the SEC thereunder.
Where You Can Find More Information
We filed a registration statement relating to the Certificates with the
SEC. This Prospectus is part of the registration statement, but the
registration statement includes additional information.
The Servicer will file with the SEC all required annual, monthly and
special SEC reports and other information about each Trust.
You may read and copy any reports, statements or other information we
file at the SEC's public reference room at 450 Fifth Street, N.W.,
Washington, D.C. 20549. You can request copies of these documents, upon
payment of a duplicating fee, by writing to the SEC. Please call the SEC at
(800) SEC-0330 for further information on the operation of the public
reference rooms. Our SEC filings are also available to the public on the
SEC Internet site (http://www.sec.gov).
The SEC allows us to "incorporate by reference" information we file
with it, which means that we can disclose important information to you by
referring you to those documents. The information incorporated by reference
is considered to be part of this Prospectus. Information that we file later
with the SEC will automatically update the information in this Prospectus.
In all cases, you should rely on the later information over different
information included in this Prospectus or the Prospectus Supplement. We
incorporate by reference any future annual, monthly and special SEC reports
and proxy materials filed by or on behalf of the Trust until we terminate
our offering of the Certificates.
As a recipient of this Prospectus, you may request a copy of any
document we incorporate by reference, except exhibits to the documents
(unless the exhibits are specifically incorporated by reference), at no
cost, by writing or calling us at: 245 Park Avenue, New York, New York
10167, telephone (212) 272-2000.
Index of Terms for Prospectus
Set forth below is a list of certain of the more significant terms used
in this Prospectus and the pages on which the definitions of such terms may
be found.
Accepted Servicing Practices..............................................48
Accrual Class.............................................................55
Act.......................................................................29
Additional Interest Payment...............................................29
Adjusted Basis...........................................................104
Adjusted Issue Price.....................................................103
Adjusted Value............................................................30
Advances..................................................................14
AFR.......................................................................95
Agency Securities.........................................................10
AMTs......................................................................71
Annual Interest Amount....................................................55
Appreciation Certificate..................................................23
Appreciation Share........................................................29
Asset Conservation Act....................................................77
Bankruptcy Code...........................................................66
Bankruptcy Instrument.....................................................62
Bankruptcy Loss...........................................................62
Bear, Stearns............................................................106
BSMCC.....................................................................11
Budget Act................................................................98
Call Class................................................................32
Call Right................................................................91
Callable Class............................................................32
Callable Class Certificate................................................91
CAR.......................................................................25
Casualty..................................................................30
Casualty Adjustment.......................................................30
Cede......................................................................33
Cedelbank.................................................................32
Cedelbank Customers.......................................................35
CERCLA....................................................................76
Certificate Administrator.................................................11
Certificate Administrator Fee.............................................13
Certificate Insurance Policies............................................68
Certificateholder.........................................................33
Certificates.......................................................11, II-10
Charter Act...............................................................16
Class Appreciation Distribution Amount....................................44
Class Factor..............................................................59
Class Principal Distribution Amount.......................................44
Class Total Distribution Amount...........................................43
CMOs......................................................................10
Collection Account........................................................40
Combinations..............................................................54
Commission................................................................12
Comparable Yield.........................................................103
Compensating Interest.....................................................24
Condemnation Adjustment...................................................30
Constant Appreciation Rate................................................25
Constant Prepayment Rate..................................................25
Contingent Payment Debt Regulations......................................103
Cooperative...............................................................35
CPR.......................................................................25
Curtailment...............................................................24
Cut-Off Date..............................................................11
D&P.......................................................................81
Defaulted Mortgage Loss...................................................62
Definitive Certificates...................................................36
Depositaries..............................................................33
Depositor..........................................................11, II-10
Depositor Employees.......................................................62
Determination Date........................................................44
Distribution Account......................................................41
Distribution Date.........................................................32
Distribution Period.......................................................42
DOL.......................................................................79
DTC.......................................................................32
Due Date..................................................................24
ECOA......................................................................73
Eligible Investments......................................................68
EPA.......................................................................77
Equity Release SAM........................................................29
Equity Release SAMs.......................................................10
ERISA.....................................................................78
Errors and Omissions Insurance Policy.....................................62
Euroclear.................................................................35
Euroclear Operator........................................................35
Euroclear Participants....................................................35
Events of Default.........................................................49
Exchangeable Certificate Trust Fund.......................................54
Exchangeable Certificates.................................................32
Exchangeable Class........................................................32
Exchangeable Classes.....................................................104
Exchangeable Pool........................................................104
Exchanged Exchangeable Class.............................................105
Extraordinary Losses......................................................62
Federal Thrifts...........................................................71
FH Act....................................................................73
FHA.......................................................................14
FHA Loans.................................................................14
FHLBB.....................................................................71
FHLMC Act.................................................................17
FHLMC Certificates........................................................10
Fidelity Bond.............................................................62
Fitch.....................................................................81
Floating Rate Class.......................................................55
FNMA Certificates.........................................................10
Fraud Bond................................................................65
Fraud Instrument..........................................................62
Fraud Loss................................................................62
Garn-St Germain Act.......................................................76
General Account Regulations...............................................82
Global Securities........................................................A-1
GNMA......................................................................14
GNMA Certificates.........................................................10
GNMA Issuer...............................................................14
Guaranty Agreement........................................................15
Hazard Insurance Policy...................................................60
Holders...................................................................37
Housing Act...............................................................14
HUD.......................................................................20
Implied Market Rate.......................................................38
Indexed Appreciation Payment..............................................38
Indirect Participants.....................................................33
Insurance Proceeds........................................................41
Insured Expenses..........................................................41
Inverse Floating Rate Class...............................................55
Jumbo SAM.................................................................29
Letter of Credit..........................................................67
Letter of Credit Bank.....................................................67
Liquidation Expenses......................................................41
Liquidation Proceeds......................................................41
LTV.......................................................................28
Master Servicer...........................................................11
Master Servicing Fee......................................................13
MGT/EOC...................................................................35
Monetary Control Act......................................................72
Moody's...................................................................81
Mortgage Banker's Blanket Bond............................................62
Mortgage Notes............................................................10
Mortgage Subsidy SAM......................................................28
Mortgage Subsidy SAMs.....................................................10
Mortgage Termination Event................................................31
Mortgaged Properties......................................................10
Mortgages.................................................................10
Mortgagor.................................................................11
Multiple Variable Rate....................................................87
Non-U.S. Person..........................................................101
OCC.......................................................................71
OID Regulations...........................................................84
Original Value............................................................30
Originators...............................................................26
OTS.......................................................................31
Parity Act................................................................71
Participants..............................................................33
Parties in Interest.......................................................78
Pass-Through Rate.........................................................23
Paying Agent..............................................................32
Payoff....................................................................24
Percentage Interest.......................................................43
Permitted Transfer........................................................31
Plan Asset Investors......................................................78
Plan Assets...............................................................78
Planned Amortization Class................................................55
Plans.....................................................................78
PMBS Agreement............................................................20
PMBS Issuer...............................................................20
PMBS Servicer.............................................................20
PMBS Trustee..............................................................20
Pool Insurance Policy.....................................................63
Pool Insurer..............................................................63
Pooling Agreement.........................................................13
Pooling Agreements.....................................................II-10
Post-Improvement Appraised Value..........................................30
Pre-Improvement Appraised Value...........................................30
Prepayment Assumption.....................................................85
Primary Insurance Policy..................................................60
Primary Insurer...........................................................60
Principal Balance.........................................................29
Principal Prepayments.....................................................25
Private Mortgage-Backed Securities........................................10
Projected Payment Schedule...............................................103
PTCE 83-1.................................................................79
PTE.......................................................................81
PTE 90-30.................................................................81
Qualified Insurer.........................................................27
Qualifying Major Home Improvement.........................................30
Rating Agency.............................................................40
RCRA......................................................................77
Received Exchangeable Class..............................................105
Record Date...............................................................32
Regulation................................................................79
REIT......................................................................97
Relief Act................................................................76
REMIC.....................................................................83
REMIC Certificates........................................................83
REMIC Provisions..........................................................83
REMIC Regular Certificate.................................................84
REMIC Regulations.........................................................84
REMIC Residual Certificate................................................84
REMIC SAM Pool............................................................83
Remittance Rate...........................................................13
Reserve Account...........................................................65
Reserve Fund..............................................................68
Residual Owner............................................................93
Restricted Group..........................................................82
Retained Yield............................................................40
Rules.....................................................................34
S&P.......................................................................81
Sale and Servicing Agreement..........................................38, 47
Sales Price...............................................................30
SAM Percentage............................................................29
SAM Pool..................................................................10
SAMs......................................................................10
Sellers...................................................................11
Senior Certificates.......................................................64
Series...............................................................11, A-1
Servicer..................................................................11
Servicing Agreement.......................................................13
Servicing Fee.............................................................13
Settlement Value..........................................................30
Simplification Act........................................................98
Single Variable Rate......................................................86
SMMEA....................................................................107
Special Hazard Instrument.................................................62
Special Hazard Insurance Policy...........................................66
Special Hazard Insurer....................................................66
Special Hazard Loss.......................................................62
Stated Interest...........................................................28
Stated Interest Rate......................................................28
Stated Interest Rates.....................................................12
Strip....................................................................105
Subordinated Certificates.................................................64
Termination Date..........................................................29
Terms and Conditions......................................................36
The SAM Pools.............................................................38
TIL Act...................................................................73
Trust Assets..............................................................13
Trust Fund................................................................13
Trustee............................................................13, II-10
U.S. Person.........................................................101, A-4
VA........................................................................14
VA Loans..................................................................14
Volatility................................................................26
Weighted average life.....................................................25
Annex I
Global Clearance, Settlement
and Tax Documentation Procedures
Except in certain limited circumstances, the globally offered
Mortgage Pass-Through Certificates (the "Global Securities") to be issued
in Series from time to time (each, a "Series") will be available only in
book-entry form. Investors in the Global Securities may hold such Global
Securities through any of the DTC, Cedelbank or Euroclear. The Global
Securities will be tradeable as home market instruments in both the
European and U.S. domestic markets. Initial settlement and all secondary
trades will settle in same-day funds.
Secondary market trading between investors holding Global
Securities through Cedelbank and Euroclear will be conducted in the
ordinary way in accordance with their normal rules and operating procedures
and in accordance with conventional eurobond practice (i.e., seven calendar
day settlement).
Secondary market trading between investors holding Global
Securities through DTC will be conducted according to the rules and
procedures applicable to U.S. corporate debt obligations.
Secondary cross-market trading between Cedelbank or Euroclear and
DTC Participants holding Certificates will be effected on a
delivery-against-payment basis through the respective Depositaries of
Cedelbank and Euroclear (in such capacity) and as DTC Participants.
Non-U.S. holders (as described below) of Global Securities will be
subject to U.S. withholding taxes unless such holders meet certain
requirements and deliver appropriate U.S. tax documents to the securities
clearing organization or their participants.
Initial Settlement
All Global Securities will be held in book-entry form by DTC in the
name of Cede & Co. as nominee of DTC. Investors' interests in the Global
Securities will be represented through financial institutions acting on
their behalf as direct and indirect Participants in DTC. As a result,
Cedelbank and Euroclear will hold positions on behalf of their participants
through their respective Depositaries, which in turn will hold such
positions in accounts as DTC Participants.
Investors electing to hold their Global Securities through DTC will
follow the settlement practices applicable to prior Mortgage Pass-Through
Certificates. Investor securities custody accounts will be credited with
their holdings against payment in same-day funds on the settlement date.
Investors electing to hold their Global Securities through
Cedelbank or Euroclear accounts will follow the settlement procedures
applicable to conventional eurobonds, except that there will be no
temporary global security and no "lock-up" or restricted period. Global
Securities will be credited to the securities custody accounts on the
settlement date against payment in same-day funds.
Secondary Market Trading
Since the purchaser determines the place of delivery, it is
important to establish at the time of the trade where both the purchaser's
and seller's accounts are located to ensure that settlement can be made on
the desired value date.
Trading between DTC Participants. Secondary market trading between
DTC Participants will be settled using the procedures applicable to prior
Mortgage Pass-Through Certificates issues in same-day funds.
Trading between Cedelbank Customers and/or Euroclear Participants.
Secondary market trading between Cedelbank Customers or Euroclear
Participants will be settled using the procedures applicable to
conventional eurobonds in same-day funds.
Trading between DTC seller and Cedelbank or Euroclear purchaser.
When Global Securities are to be transferred from the account of a DTC
Participant to the account of a Cedelbank Customer or a Euroclear
Participant, the purchaser will send instructions to Cedelbank or Euroclear
through a Cedelbank Customer or Euroclear Participant at least one business
day prior to settlement. Cedelbank or Euroclear will instruct the
respective Depositary, as the case may be, to receive the Global Securities
against payment. Payment will include interest accrued on the Global
Securities from and including the last coupon payment date to and excluding
the settlement date. Payment will then be made by the respective Depositary
to the DTC Participant's account against delivery of the Global Securities.
After settlement has been completed, the Global Securities will be credited
to the respective clearing system and by the clearing system, in accordance
with its usual procedures, to the Cedelbank Customer's or Euroclear
Participant's account. The Global Securities credit will appear the next
day (European time) and the cash debit will be back-valued to, and the
interest on the Global Securities will accrue from, the value date (which
would be the preceding day when settlement occurred in New York). If
settlement is not completed on the intended value date (i.e., the trade
fails), the Cedelbank or Euroclear cash debit will be valued instead as of
the actual settlement date.
Cedelbank Customers and Euroclear Participants will need to make
available to the respective clearing systems the funds necessary to process
same-day funds settlement. The most direct means of doing so is to
preposition funds for settlement, either from cash on hand or existing
lines of credit, as they would for any settlement occurring within
Cedelbank or Euroclear. Under this approach, they may take on credit
exposure to Cedelbank or Euroclear until the Global Securities are credited
to their accounts one day later.
As an alternative, if Cedelbank or Euroclear has extended a line of
credit to them, Cedelbank Customers or Euroclear Participants can elect not
to pre-position funds and allow that credit line to be drawn upon the
finance settlement. Under this procedure, Cedelbank Customers or Euroclear
Participants purchasing Global Securities would incur overdraft charges for
one day, assuming they cleared the overdraft when the Global Securities
were credited to their accounts. However, interest on the Global Securities
would accrue from the value date. Therefore, in many cases the investment
income on the Global Securities earned during that one-day period may
substantially reduce or offset the amount of such overdraft charges,
although this result will depend on each Cedelbank Customer's or Euroclear
Participant's particular cost of funds.
Since the settlement is taking place during New York business
hours, DTC Participants can employ their usual procedures for sending
Global Securities to the respective Depositary for the benefit of Cedelbank
Customers or Euroclear Participants. The sale proceeds will be available to
the DTC seller on the settlement date. Thus, to the DTC Participant a
cross-market transaction will settle no differently than a trade between
two DTC Participants.
Trading between Cedelbank or Euroclear seller and DTC purchaser.
Due to time zone differences in their favor, Cedelbank Customers and
Euroclear Participants may employ their customary procedures for
transactions in which Global Securities are to be transferred by the
respective clearing system, through the respective Depositary, to a DTC
Participant. The seller will send instructions to Cedelbank or Euroclear
through a Cedelbank Customer or Euroclear Participant at least one business
day prior to settlement. In these cases, Cedelbank or Euroclear will
instruct the respective Depositary, as appropriate, to deliver the bonds to
the DTC Participant's account against payment. Payment will include
interest accrued on the Global Securities from and including the last
coupon payment date to and excluding the settlement date. The payment will
then be reflected in the account of the Cedelbank Customer or Euroclear
Participant the following day, and receipt of the cash proceeds in the
Cedelbank Customer's or Euroclear Participant's account would be
back-valued to the value date (which would be the preceding day, when
settlement occurred in New York). Should the Cedelbank Customer or
Euroclear Participant have a line of credit with its respective clearing
system and elect to be in debit in anticipation of receipt of the sale
proceeds in its account, the back-valuation will extinguish any overdraft
charges incurred over that one-day period. If settlement is not completed
on the intended value date (i.e., the trade fails), receipt of the cash
proceeds in the Cedelbank Customer's or Euroclear Participant's account
would instead be valued as of the actual settlement date. Finally, day
traders that use Cedelbank or Euroclear and that purchase Global Securities
from DTC Participants for delivery to Cedelbank Customers or Euroclear
Participants should note that these trades would automatically fail on the
sale side unless affirmative action were taken. At least three techniques
should be readily available to eliminate this potential problem:
(a) borrowing through Cedelbank or Euroclear for one day
(until the purchase side of the day trade is reflected in their
Cedelbank or Euroclear accounts) in accordance with the clearing
system's customary procedures;
(b) borrowing the Global Securities in the U.S. from a DTC
Participant no later than one day prior to settlement, which would
give the Global Securities sufficient time to be reflected in their
Cedelbank or Euroclear account in order to settle the sale side of
the trade; or
(c) staggering the value dates for the buy and sell sides of
the trade so that the value date for the purchase from the DTC
Participant is at least one day prior to the value date for the
sale to the Cedelbank Customer or Euroclear Participant.
Certain U.S. Federal Income Tax Documentation Requirements
A beneficial owner of Global Securities holding securities through
Cedelbank or Euroclear (or through DTC if the holder has an address outside
the U.S.) will be subject to the 30% U.S. withholding tax that generally
applies to payments of interest (including original issue discount) on
registered debt issued by U.S. Persons, unless, under currently applicable
law, (i) each clearing system, bank or other financial institution that
holds customers' securities in the ordinary course of its trade or business
in the chain of intermediaries between such beneficial owner and the U.S.
entity required to withhold tax complies with applicable certification
requirements and (ii) such beneficial owner takes one of the following
steps to obtain an exemption or reduced tax rate:
Exemption for non-U.S. Persons (Form W-8). Beneficial owners
of Certificates that are non-U.S. Persons generally can obtain a
complete exemption from the withholding tax by filing a signed Form
W-8 (Certificate of Foreign Status). If the information shown on
Form W-8 changes, a new Form W-8 must be filed within 30 days of
such change.
Exemption for non-U.S. Persons with effectively connected
income (Form 4224). A non-U.S. Person, including a non-U.S.
corporation or bank with a U.S. branch, for which the interest
income is effectively connected with its conduct of a trade or
business in the United States, can obtain an exemption from the
withholding tax by filing Form 4224 (Exemption from Withholding of
Tax on Income Effectively Connected with the conduct of a Trade or
Business in the United States).
Exemption or reduced rate for non-U.S. Persons resident in
treaty countries (Form 1001). Non-U.S. Persons that are
Certificateholders residing in a country that has a tax treaty with
the United States can obtain an exemption or reduced tax rate
(depending on the treaty terms) by filing Form 1001 (Ownership,
Exemption or Reduced Rate Certificate). If the treaty provides only
for a reduced rate, withholding tax will be imposed at that rate
unless the filer alternatively files Form W-8. Form 1001 may be
filed by the Certificateholder or his agent.
Exemption for U.S. Persons (Form W-9). U.S. Persons can
obtain a complete exemption from the withholding tax by filing Form
W-9 (Payer's Request for Taxpayer Identification Number and
Certification).
U.S. Federal Income Tax Reporting Procedure. The Certificate
Owner of a Global Security or, in the case of a Form 1001 or a Form
4224 filer, his agent, files by submitting the appropriate form to
the person through whom it holds (the clearing agency, in the case
of persons holding directly on the books of the clearing agency).
Form W-8 and Form 1001 are effective for three calendar years and
Form 4224 is effective for one calendar year.
The term "U.S. Person" means (i) a citizen or resident of the
United States, (ii) a corporation or partnership organized in or under the
laws of the United States, any state thereof, or any political subdivision
of either (including the District of Columbia), or (iii) an estate or trust
the income of which is includible in gross income for United States tax
purposes regardless of its source. This summary does not deal with all
aspects of U.S. Federal income tax withholding that may be relevant to
foreign holders of the Global Securities. Investors are advised to consult
their own tax advisors for specific tax advice concerning their holding and
disposing of the Global Securities. Further, the U.S. Treasury Department
has recently finalized new regulations that will revise some aspects of the
current system for withholding on amounts paid to foreign persons. Under
these regulations, interest or original issue discount paid to a
nonresident alien would continue to be exempt from U.S. withholding taxes
(including backup withholding) provided that the holder complies with the
new certification procedures.
Part II
Information Not Required in Prospectus
Item 14. Other Expenses of Issuance and Distribution.
Registration fee............................. $278.00
Printing and engraving....................... *
Legal fees and expenses ..................... *
Accounting fees and expenses................. *
Trustee's fees and expenses ................. *
Blue Sky Qualification Fees and Expenses
(including Counsel Fees)............. *
Rating Agency Fee............................ *
Miscellaneous ............................... *
Total......................... $278.00
- ------------
* To be determined based upon the number of issuances and the specific
circumstances of each issuance.
Item 15. Indemnification of Directors and Officers.
Section 145 of the General Corporation Law of the State of
Delaware, as amended, under which the Registrant is incorporated, empowers
a corporation, subject to certain limitations, to indemnify its directors
and officers against the actual and reasonable expenses of defending
litigation against them in their capacities as directors and officers.
Section 13 of Article III of SAMCO Mortgage Securities Corp.'s
By-Laws provides as follows:
The provisions of this Section 13 shall apply to the
directors and officers of the corporation in accordance with
Article III and V of these By-Laws as more fully set forth herein.
(1) As used in this Article:
(a) "acted properly" as to any person shall mean that
such person acted in good faith; acted in a manner
not clearly opposed to any written policy of the
corporation or which he reasonably believed to be in
the best interests of the corporation; and with
respect to any criminal action or proceeding, had no
reasonable cause to believe that this conduct was
unlawful. The termination of any proceeding by
judgment, order, settlement, conviction, or upon a
plea of nolo contendere or its equivalent, shall not,
of itself, create a presumption that the person did
not act properly.
(b) "agent" shall mean any person who is or was a
director, officer or employee of the corporation
and/or any subsidiary; a trustee or a fiduciary under
any employee pension, profit sharing, welfare or
similar plan or trust of the corporation and/or any
subsidiary; serving at the request of the corporation
as a director, officer and/or employee of or in a
similar capacity in another corporation, partnership,
joint venture, trust or other enterprise (which
shall, for the purpose of this Article be deemed to
include not-for-profit or for-profit entities of any
type), whether acting in such capacity or in any
other capacity including, without limitation, as a
trustee or fiduciary under any employee pension,
profit sharing, welfare or similar plan or trust.
(c) "expenses" shall include attorneys' fees and any
expenses of establishing a right to indemnification
under this Article.
(d) "proceeding" shall mean any threatened, pending or
completed action or proceeding, whether civil or
criminal, and whether judicial, legislative or
administrative and shall include investigative action
by any person or body.
(e) "subsidiary" shall mean a corporation, 50% or more of
the shares of which at the time outstanding have
voting power for the election of directors, is owned
directly or indirectly by the corporation or by one
or more subsidiaries or by the corporation and one or
more subsidiaries.
(2) The corporation shall indemnify any person who was or is a
party or is threatened to be made a party to any proceeding
(other than an action by or in the right of the corporation)
by reason of the fact that such person is or was an agent
against expenses, judgments, fines and amounts paid in
settlement actually and reasonably incurred by him in
connection with such proceeding if such person acted
properly.
(3) The corporation shall indemnify any person who was or is a
party or is threatened to be made a party to any proceeding
by or in the right of the corporation to procure a judgment
in its favor by reason of the fact that such person is or
was an agent against amounts paid in settlement and against
expenses actually and reasonably incurred by him in
connection with the defense or settlement of such proceeding
if he acted properly, except that no indemnification shall
be made in respect of any claim, issue or matter as to which
such person shall have been adjudged to be liable for
negligence or misconduct in the performance of his duty to
the corporation unless and only to the extent that the Court
of Chancery or the court in which such action or suit was
brought shall determine upon application that, despite the
adjudication of liability but in view of all the
circumstances of the case, such person is fairly and
reasonably entitled to indemnity for such expenses which the
Court of Chancery or such other court shall deem proper.
(4) Expenses incurred in deferring a proceeding shall be paid by
the corporation to or on behalf of an agent in advance of
the final disposition of such proceeding if:
(a) there is a reasonable basis to believe that such
agent may be entitled to indemnification under this
Article;
(b) such advance payments would not result in undue
financial hardship to the corporation; and
(c) the corporation shall have received an undertaking by
or on behalf of such agent to repay such amount
unless it shall ultimately be determined that he is
entitled to be indemnified by the corporation as
authorized in this Article.
(5) Any indemnification or advance under paragraph (b), (c) or
(d) of this Article (unless ordered by a court) shall be
made by the corporation only as authorized in the specific
proceeding upon a determination that indemnification or
advancement to such person is proper in the circumstances.
Such determination shall be made
(a) by the Chairman of the Board so long as he was not made a
party to such proceeding;
(b) if the Chairman of the Board were made a party by the
Board of Directors, by a majority vote of a quorum
consisting of directors who were not made parties to
such proceeding;
(c) if such a quorum is not obtainable, or, even if
obtainable a quorum of disinterested directors so
directs, by independent legal counsel in a written
opinion, or
(d) by the shareholders.
(6) The corporation shall indemnify or advance funds to any
person described in Section (a)(ii)(C) only after such
person shall have sought indemnification or an advance from
the corporation, partnership, pint venture, trust or other
enterprise in which he was serving at the corporation's
request, shall have failed to receive such indemnification
or advance and shall have assigned irrevocable to the
corporation any right to receive indemnification which he
might be entitled to assert against such other corporation,
partnership, joint venture, trust or other enterprise.
(7) The indemnification provided to an agent by this Article
(a) shall not be deemed exclusive of any other rights to
which such agent may be entitled by law or under any
articles of incorporation, By-Law, agreement, vote of
shareholders or disinterested directors or otherwise;
and
(b) shall inure to the benefit of the legal
representatives of such agent or his estate, whether
such representatives are court appointed or otherwise
designated, and to the benefit of the heirs of such
agent.
(8) The indemnification and advances provided to an agent by
this Article shall extend to and include claims for such
payments arising out of any proceeding commenced or based on
actions of an agent taken prior to the effective date of
this Article; provided that payment of such claims had not
been agreed to or denied by the corporation at the effective
date.
(9) The invalidity or unenforceability of any provision in this
Article shall not affect the validity or enforceability of
the remaining provisions of this Article.
There is directors' and officers' liability insurance presently
outstanding, which insures directors and officers of SAMCO Mortgage
Securities Corp. against claims arising out of the performance of their
duties.
The Pooling Agreement for each Series of Certificates will provide
that no director, officer, employee or agent of SAMCO Mortgage Securities
Corp. is liable to any holder of Certificates or to the trustee on behalf
of the holders of such Certificates, or to any other person, except on
account of such director's, officer's, employee's or agent's own willful
misfeasance, bad faith, gross negligence or reckless disregard of duty. The
Pooling Agreement for each Series will further provide that, with the
exceptions stated above, a director, officer, employee or agent of SAMCO
Mortgage Securities Corp. is entitled to be indemnified by the Trust Fund
against all liability in connection with the mortgage pool evidenced by
such Series.
Item 16. Exhibits
Exhibit Description of Exhibit
- ------- ----------------------
1.1 Form of Underwriting Agreement (to be utilized for firm
commitment underwritings and public reoffering by
underwriters).
1.2 Form of Purchase Agreement (to be utilized for sales by the
Registrant and placement agents primarily to institutional
purchasers).
3.1 Certificate of Incorporation of SAMCO Mortgage Securities Corp.
3.2 By-Laws of SAMCO Mortgage Securities Corp.
4.1 Form of Sale and Servicing Agreement between Depositor and
applicable Master Servicer or Servicer, including Forms of
Certificates as exhibits thereto.
4.2 Form of Pooling Agreement between Depositor and Trustee,
including Forms of Certificates as exhibits thereto.
4.3 Form of typical Pool Insurance Policy.
4.4 Form of typical Special Hazard Insurance Policy.
4.5 Form of typical Primary Insurance Policy.
4.6 Form of typical Bankruptcy Bond.
4.7 Form of typical Fraud Bond.
4.8 Form of typical Letter of Credit.
5.1 Opinion of Skadden, Arps, Slate, Meagher & Flom LLP with
respect to the Certificates.
8.1 Opinion of Skadden, Arps, Slate, Meagher & Flom LLP with
respect to tax matters.
24.1 Consent of Skadden, Arps, Slate, Meagher & Flom LLP
(included in Exhibit 5.1 hereto).
24.2 Consent of Skadden, Arps, Slate, Meagher & Flom LLP
(included in Exhibit 8.1 hereto).
25.1 Powers of Attorney (included in signature page hereto).
Item 17. Undertakings.
SAMCO Mortgage Securities Corp. hereby undertakes:
1. To file, during any period in which offers or sales are
being made, a post-effective amendment to this Registration
Statement: (i) to include any prospectus required by Section
10(a)(3) of the Securities Act of 1933; (ii) to reflect in the
prospectus any facts or events arising after the effective date of
the Registration Statement (or the most recent post-effective
amendment thereof) which individually or in the aggregate,
represent a fundamental change in the information set forth in the
Registration Statement; and (iii) to include any material
information with respect to the plan of distribution not previously
disclosed in the Registration Statement or any material change to
such information in the Registration Statement.
2. That, for the purpose of determining any liability under
the Securities Act of 1933, each such post-effective amendment
shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at
that time shall be deemed to be the initial bona fide offering
thereof.
3. To remove from registration by means of a post-effective
amendment any of the securities being registered which remain
unsold at the termination of the offering.
4. That, for purposes of determining any liability under the
Securities Act of 1933, each filing of the Registrant's annual
report pursuant to Section 13(a) or Section 15(d) of the Securities
Exchange Act of 1934 that is incorporated by reference in the
Registration Statement shall be deemed to be a new registration
statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers or persons
controlling SAMCO Mortgage Securities Corp. pursuant to the foregoing
provisions, SAMCO Mortgage Securities Corp. has been informed that in the
opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by SAMCO Mortgage Securities Corp. of
expenses incurred or paid by a director, officer or controlling person of
SAMCO Mortgage Securities Corp. in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, SAMCO Mortgage
Securities Corp. will, unless in the opinion of its counsel the matter has
been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against
public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
SAMCO Mortgage Securities Corp. hereby undertakes that, for
purposes of determining any liability under the Securities Act of 1933,
each filing of the Registrant's annual report pursuant to Section 15(d) of
the Securities Exchange Act of 1934 that is incorporated by reference in
the Registration Statement shall be deemed to be a new registration
statement relating to the securities offered therein, and the offering of
such securities at that time shall be deemed to be the initial bona fide
offering thereof.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as
amended, the Registrant certifies that it has reasonable grounds to believe
that it meets all of the requirements for filing on Form S-3 and has duly
caused this Registration Statement to be signed on its behalf by the
undersigned, hereunto duly authorized, in the City of New York, State of
New York, on the 25th day of May, 1999.
SAMCO MORTGAGE SECURITIES CORP.
as Depositor
By: /S/ Jeffery Mayer
--------------------------
Jeffery Mayer
Principal Executive Officer
Each person whose signature appears below does hereby make,
constitute and appoint Paul M. Friedman, Howard Rubin, Joseph T. Jurkowski
Jr., and Samuel L. Molinaro as his/her true and lawful attorney with power
to execute, deliver and file, for and on his or her behalf, and in his or
her name and in his or her capacity or capacities as stated below, any
amendment or amendments to this Registration Statement, making such changes
in the Registration Statement as such person deems appropriate.
Pursuant to the requirements of the Securities Act of 1933, as
amended, this Registration Statement has been signed below by the following
persons in the capacities and on the dates indicated:
Signature Title Date
--------- ----- ----
President/Chairman of the Board May 25, 1999
/S/ Jeffery Mayer of Directors (Principal Executive
- ------------------------ Officer)
Jeffery Mayer
/S/ Samuel L. Molinaro Jr. Vice President/Treasurer May 21, 1999
- --------------------------- (Principal Financial Officer)
Samuel L. Molinaro Jr.
/S/ Paul M. Friedman Director/Vice President/ May 21, 1999
- -------------------------- Assistant Secretary
Paul M. Friedman
/S/ Susan R. Mitchell Controller May 21, 1999
- ---------------------------
Susan R. Mitchell
INDEX TO EXHIBITS
Exhibit Description of Exhibit
- ------- ----------------------
1.1 Form of Underwriting Agreement (to be utilized for firm
commitment underwritings and public reoffering by
underwriters).
1.2 Form of Purchase Agreement (to be utilized for sales by the
Registrant and placement agents primarily to institutional
purchasers).
3.1 Certificate of Incorporation of SAMCO Mortgage Securities Corp.
3.2 By-Laws of SAMCO Mortgage Securities Corp.
4.1 Form of Sale and Servicing Agreement between Depositor and
applicable Master Servicer or Servicer, including Forms of
Certificates as exhibits thereto.
4.2 Form of Pooling Agreement between Depositor and Trustee,
including Forms of Certificates as exhibits thereto.
4.3 Form of typical Pool Insurance Policy.
4.4 Form of typical Special Hazard Insurance Policy.
4.5 Form of typical Primary Insurance Policy.
4.6 Form of typical Bankruptcy Bond.
4.7 Form of typical Fraud Bond.
4.8 Form of typical Letter of Credit.
5.1 Opinion of Skadden, Arps, Slate, Meagher & Flom LLP with
respect to the Certificates.
8.1 Opinion of Skadden, Arps, Slate, Meagher & Flom LLP with
respect to tax matters.
24.1 Consent of Skadden, Arps, Slate, Meagher & Flom LLP
(included in Exhibit 5.1 hereto).
24.2 Consent of Skadden, Arps, Slate, Meagher & Flom LLP
(included in Exhibit 8.1 hereto).
25.1* Powers of Attorney (included in signature page hereto).
- ------------
* Filed herewith.
EXHIBITS
- -----------------
- ----------------- Exhibit 5.1
- -----------------
- -----------------
- -----------------, [1999]
Board of Directors
- -----------------
- -----------------
- -----------------
- -----------------
Gentlemen:
I have examined the Registration Statement on Form S-3 as prepared for
filing with the Securities and Exchange Commission on ___________, [1999]
by _________________ (the "Depositor"), in connection with the registration
under the Securities Act of 1933, as amended, of the Depositor's Mortgage
Pass-Through Certificates (the "Certificates"), to be issued pursuant to
various Pooling and Servicing Agreements (the "Pooling Agreements"),
between the Depositor and a bank or trust company, as Trustee (the
"Trustee"). The Certificates are to be primarily sold to underwriters and
to institutional investors as set forth in the Registration Statement.
I have also examined the proceeds relating to the authorization and
execution of the various Pooling Agreements and the issuance and sale of
the Certificates.
I am of the opinion that:
1. Each Pooling Agreement, when it has been duly executed and
delivered by the Depositor and the Trustee, will be a valid
and binding obligation of the Depositor.
2. The Certificates, when sold and duly executed, authenticated
and delivered in the manner referred to in the Registration
Statement and in accordance with the terms of the related
Pooling Agreement, will be legally and validly issued,
fully-paid and non-assessable, and the holders of the
Certificates will be entitled to the benefits of the Pooling
Agreement.
I consent to the use of this opinion as an exhibit to the Registration
Statement and further consent to the use of my name under "Legal Matters"
in the Registration Statement and in the Prospectus which is a part
thereof.
Very truly yours,
Exhibit 8.1
[to come]
